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

Good morning, everyone. Welcome to the conference call for Danske Bank's financial results for 2022. My name is Claus Ingar Jensen, and I'm Head of Danske Bank Investor Relations. With me today, I have our CEO, Carsten Egeriis; and our CFO, Stephan Engels. In today's call, we will present Danske Bank's financial results for 2022. We aim to keep this presentation to around 30 minutes and after the presentation, we will open up for a Q&A session as usual. Afterwards, feel free to contact the Investor Relations department if you have any more questions. I will now hand over to Carsten.

Thanks, Claus, and I would like also to welcome you to our conference call for the annual report. We have now put 2022 behind us and unfortunately, it turned out to be a completely different year from what we expected at the time of this conference call a year ago. The outrageous Russian invasion of Ukraine brought war to Europe and sparked geopolitical tension to a level we have not seen for decades. In 2022, a rapid increase in inflation reemerged as a major macroeconomic challenge, we started to see pockets of inflation already in 2021, driven mainly by supply chain issues caused by the pandemic. However, energy prices soared at the outbreak of the war in Ukraine and drove inflation up more broadly, including food prices. On the basis of this, we saw a prompt response from a number of central banks and many years of negative interest rates were reversed back to a more normalized territory inside a very few months. The initial reactions in the economies were a decline in consumer confidence and house prices followed by more bleak economic outlook, which I'll come back to later in this call. Although energy prices and long-term interest rates have peaked, uncertainty remains high. In this challenging environment, we have done our utmost to support our customers, both financially and with strong advisory services. Fortunately, the starting point for most of our customers was good in 2022 against the backdrop of strong macroeconomic conditions with record high employment and strong activity for most of the year despite increasing costs for both businesses and consumers. 2022 also marked the year in which we made further progress on our plans. In order to increase our focus on customers and execution, we adapted our new organizational setup in 2022 and we continue the progress in terms of enhancing our digital solutions and simplifying our business, which supported the strong commercial momentum we saw across our business units and within the corporate customer segment in particular. This resulted in solid growth and improved market share in many parts of our business. Another strong focus area for us has been and still is our work on compliance remediation. The significant amount of resources we have invested in recent years has enabled us to make good progress on our financial crime plan. A couple of examples are increased automation of processes for KYC and transaction monitoring as well as our ability to close regulatory observations. Progress has also been made on reaching solutions for our legacy cases and in this context, of course, especially pleased that late in the year, we were able to reach a final resolution with the U.S. and Danish authorities in relation to the Estonia matter. We have learned from our mistakes, and we have taken the steps necessary to ensure that Danske Bank has robust measures in place to do everything possible to prevent such failures from taking place again. Sustainable progress is at the core of our strategy and our purpose as a bank. We recognize that sustainability and especially sustainable finance is critically important for us as we can play a pivotal role by providing capital for the green transition. With our clear ambition to lead on sustainable finance in the Nordic countries, we were delighted to see tangible progress on our sustainability ambitions in 2022. So for instance, we provided project financing for the consortium behind the Hornsea 2 wind farm, currently the world's largest offshore wind farm, and we continue to be ranked #1 among Nordic arrangers and Bloomberg's global league table. In addition, just 2 weeks ago, we raised our ambitions when we launched our new comprehensive climate action plan, which I will discuss in more detail later in the presentation. Financially, the result for 2022 included a significant impact from the provision for the Estonia matter, and we, therefore, posted a net loss for the year of DKK 5.1 billion, including one-offs, which is in line with our guidance. The underlying result for the year was based, among other things, on strong customer activity following the reopening of societies after the pandemic. Against that background, we saw a solid uplift in lending, and improving market share positions for retail as well as corporate bank lending in Denmark and towards the end of the year, however, housing market activity declined as a result of higher uncertainty and corporate lending demand retracted from a very high level. The return to a more normalized interest rate environment we saw during the second part of the year was a very important contributor to our results and in combination with stringent execution of strategic pricing initiatives; this enabled us to reestablish deposit margins. The turmoil in the financial markets impacted our results in different ways. The significant higher uncertainty led to lower activity and thereby lower income from our capital markets business, however, partly mitigated by a shift in preference towards bank lending. Within our trading and insurance