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

Thank you, operator. Indeed, I'm here, Chris Vogelzang, CEO of the bank. And I'm here with Stephan Engels, Chief Financial Officer; and Claus Ingar, Head of Investor Relations. What we propose to do today is run quickly through a few slides to give you the headlines of the announcements we made today and then open the floor up for questions if there are anything -- any. So if you go to the slide, which is called, why are we changing our organization, essentially, we're saying is that we've made a lot of progress to become a better bank last year -- over the last year. We've embarked on a very large simplification program and acceleration program in our IT development and in our product development, which will come to fruition before the end of the year with about 4,000 to 5,000 people, including a cost reduction there. We have made steps on sustainability. We are making steps on costs, et cetera, et cetera. So a lot of things are happening. But the next step in this journey, and it is a transformation journey, is that we also need to reduce the complexity of the bank. Our organization is too complex for the size of our operation, and there are too many handoff challenges between the business units. There are the risk, compliance, IT, et cetera, organizations. All have too many clients -- too many internal clients to deal with and we see too many local tailoring. So we decided to go from 4 to 2 business units, which we are convinced will make us simpler, faster and cheaper and make it possible to realize our commercial opportunities. If you go to Slide 2, what are we changing? We are going from 4 to 2 business units, 1 for Personal & Business Customers and that is essentially an organization which is primarily focused on standardized product offerings. That means that we will be standardizing as much as possible across the countries but also towards our clients. It is a very traditional distinguish -- distinction between 2 business units, which we've done and you can see in many banks, and we will run this Personal & Business Customers business unit very much as an efficient, streamlined activity. On the other side, we will have Large Corporate & Wholesale Customers, which is an organization which will make -- have more tailored products. That means that, for example, if you look at the current business segmentation in the bank across the countries, it's diverse across all those countries. And as an example, we now have people in the business banking unit of the business organization, business banking units who are essentially large corporate customers and vice versa, increasing cost, increasing complexity, increasing transfer issues, increasing politics, et cetera. So this will be a very, very clean organization going forward. That also means that we will not have strategy units in 4 units, HR units in 4 units, and we will have a far lighter country setups. Of course, we will have a country executive, but we will look at large strategy units and support units there and we'll stick to the regulatory minimum. So in that sense, the whole thing should be simpler, cheaper, faster, et cetera. At the same time, we are appointing or promoting our Head of Group HR, Karsten Breum, to the executive leadership team. I am of the opinion that we should, in organization of our size with the changes we are about to go through also in job reductions, also in culture, et cetera, have somebody on the table who is actually responsible for supporting that. Karsten was already in the team. We looked at this for a few months, and we now decided that he can actually be promoted. What we will also be doing is creating a group leadership team that -- and you have to see that also this -- that includes the ELT, but we add about now plus or minus about 15 people who have critical jobs below the ELT, and they will be in most of the meetings or commercial meetings with the ELT to drive the business and to make sure that the implementation and execution power of Danske is increased as these people are actually part of decision-making. These GLT members will be appointed in October as we are in the middle of some of these processes at the moment. In the coming months, the new organization will be finalized. I'm now looking at Slide 3. We will formally -- these changes will take effect on the 1st of January 2021. This also has a performance reporting element to it. I expect that -- we believe we will, well before that, be able to announce the next steps there. The -- our priority remains, of course, our customers and the change we make will help us to serve them even better. The changes we are implementing, the way we're doing that, the speed at which we're doing that will mean that none of the cost programs we are working on will be delayed, and none of the Better Bank programs will be delayed. If anything, I expect them to be accelerated by this because we are actually taking some decisions which otherwise would have been taking a longer time. Financial reporting will be updated with the pro forma figures in the annual report, and the report for Q1 '21 will reflect the new structure fully. Again, at the moment, our future organization is detailed. And again, that's very much underway, but there's people involved. So we will talk to people about that. We will immediately, of course, inform you. So all in all, this is a step within the overall transformation program the bank is doing. It aligns completely with our agile transformation, which is also based on customer journeys. And the customer journeys, we'll now easily implement across the geographies and also make these processes faster and easier. That is, in short, the reorganization we've just announced and I would open the floor up for questions, operator.

