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

Hello, and welcome to the presentation of Danske Bank's financial results for the first half of 2020. Thank you for all taking the time to listen in on this call today in the middle of the summer. My name is Chris Vogelzang. I'm the CEO. And with me, I have our CFO, Stephan Engels; and our Head of Investor Relations, Claus Ingar Jensen. Slide 1, please. In today's call, we will present Danske Bank's financial results for the first half of 2020. We aim to keep this presentation to around 25 minutes. After the presentation, we will open up for Q&A as usual. Afterwards, feel free to contact our Investor Relations department if you have any more questions. Slide 2, please. In many ways, the first half year of 2020 has been a turbulent period, in history as well as for Danske Bank. The outbreak of the coronavirus pandemic in March led to a notable change to the world as we know it and has a huge potential for making us rethink the way we are organized around our customers and our stakeholders, including our own organization. Financially, we are today presenting a result that demonstrates a resilient business in the time of stress. The impact of the lockdown has been limited due to a combination of continuously good consumer lending activity, strong credit quality, sufficient public support and solid Nordic economies in general. Net profit for the first half year came in at DKK 1 billion, impacted by a weak result in the first quarter that was mitigated by a subsequent rebound in lending activity that led to a somewhat stronger result for the second quarter. As our income turned out to be more resilient in nature, 2 line items, expenses and loan impairments, explain the decline in net profit from the same period the year before. Total expenses increased, due primarily to costs related to the continued strengthening and remediation of our compliance setup and the Estonia case. We also saw planned costs for the transformation to become a better bank. Reducing costs remains a priority, as we aim to lower our expense by 8% to 10% in 2021 to around DKK 26 billion. Our initiatives will include additional structural staff reductions across the group towards the end of 2020 as well as in '21. Loan impairments were clearly impacted by charges in Q1, primarily because of adjustments of model assumptions, but also because of impairments against our oil-related exposure. Overall, credit quality remained strong. On that basis, we maintain our financial outlook for 2020 for net profit of at least DKK 3 billion. Before we go into more detail about our performance in the first half of the year, I would like to comment on the progress we are making on our transformation agenda. In the second quarter, we maintained a strong focus on executing on our plans toward 2023 to become a better bank. We're now 7 months into the transformation process, and we continue to see good traction in all focus areas, which is vital for us to deliver an overall better customer experience. No doubt, we still have a lot of work ahead of us towards '23, but let me start by providing you with some tangible proof points for the progress on our transformation before we move into the financial highlights for the period. As we have previously stated, better ways of working is a key focus area as we need to fundamentally change the way we organize around our customers. Reducing hierarchy and complexity by working in empowered and multifunctional teams is a key requisite for placing customer needs at the center of everything we do. In June, we announced that 750 colleagues in finance and development have started to work in a new, different and agile manner. And there's more to come as we expected around 5,000 employees will be directly affected. The next proof point for the transformation is the better Nordic retail bank. With this initiative, we are streamlining and aligning our product offering at banking Nordic and building 1 common platform instead of 3 in order to deliver and harmonize a scalable business model. Across the bank, we continue to strive for reduced complexity by simplifying our product offering. And so far, we have removed 20% of our account products with an ambition for even more before the end of 2020. The new and more simplified processes mean that over time, we will need fewer employees. In the first half year, we had to let go of a number of people as part of the new ways of working initiatives. This is an essential part of our group-wide cost program, together with increased discipline in relation to nonpersonnel costs. As total expenses increased in the first half of the year due primarily to costs related to the continued remediation of our compliance setup as well as cost for the Estonia case, we will now expedite our efforts to bring costs down in 2020 and '21. Needless to say, this is crucial for us to our competitiveness in a market with low rates, low margins and strong competition, but also to deliver on our ROE ambition and cost target for '23. The compliance agenda continues to be a focus area. We're making good progress in terms of improving the foundation for building an effective and efficient compliance function. A large amount of resources is earmarked for developing and building our capabilities within financial crime prevention, and we are setting up a revised conduct framework and improving trade surveillance. We've closed a large number of FSA orders and have been acknowledged by the authorities for the improved quality of our suspicious activity reports. I will leave the details of our financials to Stephan. Before I do so, let me proactively comment on developments in the Estonia case, as previously stated. Our internal investigation into the nonresident portfolio at a now closed Estonia brand is programming as planned -- is progressing as planned. And we still expect to finish our internal investigation in the fourth quarter of 2020, with many work streams completing in Q3 2020. As we have said all along, Danske Bank is cooperating with the investigating authorities, sharing information from our ongoing investigation and it will be for the authorities to reach conclusions based on this work. Danske Bank itself does not intend to publish any further reports or filings from the internal investigations, and there are also restrictions on what we're able to disclose while under investigation. But we will, of course, comply with our legal obligations regarding disclosure, if this becomes relevant. We continue to be in close dialogue with investigating authorities in Denmark, the U.S., Estonia and France. However, the timing and potential outcome of these discussions remain uncertain, and this is a matter for the authorities rather than for Danske Bank. Because of the continued uncertainty, we remain unable to provision for any potential fines at this stage. However, based on the orders from the Danish FSA, Danske Bank solvency need has been increased in 2018 by Pillar II add-on of a total DKK 10 billion to ensure capital coverage of the increased compliance and reputational risk in relation to the Estonia case. Our goal will be to reach a coordinated resolution with key authorities following the above-mentioned completion of our internal investigation, but the timing and manner of any resolution will be for the authorities to determine. And then over to Stephan for the financial results in more detail. Stephan.