activities, the full year results are an impact from very difficult market conditions due to significant repricing of almost all assets and as I explained in our previous conference call, this repricing happened over a relatively short period of time during which we continued to provide liquidity to our customers and with a magnitude that we only really know from stress test scenarios. The underlying insurance business performed well, and we're pleased to note that the recovery in the financial markets in the second half of the year translated into more positive results, not only for insurance activities but also for trading income and I'm also pleased to see that this has continued into January this year. Our operating expenses came in at DKK 26.5 billion, including the provisions for the accelerated solutions for the debt collections case. Net of the provision underlying costs amounted to DKK 25.6 billion, in line with our guidance. Costs for the remediation of legacy cases, including the Estonia matter, have been elevated throughout the year, partly mitigated by good progress on underlying cost efficiency. We expect sustained elevated costs for remediation of legacy issues of approximately DKK 1.1 billion in 2023. Compared to the level at the end of 2021, salary costs are down by more than 3%, underpinned by a decline in the number of FTEs of more than 5%, and also disregarding our AML ramp-up. Credit quality remained strong and the loan loss ratio for 2022 came in at 8 basis points, including the effect from the accelerated solution for the debt collections case. Despite a high degree of macroeconomic uncertainty, the credit quality of individual customers was strong, and our impairment charges consist mainly of model-driven effects, including additional post-model adjustments. That said, I'll now comment in more details on what we see ahead of us in 2023. Given that 2022 turn out to be a very turbulent year given the rising geopolitical tensions and changes in the macroeconomic landscape, I believe it's worthwhile to provide an insight in how we see 2023 and how we believe we're positioned to navigate in this more uncertain environment. During primarily the second half of last year, various economic forecasts, including also our own Nordic outlook, were adjusted towards deteriorating or even mild recession scenarios. In this context, the outlook for unemployment is of particular interest for us as it plays an essential role for credit quality. We have noted that unemployment in Denmark is expected to rise, but only modestly, and of course, from historically low levels. Also in Denmark, we consider the economy to be well prepared after several years of financial consolidation for our customers and strong public finances. Against this strong backdrop, Danske Bank is well positioned to face a scenario with lower growth as we have a robust and a well-diversified balance sheet derived from prudent credit policies and comfortable impairment buffers, including a solid capital position. When it comes to our exposure against commercial real estate, we have maintained a prudent approach post the great financial crisis and over the past 3 years, reduced exposure to the nonresidential segment. Our conservative approach has ensured that our exposure in Sweden has remained stable despite market growth and well diversified with lower concentration risk over the past years. Post model adjustments for the commercial real estate exposure were increased in 2022 to address increasing uncertainties and now stand at DKK 1.8 billion. For 2023, we may see loan impairment charges of up to DKK 3 billion, primarily driven by weaker macroeconomic outlook affecting our models. In this operating environment, we expect a net profit of DKK 15 billion to DKK 17 billion and I will leave it to Stephan to comment in more details on that later in the call. As we look into 2023, we will continue to focus on driving our commercial agenda and to build on the many improvements that we've seen in 2022. As mentioned earlier, we have a clear ambition to be the leading bank for sustainable finance in Denmark and among the market leaders in the Nordic countries. Further to this, 2 weeks ago, we raised our ambitions as we launched our new climate action plan and this plan outlines how we will reduce CO2 emissions across all customer segments in order to accelerate our customers' green transition; and a key element of this plan is an ambitious increase and expansion of our 2030 targets. So for instance, we've increased reduction targets for power generation from 30% to 50%, and for shipping from 20% to 30%, to around 50%. We've also expanded the scope of our targets to now also include commercial real estate, cement, steel, and also personal mortgages. Our commitment to sustainability and to net zero is not new, but we are now specifying our starting point and our road map to reaching this goal and with around DKK 2,800 billion in invested capital and lending, we really have a unique opportunity to contribute to solving the climate crisis. The journey ahead of us will undoubtedly be challenging, but we're committed to supporting the sustainability transformation, and we will continue to play the role that we have always played and that is helping our customers adapt to new circumstances and to benefit from those new opportunities. Let's take a look at our 3 core business units. At personal customer, we have generally seen high customer activity, particularly related to the Danes' ability to remortgage, which has supported our fee income and more than mitigated the lower AUM-related fees. Additionally, the solid improvement in profit before impairments