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DNB Bank ASA
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Good afternoon, ladies and gentlemen, and welcome to the DNB Quarter 4 2017. My name is Anna, and I will be your operator for this meeting. [Operator Instructions]
I will now hand you over to Head of Investor Relations, Rune Helland, to begin today's conference. Thank you.
Thank you, and hello, everyone. And welcome to DNB's analyst call for the fourth quarter. We are represented here by the CEO, Rune Bjerke; CFO, Kjerstin Braathen; and also Head of DNB Liv, Anders Skjaevestad. Kjerstin will start by giving a short introduction and highlights for the quarter, and then we will open up for Q&A.
So please, Kjerstin.
Thank you, Rune. And I'll just touch briefly upon the key headlines for the fourth quarter before we open up for Q&A. 2017 has been a good year across all business units in DNB and this trend continued throughout the fourth quarter.
We continue to see good growth in both personal customer and SMEs, while we have rebalanced our book and reduced exposure to cyclical industries. Volumes were relatively flat in the fourth quarter, up 0.5% and margins were stable, which we think is a good development, taking into consideration the rebalancing that has happened during the quarter. All-in-all, NII growth of NOK 135 million, if you adjust for Baltics in the third quarter and the main contributors to the growth in NII is a positive effect on the currency as well as higher revenue from the amortization and fees.
And talking fees, fees are strong for the year and for the quarter, up 1.8% compared to the same quarter last year. The 2 main drivers in the quarter was revenue from money transfer and banking services, where we no longer have the effects from the capping of interchange fees. We see the results of all the initiatives that has been taken across business segments throughout the year and see a growth in this category by more than 16%.
The other strong contributor was asset management where both net inflows as well as increased revenue from performance fees are strong earning generators for the quarter. In terms of cost, they are up in the quarter, very influenced by the write-down of a goodwill on intangible assets. But when it comes to costs, we think it makes more sense to look at the longer picture.
So if you look at the year, the increase out of the box is NOK 1.5 billion, of which NOK 1 billion of this is related to nonrecurring elements. One, I already mentioned is the write-down on goodwill on intangible assets. The second largest element is related to pensions that had a positive effect fourth quarter '16. And the third element that I would mention in the nonrecurring basket is write-downs related to the closing of Luminor in third quarter.
More importantly, if we look at the running business, there are 2 main factors that influenced our cost picture in '17 and we've talked to these factors throughout '17 when reporting our results. These are a higher investment activity on the IT side, both for business development as well as in cost efficiency initiatives and compliance-related cost. The other driver is finance tax. So we are continuously working on efficiency measure and I'm quite confident that there are huge potential on cost and we are committed to our target on cost income.
Losses are low. There is a strong sentiment in the Norwegian economy. You can see this, both from a top line perspective, but definitely also on the losses that come in at net NOK 402 million for the quarter, with a substantial impact from reversals on collective impairment.
Dividend, I'm sure you've seen, I know you follow that closely. The proposed dividend, 25% up from '16 as well as proposing -- not proposing, but announcing the [ last ] share buyback that we're starting today, which results in a full payout ratio of 70% for the year 2017.
Capital, rock solid and fully able to absorb the IFRS 9 effects of approximately 25 basis points from the capital position year-end, which was 16.4%.
So with that, I think we're ready to open up for questions.
[Operator Instructions] The first one is Willis Palermo from Goldman Sachs.
The first question is on the competitive landscape in Norway. If you could give some color on what you are currently seeing in mortgages, especially as in the third quarter you were pointing to some rationality in the players that continuing, and in this context of high demand for PC and also SME? Is there any room for repricing and in which segment?