Thank you, Chris. First, a couple of general observations around H1 from my side on the different corona crisis-related effects we have seen so far. During H1, we saw lending trending up, specifically at C&I, mainly for short-term credit facilities. Since the gradual reopening of the societies began, the main Danish macroeconomic indicators such as consumer spending and Nordic house prices have recovered or look reasonably good. Unemployment is still trending upwards, although not as high as we feared and well within our model assumptions. The true status of the economies is still not completely clear as various government aid programs are still in place, and it remains to be seen how H2 will develop. Nevertheless, the way forward seems to be a good bit brighter than 3 months ago, but we still have reason to be diligent and cautious. Slide 4, please. Let us look a bit more closely at the financial results for the period, which overall reflects a resilient business model in the turbulent period, with result for the second quarter coming in better than expected. During the first half year, we saw a very different dynamic that, to a large extent, explains the development between the quarters. The overall customer activity level fluctuated a lot during the first half due to the outbreak of the coronavirus pandemic. In general, customer activity was solid at the beginning of the year until mid-March. Then followed the lockdown period with low activity that reversed in May when the societies started to scale down the various restrictions. Excluding one-off effects, total income was 1% lower than in the first half last year. Overall, total income came in at DKK 20.9 billion or 7% lower due to a one-off gain from the sale of Danica Pension Sweden in 2019. Net interest income increased as a result of good business activity and a slightly more positive development, mainly for deposit margins and volumes, which explains the better result in the second quarter. Deposits increased 17% in the period, primarily because of corporate deposits at market rates, whereas the increase in retail deposits, primarily on ordinary transaction accounts was due to significantly lower consumer spending during the quarter. That also had a negative impact on transaction-based fee income. Fee income, excluding one-off effects, was driven by higher customer activity among our Nordic customers and large corporates, whereas reduced remortgaging activity in Denmark affected income in the second quarter as expected. Trading income for the second quarter improved significantly due to much better market conditions and reversal of negative valuation effects from the first quarter. C&I, being the main contributor to this line item, saw overall good customer activity and increased income. However, year-over-year trading income came in lower because of negative value adjustments. Our expenses, which I will comment on in more detail later, were up from the same period last year as well as the preceding quarter due to transformation initiatives driven by our 2023 agenda and continually elevated costs for the Estonia case and remediation of compliance. Loan impairment charges, which, to a high degree, explain the difference to the financial result for the same period last year, amounted to DKK 5.3 billion for H1, accounting for most of the charges we expect in 2020. 2 items explain the development: Firstly, the impact of model adjustments driven by changes in macroeconomic assumptions; and secondly, an adverse development of our oil-related exposure, which I will come back to later. The result for the second quarter in isolation was DKK 2.3 billion and was, thus, significantly up from the negative result in the first quarter, whereas the result for the first half year amounted to DKK 1 billion against DKK 7 billion last year. Slide 5, please. Now let us take a closer look at the underlying development in net interest income. If we start with the developments from the same period last year, it is quite clear that the improvement in NII of 1% is affected by headwinds from the Nordic currencies and the Norwegian krone, in particular. Adjusted for this, NII is up 3%. Good customer activity in the form of lending and deposit growth as well as higher deposit margins had a positive effect; however, countered somewhat by continued pressure on lending margins. Compared to the previous quarter, NII was up 1%, driven primarily by positive deposit margin effect because of the Danish rate hike in March, whereas the pressure on lending margins resulting from the low interest rate environment continued. Slide 6, please. Lending at Banking DK was down 2% year-over-year due to declining demand for credit among commercial and retail customers as well as negative value adjustments in the mortgage book. The pressure on lending margins was most evident at Banking DK, where we see the effect of our customers shift towards longer-term fixed-rate mortgages with lower margins. At Banking Nordic, we saw growth in business activity, with lending up 4% in local currency as a result of strong growth in retail Sweden and Norway where the inflow from the partnership agreements continued in the first half of the year. We also continue to see higher lending in commercial Finland and Norway. Adjusted for the effect of the depreciation of the Norwegian and Swedish krona, lending was up 1%. NII improved from the same period of last year, benefiting from volume growth as well as improvement in lending margins. At Corporates & Institutions, lending volume increased 12% year-over-year and 5% quarter-over-quarter. The increase reflects the utilization of part of the short-term facilities we granted in the first quarter due to the coronavirus pandemic. However, a significant part remains unutilized and serves as backup facilities. NII benefited from higher lending and higher deposit volume at market rates. The elevated level of deposits as well as some of the short-term lending facilities provided to corporate customers should be seen in the context of the current uncertainty and are, therefore, not necessarily of a permanent nature. Although pricing at C&I has improved, the average margin on lending is somewhat lower, reflecting shorter-term credit facilities originated with highly rated corporate customers. Slide 