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

Good afternoon, everybody, and welcome to the Danske Bank Q3 2022 Pre-Close Call. My name is Claus Ingar Jensen, and I'm Head of Investor Relations. 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 via teams, please be aware that if you want to ask questions, you must log on via the Teams app or your browser. And if you are online via a telephone line, the IR team will be available for questions after the call. In today's call, I will highlight relevant public data and macroeconomic trends in our markets as well as one-offs that you should be aware of before we start the silent period on the 7th of October, and of the publication of our Q3 report on the 28th of October. I will go through the P&L statement line by line and remark on capital at the end. Afterwards, we will open up for a Q&A session. But before we start and for the sake of good order, I would like to highlight the following: I will only answer questions related to already disclosed information and one-offs as well as publicly available data as of the 26th of September, unless otherwise noted. In this connection, I wish to stress that developments in specific indices may not always have the same effect on our performance. Firstly, I would like to recap on the current macroeconomic outlook before we go through the line items. The environment overall is characterized by uncertainty and our outlook, therefore, remains clouded. Central banks appear committed to bringing down the rapid rise in inflation, even if this requires an extended period of below trend growth and some weakening of labor market conditions. Our most recent economic outlook indicates a further uplift in Central Bank rates. And though unemployment is expected to rise, we still see it being at a low level of around 3%. So far, economic activity has remained high and household finances were robust in the third quarter, a good starting point for entering a potential recession. With regard to the Estonia matter, we still have no estimate regarding the timing, form of resolution or amount of a potential settlement or fine, which, as previously stated, is likely to be material. We can only refer to company announcement and #7 released on the 28th of April. On the 31st of August, we presented a solution for our legacy debt collection issues. This included setting the outstanding debt for 90,000 debt collection customers to 0, and our operating expenses for 2022 are therefore expected to increase by approximately DKK 0.6 billion due to an increase in provisions for compensation to customers. The write-down of debt will also lead to an increase in the loan impairment charges of DKK 0.65 billion, including -- which includes part of the compensation to customers. These items will be booked as one-off items in the third quarter of this year. Finally, as announced on the 16th of September, the changes in the ownership shares of the MobilePay merger will not materially affect Danske Bank's previously communicated expectations. The tax-exempted one-off gain of the transaction is expected to be approximately DKK 0.4 billion on the basis of the merger and the distribution of shares in the new parent company, in which Danske Bank will now have an ownership share of 28 -- 27.8% rather than the previously announced 25%. The merger continues to be subject to approval by the relevant authorities, including the EU Commission. In respect of the timing of the financial gain, we have noted that some estimates include this one-off gain in the third quarter. However, as we expect final approval to be given in Q4 this year, this should be reflected accordingly in [ your ] estimates. That said, let's have a look on net interest income. As always, please note that the impact of currency fluctuations in the regions in which we operate and further note that the third quarter has one interest day more than the second quarter with an NII impact of around DKK 40 million, four zero million per day. Regarding volume developments, we refer to publicly available sector statistics as the only externally available source of insight and note that we continue to see a positive trend for corporate lending, particularly in Denmark based on August figures. As we saw in the second quarter, please be mindful of the potential fair value effects on the reported lending volume at Realkredit Danmark when rates are moving up. Since Q2, 3 months STIBOR and NIBOR have increased 93 and 102 basis points, respectively, all on the basis of quarterly averages. Please be aware that such increases will lead to higher funding costs in Norway and Sweden, all else being equal. We have seen several central bank hikes during the quarter across the markets in which we operate. Further to the increases in policy rates, we have also adjusted our deposits and lending rates for customers. However, as always, these adjustments will be implemented with a slight delay due to notice periods for certain products. I will now highlight the policy rate changes we have seen in the regions in which we operate that will have an impact on NII in the third quarter. Following the ECB and the Danish Central Bank's rate hikes of 50 basis points on the 21st of July, we expect a 2022 effect of DKK 330 million to DKK 340 million with a 2-month effect in the third quarter. In Norway, at its meeting on the 22nd of June, the committee decided to raise the policy rate by 0.5 percentage points to 1.25%. And we followed on almost all lending products and, to a lesser degree, on deposits. Due to the notice period, prices in Norway were adjusted with effect from the 12th of August. In Sweden, on the 30th of June, Riksbank announced that they would raise its policy rates by 50 basis points to 0.75%. We have taken numerous price initiatives related to lending products to reflect the higher Central Bank and funding rates while we pass through some of the effects on the deposit side. On the 4th of August, the Bank of England raised its bank rate to 50 basis points -- by 50 basis points to 1.75%. In high-level terms, the higher BoE rates were largely passed through on the lending side