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

Sorry for maybe being a bit direct here at the beginning. But in April 2018 and September 2019, you also changed the organizational structure and new one here. So the third one in about 2 years. Seems pretty similar to the one you had back in 2018. When you changed back in '18, it was written that it was to become -- to come closer to the customers in the units that you did the change that you're now changing away from. So it could be interesting to hear your thoughts on that and why this is now the right solution for Danske Bank.

Thank you, and that's a good question. To start with, I wasn't responsible for that reorganization. And -- but obviously, you can have endless debates whether country organization or a functional organization is better. I believe in the stage Danske Bank is in, in terms of cost, focus, standardization, IT development, et cetera, et cetera, the more or less decentralization of everything around development strategy, et cetera, is not the right thing to do. So we are indeed turning some of this stuff around and we have reasons for that, as we have seen after that process in which also Estonia, of course, popped up, that this has led to a complex, decentralized organization with far too many deviations and unnecessary costs. So I'm not going to defend something which has been done in the past. I do know that you can have endless philosophical debates on what is the right structure. We are actually taking the organization further than before 2018 as we will have far more streamlined and disciplined processes, which starts indeed with our agile organization, which will now be running the whole of the Nordics. So yes, I mean this is our choice and we think it's a better choice.

So fair enough, of course, that you didn't do that one. But again, if I could maybe play the devil's advocate, couldn't it be also that -- so I think -- I can't remember longer back than '18, but I'm pretty sure, also in the past, the organizational structure had been changed roughly every second year, at least it seems so from all the times, and -- but -- and also, we have seen quite a lot of management changes recently that this could actually create a lot of fuss as well internally that will outweigh the potential positives on the new structure.

Well I don't think so. I mean let's also be very clear. It is not exactly that we were all happy with the performance of Danske Bank. We had the Estonia case. Our financial results were not overwhelming. So the fact that we are actually going through a transformation, and that implies also changing some people, so be it. I mean the business unit heads are very, very experienced, people who have been in the bank for many, many years and have done many, many jobs in the bank. So in that sense, their experience with the client groups and the segments is very high. Glenn Söderholm had -- literally had the job of Banking DK, the job of Banking Nordic and the C&I unit. And Berit has been responsible for large corporates -- has been responsible for corporate finance, has been one of the leaders in the markets organization and they all have long track records within the bank. So that's one side. The other side is that we truly believe that we had to inject in the bank capabilities which the bank didn't have. For example, Frans Woelders is now running the COO area and he has already twice executed a large-scale agile operation, and he's doing that now and we're doing that at great speed. With the appointment of Stephan Engels, we have made the step change in performance management and financial acumen as compared to any of the CFOs before. So in that sense, I think we are, at the moment, taking the right kind of balance between experience and new injections.

Okay. And then just a quick one here on a bit more -- so detail. So you're putting in the wealth management bit within personal and corporate banking, as I also understand. I was just wondering that change combined with also, I guess, COVID-19, will that have any implications to those Flexinvest Fri remedies that you were carrying out? Will that be delayed because of this change in COVID-19?

Now the remediation of Flexinvest has -- is finalized, I believe.

In the autumn.

In the -- yes, in the autumn, which almost finalized. So that's one. Two, I have not said anywhere that wealth is going to be in the Personal & Business Customers segment. So this is -- especially the unit, asset management and Danica, is something which we have to discuss in the next few days, but I don't see relationship with the Flexinvest Fri case.

Okay. And then very finally, sorry, but on the bank tax that is being heavily debated in Denmark, if that will come, is that then something that you will have to try and compensate for in your ROE plan? Or will that change the plan?