7, please. Let's have a look at fee income. Fee income was up 4% year-over-year. Adjusted for the Flexinvest Fri compensation in 2019, fee income was up 1%. Activity-based fee income declined from the same period last year and also from the preceding quarter due to the effects of the lockdown of societies during the spring. Transaction-related fee income as well as fees from lending and guarantees were down 10% and 3%, respectively, whereas investment-based fee income was stable when adjusted for the Flexinvest Fri compensation. Compared with income last year, fee income at Banking DK was unchanged, adjusted for the one-off in 2019. Transaction-related income came in lower due to the slowdown in the housing market-related activities and overall lower customer activity. At Banking Nordic, fee income was up 2% since we saw good investment activity and higher commission fees in Sweden, in particular. At C&I, higher customer activity in mainly equities and debt capital markets, explains the increase of 7% in our capital markets-related fee income. Fee income at Wealth Management was up 2% in the first half of the year from the year earlier period despite the effect of the sale of Danica Pension Sweden. In Q2, fee income from pension and insurance was up mainly due to one-offs related to the reversal of losses on guarantees on certain Danica products booked in the first quarter. Slide 8, please. Now let's turn to trading income. In the second quarter, we saw a strong rebound in trading activity as the markets came back. Trading income year-over-year, excluding the effects of value adjustments, was stable. Including value adjustments, trading income was down. At Corporate & Institutions, which generates most of our trading income, the business benefited from an overall good franchise value and a leading market position with in a high number of specialized markets. Trading income was up 20% from the same period last year and amounted to DKK 1.8 billion in the second quarter against a negative DKK 0.2 billion in the preceding quarter. High customer activity, a more positive development for credit spreads in general and for Danish mortgage bonds, in particular, had a positive impact on trading income in FI&C. We also saw a positive contribution from the equity business. Negative xVA in H1 amounted to DKK 0.1 billion, which lower funding spreads reversed from the negative impact from Q1. In the banking units, trading income came in lower as a result of lower investment activity among retail customers, mainly in the second quarter. At Wealth Management, the investment results in the health and accident business benefited from a more positive development in financial markets in the second quarter. Slide 9, please. Total expenses for the first half of the year amounted to DKK 13.7 billion and were up 7% year-over-year. Quarter-over-quarter, expenses were up 3%. The increases were driven mainly by costs related to the Estonia case, compliance remediation and compliance buildup as well as transformation cost. If we look at the moving parts of our cost development, you will see that we have enhanced our disclosure with details for transformation costs, which amounted to DKK 0.5 billion in the first half of the year. This is part of the DKK 1.5 billion to DKK 2 billion budget in the 2023 plan, which we will spend on changing our organization in order to remain competitive and customer focused. Transformation costs increased significantly in the second quarter. And we expect total cost for this year of approximately DKK 1.5 billion. Costs for the compliance-related activities and the Estonia case increased DKK 0.9 billion from the first half of last year, which is more than expected. The total spend in the first half year amounted to approximately DKK 1.9 billion. Compared with our previous estimate of total costs for these activities of DKK 3.3 billion to DKK 3.5 billion in 2020, we now expect an increase of approximately DKK 0.7 billion to DKK 4.2 billion for the full year. However, the effect of the group-wide cost program is now showing in our expenses. In the first quarter, 400 positions were discontinued, and we continue to make progress on further cost initiatives such as product simplification, and focus on nonpersonnel expenses. Now let's look what we expect for the coming periods. Slide 10, please. As you could see from the preceding slide, expenses for the first half of 2020 reflect only a modest impact from our investment budget, partly because of a slight delay caused by the coronavirus pandemic. The transformation is now in full motion, and we expect to spend approximately DKK 1.5 billion this year and the remaining DKK 0.5 billion next year. Despite the change in timing, this is very much in line with our expectations. Costs continue to be a priority to ensure that we can increase profitability in a highly competitive and low-margin market. With a cost/income ratio of more than 60% in the second quarter, underlying costs continue to be too high. And given the increased macroeconomic uncertainty and the challenges this creates for our ability to drive top line income, we have to focus even more on bringing costs down. To ensure adequate progress, we will, therefore, expedite our efforts in this area, which will also include additional structural staff reductions in all parts of the organizations towards the end of 2020 as well as in 2021. This is a clear necessity for us in order to make sure that we can maintain competitiveness and deliver on our promises in the 2023 plan for a cost/income ratios in the low 50s. The initiatives taken this year are vital for us to secure an adequate cost trajectory for next year. The cost base for 2021 will reflect lower expenses for compliance remediation, including a lower spend on the Estonia case but also lower transformation costs and further FTE reductions as a result of our continued work in transforming the bank. We, therefore, expect to see materially lower costs for 2021. As this is still very early days in respect of the financial outlook, our estimate for now is for costs to come down 8% to 10%, equivalent to around DKK 26 billion, including transformation costs of around DKK 0.5 billion. Slide 11, please. We are progressing on the better bank transformation, and now it is all about execution, which