Thank you. We have seen no changes in behavior in the different market segments over the last quarter or 2. I would say, we have faced pretty tough competition throughout the year, but no trend shifts have been seen from our side. And the key point here is to continue to work on the sophisticated pricing and try to do what we can to raise margins. We have some smaller pockets of potentials when it comes to deposits in a few of the segments and we will do what we can to at least keep the volume stable, but again, no significant shift or no shift that we have felt since we presented the last quarter. And we believe there is good opportunity to continue to grow in the segments for personal customers due to the improved macro conditions in Norway. And as you know, the optimism among business leaders as well as consumers in Norway continue. So we see a clear trend shift in more investments, in retail, in services and in Mainland industries. So all-in-all, the competitive picture is more or less the same, with good growth opportunities, with good opportunities to at least maintain the spreads. So that is the brief picture we can give of the market conditions right now.
And the second question I have is on the cost line, the absolute level and the moving part going in 2018. On the one hand, the inflation is quite high in the country, but on the other hand, the FTE declined quite [ late ] in the year, if we exclude Vipps and the Baltics. And I was wondering, is that enough to offset the inflation? And also related to the IT expense, you mentioned you didn't expect them to increase further. Would you say this is the normal run rate or is there any chance they would decline from here?
I think to start with your latter point, first of all, I think it's important to look beyond the quarter as such. And what we have said is that the investment level were at in 2017 is the investment level we expect to be at also in 2018, but there can be fluctuations from quarter to quarter. When it comes to efficiency measures, we have ongoing efficiency measures that take effect continuously and these are sufficient to neutralize inflation cost and drop-downing cost from previous investments. As for the larger potentials we've talked to, that has to do with digitizing for core processes, such as credit processes and customer on-boarding. We are still in a relatively early phase and investing and it will take some time before we see the full effects of these. But we are committed to our target and there are substantial nonrecurring elements, as I've talked to, in '17.
And the next question comes from Jan Wolter, Credit Suisse.
Jan Wolter here, Credit Suisse. Just a couple of things on the loan loss level or write-backs there, if you could talk a little bit about what is driving the collective -- the write-back of the collective reserve. So I know that you've stated 2, 3 factors in the presentation, but just -- on the macro factors, which are those? Who are the key drivers, meaning that the reserves are going down? I think you've spoken about both oil price and rig utilization rates and other factors previously. Just trying to gauge whether or not they could -- if they improve, then the collective provisions continue to fall or being written back? And the second thing is, I think Rune, you spoke earlier today around becoming more flexible on the buybacks or at least asking the AGM for a more flexible buyback mandate, if you just could elaborate a little bit what that could mean?
Thank you, Jan. To start with the macroeconomic parameters, as you know, the oil price play a vital role in that respect and also the GDP GAAP development and GDP is increasing. In Norway the growth rate is up and also the expectations regarding the future. I think that are the 2 most important factors on the macro side. When it comes to more flexibility, it's simply matter of portion or the percentage you ask the AGM for. And when I'm saying increased flexibility, that includes a higher number than 2%.
Maybe, just to add, Jan, a little bit; bear in mind that while going into IFRS 9, we are changing our models related to collective impairments. And Rune specified the elements that is influencing the current model leading to the write-backs that we've seen in the fourth quarter. The biggest methodical change related to IFRS 9 is that the model now represents a discounted view of our future view, both on the macroeconomic levels and industry. So obviously, if those change, then to be clear, of course there are reserves there towards the offshore portfolio and we have a, we believe, quite conservative view on the offshore sectors saying that we do expect it to be struggling or have a flat development for the next couple of year. If that would change that would also lead to future reversals, the methods change.
And just to clarify there quickly then, if say, oil prices go up or down that will still be an important driver of the -- in the model of collective provisions, so will the rig utilization rates, which I think you talked to previously, as one key determinant. Is that correct?
There are -- yes, that is correct. Our view both in terms of utilization and on development of rate, future view on utilization and development of rate has an effect, but it's not -- it's our view that is factored into the model. So it depends on how the market develops compared to the view that we have taken on the markets. And the same goes for the oil price and for the macroeconomic factors and I mean you can take a view on the macroeconomist's end-market, it doesn't necessarily mean that we have to have a view that is identical with the macro economist. But it is the view of the bank that is factored into the model.
