Danske Bank A/S (DANSKE.CO) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the Danske Bank Third Quarter 2025 Pre-Close Call. My name is Claus Ingar Jensen. I'm Head of Investor Relations. And with me, I have Olav Jørgensen and Nicolai Tvernø, from our IR team. Please note that this call is being recorded for compliance reasons, and the script used for this call will be published on the Investor Relations website after the call. Given that we conduct this call by our Teams. In today's call, I will highlight relevant public data and macroeconomic trends in our markets. I will go through the relevant P&L lines and comment on capital at the end. Afterwards, we will open up for the Q&A session. And for the sake of good order, I would also like to highlight the following. I will only answer questions related to already disclosed information, as well as publicly available information, unless otherwise noted. In connection with this, I wish to highlight that developments in specific indices may not always have the same effect on our performance. Let's start out with the macro. Before going through the income lines, I would like to start with a brief comment on the most recent macroeconomic development based on our Nordic outlook published in early September. In the Euro area, optimism is gradually rising as growth has been higher than expected and inflation has come under control. Also, the EU, U.S. trade deal has reduced the downside risk to the economic outlook. For the Nordic economies, overall, the improvement is expected to continue except for Sweden, that has been marked by high inflation and weak growth. Moreover, broadly, uncertainty still weighs on business and especially consumer sentiment. Turning to the Danish economy specifically, the GDP growth figures have been revised following lower -- following the revision by the Danish Institute of Statistics due to a computation era so that the growth forecast for 2025 is now 1.8% and no longer 3.2%. This means that looking at GDP growth, Denmark is now viewed as an average European economy just with Novo Nordisk on top as an extra growth driver and not a significant positive outlier in Europe. Nonetheless, the Danish economy is still strong, employment is high. The current account surplus has reached record levels and government finances are robust. Also, although consumer confidence remains low, the housing market activity in Denmark has gradually improved and the outlook is positive with higher expected housing prices. Now let's have a look at the NII. Let's start by highlighting the relevant changes to the Central Bank policy rates. The expectation is now that the ECB has finalized the cutting cycle and reached its terminal rate. In September, both in Sweden and Norway, Central banks have cut rates, Riksbanken lowered it's policy rates to 1.75% and signaled unchanged rates until 2026. Norges Bank has reduced the policy rate from 4.25% to 4%, however, signaling further cuts. Regarding recent volume developments, we refer to publicly available data. In terms of lending volumes, we note that overall credit demand has modestly improved, especially with respect to corporate lending demand. Please note that the Q3 has one additional interest day compared to Q2 and the day effect is estimated to be around DKK 75 million. As always, please be mindful of currency fluctuations in the markets where we operate. In the third quarter until now, NOK, SEK has appreciated around 2% against DKK, while the pound sterling has depreciated around 2%. Looking at funding costs, we note that CIBOR, STIBOR and NIBOR have decreased during the quarter with CIBOR lower by around 6 basis points, STIBOR lower by around 19 basis points. and NIBOR lower by around 29 basis points, all based on quarterly averages. In terms of wholesale funding, we are progressing well according to our full year funding plan, of between DKK 60 billion and DKK 80 billion of debt issuance across instruments as we have issued around DKK 65 billion in total year-to-date with around DKK 18 billion done in the third quarter. As always, please visit Danske Bank in the Debt section for further details on terms and pricing of our issuance. With respect to NII, we reiterated the interest rate sensitivity given at the Q2 '25 interim report release, which is an approximately DKK 650 million negative impact for 25 basis points cut across all currencies. Correspondingly, per 25 basis point hike, we estimate an effect of around DKK 450 million. In addition, we estimate a year 2 and year 3, up and down effect of DKK 300 million and DKK 100 million, respectively, related to our structural hedge. Please note that, by far, most of our sensitivity relates to DKK and Euro in that order. In respect to fee income, we will start by noting that the development is always subject to conditions in the financial markets, housing market activity and the general activity level among our customers. For fee income, in general, we note that the uncertainty and relative negative business and consumer sentiment as well as the summer period are expected to have a dampening effect on customer activity in the third quarter. This also applies to activity-driven fees with muted consumer spending due to sustained low consumer sentiment. Looking at investment fees, published data by Finans Denmark supports continued strong momentum in AUM through August. And since the start of the third quarter, we have seen higher asset prices, which could have a potential positive effect on asset under management and investment appetite among our retail customers. In respect to fees generated from financing, most lending volume at Realkredit Danmark, refinancing options for adjustable rate mortgages will take place in Q4 '25. Therefore, we expect income from refinancing fees in the third quarter of '25 to be immaterial to increase in Q4. In addition, in terms of lending demand, we refer to recent public sector statistics being released on the 25th of September, showing a slight recovery in retail lending and solid corporate lending for the sector. And finally, concerning income from capital markets activity, please note that the third quarter is typically impacted by seasonality across primary debt and equity markets. Now turning our focus to trading income. The third quarter has been characterized by spread compression and lower volatility in Danish mortgage market, while spreads of Danish Government bonds have been broadly unchanged during the third quarter. Generally, market conditions and consumer activity has been constructive in the third quarter. We have nothing to of note when it comes to Danica but please be aware that the results are always subject to developments in the financial markets and trends impacting the health and accident claims. With respect to Other income, we can reconfirm the lower run rate for Other income seen in earlier quarters in 2025 due to lower contribution from asset finance activities. On the cost line, we reiterate our outlook for full year expenses of up to DKK 26 billion, given the expected higher seasonal costs occurring in the fourth quarter, which current consensus might not fully reflect. Kindly note that in the third quarter of '24, we recognized an insurance reimbursement of DKK 175 million in the expense line. For the third quarter, we have no comments on asset quality other than to note that macroeconomic conditions continue to support credit quality as we reiterate full year loan impairment guidance of around DKK 1 billion. We have no comments with respect to tax. And at this point in time, we do not expect any one-off items for the third quarter of '25. Regarding capital and our CET1 ratio, please be mindful that during the quarter, we have called a Danica Euro Tier 2 instrument of DKK 500 million. This will all else equal, lead to an around DKK 3.7 billion increase in the group's statutory deduction for insurance subsidiaries and consequently reducing the CET1 ratio by around 50 basis points. However, as highlighted in our Q2 report, the draft legislation of the EU Conglomerate Directive is ambition to apply from the 1st of January 2026, and as such, we expect the CET1 reduction to be temporary. We do not have any specific comments on REA besides noting that market risk remains subject to volatility in the market. So this concludes our initial comments in this pre-close call. Before we move to the Q&A session, I would like to highlight that we begin our silent period on the 10th of October, we will shortly start to collect consensus estimates with a contribution deadline on Monday, the 13th of October. Please note that we publish our third quarter results on the 31st of October at 7:30 a.m. and that the conference call for investors and analysts will take place at 8:30 as usual. We are now ready for the Q&A session. Thank you.