clearly benefited by the improved deposit margins driving NII up 11% year-on-year and 26% quarter-on-quarter. Given the economic uncertainties and the slowdown in the housing market, the lending trend was more muted towards the end of the year. This also affected our ability to regain further market shares at Realkredit Denmark. However, we continue to focus on improving our front book market share, which is also supplemented by growth in market shares for bank lending, including the growth for our Danske Bolig free loan product of almost 60% in 2022. It is a strength of our franchise that we're able to accommodate our customers' needs by offering both traditional mortgages through Realkredit Denmark and competitive mortgage like bank products. We also see a steady improvement in the customer flows in Denmark and high priority segments, such as young customers and the mass affluent segment and also the Private Banking segment. Furthermore, the recent box meter survey on customer satisfaction showed significant improvement with Danske Bank improving both in 2021 and being the most improved in 2022. At personal customers Nordic, we have taken steps to strengthen our advisory services further, and we have a clear ambition to continue to improve profitability also through our renewed partnership agreements, which include improved repricing possibilities. This will support our effort across the region on both lending and deposits and our ability to expand our wallet through cross-selling and more holistic customer relationships. Throughout the year, we continued to expand and improve our digital offerings to our customers. This includes the ability to open transaction and saving accounts directly in the mobile banking app and 53% of all new accounts were opened digitally. Another proof point was our customers' preference for online bank meetings with 70% of meetings in 2022 conducted online. No doubt that these initiatives both enhance customer satisfaction and they contribute to further improving efficiency and thereby lowering our cost to serve. For our business customers, we continue to see positive lending volume across regions, which is a testament to our ability to help clients navigate the current uncertainties. Furthermore, our tiered service model gained further recognition among customers with associated activity within FX and within cash management. Our fee initiatives and our cross selling of products to our district platform, together with improved deposit margins, bolstered our core income throughout 2022 and created sustainable profitability enhancement. We continue to expand our digital ecosystem through third-party integrations and new in-house solutions that will allow us to further tap into new revenue streams and improve our value proposition towards customers. It will also allow us to further harvest efficiency gains going forward. This also contributed to the significant uplift in profitability through lower FTEs and from core banking income that benefited from improved deposit margins that drove NII 13% higher in the quarter alone as well as high ancillary income, supporting a fee uplift of 5% in Q4. With an uncertain year for the SME segment ahead, we're really pleased to see improved customer satisfaction, which is a testament to our commitment and this includes a #1 on customer satisfaction in Sweden and Finland as we continue to invest in our digital channels and expert advisory services. Let's turn our focus to LC&I. 2022 saw high customer activity and was a very busy year for LC&I and for our customers. We experienced strong demand for credit advisory services and risk management solutions as we supported our customers in managing an uncertain environment. Our balance sheet and our advisory expertise, coupled also with the significant demand for credit enable us to support customers with more than $40 billion in additional lending during 2022 and measured in relative terms, lending volumes at LC&I increased 21% from the level the year before. Overall, our customers have utilized new and existing facilities against the backdrop of a challenging operating environment with, for instance, the rapid increase in energy prices and challenging access to capital markets, but the growth also reflects our strategic ambition to grow especially also in Sweden. The strong growth in lending volume as well as higher deposit margins were key drivers of NII, which increased 18% year-over-year. And total income in our general banking activities have now grown with a CAGR of approximately 5% over the past 3 years, and I'm very pleased to see that Q4 was the highest ever income quarter in general banking. Notwithstanding the increase in NII, total income in LC&I was down 12% from the level in 2021 as a result of lower fee income and significantly lower net trading income. The decline in fee income of 15% from last year stemmed from lower capital markets-related activity primarily deal volumes and equity capital markets and lower income from Asset Management following a decline in assets under management and lower performance fees. However, strong traction for our M&A offering and continually strong activity within everyday banking services, such as cash management, partly mitigated the decline. The turmoil in the financial markets had a significant impact on our trading income in 2022, especially in Q2, within our fixed income business. As a leading Nordic fixed income house, we continued to support our customers through this very volatile period and in the second half of the year, net trading income recovered as market conditions became more supportive. And with that, I will hand it over to Stephan.