while on the deposit side, pass-through has been more mixed depending on product and pricing. Additionally, please note that we have seen several rate hikes from central banks towards the end of the quarter, but the price actions that we have taken following these rate hikes will be implemented with effects only beyond the third quarter. Generally, we maintain our group NII sensitivity guidance across all currencies of around DKK 800 million per 25 basis points with a slightly positive convexity for the next 100 basis points increase. Turning to funding. We remain comfortable with our funding position. On the 6th of September, we successfully issued a new EUR 1.25 billion 3-year covered bond. The benchmark issue was priced at mid-swap flat, had a 2.125% coupon, and was more than 2.5x oversubscribed. In respect to our fee income in the third quarter, we have noted that retail activity generally remained relatively high. Our recent spending monitor highlighted that based on card data for Denmark, spending was up by 2.6% in August from August 2021, with a similar increase in July from the year before. Real spending adjusted for inflation has slowed, however, with an implied drop of 3% to 4% from a high level. The relatively high activity is in contrast to the consumer confidence level measured by Statistics Denmark, which is at a historically speaking, very low level. Considering the current erosion of purchasing power and uncertainty for households, the resilience of consumer spending is so far supporting activity-driven fees, but we could see an impact beyond the third quarter. Additionally, we reiterate that the development in interest rates in Denmark has enabled some of our customers to benefit from remortgaging, although this is countered by a general slowdown on the housing market. Finally, in respect to activity-driven fees, corporate activity generally remained at a high level, as indicated by public volume statistics. Activity remained subdued in the capital markets during the third quarter with low issuance activity in primary ECM markets in particular. We, therefore, expect income from capital markets fee to be affected and the same for investment fees due to the lower-than-expected asset under management in line with our guidance for total income for the full year. Looking at trading income and net income from insurance business, we can point to the volatile developments in the markets during the third quarter. In this context, we have seen a very large widening of spreads on callable bonds by some 25 to 50 basis points, mostly for lower coupon bonds. Credit spreads on noncallable bonds have also widened but only 10 basis points for 5-year bonds from the level in the preceding quarter. The yield spread between Danish and German government bonds has widened by 5 -- by 4 basis points as of the 26th of September. Performance related to customer activity in FI&C will always be subject to market conditions, whereas the valuation adjustments from our treasury operations and Northern Ireland, which contributed negatively in the second quarter, is likely to add materially to the uncertainty for trading income in the third quarter, driven by significantly higher interest rates in the U.K. market in particular. For both trading income and income from insurance, we continue to expect a below normalized level based on significant lower income in the first 6 months of the year. Please note that when comparing income from insurance to the level in the preceding quarter, we had a gain of approximately DKK 0.4 billion in the second quarter. In addition, we expect a one-off product-related cost of approximately DKK 125 million in Danica in the third quarter. We have -- we do not have any specific comments on other income, except that the merger of MobilePay will not be reflected in Q3, as mentioned in the beginning of this call. And this concludes our comments on the income lines. If we look at the cost line, we would like to reiterate our guidance for elevated remediation costs for the full year. Other than that, we do not have any specific comments regarding to our cost development. And we have no changes to our underlying cost guidance for the full year when you disregard the impact of the solution we have presented for our debt collection customers, which will result in a one-off cost of DKK 0.6 billion in the third quarter. Specifically for impairments, we are mindful of the potential impact of the deteriorating macroeconomic environment, but we remain comfortable with the quality of our lending book and the adequate provisions we have previously made in terms of buffers. In addition, the starting point for households in the Nordic countries remains solid with healthy home equity levels. And since the unemployment level remain high, we therefore do not have any immediate concerns with regards to the credit quality in the third quarter. And in respect of credit quality, we have nothing to add from when we published our Q2 report when you keep in mind that the impairments related to the debt collection case of approximately DKK 650 million, which I mentioned earlier. Finally, please note that the DKK 250 million one-off we booked in the second quarter related to a potentially lower recovery rate for debt collection customers in Denmark. We do not have any comments on noncore or the tax line, and this concludes our comments on the P&L. Finally, our capital position will, as always, be impacted by earnings less the dividend accrual. We do not have any specific comments on the risk exposure amount besides noting that market risk remains subject to volatility in the market. This concludes our initial comments in this pre-close call. Before we move on to the Q&A session, I would like to highlight that we enter into our silent period on the 7th of October. Shortly after today's call, we will also start collecting consensus estimates with a contribution deadline on the 7th of October end of business. Please note that we will publish our Q3 2022 report on the 28th of October at 7:30 a.m. CET, and that the conference call for investors and analysts will take place at 8:30 a.m.