The next question comes from Kim Bergoe with Deutsche Bank.
It's Kim Bergoe from Deutsche Bank. Just a question about your outlook, and if you could just sort of specify a little bit the -- so you're saying flat margins or flat spreads and 2%, 3% or 3% to 4% volume growth. Can you sort of specify little bit in terms of the spreads at least, what are the assumptions behind that in terms of future competition, interest rate changes if that's a factor going into that, but also in terms of mix effects, just so we can get an idea of the sensitivity around that. And also, you are then saying 3%, 4% volume growth and you're saying higher lending volumes expected for personal customers in small and medium size, is that what -- is that the more positive economic outlook that's driving that and do you think we've seen the regulator pointing to higher household indebtedness being an issue? Could that be an issue if that continues to outgrow the economy?
We can try to give some flavor to your questions according to what we actually can talk about. The outlook for the different segments, obviously, is linked to the forecasts given by all analysts following the Norwegian economy. And as you have seen, GDP expectations have been lifted. You are seeing unemployment coming down from -- actually from close to 5% December 2016 down to 4% or so right now and expecting to continue to go down going forward. And we actually expect the next 3 years to be very positive years in the Norwegian macro economy, due to the fact that we are seeing investments offshore is starting to pick up again. We are seeing increased investments related to traditional manufacturing industries Mainland and we are seeing increased investments related to retail and service. All these effects have a positive impact on the growth outlook for SMEs as well as for private customers. So what you saw in 2017 was a reduction in the house or the home prices and that was the kind of correction that we appreciated because in 2016 we had a various steep, unsustainable price increase that couldn't continue. Right now, we have seen in December and in January, more activity in the housing market. It is a higher number of sales within our real estate brokering arm and we have seen that demand is picking up and we are seeing prices higher than price expectations, again. It's not a question if home prices will increase, it's a question when they will start to increase again. And DNB Markets expects home prices to increase from 2019, but based upon the activity and the demand that we see right now, it's a pretty high likelihood for an uptick in the prices at an earlier stage. When it comes to margins in the different segments, it's fair to say that 10% growth and margin improvement in the SME sector with an unexpected increase in demand going forward is a very good and solid sign for DNB in our home market as the market leader. We are facing a pretty tough competition in the mortgage market. But as you have seen, we have managed to grow the book by more than 5%, despite the fact that we have closed down our branches by 50%. And we have a fantastic distribution model, where the cooperation between the real estate broker and the bank seems to work very, very constructive. So we are pretty optimistic that we did manage to grow the mortgage book and the lending to private customers more or less along the pace we've seen in [Technical difficulty].
I am sorry, I am struggling to hear you.
We have some noise on the line. I think it's okay now.
I don't know how much you missed, but...
No, only the very last bit, I think I got that. But again, coming back to the competition, obviously, you are the largest player, you see what's going on. But we did hear just within sort of recent days from one of your peers in the market, they were talking about things sort of heating up in terms of the competition in Norway. We did see one price cart in the fourth quarter is -- but you don't sort of recognize that pictures sort of overall?
I mean, we have seen a pretty tough competition all through the year and we have seen no significant shifts in competition during the last quarter. We have different market conditions in geographical areas. But all-in-all, our personal customer segment seems to be pretty optimistic regarding 2018. You never know what will happen going forward, but as it looks, it looks good. That is what we can send as a message to the market. I don't know what kind of experiences our competitors have. But as you can see, we are growing and we are keeping up margins throughout the quarter.
Now with next question we have Matti Ahokas from Danske Bank.
Matti Ahokas from Danske Bank. If I may follow-up on the mortgage and house price assumptions, Rune you mentioned that DNB economist expected house prices will be down in 2018, but you sounded a bit more optimistic. So could you give us your best guesstimate on the house price development for 2018? And then to continue on that also on the mortgage volume growth, would you say that you lost market share in mortgages in the fourth quarter in Norway, at least it looks like your growth has been leveling off?