Thank you, Carsten, and good morning. I will now briefly go through the reporting lines in the income statement and reserve comments that are more detailed for the following slides. As Carsten just mentioned, we saw good progress for our core banking activities in 2022 as the strong commercial momentum led to an increase in lending volumes, primarily with our corporate customers, followed by implementation of pricing initiatives. Income from core banking activities performed well and was in line with expectations. NII was up 14% from the level in 2021 as the normalization of interest rate had a positive impact on deposit margins as well as from an increase in lending volumes. The positive development in volumes more than mitigated margin pressure from lending activities. The improvements accelerated in the fourth quarter, where NII was up 18% from the preceding quarter as the effects from normalized interest rate materialized in our numbers. Net fee income came in lower than the level in 2021. Fee income benefited from higher customer activity throughout most of the year. However, the turbulence and uncertainty in the financial markets had an adverse impact on fee income from capital markets activities as well as on investment fees. In Q4, fee income was up 2%, driven by an increase in fees from capital market activities and from remortgage activity in Denmark. The decline in net trading income from the level in 2021 reflects the impact of volatile and difficult financial markets on our rates business, primarily in the first half of the year. In the second half, income recovered as market conditions became more supportive. Trading income was also impacted by various valuation effects, which I will comment on later. The difficult conditions in the financial markets had a significant impact on our insurance business. As Carsten mentioned earlier, the underlying business at Danica Pension performed well with high premiums and a modest level of claims. However, net income from insurance business came in significantly lower due to negative investment results on life insurance products where Danica has the investment risk. Other income amounted to DKK 1.9 billion in 2022, including the gain of DKK 0.8 billion from the sale of our business activities in Luxembourg and MobilePay. Operating expenses came in 3% higher than the same period last year due to a one-off provision related to the accelerated solution for the debt collection case of DKK 0.9 billion in total. Excluding the one-off expenses were in line with our guidance for underlying costs for the full year of around DKK 25.5 billion. Of the total provision, DKK 0.3 billion was recognized in Q4, which explains the increase from Q3. Remediation and litigation costs remained elevated during 2022. However, we continue to improve our underlying costs quarter-by-quarter. Loan impairment charges reflect continually strong credit quality and amounted to DKK 1.6 billion for the full year. The charges include the one-off effect of EUR 0.7 billion relating to the debt collection case recognized in Q3. In Q4, loan impairment charges were driven by updated macroeconomic scenarios and post-model adjustments. Overall credit quality continued to be strong, resulting in reversals in Q4 related to individual customers. Finally, the tax expense of DKK 2.8 billion reflected mainly nondeductible items, including the provision for the Estonia matter and the goodwill impairment charge in Danica. Net profit for the year, thus amounted to a loss of DKK 5.1 million, including one-offs and in line with our guidance. For Q4 in isolation, the net profit was DKK 4.2 billion. Now let us take a closer look at the development in the net interest income for the group. Overall, NII saw a healthy improvement of 14% for the full year and 18% quarter-on-quarter, driven by deposit margins as well as robust growth in lending volumes, primarily driven by our corporate customers. The positive effect was partly countered by various lending margin effects. On the deposit side, the uplift was driven by a normalization of interest rate as a result of the rapid change in central bank rates in the second half of the year, but also from the optimization of deposit pricing, we started implementing in the first half of the year. Deposit margins at the end of the year clearly reflect that we have moved away from the negative interest rate territory, and margins have to a high degree being reestablished. Total deposit volume was stable throughout the year with a slightly varying development between the segments. On the contribution from lending, the increase in volumes added positively to net interest income. As I just mentioned, that was primarily driven by unusually strong demand from our corporate customers. However, as expected, the trends slow towards the end of the year. This effect was offset by various margin effects, including delay effects, lower margins on mortgages in Denmark and an impact from credit facilities that had been floored at 0. The credit demand we saw throughout the year includes liquidity facilities to some of our larger and better-rated