is why we decided to allocate around DKK 1.5 billion solely for transformation efforts in 2020 to help us reach our visions for 2023 for our stakeholders. Most of the transformation costs are allocated to the 4 prioritized focus area for the remainder of the year to enhance the speed of the transformation process and ensure the necessary attention resources. For better ways of working, we are, as mentioned, improving how we work, and we are, therefore, investing to change our organization. Investments includes both non-IT and IT, which are also directed at proving end-to-end processes. We are also investing in purpose, brand culture and engagement with the aim of redefining our purpose and culture to reach our ambitions for employee engagement and customer satisfaction. On the group-wide cost program, we have taken action to become more disciplined in terms of cost across the group. We are looking into further simplifying our organization just as we are looking at a broad range of nonpersonnel costs across units. Continuous diligence in terms of hiring, near shoring, offshoring and rightsizing the organization is in focus going forward. For compliance under control, we are investing to establish the foundation for Danske Bank to be a fully compliant bank. We are continuously improving the foundation and investing in tools to enhance our trade surveillance and sanctions and embargo setup. 7 months into the program, the transformation continues in breadth, and all streams will continue to be executing towards 2023. Slide 12, please. Impairments in the second quarter amounted to DKK 1 billion, equivalent to a loan loss ratio of 22 basis points for the core activities. Loan impairments were significantly lower than in the second -- lower in the second quarter than in the first quarter when charges were recognized primarily due to the changes to macroeconomic assumptions in the IFRS 9 model and credit deterioration within our oil-related exposure. In the second quarter, we updated our macroeconomic model scenarios to reflect a more COVID-19 bespoke impact. The changes led to a more adverse GDP scenario, but also a slightly lower weighting of the downside scenario and assumes a softer effect from the development and property prices in 2020 and in 2021, resulting in a reversal of DKK 0.5 billion. Most of this reversal was offset by post model adjustments of DKK 0.2 billion, representing not yet materialized but expected credit deterioration for retail as well as commercial property exposure, that might not be fully captured by the models. Impairment against our oil-related exposure, which I will come back to in more detail on the next slide, continue to have negative impact and amounted to DKK 1 billion in the second quarter. The charges against this sector in the first half of the year explain the high charge at C&I. Specific charges against single name exposures for which a deterioration of credit wiseness has been identified amounted to DKK 0.4 billion due mainly to industries highly affected by the coronavirus pandemic. Total impairment charges for the first half of this year, which amounted to DKK 5.3 billion, are in line with our guidance and represent most of what we expect for the full year. Under the current assumptions, the impairment charters booked year-to-date should represent 70% to 80% of what we expect for the full year. We will now provide additional comments on our oil-related exposure. Slide 13, please. As you can see from the pie chart on the left side, the oil-related exposure accounts for only 0.8% of our total credit exposure. A little more than half of our exposure is against oil majors and oil services, whose credit quality in general is considered to be strong and stable. The remaining part, which accounts for 0.4%, is against various offshore segments in Norway, where the majority of exposures were entered into up to 2015 in a more benign market environment. However, the significantly and almost permanently lower oil prices we have seen since the middle of the last decade made new exploration activities less profitable and left the offshore sector with overcapacity in terms of production facilities and associated support capacity. Despite representing less than half of our exposure, the charges recognized represent 84% of total expected credit losses of DKK 4.4 billion. Around 2/3 of the exposure is now in Stage 3. Despite a rebound in oil prices during the second quarter, oil prices continue to be at a low level. The prolonged weakness of the oil market leads to continued uncertainty and especially the offshore services and drilling segment, and makes restructuring increasingly difficult. We consider the additional impairments we have recognized in the second quarter to be adequate based on the deteriorating outlook for the sector we have seen lately. Slide 14, please. Our capital position remains strong with a reported CET1 capital ratio of 17.6% at the end of second quarter. The CET1 capital ratio was flat as an increased REA and higher deductions for Danica offset the effect of net earnings after dividend accruals. The fully loaded CET1 capital ratio was 17.3%. The REA came in slightly higher than at the end of last quarter due to an expected increase in market risk REA of DKK 15 billion. Credit risk was down DKK 3 billion at the -- as the effect of increased lending was mitigated by the implementation of CRR Quick Fixes as expected. We expect to see an increase in the credit risk REA in the second half of the year because of the implementation of a revised set of EBA guidelines, we expect the implementation to increase the REA by around 3% with further increases in 2021. The leverage ratio was at 4.4% according to both transitional and fully phased rules. And then a couple of small adjustments to our financial outlook for 2020. We expect net interest income to be around the same level as in 2019 as margin pressure and higher funding costs will offset continued volume growth. For loan impairment charges in 2020, we still expect significantly higher charges. However, we now expect that most have been recognized in the first half of the year. The financial target for 2023, where we have an ambition for a return of equity -- return on equity of 9% to 10% is unchanged. Slide 16, please, and over to Chris.