DNB Markets is obviously the best forecaster in Norway and I strongly support what they are doing. But again, they are saying that the price decline is leveling off in 2018 and they do definitely not expect a significant reduction in home prices throughout the year and they are saying that they have seen signs of improvement already. So it's a question, not if the prices will start to rise again, it's a question when. Personally, I believe that you might see an increase from 2018, but again, let's have the discussion of the first or second quarter, it's based upon what we are seeing right now and the activity level is ticking up, and also the number of sales through our real estate brokering arm. So all-in-all, it looks more promising now throughout the 2 latest months compared with what we saw in the beginning of fourth quarter.
Yes. Rune, regarding the market shares, did you lose market share, in your opinion, in the mortgage market in the fourth quarter?
I mean, if we lost market share, it was very limited and very limited reduction. The content of the K2 numbers is a little bit hard to understand, divided by mortgages and consumer loans. We have not seen a growth in our consumer loans, but we have, as you know, seen a growth in mortgages close to 6%. And based upon that number, it might be a very and significant market share reduction. But we will look deeper into the numbers to analyze the situation. But bear in mind that we are growing our mortgage book by 1 Skandia Bank in 2017 and we are growing our mortgage book by 0.5 a Danske Bank in 2017 as well, and this have been possible after a reduction in the number of branches by 50%. So I will definitely not complain about our activity and -- in the PC segments.
And I think it's important to stress that what we feel has made the biggest impact in terms of our personal customer business is actually the turn -- and the changes that we've done to our distribution model and the corporation between the bank and the real estate agency. And yes, we follow the market share closely, but we're also very focused on rational pricing and profitability, and it's actually the model and the way we are working, which we feel has made -- enabled us to get more out to the market and keep up with the market share much more than anything else.
Great, make sense. If I may, I have a follow-up. If I look at the, Kjerstin, on the profit from investments accounted by the equity method, [ minus 74], how much was the Luminor impact here? And what are the other items making this negative?
There are several companies being reported on this line. You mentioned Luminor is one of them, Vipps is one of them, and Eksportfinans is another and there are also other elements and we're owning these companies together with other entities, so we can't be specific as to the lines. But what I can say is that the underlying development in all of the companies is proceeding as expected. And there are some one-off effects related to Luminor that are visible this quarter, but the business is progressing well and as expected.
So how much are the one-off effects on this line in the fourth quarter then?
I haven't given a specific number on that, I believe.
Well, if I may rephrase then, should this line be positive in 2018, or should it be -- should you expect this...
Yes, I think that's a fair assumption once we talk about one-off effects, you know the run rate that we had given for Luminor business. The run rates for the bottom line in the previous quarters that we shared with you when the business was spun off and merged into Luminor, I think was around NOK 150 million a quarter.
That's why I'm wondering why this is so negative, this figure.
Yes. And I can tell you, it wasn't at that level in fourth quarter, but I cannot be specific as to be now.
And the next question comes from Adrian Cighi from RBC.
This is Adrian Cighi from RBC. Two follow-up questions, one on capital and one on NII. On capital, you made a follow-up comment in the morning press conference. As I understood it, you binding constraint for total capital return is the capital ratio and not the potential dividend cap. Is that the case? And can you give us any more color on which of the 2 management fees is a binding constraint into next year? And on the second question NII, Norges Bank is still talking about a potential increase in rates in the second half of '18. Can you provide us with any sort of estimate or sensitivity to a 50 basis points increase in rates?
The first question related to limitations regarding dividend and buybacks, we have no limitations from other elements than the core equity Tier 1 ratio and we have paid out and bought back exactly what we perceive is the right thing to do based upon the fact that we are foreseeing an IFRS effects as of January 1 amounting to about 25 bps, that will be taken upfront, and if you look at the number 16.4% and deduct 25 bps, you'll see that we are performing well above the capital requirements, and that we have flexibility for growth, buybacks, and dividends in 2018.
