Sparebank 1 SR Bank ASA
OSE:SRBNK
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Okay. Good afternoon, everyone. Welcome to this presentation for International Investors Analytics. Today, we have Benedicte Schilbred Fasmer, CEO of the bank; and Inge Reinertsen, CFO. My name is Stian Helgøy, and I'm Head of Investor Relations. So first of all, we're going to give you a brief presentation of our quarterly figures that will take about 10 to 15 minutes. And after that, we open up for questions. So then I will give the word to Benedicte.
Thank you, Stian. And again, good afternoon, and welcome to the presentation of our results for the fourth quarter and 2021. When we sum up after 2021, 40% of SR-Bank's loan book is outside our core region, Rogaland, which you see to the left here where the bank was started and which was the starting point in this region. And we have -- since early 2000, started to grow in Vestland, Agder in last 3 years, also in Oslo and Viken and our ambition now is to be a financial group for the south of Norway and not only for this region. If you look at the growth over the last year, we grew with -- or by NOK 11.1 billion; NOK 5 billion of those were in Oslo and Viken; NOK 3 billion in the Vestland region. And as you see from this slide, Rogaland, our home turf, has been flat over the last 3 years. I'm thus very happy to tell you that within the private market, our market share has remained the same with approximately 3 percentage -- 3% yearly growth. If we look at the corporate market, we have had a decline, very much explained by the fall in the offshore sector and our -- us taking down the exposure in that industry. We have defined our market, as I said, as the southern part of Norway or South Norway, 3 out of the 4 largest cities in this country are in -- within that region. We have the highest density when it comes to population. We have low unemployment, and we have also a well-established corporate market, which gives us a good basis for corporate growth in the southern part of Norway. If we look at the fourth quarter, our results came -- before tax came out at NOK 1.073 billion, which is up 56% compared with the fourth quarter of last year. The return on equity was 14% in the quarter and the improvement is explained by net interest income, higher other income, better financial -- or results and financial investments as well as lower impairments on loans. We also communicated in the third quarter that we were merging SR-Forvaltning, which is our asset management company with the asset management company of the SpareBank Group. And the result of that sale was -- came in, in the fourth quarter with a gain of NOK 92 million. If you take that away, our return on activity would have been 12.5% in the quarter. The impairments were with a negative sign here, which is, in essence, positive on the results. So we had NOK 138 million in reduced IFRS impairment and NOK 114 million in increased individual losses. And the individual losses are still in the offshore-related segments and on names or customers that we've had for a number of years. If we look at the year as a whole, the net result before tax was 52% above last year and came in at NOK 3.828 billion. We delivered 12.6% return on equity, which is nearly double of last -- or the previous years at 6.4%, which, as you may remember, was influenced by COVID-19, as well as higher impairments and weak financial -- results of financial investments. So this year's result, we had also benefited from a record result in the SpareBank 1 Group and particularly Fremtind Forsikring, which is our non-life insurance company, which delivered a result of more than NOK 3 billion alone and a return on equity of more than 28%. The impairments in 2021 are reduced compared to 2020. And the NOK 192 million is composed of NOK 231 million, I would say, negative impairments in the corporate market, while we've had reversals in the private market of NOK 39 million. Despite a decline in net interest income and as well as some increased costs, we have increased the net result by more than NOK 2 billion to NOK 3.8 billion. As I mentioned, we grew by NOK 11.1 billion, which equals 5.1%, and you see the composition of that growth on the slide here between the retail market, our new segment, which we call SME in agriculture, and corporate market, which is larger corporate clients, which grew by 6.4%. We also have benefited from deposit -- growth in deposits of 16.5% or NOK 19.5 billion. If we exclude the growth in the public sector, the deposit growth was at 12.1%. And the high growth in deposits can be explained by COVID-19 effects and also lower consumer -- lower spending, I think, in the private markets, as well as an increased savings. If you look at the corporate market, as I said, a large portion of the deposit growth came from the public sector, about NOK 8 billion out of the NOK 12.5 billion deposit growth came from the public sector. We have a strong capital situation with a core capital ratio of 17.4% at the end of the year, which is above the requirement from the authorities of 15.2%, and also above our internal measure, which is at 16.7%. The cost went from NOK 38.3 million in -- or cost-to-income ratio, sorry, it went from NOK 38.3 million in 2020 to NOK 40.2 million in 2021. And the increase is explained by bonuses to the whole organization, increased activity in ForretningsPartner, which is our accounting business and where we acquired a company in April of last year, as well as the real estate business, which both areas have a much higher cost-to-income ratio than the banking business as such. For the year as a whole, the costs grew by 13.7%. If you exclude bonuses, the real estate sector, or activity increase in the real estate sector and ForretningsPartner of the accounting business, the cost growth was at 2.2%. And the Board will propose a dividend of NOK 6 per share, which is 49.7% of the group's results in 2021. I think I've touched upon most of these financial targets and our performance, I guess, -- we can -- it's worth mentioning that the total earnings per share was NOK 12.1 per share. And again, the dividend proposal is at NOK 6. And then I'll give you -- I'll hand you over to Inge, who will go a bit more in detail on the numbers.