corporate customers, which is contributing positively, but at the same time, lowered our average lending margin. Our interest rate sensitivity for rate hikes has been changed to DKK 700 million to DKK 800 million, reflecting that we are now in a positive rate environment, and we expect higher migration to savings accounts and potential effects from quantitative tightening. And finally, given the resolve status of the Estonia matter, we resumed our wholesale funding activities in the beginning of this year. Confirming our good access to the capital market, we issued both preferred senior and non-preferred senior bonds in different maturities and currencies equivalent to DKK 23.5 billion. Against this background, we expect the remaining funding need in 2023 to be approximately DKK 60 million to DKK 80 billion. Next, I will comment on our fee income development. We report lower fee income down 7% year-on-year. However, the underlying development differed between segments, underlining the benefits of our diversified business model. In general, activity-driven fees saw a strong development, whereas the volatile conditions in the financial markets had an offsetting impact in the form of lower fee income from our capital markets-related activities. The increase in activity-related fees was, to a large extent, driven by our everyday banking services at all business units and reflects, amongst other things, that the economy gained momentum after the pandemic-related lockdown periods. In addition, there was a positive contribution from good remortgaging activity as a result of the changes in interest rate. Repricing of service fees during the year also had a positive impact on fee income. During Q4, we continued to benefit from remortgaging activity, whereas other activity-related fees were more in line with the previous quarter. As mentioned previously, fee income from our capital market related activities was impacted by the very volatile and unpredictable conditions in the financial markets. Hence, capital markets income came in lower than the year before, which benefited from our participation in the Landmark transaction. Income in Q4, however, came in higher than the preceding quarter due to good activity within M&A advisory services. The difficult financial market conditions also led to a decline in investment fees. The decline in investment fees was due to lower assets under management and lower investment appetite among our customers. The annual performance fees in Asset Management came in significantly lower than in previous years as this item relates mainly to the performance of certain fixed income funds that were operating under difficult market conditions in 2022. Now let us turn to the development in trading income. As mentioned previously, the high volatility in the financial markets and the general repricing of almost all assets we saw for most of the year had an adverse impact on the trading income. The negative impact came primarily from our rates business during the first half of the year when lower liquidity in the Nordic fixed income markets made the market making services and the management of the risk helped to support our fixed income franchise difficult. The effect was partly mitigated by our FX business that saw a positive development. As market conditions became more supportive in the second half of the year, trading income in our rates business improved to a more normalized level, supported by initiatives taken to lower risk utilization. Higher trading income from the banking units contributed positively and confirms the strong customer activity we saw in 2022 within other types of income. The result of other activities was negatively impacted by various value adjustments, including market-to-market effects in group treasury and from the accounting treatment of directly owned securities issued by Danske Bank. The interest rate hedge in Northern Ireland had a negative impact for the full year, but recovered significantly in Q4 due to lower interest rates. Please note that this should be seen in the context of a strong uplift in NII in Northern Ireland, which more than countered the valuation of the hedge. Now let's take a look at our operating expenses. Total cost in 2022 were clearly affected by the additional Estonia related provision and the goodwill impairment charge in Danica booked in Q3. Outside of these effects, operating expenses came in higher than in 2021 due to the provision for the debt collection case of DKK 0.9 billion. The provision was increased by DKK 0.3 billion in Q4 driven by further validation of the customer compensation model to ensure that our total provision is sufficient to cover the expected cost of the solution. We expect sustained elevated costs for remediation of legacy issues of approximately DKK 1.1 billion also in 2023. Excluding this item, operating expenses came in slightly lower than the year before due mainly to progress on structural cost takeout and efficiency gains, resulting in lower staff costs amongst other things. During 2022, the total number of FTEs came down by more than 700 despite the planned