And for your question on NII sensitivity, we haven't given a specific amount on this. But no doubt, an increasing interest rate environment is a positive for us and where you would immediately see a net effect is on the return on the equity position of the bank. And it's important to point out that 90% of our mortgage book as well as 30% of our SME book are flexible priced exposure that can be repriced on a 6-week notice. So it would be a substantial positive effect if rates start to increase, but they would also have to be driven by an active pricing activity from our side.
And just to be clear about the dividend, we have stated in previous conference calls that we are going to pay out excess capital one way or the other. So we have been true to that statement so far and we will continue to be true to that statement as we are going forward.
The next question comes from Vivek Gautam from JPMorgan.
Two questions from me. The first one is on the LCI, the rebalancing continuing at a very fast pace in Q4. I was just wondering how much of rebalancing is remaining? In the past, you've indicated for a turnaround in net loans in the LCI segment sometime in second half of 2018, would you now bring that forward, given the pace of rebalancing in Q3, Q4? And the second one is on the NOK 1.3 billion collective impairment release, can you can you specify how much of that has moved as individual provision and how much has actually released?
In terms of LCI, you are quite right, we were targeting a substantial rebalancing in 2017 and we have delivered on this. I think we can even say that at a somewhat higher pace than anticipated for the fourth quarter. The pace of rebalancing will level off in 2018 and what we are expecting is a more flattish volume development for LCI overall. We will however, continue to rebalance by growing faster in personal customer and SMEs and we will continue to reduce the exposure to the more cyclical industries, but at a slower pace than we have done in '17. And this also includes the -- this is the total picture. It does include the activity that I believe you are referring to in the restructuring group where we have allocated write-off under NOK 10 billion of exposure that we are either actively restructuring or building down, but slower pace on this in 2018. But in the short term, just to remind you to keep in mind that there is a lag effect from the rebalancing that took place in the fourth quarter as year-end exposure in LCI was lower than the average volumes in the fourth quarter. As for the collective impairments, I cannot give you a specific amount, but the main 3 drivers are in fact improved macroeconomic factors together with lower exposure and not necessarily transferred into individual, but there is a part of that that is also there, but it's also reduction exposure partly from sale of assets, but also from a net-net positive migration in the loan book. But we talked to a few company-specific situations that are hitting the losses in the fourth quarter and these are moved out of -- they have -- these are move into the nonperforming portfolio during the quarter and triggered a reversal, but that's not the predominant part of it. Was I able to answer your question?
Yes it did.
The next question comes from Natacha Blackman from Societe Generale.
I'm Natacha here from the Credit Research team at SocGen. I have a question around funding plans. Would you be able to provide an update on what your plans do in subordinated and senior debts? And also on [ EMRA ], will you be subject to any EMRA requirements? And if you are, would you be looking to issue some senior nonpreferred debt? If you have any color around this would be great.
And I'll leave it to Thor Tellefsen, who is Head of Funding to answer.
I think in general, 2018 will be very similar to 2017 when it comes to issuing plans for DNB. We will mainly issue covered bonds. There will probably not be any EMRA or senior nonpreferred from DNB this year. The requirements and regulations are not yet finished in Norway, so we have no intention to issue ahead of that. But if you look at what we issued last year that will give you a very good proxy for how we're going to do this year.
And the next question comes from Vardhman Jain from Macquarie.
I have a couple of questions. First is on regulations. I mean I was going through your financial report and you mentioned that the Norwegian FSA will consider a new capital floor based on the Basel IV's new standardized approach. Could you just give us more color around this as in what has been discussed so far? What are the underlying intentions for both government and FSA here? And what might be a likely time scale? And second question, just circling back on your Capital Market Day, you mentioned about setting up the noncore division out of in your LCI portfolio. Just wanted to know more details around the progress on that? Is that already being setup? How much are you planning to offload in 2018?