Thank you, Benedicte. I will briefly comment on some of the lines in our P&L, starting with the net interest income, which decreased by NOK 152 million for the full year of 2020. The main reason for that is the inclining NIBOR from summer and up to the end of the year, but we managed to increase the net interest income by NOK 16 million in the fourth quarter. I will also give a further explanation of the net interest income on the following page. If we look at net commission and other income, it grew by NOK 321 million for the full year and also with NOK 49 million in the fourth quarter. We had significant contributions of all business areas, and we managed to increase the net commission and other income on all business -- on all segments, except from payment facilities, and that is due to lesser travel activity from our customers due to the COVID situation and probably will be temporary. The net income on investment securities came in at NOK 1.37 billion, which is a very strong year with respect to financial performance. And if we look at the NOK 344 million for the fourth quarter, it's mainly influenced by another very strong quarter from the SpareBank 1 Group, which is the product holding company that we own together with other SpareBank 1 alliance members and also due to the 65% ownership from SpareBank 1 Gruppen in Fremtind Forsikring, the non-life insurance company, which had another very solid quarter. Also, we had the contribution from the transaction with SR-Forvaltning, our company from asset management, thank you, [Indiscernible] which contributed with NOK 92 million for the quarter. Total expenses grew by NOK 328 million, but that is mainly due to the strategic activities where we have acquired trade landscape, the company, and also some other actions taken to strengthen, especially our net commission and other income and also the variable compensation accounts for NOK 100 million of that increase, which was entirely of the P&L in 2020. But then now with a strong result, we have a variable compensation for our employees within the parent bank for 2021. Then we will comment briefly on the lending and the deposit margins. We lost 29 basis points on the retail margin on the lending side due to the increased NIBOR. We had a change of the interest rate as of the 9th of November. But as the NIBOR has inclined steeply during the quarter, we have not been able to fully adjust the increased level and thereby maintain the margin. On the other hand, the kind of too-late adjustment of margin gives us a stronger net interest margin when it comes to deposits. But the balance is, of course, larger on the lending side than on the deposit side. So that's why they will not truly balance each other. We expect more interest changes or increases in interest rates in the Norwegian market. And probably, we will have 3 increases -- hikes during the next year, but that also we expect NIBOR to increase. So probably this pattern will maintain during the full year 2022. But then as we eventually hit the top of the interest curve, we will then hopefully have expanded margins since we are adjusting the deposit margins to a lesser extent and we adjust the lending margins. If we look at lending loan growth, we came in at 5.1% for the SR-Bank Group as such, which was from 4.6% within the retail market, 3.1% within the SME and agriculture and also a 6.4% in the corporate market. We believe that activity will be strong within our market area. The unemployment rate is very low and the PMIs are very positive with respect to revenue, hiring of people, and so on. So we are quite optimistic that we will have a strong activity within both the corporate market and the retail market for the upcoming year. If we look at deposits, it grew by 8.9% within the retail sector, 10.7% within the SME and agriculture, and a very strong 26.7% within the large corporate market. And this shows that the liquidity within both the corporate sector and the households are very strong. We have even with rate hikes that we expect, we believe the ability to service the loans will be strong both within the retail and the corporate sector. As I mentioned, we had an increase on every line here on the net commission and other income, except from payment facilities. We increased the savings and placements line by NOK 21 million, even with pressure on the margin. We have more than -- we have offset that with a higher volume. Also, we increased the commission on the insurance products by NOK 25 million, which shows that we are able to build a portfolio with very stable revenues. Also, a very good year for our real estate broker, which increased the revenue by NOK 44 million and came in with a net result of NOK 60 million before tax guarantee commission, NOK 10 million increase. And as you see, a very strong quarter on arrangement and customer fees and also a very strong full year for that area, which more than -- or exactly doubled the income on that area and also the commission income from ForretningsPartner more than doubled during the year. If we look at operating expenses, this high activity, of course, has an influence on the cost of the group, and perhaps you'll see when you flip into the next page because here we have broken down the 13.7% increase. As