We are now ready for the Q&A session. [Operator Instructions] And I can see we have a question here from Jan Erik.

Yes. Jan Erik from ABG in Oslo. Regarding your loan loss provision on the COVID side and sort of the -- what you had in -- after the COVID and pandemic and into the Ukraine war, et cetera. What kind of level do you have on your book today which we should sort of be aware of entering this more difficult phase? Have you touched upon that?

Yes. In total, we have PMAs or post-model adjustments of DKK 6 billion. And the DKK 200 million that we took in relation to the COVID is still included, but we did a kind of renaming where we reclassified DKK 100 million as a buffer towards global tensions earlier this year. So that's what we have. And then I think we have a question from Martin Birk.

Yes. Actually four questions. So I guess we will take them one at a time. The first one, NII sensitivity, has that changed after recent Central Bank rate hikes?

No, Martin, it's still the same.

Okay. And then second question on health and accident. It seems like over recent quarters, health and accident has been struggling on the increasing inflation. Should we expect similar impact on that area in Q3, given that inflation continues to tick up?

Well, I think as we mentioned in the second quarter report, the underlying health and accident business has actually improved. Due to that, we have seen the effects from the many initiatives taken by Danica. So we have seen fewer claims and we have seen that the recovery periods for our customers in Danica has also been shorter. So to what extent inflation will impact in the third quarter? I'm not aware, but I think we will have to await the third quarter report. But so far and up until the second quarter, we were happy to see improvement in underlying health and accident performance.

But as far as I understand, this effect comes from the investment side of the health and accident business [ case ].

Okay. Okay. Good. I thought you mentioned the underlying performance of the health and accident. No, you can say on the investment side, I think I covered that in my comments by stating that please be aware that there could be valuation effects also in the third quarter as we saw it in the second quarter. And that comes from what is happening on both rates market as well as share prices for the time being. So...

And then on your Northern Ireland franchise, given what has happened in sterling markets, I could imagine there would be one, of course, a sterling-DKK translation effect. But beyond that, how does this impact your Northern Irish franchise? And what should we make up of this chaos?

Well, I think that, first of all, we have so far this year seen a positive impact on NII from the Bank of England rate hikes. And that is also what we are flagging here for the third quarter development. Fully aware that there is a currency impact that we have to wait and see for. And then there is this hedging we have in place in Northern Ireland, which provided a negative contribution on the trading income for Northern Ireland in the second quarter, and that is also what we have tried to indicate that, that could also have a further negative impact here in the third quarter. But otherwise than that, if you were hinting to items like credit quality, I would not expect that, that will materially deviate from the comments we have made on the group's credit quality overall.

Okay. But in order to run the Northern Irish business, I assume you here also hold inventory. And given the massive movements in credit markets...

No. The business in Northern Ireland is primarily a corporate and retail business. And there is no investment banking activities as such which require that we hold inventory in pound sterling bonds, if that's what you are hinting to.

Yes, exactly. Okay. All right. Pretty clear. And then -- sorry for a final question. In terms of the one-offs that you guided for, as far as I recall, there was also DKK 125 million out of Danica.

Yes.

But those weren't included in the one-offs that you highlighted initially?

Yes. It was mentioned in my comments for Danica where I stated that in addition, we expect a one-off product-related cost of approximately DKK 125 million in Danica in the third quarter. Okay?

I didn't get that, sorry.

That's okay. Okay, seems to be the last question. So thank you very much, everybody, for participating and looking forward to talk to you when we publish the third quarter result. Have a nice weekend. Goodbye.