up staffing within AML and compliance. Throughout 2022, costs continued to be impacted by elevated legacy remediation costs, which, however, were almost in line with our expectation. The increased Swedish resolution fund contribution and an increase in inflation and IT costs driven by expenses of a one-off nature also drove costs higher. Expenses in Q4 were, as I just mentioned, impacted by the additional provision for the debt collection case of DKK 0.3 billion. Staff costs increased due to inflation and higher severance pay. In addition, we saw slightly higher costs for legacy-related cases in particular. Finally, in Q4, the final settlement in December with the U.S. and Danish authorities led to an adjustment of the provision of DKK 0.2 billion. Continuing our efforts to improve operational efficiency is increasingly a key focus area for us, given that our forecasting progress incorporates an increase in inflationary pressure that will be a headwind going forward. No doubt the level in 2022 was higher than initially anticipated, but it was driven by our deliberate decisions and was, in many cases, characterized by items of a one-off nature that helped put legacy cases behind us and enhance the foundation for achieving the cost income targets we have outlined. Here, we outlined our strong portfolio, trends, and impairments. While the macro outlook deteriorated further during Q4 and the implication of the higher interest rates are expected to impact both corporates and household. The quality of our lending book remains strong. We continue to see limited downward migration of exposure. As a result of recoveries in our oil and gas portfolio as well as post pandemic recoveries in general, the share of net exposure in Stage 3 continued to trend down as single name deterioration remained very modest. Net new single name impairments resulted in reversals for the quarter, which were, however, mitigated by the updated macro scenarios in our models, which led to charges of DKK 0.8 billion as well as additional post-model adjustments of DKK 0.6 billion to provide a further cushion against potential credit deterioration throughout 2023, not yet evident in our portfolio or captured through macroeconomic scenarios. The total impairments of DKK 774 billion booked in Q4 brings our full year loan losses to just under DKK 1.6 billion, which is in line with our expected through-the-cycle loan losses level of around 8 bps. However, over the course of '22, these charges were by and large driven by the adjusted macro scenarios to reflect the higher inflation rate and lower growth expectations as well as additional PMAs and the DKK 650 million impact from the debt collection case. With a mentioned addition to our post model adjustments, our buffer now stands at DKK 6.6 billion. So while we are cautiously looking at a year of high uncertainty and take this into account in our outlook, we remain comfortable with our well diversified and low-risk balance sheet, which is further supported by healthy household finances and generally low leverage. Headwinds in the corporate could naturally be expected with the current economic sentiment, and we are prudently managing accordingly to mitigate any tail risk that could match, which is also reflected in our financial guidance that I will outline in a moment. Before that, let's have a look at our capital position. Our reported Core Tier 1 ratio at the end of the year increased to 17.8% from 16.9% at the end of the preceding quarter. The increase includes the full effect of the net profit in Q4, in line with the Board's proposal not to distribute a dividend for 2022. Additionally, lower capital deductions for our insurance activities in Danica Pension driven by financial market effects and the lower risk exposure amount added to the increase in CT1 ratio. The decrease in risk exposure amount was due mainly to a decline in credit risk. Our fully phased-in Core Tier 1 requirement was 13.6% at the end of Q4, unchanged from the preceding quarter. We remain comfortable with Danske Bank solid foundation and healthy buffer to current and future regulatory requirements. And then I would like to comment on our outlook for 2023, which, of course, is subject to uncertainty and depends on macroeconomic conditions and volume growth. In respect to our income lines, we expect our income to grow, driven by higher NII, and our continued efforts to drive the commercial momentum. And despite a high degree of uncertainty, we expect income from trading and insurance activities to recover from the levels in 2022. Our costs in 2023 are expected to be in the range of DKK 25 million to DKK 25.5 billion, reflecting continued focus on cost management and despite pressure from inflation. The outlook includes sustained elevated costs for legacy remediation of approximately DKK 1.1 billion. For loan impairment charges, we expect up to DKK 3 billion, driven primarily by weaker economic macro outlook, affecting model-driven impairments. And finally, as Carsten announced previously, net profit for the year is expected to be in the range of EUR 15 million to EUR 17 billion.