We have stated in the past and we will continue to say that you should not expect any reliefs the day Basel IV regulation is implemented in Norway. I think, the Norwegian FSA perceive the level of today as the level they want to see us, and that's why we are not saying that Basel IV regulation will lead to capital relief. You know that the Pillar 2 requirement may go a little bit up or a little bit down according to the annual revision. And you may know that how the [ security ] buffer can be raised additional 50 basis points sometime in the future, not according to today's situation and today's models, but you never know. But that are the 2 elements that we foresee as a potential shift in capital requirements overall. So Basel IV is not going to play a significant role in our capital position going forward.
And to comment on the noncore units which we identified as approximately NOK 10 billion on our Capital Markets Day. Now we have completed the implementation of setting up the division and I believe we ended up around NOK 9 billion or slightly less than we announced at the Capital Markets Day. And this is the portfolio that we had to set up with an organization with the competence and the resources to build this portfolio down and restructure and deal with the exposure as we see fit. And bear in mind, when we are talking about activities going forward in large corporates and growth opportunities on prospects, we factor the noncore portfolio into the picture. So our expectations of a more flattish development in the total volumes in LCI for '18 also incorporates our expectations of the build down in the noncore portfolio.
I just had a one follow-up question on the question which was asked earlier on the rate hike sensitivity. You mentioned about that the mortgage 90% is variable rate and SME 30%, could you give any color on the liability side as to what percentage would be repriced on day 1, if there is a rate hike, say tomorrow?
Wow, I think all of our deposits on the personal customer side have flexible pricing as well as basically all of the deposits on the SME side have flexible prices, and the majority of the deposits in the large corporate area. Very few deposits are now fixed in with long-term pricing as we historically have had, somehow after the financial crisis, but at very, very much short-term and flexible prices. Our deposit ratio to loan is at 66%, so that gives you an idea of the dynamics. And then the rest of the -- in terms of the liabilities represented on the funding side, where I think you have details on the maturities in our sector.
[Operator Instruction] And the next one is question from Jacob Kruse from Autonomous.
Just wanted to ask on the impairments. If you're saying most of the collective recoveries were macro backdrop rather than moving to individual, what then happened, because you had quite a big pick up in individual impairments quarter-on-quarter, especially in the Nordic Corporate division. What is going on there?
The individual impairments for the quarter is, I would say, as expected. The majority of these are stemming from our offshore portfolio and from names that has predominantly also is already a part of the nonperforming book, and this is in accordance with our expectations and depends on how the restructuring and the progress of each of these exposures develop. The other element that we referred to is a couple of a new names in the retail sectors that are impacting our individual impairment. And as I referred to earlier, these have moved from our healthy portfolio into the nonperforming and thus for these couple of names, you have a reversal of collective and a registration of new individual impairments. And again, we underline that these are company-specific situation and no negative trends in the portfolio.
The next question comes from Bruce Hamilton from Morgan Stanley.
My main question been answered, just to clarify, on the buyback authorization, did I hear it right that you gave something above 2%, firstly? And then secondly, on the sort of sensitivity to rising rates, would your expectation be that deposits would move at a similar pace, or I guess I'm asking about deposit beta, whether you'll be able to sort of repricing the assets so I didn't hold things back on the liability side. And then finally, just on the loan loss provision, obviously the Q4 run rate looks pretty encouraging, the macro is improving. So I feels like your guidance is conservative, but I know things could be lumpy. Could you also say that there is an IFRS 9 specific impact in Q4 and that's why we shouldn't get too excited about that run rate?
To answer your first question. Yes, there is definitely an indication that we will ask for more flexibility in terms of asking the general assembly for an increased proxy to buy back shares. As for your question related to sensitivity, which is a very good one. No, we do not believe we will increase or necessarily have the same pace of repricing in both lending and deposits, which is the opportunity that lies in the environment, with increasing interest rates that we would certainly look to optimize, if you will. In terms of loan loss provisions, there is no IFRS 9 attached in the fourth quarter. With regards to the picture going forward, I can understand that you see it being conservative. We are not stating anything different than our Capital Markets Day for now. We're saying around the approximate run rate, but as you well know, it is challenging to be very specific in terms of loss guiding. And in particular to see the timing of reversals which has impacted our numbers in '17. And it can be a bit lumpy, vary from quarter-to-quarter, but again the strong sentiment and outlook in the Norwegian economy is promising and it is the offshore sector that -- that is the challenge.