No, we compensate for that. Sorry, we compensate but it looks -- we -- the 9% to 10% stands, including the bank debt. So that means that we just have to cut harder or sell more. But let's first see what this bank tax is, yes?

Yes. Fair enough.

[Operator Instructions] And our next question comes from the line of Robin Rane of Kepler Cheuvreux.

Yes. So a follow-up on the previous analyst. Does this, in any way, alter the priorities in terms of the business that the bank will pursue? Or is this merely an organizational change to the -- yes. That's my first question.

No, it is not. Yes, shall I answer that immediately? The -- as I've said many times, I don't think we -- we are strategically broken. I think we are operationally -- we have operational challenges. And so that means that by doing this, we expect to execute in our universal banking strategy across the Nordic countries in a more efficient and more effective manner. So this is not a change in segment focus or portfolio choices. I always said every quarter that, of course, we stay open and we keep on thinking. And of course, we understand that if some businesses don't do well and we did everything we can to make that better that we might have to take other decisions. But for the moment, this is not the intention. The nice thing about this is that it at least gives very great, great clarity to us, at least, about the segment -- the different segments and businesses' profitabilities in greater detail.

Okay. And then any restructuring costs that will be associated with this? Is that already included in the guidance for this year? Or how should we think about that?

Yes. I mean, I'm also looking at Stephan now. As far as I'm concerned, I mean not more than we were planning anyway, but I'll give you Stephan.

All subject to final detail, but we don't see anything being affected on goodwill, intangibles or tax items. So that's just kind of where most of it. You know that we have quite a bit less in our transformation budget for the rest of the year. And I would think that, that would cover a good part of the severance pay. But again, it's not been fully fleshed out, and we'll update you definitely around Q3, yes. But is it also a concern? No.

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

I think the question, 10 months ago since you launched your 9% to 10% ROE target, now we get a re-ramp of your organizational chart. I think what a lot of investors are looking for is actually to see clear evidence that costs are coming down, including the number of employees are coming down. You talked about 4,000 to 5,000 people at the beginning. I didn't really get the context of that. But what should we expect going forward from here?

Per, I mean, thank you for your question. But I think we have been very clear in Q3 that our cost -- Q2, sorry, in our cost saving in 2021 is DKK 26 billion, which is a significant reduction towards the current projections. You can make the calculations yourself how many people that involves, but this is also part of that process. So we will have -- our cost next year will not be higher than DKK 26 billion.

When will we see the actual number of staff starting to come visibly down? Can you put a more clear timing on that? Is that before year-end? Will that go into '21?

I expect before year-end or just after year-end, already quite a significant reduction.

[Operator Instructions] And our next question comes from the line of Mads Thinggaard of ABG Sundal Collier.

It was just a small one I had on the organizational changes. And I mean your compliance cost overrun this year. Does -- the new setup you have here, does that make it easier to cut compliance costs going forward?

Yes. The answer is yes. And I can tell you why. If you have an organization which with a -- and again, I didn't introduce that, but with a great variety of procedures, a great variety of segmentation borders, et cetera, it means that you more or less have to tailor your compliance policies not only to the local legislation but also to the different internal complexities which we have imposed on ourselves. So that's one, and that's not done overnight. But we will now have a very limited number of people which will be responsible for, for example, personal banking instead of a range of people across the board. So these decisions can be made and implemented in a far more disciplined manner. Then on a more generic level, if you have to deal with 4 relatively separate business units, which also have a geographical angle, the compliance organization itself needs to be of a far larger complexity to service all those people if only -- over the hundreds of meetings. So in that sense, I mean this is not going to be manna from heaven from one day to the other. But this is definitely going to have an effect during 2021 on the control functions but also on the IT organization of the bank.

And we have no further questions on the line. Please go ahead, speakers.

Okay. Thank you very much. I hope this was clear. I mean -- and if there's more questions, you always know how to reach Claus. And we are going to work to make this really very successful. Thank you very much. Bye-bye.