Yes. Thank you, Stephan. Lastly, let me give you a quick update on our targets for societal impact and sustainability. We have set ambitious targets in this area because we know that as one of the largest Nordic bank we have a special responsibility to contribute to the societies we are part of. And only 6 months after we've launched these targets, I'm happy to say that we are well on our way to reaching them. For example, we have made great progress on our sustainable investments as we increased our green investments by DKK 10 billion in the first half of 2020 alone. We're now at DKK 20 billion and is well on our way to meeting the target of DKK 30 billion in '23. The same goes for sustainable financing. With DKK 70 billion -- DKK 71 billion at the end of the second quarter, we are well placed to meet our target of well above DKK 100 billion in '23. We've already -- also already supported more than 1 million people with financial literacy tools and expertise, an increase of 43% since the end of 2019. This is driven by our new platform, PengeSkyen, which, of course, you know means money cloud, and illustrates how digitalization and new IT solutions help us to drive our work forward and reach our new target audiences. We continue this important work going forward, and we'll keep you updated on the progress. Last slide, please. Those were the initial comments and messages. We are now ready for your questions. Please limit yourself to 2 questions. If you're listening to the conference call from our website, you're welcome to ask questions by e-mail. Operator, we are ready for the Q&A session.

[Operator Instructions] And our first question comes from the line of Jakob Brink of Nordea.