Benedicte mentioned, if you look at the cost from ForretningsPartner, which is the accounting company, it increased by NOK 143 million, but then also the income grew by NOK 161 million. If we look at the real estate broker, the EiendomsMegler 1, it increased 34% within the cost base. But then, on the other hand, increased revenues with 43%. So even though it has a high density of cost, it is very important to us in the value chain thinking where we are aiming and selling as many products as possible to our customers and it also contributes to the bottom line of the P&L. Also, we have taken significant action on distribution and digitalization to strengthen our distribution power and make the bank more effective. And as commented on, since we have a very strong financial performance, variable compensation to our employees account for 4.2% of the total cost increase this year. But of course, if we have lower profitability, this will also imply a lower cost for the upcoming year. And all together, if we look at the other personnel expenses and then also the effectivization and other expenses, we had only a marginal increase of the cost base of the -- also the total group of SR-Bank. Looking at the impairments, we are very happy to conclude that we are out of the challenging environment that we experienced in 2020. And as commented on from Benedicte, this quarter even gave us a net reversal even though we have strength even further the provision on a handful of our offshore exposures. We have also NOK 138 million in the reversal of the IFRS 9 impairment. So altogether, we believe that we have shown both the resilience of our portfolio and also been kind of proved that our provisioning from a challenging 2020 was prudent in the way that we now are on the rock-solid ground with our portfolio as kind of the macro-economic climate stands as of today. Benedicte, I will hand the word over to you to comment on sustainability activities.
Yes. And I think -- well, we have sustainability, as you know, a core element in our updated strategy. And we are working on how to kind of report progress both for ourselves and as well as for you as our investors and owners. And we are eager to supply both capital products and services to clients who are already in a sustainable business model or to those who have a wish or an aim to improve sustainability going forward. We have defined sustainable credits or capital financing as projects which improves the carbon imprint and has, again, when it comes to sustainability and climate emissions. It can either be on a 100% basis if the whole company is in such an industry or it can be part of the company and the loan to that company if it's part of its activities that is within that category. And I thought it was quite interesting to share with you that one out of each -- 1 or 2 of the NOK 5 is actually -- in 2021 was the financing of what we call sustainable activity. And as to the new loans on the corporate market altogether NOK 29 billion , which is a gross growth in the corporate market, NOK 5 billion qualified as sustainable. And similarly, on the market activities in some markets, we had altogether, NOK 400 million allocated to projects or companies within the renewable energy, drone technology, and food securities business. We are now finalizing the framework for sustainable financing and activities. It will be built on the EU taxonomy, and it will hopefully be of use in clear to us to the clients and U.S. investors what we can put in the sustainability category. For the moment, we've been fairly conservative in our approach. So these numbers are preliminary, but it gives you still a flavor of where -- which direction we are moving on the sustainability financing front. I think summing up, SR-Bank has a business with a good range of products and services, and we are managing our business in an efficient manner. We have significantly lowered impairments in 2021. And I think we've put the challenging times, particularly in the offshore sector behind us. And also, hopefully, COVID-19 will be back to normal in not too long. The corporate market in Southern Norway are expecting growth and good growth in 2022. The housing market is strong and stronger also outside Oslo, which is a bit different from what we've seen previously. And we also see increasing housing prices in this region, which has been fairly stagnant over a number of years. And we believe that we are well positioned for further growth. Our financial ambitions remain the same with a long-term target of delivering a return on equity of 12%, whilst maintaining a cost-to-income ratio of 40%, albeit with an increased portion of our business with a much higher cost-to-income ratio than the targeted 40%. So this means that we have to be very diligent and efficient in how we develop the parent bank. And we think our growth strategy in south of Norway will be rentable and also there are good possibilities for us market-wise to expand. And we also, last but not least, expect the interest rate level to increase rate hikes 3x in the coming year by the Central Bank, which, with some delay, will also give us an improved interest margin in due course. So with those comments, I think I'll stop there and open up for questions.