Okay. It doesn't seem we have any questions. So Sorry, I overlooked your ...

No problem. I'm back. So yes, I was just wondering how should we think about the kind of GDP downgrades we have seen for Denmark. Will it have any impact on your provisions kind of the macro over relays that you need to take or it eventually impact those?

No, absolutely not. That is not what we can see. The nature of the downgrade were very much due to more statistical reasons. There has been some changes in the models for how you incorporate certain growth elements and including the impact from the quite sizable daily shipping sector. And on top of that, we have also revised the outlook due to a lower impact from the export of pharmaceuticals, and you should read it as the impact from Novo Nordisk. So I think from the 1.4% lower GDP growth, 1% is coming from this statistical revision I'm talking about and the 0.4% is the pure pharmaceutical or the Novo effect.

Okay. And how should we think about the relays? Did we expect any releases after overlays, given that you still have quite a lot of realized?

I think we have, over the last couple of quarters had a flexible approach, and we have also released some of our PMAs. Whether we will do that in the third quarter, it's too early for me to comment on. So we will be back on that. But our initial approach to PMAs are essentially unchanged compared to Q2.

Okay. Okay. That's clear. And then on the remortgaging fees. So should we basically -- did I understand your comment correct that we should expect quite slow activity in the remortgaging fees in the third quarter and then a big pickup in the fourth quarter?

Yes. That you can say that follows a little bit the refinancing calendar where we have a lot of adjustable rate mortgages coming up for refinancing in Q4, while we hardly have any in the second and the third quarter. So I would even dare to say that that the third quarter impact will be even lower than what we saw in the second quarter. And I think I used the word immaterial. It is very immaterial income from refinancing we will see in the third quarter.

Okay. Okay. And then final question. Some of the other Nordic banks, there are some questions around interim dividends. Is this anything that Danske would consider?

No, it's not on our agenda. Sofie, I think we have paid out interim dividends twice in order to catch up on the lack of dividend payments back in time. I think we have been quite clear in what we have stated recently that our dividend policy is actually based on annual dividend payments and this is also very much in line with what the Danish regulator actually prefer -- corporates to do in Denmark.

Okay. Okay. That's very clear. or actually, in terms of the Danish FSA, like are they still quite conservative? Or do you think they would be happy for you to pay more than 100%?

Yes. I think our communication around potentially pay out above 100% is unchanged from the second quarter. If all all share-backed decisions needs to go through the Danish FSA because it seems as a change in the company's capital structure. And so we will just do what we have done in previous years. And -- but whether we are able to discuss anything about -- I think it's a little bit too premature also because as we have communicated earlier, the probation period with the DOJ is coming to an end by the end of the year, and that will naturally open up for the discussions on the Danish FSA. But that's not for now. That's for later. [indiscernible]

Could you just repeat your comments around costs? There was something about seasonality and consensus and then there was something around DKK 175 million of one-offs.

Yes. That is referring back to last year, third quarter of last year. But I am happy to repeat, we reiterate our outlook for full year expenses of up to DKK 26 billion, given the expected higher seasonal costs occurring in Q4, which current consensus might not fully reflect. I can't see any more questions. So thank you very much for your participation, and I wish you a nice afternoon. Goodbye.