The next question comes from Amal Shah from Redburn.
I was wondering if you could say something more about your growth strategy in the SME segment. For example, at what sectors are you growing in? How do I think about the mix of this segment changing over the time?
The SME segment in Norway is very much linked to diverse number of enterprises. You have everything from commercial real estate to seafood services, manufacturing industries. And what we are seeing right now is that investments are picking up in most segments, I would say, maybe with an exemption related to commercial real estate. But we are involved in profitable exposures in all of the segments. The book is very diverse. As you can see from 2017, it's a very solid portfolio with loan losses at 50% to what is perceived to be normalized and we managed to grow by 10% in 2017. We can't guarantee that we would do as good in 2018. But from the starting point of the year, it looks very good, and we are doing what we can to keep up the pace. And you can also see that margins are developing in a satisfactory direction and we will do what we can to price it as both competitive, as profitable as possible.
And what is your market share in the segment?
It varies. I mean, among the startups in Norway, the smaller startups, we typically have a market share of about 40%. In some places, we have market shares closer to 50%. In other geographies, we are down to 25% or a little bit below 30%, but it varies when it comes to size and geography. But looking at the numbers, you can clearly see that we are growing market share in this segment. We saw [ in U.K.] 2 numbers for Norwegian corporates coming out recently and the number was about 6%, a little bit up, but we grew significantly higher than the markets during 2017.
[Operator Instruction] The next question comes from Riccardo Rovere from Mediobanca.
Three questions if I may. The first one is on risk-weighted assets. Is it fair to assume, given that you're chasing growth in personal customer, where risk-weights are lower than large corporate, given that at some point you will get rid of some of the noncore exposures, the USD 10 billion that you've identified. Is it fair to assume that [ discounted ] assets growth will be less than the 3%, 4% growth, same like the exposures that you were [ flog in ] before? This is my first question. The second question I have is on capital. We start from 16.4% take out 25 basis points, let's say, we'll land at 16.1%, if this would be the case on 1st of January 2018 and then we have all the 4 quarters of 2018. I just want to understand, is 16.1% a firm commitment to you or you think you can go above that level, because if 16.1% is a firm commitment, your payout ratio through buybacks or dividends cannot be 70%, otherwise your ROE target is technically impossible. The third question I have is on, sorry, to get back to that on the credit loss guidance. If I understand it correctly, you are saying that real estate prices will maybe start growing again in Norway, maybe already in 2018, economic activity is picking up, average oil price is going to be higher probably, if the situation remains as it is today, on average is to be higher in '18 than in '17, GDP growth certainly on average is going to be higher in '18 than in '17. Why you will be charging NOK 3.5 billion against the equity on 1st of January 2018 due to IFRS 9, then something has to be related to some impairments or some credit exposures? Why should credit losses be 20%, 25% higher than what you have reported in 2017? I understand that this is what you have stated in the Capital Markets Day, okay, fine. But don't you think that this guidance is technical -- is kind of incoherent with all the messages that you have been giving us this morning during the press conference and today during this conference call?