Thank you, Benedicte. And we open up for questions. If you're logged on outlook via a computer or a tablet, please plus the unmute button. If you're logged on or dialed in by phone, please press star 6 to unmute. Please state your name and company you're working at before asking the questions. So please go ahead.
So 3 questions from me. Maybe we can start on the growth side. So you mentioned that an outlook for 2022 looks good. Is it possible to be a concrete? For instance, do you expect growth for 2022 -- I mean, growth in 2022 to exceed the level in 2021?
Well, I know that we gave you some quite firm indications last year on where we were heading on the growth side. we have been, hopefully now back to normal. We will not be guiding on as we did in the trouble years. So I think you can expect us to have similar ambitions to what we had last year, if that would be a help to you in your guidance.
I'll give some more color on that. Of course, the most important thing for us is to have a profitable run, but we are seeing signs now that the market -- in our old market area, Rogaland, the lending growth is picking up. It has been around 3% for the last 2 years, while the average for the rest of Norway has been between 5% and 6% in the same period. But now we see that environment rate has come down to 2.1% and also housing prices are increasing by 6% to 7% more than the average in Norway. So depending on that, yes, we have to see, but most importantly, to have a profitable growth.
Just a quick follow-up on that one. In your 3 different markets, retail, SME, corporate, where you see the strongest credit demand at the moment?
I guess, the demand -- there is a fierce competition in all 3 segments. I mean that's -- lets you know just state that. And I think if we start with the larger corporates, there is an increasing margin squeeze and particularly on financing, which can be characterized as sustainable or green. And there is a very high appetite on the bank side on those. Otherwise, I think we -- our experience is that the market is, as we see -- I mean, we are a bit in and out all of a someway in the different industries. And there are no major shifts as such at this point. When it comes to the SMEs, what we're trying to do is we put the ForretningsPartner business into that segment because the overlap between the accounting business and the banking business is largest in the SME segment. And we believe that we will be able to have synergies on the banking and accounting side developing in that market. And we also are the strongest one on accounting on -- agriculture, thank you, which also could give us a potential to develop that sector or industry even further. And the main thing is also that the way of working with SMEs vis-a-vis bigger corporates is quite different. So that's also a reason for why we chose to split that into 2 different segments. When it comes to the private market, I think we had a very special year in 2021 with the situation around SR-Bank, which gave you bigger shifts and movements within the retail market than we've seen for years. I think no market products, loans -- housing loans with loan-to-value less than 75% and all that, which also has a margin pressure on it. We've decided not to go slow in margins. We believe that our clients appreciate also the advice and the relationship with the bank. And so far, that strategy has proven successful.
And then just a bit, there is a smaller question on the growth side then on the green lending are the -- I think you mentioned 20% of NOK 5 billion in gross lending. So is it possible to add some flavor if the margin there is higher than the average and the risk weight is higher or lower than the average? Just to get some flavor on what kind of lending that actually is?
Just to take the numbers first. The gross loan growth in the big corporate market was NOK 30 billion or NOK 29 billion and the green or sustainable share of that was NOK 5 billion, right. So that is not the same as the net loan book. With all the new loans coming on the book, NOK 1 out of NOK 5 was with the sustainable character. We maintained the same level of return requirements on those financings, as we've done to other parts of the portfolio. So there is no difference in the financing in our portfolio than compared to the rest of -- the rest of it, to my knowledge. You agree with that? Inge.
Yes. But we have to be careful with respect to credit quality because even if it's kind of green, it doesn't mean that it's without risk. So we are all the time working on our kind of credit policy to make sure that we underwrite the right credit, and with a lot of new companies on Euronext growth, it doesn't mean that they are necessarily bankable in our books. So we are trying to really to pick the right risk as we move forward on the kind of achieving our ambitions on the ESG side.