Thank you, Stephan. Those were our initial comments and messages. We are now ready for your questions.

[Operator Instructions] The first question is from Namita Samtani from Barclays.

Just a question on deposits in Denmark. I can see from the report, most of the deposits are in maturity of 0 to 1 month. So what percentage of these are transaction accounts and what percentage are those, which are getting paid 50 bps? And just a follow-up on deposit rates in Denmark. Danske is currently paying 50 bps to deposit holders who have below DKK 100,000. Do you believe this is a sustainable level? And why is the deposit rates paid to customers not more in line with where the base rate is? Thanks.

Let me start and then Claus maybe can come up with some more statistical detail. In general, in Denmark, we don't pay any interest rates traditionally on the so-called transaction on MID accounts but what we have been seeing throughout the year is that there is an increased migration to more savings products or even term deposit products. Year-over-year, it's 19%, but obviously, most of that has been happening, call it, throughout Q3 and Q4. So in that sense, we expect that to go on. So far, I think the market has been, call it, relatively disciplined. But again, going forward, and that's also reflected in the interest rate sensitivity the ongoing pressure on disposable income, the most likely slightly uptick in unemployment, as well as the possible effects of quantitative tightening, will probably both affect the deposit volume in total as well as the product mix throughout the year. Claus, is there anything you want to add?

I don't think so.

The next question from Sofie Peterzens from JPMorgan.

So previously, you guided for DKK 23.5 billion, of course, and now it DKK 25.5 billion. What could have happened with the DKK 2 billion of gross sales that we previously should have been expected? And if you could maybe just give a little bit more detail around kind of what your inflation expectations are, salary increases that you're seeing, kind of any other inflationary like growth, cost increases, and then how much the offsets are? So that would be my first question. And then my second question is on loan losses. If you look in the third quarter, your Stage 3 loans were down quarter-on-quarter, you have DKK 6.6 billion of model adjustments in the quarter, you saw lower risk exposure amount from credit risk, which implies that the credit risk was lower. So why do you guide for DKK 3 billion of loan losses in 2023? What are your assumptions for these biggest seems soon? I mean do you mean it seems that your credit quality is quite solid. So shouldn't your loan loss is coming lower in 2023? Thank you.

So thanks for your questions. Just to take the loan loss rate question to start with. It's correct that we have seen a decreasing Stage 3 exposure and we continue to see very little negative rating migration and in fact, very little asset quality deterioration. So we remain very comfortable with our asset quality. The up to DKK 3 billion that we're guiding is in the light of an expectation of a mild recession and falling house prices and slightly increasing unemployment. We remain careful in terms of what we see is a very uncertain environment, and that is why we're guiding up towards DKK 3 billion based on sort of the current uncertainty and those macro dynamics. On costs, essentially, you can think about 2 main components of the increase from the initial guidance of 23.5% to now 25% to 25.5%. One component is roughly DKK 1.1 billion of remediation associated with a higher-than-expected remediation cost on the debt collections case as well as continued costs from, let's say, closing down the various different things we need to do on the back of the Estonia case. You'll recall, we actually and close that case, so to speak with authorities at the very back end of '22, and therefore, there is still a tail of cost there. So that's DKK 1 billion and then the other DKK 1 billion, roughly speaking, is inflation. Recall that the 22.5% or something given in '21 way before we saw the quite the much higher inflation numbers. And in terms of inflation assumptions, Stephan, that we're using those costs?

Yes, I would add maybe one interesting piece of information, if you already look at 2022 compared to our initial expectation, we have probably around DKK 300 million of inflationary pressure already in the cost base 2022. Secondly, if I can you give you some numbers, the inflation in Denmark in '22 was already 7.7%. I'm not in the forecasting business really, but I think it gives us a bit of a flavor for '23 as well. And then keep in mind that in Lithuania, where we have quite a substantial part of our cost base as well, inflation was well above 15% in 2022. And that will also clearly drive inflationary pressure mainly on staff cost, but also on all the other related services and index contracts that we have for 2023.

The next question from Omar Keenan from Credit Suisse.