The first question regarding costs. That DKK 500 million underlying cost improvement you're guiding for in 2021 on Slide 10, I believe it is, is that sort of a consequence of the whole agile processes you're doing? And also in that connection, is the DKK 1.5 billion you're spending this year and DKK 500 million next year, how much of that is related to that agile process? That's the first part. The second part also on costs, on AML costs. I guess it's fair to say that this is not the first time Danske has been guiding up on AML costs. So why are you still so confident that you can reach the '22, '23 -- or sorry, the '23 target on cost? I mean it's a pretty big decline you need at some point. So what makes you confident that this time is different than the other times? And then if I may, just a very short question on funding. What should we look for? Is it DKK 15 billion or DKK 35 billion of additional funding needed in H2? Could you just give us some guidance there, please?

Yes. If I can take that one, if you look at the change of underlying costs, you need to keep in mind that there is between '20 and '21, probably also a good bit of inflation on the cost base. So the DKK 0.5 billion effectively is a bigger gross number and will be addressed by the better bank initiatives as well as the structural changes to our employee base that we have mentioned earlier. Out of the DKK 0.5 billion to DKK 1.5 billion, I think the question was how much is allocated to better bank. That is a mix of 2 things: one is investments in new abilities; and the second part is investments also in new systems. But I would think that about, let's call it, a good 1/3 is allocated to this initiative. On your question on AML cost, I would like to differentiate that a little bit in the sense of that what has been driving to the -- for the most part, the higher cost in the first half of this year is around the Estonia case, where we are now really crossing the Ts and dotting the Is. And as Chris has said, we still expect to be finished with our internal investigation by Q4, some of that probably already in Q3. It is around these expenses, which are unfortunately hard to predict. And the other part of it is mainly around AML remediation where we kind of work off on our backlogs in KYC, ODD and other stuff, where not in all the cases we have seen the effectiveness and efficiency of the setup that we have been looking for. So that is that part. The way going forward, again, we are confident that we, a, will see much lower Estonia cost next year as again the remediation and the forensic part as well as some of the litigation money spend should reasonably come down. And the same is true for remediation. We will still have an elevated level of compliance cost in total that over a year, and if we have really a full -- achieved full compliance, then will only come down if we can apply more efficiently there going forward. On funding, you have seen that our funding spreads came nicely back during Q2. We have also seen quite some funding activity in Q2. And so far, I think there is nothing really specific to be mentioned on H2 this year.

If I may add just one thing to Stephan's comment on funding, Jakob. As you know, we have a funding need for the year. But as you have seen in previous years, if the funding conditions in the market turns out to be favorable, we can, of course, in the second half, also decide to start front-loading some of our funding need for the next year.

But I seeing -- I guess, it's not that great. You mentioned some place in the report that you could also tap into Central Bank facilities. Is that part of the additional funding need?

And our next question comes from the line of Mads Thinggaard of ABG.

Yes. I'm very sorry. Yes, I was muted, indeed. Looking going back to the compliance hump that we discussed or Jakob asked about before, could you tell us a bit about how exactly you are going to bring a reduction next year, I mean, beside of the AML drop over the Estonia costs? I don't know if you could be a bit more specific there and telling us a bit about your -- what your -- what plans you have to reduce it for practical matters. And also under that, if you could confirm that it's still DKK 1.5 billion to DKK 1.7 billion compliance costs that we should expect in 2023, that would be nice. And then as a second question, looking into the cost bits on Slide 9, I wondered if you could tell just a bit about the remaining DKK 1.0 billion transformation costs in -- for the second half of 2020 how would that be split on investments and severance pay?

On the compliance hump, where do -- the question is, where do we expect the cost to go down between '20 and '21. That's out of basically 2 buckets. One is the Estonia bucket, where both the cost for forensic analysis as well as for legal support and litigation will come down. That is mainly reflecting the end of the internal investigations, which we expect for Q4 this year. Most of that money will probably be visible in external supplier spend. AML remediation, again, is, to a large part, working off backlogs in KYC, ODD and other stuff, which we expect to finish towards the end of the year. And in that sense, once the backlog is done, also that is cost that will come down. I confirm the 2023 DKK 1.5 billion to DKK 1.7 billion of compliance cost. With respect to the severance pay question for the second half of the year, I do understand very well that you're also probably trying to get a little bit closer to how much employees we are really talking about. Let me say that much, we will have to, and that is what we also promised internally. We will have these discussions first with unions and internal gremio and then come with a real number. So in general, I expect both investment activity as well as severance pay to pick up for H2.