The next person on our list is Jan Erik Gjerland from ABG.
Couple of questions from my side as well. Just touch upon the growth as Håkon did. Would you say that it's easier now to see growth in the Stavanger region also for large corporates and SMEs since you said that the book was sort of flat for the last 3 years? It seems like you have been growing the personal market side or household market a little bit more than the rest. Is the shrinking of the large corporates and SMEs now done, so to speak? Or should we expect more to come also in '22?
Well, the decline has been, to a large extent, explained by the fact that we've lowered our exposure in the offshore sector. That's the main explanation, Jan Erik. And we certainly hope that -- and also that some businesses have been sold, and thus the loans have been paid back -- some major loans of a bigger size. But we certainly hope to see growth in this region. And our general impression is that this region has a quite interesting mix of competence and experience with technology, which will -- has now kind of been channeled into more sustainable business models and also to make the on and offshore sector more sustainable. And it will be an important sector in many, many years to come.
Perfect. On the cost side, how do you see the cost inflation now versus sort of what you saw in 2021, where it was sort of not coming as fast? And now it looks like it's coming very fast from all parties, all kind of cost levels, both wages and other costs. So how should we read your sort of potential cost increases in 2022? Of course, maybe not the bonuses will be repeated, et cetera, but you will still have probably some wage inflation and other cost inflation coming. So how should you read your sort of cost-to-income target into 2022?
We are very aware that we have underlying cost pressure. We have a low unemployment rate of 2% within our region, which is equal to cost pressure on wages. The measures are taken by the Norwegian authorities to help out the corporate sector and also to support the retail sector when it comes to good actions on temporary layoffs and so on. Altogether, that has made the Norwegian economy performed very well. So as an activity now picks up again, we believe that a lot of our corporate customers, they will need to hire more people. Of course, probably that will lead to a larger migration of workers from abroad back to Norway. But it will put pressure on the cost side. Also, we have a lot of activities within SR-Bank that have been kind of temporarily suspended due to the COVID situation, where most of the people have worked from their home office. We haven't had any kind of meeting points with our customers and so on. So of course, that will also add some costs. So to make sure that we have something to offset that being more effective will become even more important. And that also means taking a significant growth within the cost base that we already have. But it's kind of my job to be professional concerned -- on-page to be concerned as a CFO. And of course, the cost side is something which kind of occupies my attention to make sure that we, as I said, never waste a good crisis that we kind of take the right measures as things are getting more back to kind of normal where people go to work as we did 2 years ago.
Okay. So more and more cost to come is the theme then after this? Finally, then on the margin side, you seem to have some 25 basis points downtick on your mortgage or household margin, which is impressive when you have the 40 basis points downtick on the NIBOR. So how successful have you sort of repricing been for the household mortgage book, do you think? And how is it looking now into the first quarter for 2022?
We had a rate increase effective from the 9th of November, then we have another one that was in effect from January 31. But of course, due to kind of the nature of how the interest rate is changed from the bank to the customers, we are lagging, definitely kind of as an industry. So as we have kind of faced the sharp incline of the NIBOR due to our kind of duty to have 6 weeks in advance notice towards the customer and also the fact that NIBOR increases prior to the rate hike from the Norwegian Central Bank. We are kind of continuously too late on adjusting the interest rate against the customer. But of course, every time you change the interest rate, we changed it lesser -- less on the deposit side than on the lending side. So all other equal, that will make us gain margin, but it's kind of offset by the sharply rising NIBOR. And so I'm kind of looking forward to the top of the rate curve. But as we are kind of climbing rate curve, it is challenging to expand the margins. But of course, this kind of hits us the most in the beginning of this period until we have started changing the interest rate. But due to kind of the fierce competition amongst the banks, it is challenging to increase more than 25 basis points and it's also challenging to increase the interest rate kind of on others according to the time that when the Central Bank increased the rate. So this is putting pressure on the net interest margin and thereby also the volume growth becomes all other equal, increasingly more important.