So my question is related to the remediation cost. Could you please add some color around this validation of the customer compensation model and can you give us really an idea as to what the math is around working out some of these remediation costs, just so we can get a bit of comfort as to what the final expense might be and whether you can also give us a look for 2024 on that? Or can we be certain that 2023 will be the last year of that? And my second question was on interest rate sensitivities. I was wondering if you could just give us a bit of an updated view on your interest rate sensitivities in the various geographies. Thank you.

Yes. Thanks for the question. On the remediation question on debt collection, essentially, at the end of the summer, end of August last year, we presented this alternative solution to ensure that we could compensate all the customers that we needed to compensate. We also, at the same time, said that we needed to do more sample testing to validate that model. Our primary aim is, of course, to compensate all the customers that need compensation as quickly as possible, which is why we're doing a model-based solution to compensate the customers in the process of doing those additional sample tests. It turns out that particularly the older customers, customers that have been with us before 2004. It is very difficult to do that extrapolation and therefore, we've decided to provision a further amount to ensure that we have a robust compensation amount. This is, of course, a process that we also ongoing discuss with our independent expert who is overseeing this work. And I think I can say that we feel as comfortable as we can that we now have provisioned for the cost, we would expect, if anything, a substantially lower remediation cost in 2024. On interest rate sensitivities, we guide to DKK 700 million to DKK 800 million. Clearly, there's lots of assumptions around behavioral aspects to this. Amongst others, ongoing pricing competition to what extent customers will move more of their deposits into saving products, both saving accounts and saving products. Then, I think there is also an aspect of an expectation of further savings depletion as unemployment increases and inflation persists. I don't know if you want to say anything on NII sensitivities across geographies.

The only little comment I would make that DKK 700 million to DKK 800 million is the 25 bps parallel shift of the curve theory and across all currencies. And I think without getting into forecasting, I think you need to keep in mind that there's probably differences in what we can expect in rate moves going forward between SEKs, NOKs, Euros and also the U.K. pound, which our Northern Ireland operation is in.

But can you tell us how the DKK 700 million to DKK 800 million is split between different currencies?

That is very assumption-driven.

But you can say, Omar, that this is very much linked to the deposit positions we are having and that's why a majority is against Danish kroner and Euros.

The next question is from Riccardo Rovere from Mediobanca.

A couple of questions, if I may. The first one is on the guidance on credit losses for 2023. The rougher DKK 3 billion indication achieved by this includes some use, release, or other lays? Or do you expect this to keep -- to remain a part of this furniture for the whole 2023 and maybe one more. And if you can share a little bit of your thoughts around this topic. And then the second question, I, just me to understand it correctly. The DKK 1.1 billion remediation cost that you see in '23. Is this a number that we can say is weakening the storm? Or can it be robust around this number, given that this quarter, there is another DKK 300 million -- is DKK 1.1 billion your best and maybe final assessment or where we should land on this line on this topic?

Thanks, Riccardo. On the remediation cost, the approximately DKK 1.1 billion is our best estimate of the total remediation costs after having, of course, worked on this for quite some time now and with quite a high degree of confidence. And as I mentioned, any tail remediation costs into 2024, we see as being substantially lower, if anything. On your question on to what extent the up to DKK 3 billion would include also releasing post-model adjustments, that really depends, right? I mean, the up to DKK 3 billion depends on sort of a recession with falling house prices and higher unemployment. And it would require, of course, that we saw quite large decreases in housing, some increasing unemployment, and defaults that lead us to actually have to then transfer some of the post-model adjustments because that's what they're there for, to actual stage 1, stage 2 provisions, if you see what I mean. So it is a question mark, the DKK 3 billion and potential PMAs that would be the total worst-case scenario, if you will, based on our current macro outlook. But again, that is based on a very uncertain environment. And of course, again, quite a deterioration on many of the different macro variables, if you see what I mean.

And I would probably like to add just for reference that our local regulator has been public with a clear statement that they would not think that anybody should use PMAs in 2023 to kind of cover what they would think of as being normal losses. So that is something that remains to be seen throughout the year then.