Let me start with the first question regarding 16.1%. It's definitely not a firm commitment. It's the level we believe is the most appropriate level for our capital position based upon what is expected from the Norwegian FSA and based upon what we see as a reasonable level of having a management buffer. We are optimizing our capital structure constantly and we will continue to do that going forward as well based upon the growth opportunities, profitable growth opportunities, regulatory requirements, what we see when it comes to currency fluctuations, and obviously the number might be a little bit different from 16.1%. It could be 16.1%, but it's not a firm commitment. And you're clear when it comes to the dividend payout ratio, it might vary as well, depending on currency, depending on growth and depending upon the rebalancing activities we are going through. But we are very clear that we target 12% return on equity. We are saying that we, one way or the other, will optimize capital structure and pay out excess capital to our owners. But we will also follow up on profitable growth opportunities related to that business areas we are involved in. And when it comes to loan losses, you know that we are one of the very few banks giving guiding related to losses at all and this is out of historical reasons. It started during the shipping crisis in 2008-'09 after the financial crisis. And at that time, it was very important to give numbers, so that the market was home down. They expected, at that time, much higher loan losses that we saw would come on stream and we started to give the kind of cap for loan losses related to that. It's very hard to get rid of such kind of guidance, because then the market start to be suspicious. And that's why we have gradually moved from giving detailed guidance related to loan losses to be more precise about estimates related to historical numbers, and the estimate we gave during the Capital Markets Day for 2018 was typically such an historic estimate. It might be lower loan losses, it could be higher and we will gradually phase-out the guiding related to loan losses overall. But for 2018, we found that the 17 basis points was the best number we could give. But this is not going forward, this is not or will not be guiding, it's only a historical number that you should look at when you estimate or assume what loan losses are going to be, based upon the economic conditions. Right now, things are moving in a better terrain and we are expecting to strengthen credit quality going forward. But in some segments, like offshore and oil price related pockets of the drilling or rig related business lines, there will be challenges in 2018 and 2019, despite the improved conditions.
Okay. Did I understand you correctly, you stated that you see the NOK 3 billion as a kind of upper cap, upper ceiling, let's put it this way. Did I get it right?
No, I did said that it was a number based upon historical experiences through the cycle. So it's not an indication of what we expect or believe in, it's an indication of what we have experienced in the past.
Right. And on the risk-weighted assets, my previous question, is it fair to assume that the growth will be lower than the 3%, 4% you're expecting...
We haven't given -- we haven't guided on the specific number for risk-weighted assets. But you're quite right when you're saying that the growth in personal customers is a lower RWA density growth than large corporates and SMEs. And we will always strive to increase capital efficiency through the tools that we have, but everything else being equal. Of course, RWA development would be a result of the mix of our growth.
We have the time for one more question, please.
Yes and actually there is just one person left in the queue and that is Ian Sealey from Citigroup.
This is Ian Sealey from Citigroup. Two please, first on DCM and investment banking, it was a pretty strong quarter in Q4, why don't you just give us some color around what the pipeline looks like? And also around what sort of sectors you're seeing particularly high activity? And second question, the press release this morning said DNB attracts more customers through digital initiatives. I'm just wondering in terms of -- are these new customers, are they current customers? So I guess what I'm asking, is it revenue positive or is it cost positive or is it base?
Just to start with the new markets. The outlook is promising for 2018, especially what we are seeing in the first quarter so far. It's pretty diverse pipeline from many different sectors and the pipeline looks pretty strong. The same goes for [indiscernible]. We see good opportunities, but also really tough competition out there. But the position of DNB Market is strong. And as you know, we have built our platforms stronger outside Norway and the cooperation between Norway, Sweden, London and the U.S. seem to work well.
And in terms of your question on digital, I think it's a mix of both new and existing customers increasingly using the new digital products that we have launched in the market. We have talked to both a fully digital secured focus for refinancing of secured mortgages. And during the second half, we also launched a digital process for application for new mortgage loans and we can see that the customers very quickly respond to this and use these new products and that goes for both our existing and new customers. These are both important in terms of attractivity of the bank. But also in terms of future cost efficiency measures, as we can scale up the digital products versus the more manual services that we have been giving in the market.
Okay. I think that was the last questions for today. If you have some more questions, you can of course call IR, Amra or myself. And thank you very much for participating, and have a nice day. Thank you.
Thank you for joining today's conference. You may now replace your handsets to end this call. Thank you.