Indeed. On the write-back side, on the COVID-19 provision, you saw that you have more to give back to your shareholders from those kind of provisions, or is -- lot of it you take in those losses in the offshore sector?
At all times, we aim to kind of have -- kind of the exact -- right provision, but it's our best estimate. So that means that we cannot kind of exclude the probability of having more reversals. We regard ourselves as conservative, but only to some extent. So the figures that we present this quarter show that we believe it's right to reverse some of the collective impairments from the IFRS 9 because if we look at outside the window, it is a kind of better climate at this time 2022 than it was 1 year ago. But at the same time, we have -- instead of having even a larger reversal, we have decided to increase the provision on a handful of offshore engagements even further. But of course, our customers are aiming at having utilization for their fleet. We are kind of monitoring the situation. And of course, there is also a probability that we can have even more reversals.
The next person on our list is Vegard Toverud from Pareto.
I have 4, I think. The arrangement fees have been fluctuating, but ended with a very strong year and a strong quarter. What are your expectations for arrangement fees for 2022?
It's kind of -- we don't have a kind of a budget on that, Vegard. Of course, it will be kind of linked to the general activity within the market. We have a very strong cooperation in between the corporate division and our markets division where a large share of the projects that we work on is kind of on customers that we also have credit line for on low engagement. And we kind of -- we try to have even kind of more synergies coming up. But of course, it's dependent on the general activity.
Of course. But if you look from your position now and what's going on, would you say that 2021 was artificially high, or is this a level that's also achievable for 2020?
I definitely think it's achievable also for the upcoming year, but we know that the activity within kind of this sector within Norway has been very high for the last year. So of course, it's difficult to predict. And I believe everyone's guess is as good as mine on that topic.
I think if you -- to give you some indication, Vegard, we have to remember the SR market activities are mainly with companies that are not listed and on the M&A and private placement side in those types of businesses and the activity in that sector or in that segment has been particularly high over the last couple of years. So -- but it's difficult to say exactly where it ends up.
And I think you mentioned that you, as a CFO, are concerned about costs. Were you more concerned about the cost in Q4 than you were in Q3 or Q2?
No. Actually, not Vegard. But we have taken kind of measures to significantly reduce the cost during the COVID situation. And something kind of has been deliberate, some things have been kind of -- it's caused by COVID situation in itself. And as things are kind of coming back to a more normalized situation, I believe our attention needs to be even higher on the cost side to prevent that we have spending, which is not kind of linked towards increasing the revenues for the SR-Bank Group as such. So my concern on the cost side is not new, but you kind of -- is more easy to spot in the fourth quarter than in the previous quarters.
Excellent. And what do you expect as the cost-to-income for ForretningsPartner?
It is 85%?
Yes, 85%. If you have a margin on this activity of 15%, you will be kind of in benchmark the industry as such. But the 15% margin is equal then to 85% cost income. So if we were only kind of having a focus on the KPI cost/income ratio, we shouldn't have had either the broker -- the real estate broker or the accounting companies within the SR-Bank Group. But then on the other hand, we would have been even more dependent on net interest. So we believe that in order to achieve our 12% long-term return on equity target, we should also have a significant contribution from the net commission and other income.
But do you still have the 40% cost income ambition?
That's a long-term target, Vegard. We also communicated today that we expect our cost-income ratio is sort of to go up somewhat as a result of increased part of our business being within the high cost-to-income areas, and which ForretningsPartner and EiendomsMegler are the 2 companies in that category.
So what would you expect then as the cost-to-income for 2022?
We haven't kind of posted any specific target. I mean it's also important to bear in mind that as we measure the cost-to-income ratio, you also have the financial line within this measure. And from time to time, the variation on the income side thereby is more volatile in the income than it is on the cost side. But we are -- in the long term, we are pinpointing the 40% target. And we have, of course, a lot of quarters where we are even below 40%, but then usually is due to a strong contribution from the finance side.
So then just lastly from...
Yes. And one thing which is worth remembering, I guess, maybe it doesn't impact that particular ratio. But when we -- we've now sold the asset management company SR-Forvaltning which has been come in as other income in our accounts up until now. When we now merge that with [Indiscernible] Forvaltning, it will kind of transform into financial or return on investments. So it will kind of move between lines in the P&L. That won't impact cost-to-income ratio, but it's nice maybe for you to be aware of anyways.