Our next question comes from the line of Per Grønborg of SEB.

Two questions from my side. The first one being on your oil and offshore where you took a quite significant chunk in the first quarter. Now you're taking another significant amount in the second quarter. Can you give us some insight into what has been driving the worsening of that book? I hear that you're saying that it's become more difficult to restructure companies. But when we look at it from the outside, oil prices are up. Share price In the industry have clearly rebounded from the low levels we had back in April. So overall, a bit of insight into why are you taking this charge now and wasn't your provisions already adequate after Q1? That was my perception that, that was the message you sent at those days. The second question related to your Danish banking operations. If I look at, of course, assuming that the report you are releasing from real that Denmark is giving a fair picture, it looks like your banking operation is back at loss-making, excluding the mortgage business in Banking DK. Any thoughts on this going forward? I know that you're looking for a new head for that office. Maybe also an update on that part.

Yes, Per, on the oil and gas stuff, as I tried to allude, what we are seeing here is basically 2 parts. One is the oil and gas majors, which indeed are perceived as being stable and good credit quality, and they effectively do benefit from oil prices picking up a bit between Q2 and -- between Q1 and Q2. The other half of it is really exploration, drilling and associated services and between -- and let's call it, between Q1 and Q2, I think the oil price recovery has not been good enough and the oil price -- and the oil demand long term has not been good enough to assume that we will see exploration activities at a level that all the drilling equipment that we have around the world generally will be put back into service. So reflecting this insight, we have, again, backed up our allowance account for these operations. And if you look at the coverage ratios, you'll find that we are pretty cautious there. It probably also reflects a little bit of a catch-up on positions that we have on the books for quite a while. And in that sense, that is this part. Banking DK, I'm not sure whether it's smart to dissect a complete business model in separate pieces because there is always a lot of also, let's say, process and cost share between things. But it's obvious that in Denmark, despite the slight uptick on deposit margins, we see a general pressure on margins, and currently also in cost as we go through the invest phase for better bank. So the way forward, obviously, and that is what we have also said today in today's announcement, we need to focus on cost/income ratio, which means that we need to work both on the income as well as on the cost line.

Yes, with regards to the succession of Banking Denmark, we will inform the market as soon as there is something to inform. Currently, it is -- we don't have anything to say.

Okay. Is it fair to assume that is also holding back some of the initiatives that needs to be taken on Banking DK?

No, I don't see that at all. The way we're managing Banking DK now with Glenn Söderholm in the saddle, I don't have any concerns that we're not doing the things we need to do.

Our next question comes from the line of Johan Ekblom of UBS.

Just 2 quick follow-ups, if I may. Firstly, on the funding, can you confirm that you do not intend to issue senior nonpreferred given the changes to MREL regulation, just as we think of funding headwinds and tailwinds over the next 12 months or so? And secondly, just to come back to the AML. You said that you do not intend to report anything more to the public. But if something material was to come out of it, you'd make that known. Can you just remind us what your view is on potential sanctions violations there? Is that something that would automatically have to be reported to the market if it was found or not?

Johan, on financing, we will still issue a mix of funding instruments, including most likely senior nonpreferred to meet our MREL and our subordination requirement. You know that there has been a slight change from the Danish FSA, which has given us a little bit more leeway, but in principle, I would still assume that senior nonpreferred is an instrument that we would use going forward. Under AML, as Chris had said earlier, if there would be something materially, we would obviously need to comply with our market abuse regulation announcement requirements, which, in turn, means since we haven't announced anything on sanction breaches or the likes, we haven't seen any material issues in this matter.

And our next question comes from the line of Robin Rane at Kepler Cheuvreux.

Yes. So in the fact book, I said that number of branches in Finland was reduced from 31 to -- 31 at the end of Q1 to 19 in Q2. So could you -- I guess this is part of the cost reduction program. But could you elaborate a bit on how you see your position in Finland going forward? And then secondly, on the fees. Could you give some color on the drivers behind the quarterly movements in the pension and insurance line, please?