Yes. So just finally then to understand the ambition of 48%, when you are referring to it as a long-term target, what would be long term? Is that 2023, 2024, or even longer out?
No. When I say the long-term target, it doesn't mean that it's not kind of possible to reach it on the shorter term. We are kind of aiming at this at all times, but we are aware that we had some -- kind of some factors influencing on this target. We also have an internal target when it comes to the cost-to-income ratio excluding the finance line on the parent bank, which is a more stable KPI, but that doesn't cover the entire SR-Bank Group. So that's why we are -- it's like driving a car or playing. You have a lot of instruments that you have to monitor closely. And the cost-to-income ratio, we also measure both by the group and by the current bank with and without the financial gains.
Then the next person on our list is Mr. Michael [Indiscernible].
It's [Indiscernible] from Fitch Ratings. I have a couple of questions related to asset quality actually. And firstly, I wanted to clarify if the drop in Stage 3 loans in the fourth quarter, I think, was around 20%, is it solidly linked to the write-offs in offshore?
Yes. We have -- during the year, we have significantly reduced the Stage 3 engagement. The main contribution from that is that we have -- and now I have to look at my colleague here, what's the right word in English, [Indiscernible] you have in the English translation. We have kind of taken the provision and then write away -- the write-off [Indiscernible] of our balance sheet.
Yes. So do you recognize these loans from the balance sheet?
Excuse me?
They're recognized?
Yes, they're recognized, also a result of the financial restructuring in one of our [Indiscernible].
Understood. And for me, it begs a question, if you could guide us, what is the future risk cost guidance because you've been deleveraging in the risky area, which is this offshore for a couple of years, so the previous through-the-cycle cost of risk, which was, I think, about 25, maybe 30 basis points depending on the period you take into consideration, but now you could read of that pocket of risk to a large extent. So just what do you think is a more natural normalized level of risk cost for the bank these days?
If you look at through the cycle, we regard the level of 15 to 18 basis points to be what would regard as a normalized level. And then if you go look at 2021, which took us to 9 basis points, that's kind of even lower than what we regard as a normal loss level. But of course, that will also have an influence by -- if we have new net reversals, we can, of course, and even lower than that also for the upcoming years.
Understood. I have a question about commercial real estate because this is the, let's say, the usual suspect always as potential risky lending. However, it remains quite resilient through the pandemic. Of course, the rental income was supported by different state measures. And now them being withdrawn and bearing in mind these megatrends that might be affecting office space and retail space, is there a potential risk there that can start materializing and EPS when...
Of course, that is a very valid question. If we look at the resilience throughout the challenging 5-year period that we have behind us, the corporate real estate portfolio has performed very well what has been on our balance. We also believe that activity will pick up again. So even though we will kind of all other equal, were more hours from our home office, still, we will need the kind of the regular office to meet and have meeting. So we haven't kind of experienced that there is kind of a significant reduction in demand for square meters within the corporate real estate sector within our region. And as we also are quite positive on the PMIs and expectations on activity, we are not concerned that either the rate hikes or the kind of change in our way of working should have a significant negative impact on the corporate real estate sector.
Understood. And maybe -- I saw in the presentation for the third quarter, there was guidance with regards the issuance of senior nonpreferred bonds, you said EUR 1.3 billion of which you already issued EUR 700 million around. I'm just wondering, can you reiterate this guidance because it's not in the presentation anymore, this EUR 1.3 billion senior nonpreferred issuance.
And that was EUR 1.3 billion. Yes. I'm now looking at my colleague because I believe we have commented on the MREL demand that says 34.4%. But there has been a change or reduction in the financial authorities' demand when it comes to them. And we had a large issue last year, which took us kind of ahead of the path of how to achieve the requirements within 2024.
But there's only been minor changes from the third quarter to the fourth quarter with our requirements. So as Inge said that requirements are a little bit less than we posted in the third quarter, but they're not significant changes. Thank you. Any further questions? We've now come to the end of the presentation, but I think we got time for one more if anyone. No. Then I would like to thank you all for participating in this webcast and thank you very much.
Thank you. Bye-bye.
Bye.