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

All right. I think we will just kick off, it's one minute past the hour. So good afternoon again, and welcome to the Danske Bank Q1 '23 pre close call. My name is Claus Ingar Jensen, and I am Head of Group Capital Market Relations. And with me, I have Olav Jørgensen, Katrine Strøbech 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. If you are online via 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 the start of the silent period on the 7th of April, ahead of the publication of our interim report on the 28th of April. I will go through the P&L statement line by line and remark on capital at the end. And 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 20th of March 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. I would like to start by commenting on the current macroeconomic backdrop before we go through the line items. The risk of recession appears to be easing. However, the environment overall continues to be characterized by high uncertainty. Central banks also still seem committed to bring down inflation given the recent hikes announced on the 16th of March, albeit concerns have been voiced about potential knock-on effects on financial stability of rapid rate increases. In this context, we view the speculation lately about the banking sector following the events involving Silicon Valley Bank and Credit Suisse as idiosyncratic for specific institutions rather than systemic problems. Danske Bank's exposure to Silicon Valley Bank and Credit Suisse is immaterial and our capital and liquidity positions remain strong with significant buffers well above the regulatory requirements. However, we further note that the financial market volatility has caused additional uncertainty for the future rate trajectory. Our most recent economic outlook from early January projects rising central bank rates. And although unemployment is expected to rise and property prices will decline further, we continue to see resilient household finances. That said, let's have a look on the net interest income. As always, please note the impact of currency fluctuations in the regions in which we operate, and please further note that Q1 has 2 fewer interest days than Q4 of 2022 due to higher net interest income, that the day effect is now estimated at DKK 70 million to DKK 75 million. Regarding volume development, we refer to publicly available sector statistics as the only externally available source of insight. Most recent data from Denmark and Sweden as of January 2023 points to a largely flat volume development, although with slightly higher volumes for Swedish corporates. We note that the housing market has continued to slow further in 2023 and demand for credit from business customers and large corporates is also likely to slow if economic activity slows. Since Q4, 3-month STIBOR and CIBOR have risen around 83 to 73 basis points, respectively, while NIBOR has been largely stable, all on the basis of quarterly averages. Please be aware that when we observe increases in LIBOR and STIBOR, the impact on our NII comes with a lagged effect due to notice periods. We have seen several central bank hikes during the first quarter of 2023. ECB and the Danish Central Bank hiked rates in February with 50 basis points and 35 basis points, respectively, and again in March with 50 basis points from each. Furthermore, we confirm our current NII sensitivity of DKK 700 million to DKK 800 million per 25 basis points uplift across all currencies on average over the next 100 basis points. Please note that by far most of our sensitivity relates to Danish kroner and euros in that order. In this context, it is also relevant to highlight that we have raised rates on our Danske in loan savings product with effect from the 1st of February and introduced the Danske Toprente account, which offers an even higher deposit rate against a minimum commitment period of 6 months. Further to these initiatives, we expect further migration of deposits into saving accounts, although it is uncertain how exactly customer behavior will develop. Further to the increases in the policy rates, we have adjusted our deposits and lending rates for certain customers. However, as always, these adjustments are implemented with a slight delay due to notice periods for certain products. The interest rate on transaction accounts, which represents the vast majority of retail deposits, is currently at 0%. Turning to wholesale funding. We remain comfortable with our overall funding position and market access, which was underpinned by the strong demand for our benchmark issuance we have executed earlier this year, which included debt transactions for almost DKK 40 billion through the quarter. Please see danskebank.com debt section for further details on terms and pricing for each issuance. In respect to fee income, we are dependent on market conditions in the financial markets and the general activity level in our banking operations. Let's start with the development in investment business. This will, as always, be subject to asset under management and investment appetite from our customers, which could be negatively affected by the volatility in the financial markets. Turning to activity-driven fees. We have noted that the latest consumer sentiment measures from Statistics Denmark is still negative. Although we also note that our recent spending monitor by Danske Bank's macro research shows that retail spending holds up compared to the low of last year. Turning to fees from lending activities, housing market activity in general has been subdued, and we would expect remortgaging activity to moderate relative to the strong activity we saw last year. Please note that fees from refinancing auctions are, as usual, booked in Q1. Activity remained muted in the capital markets during Q1 with low issuance activity in primary ECM markets in particular. And looking at trading income, please be mindful that Q1 is normally a quarter with healthy customer activity. Spreads on mortgage bonds in general have widened slightly during Q1 in the market environment characterized by large volatility. The yield spread between Danish and German government bonds has been broadly unchanged, while the Danish kroner-euro swap spread has narrowed in the short end. Regarding our insurance activities, please note that we overall have seen more constructive financial market conditions during the quarter. And this concludes our comments on the income lines. If we turn to look at the cost line. We take note of the new 2-year collective agreement in Denmark that have been reached giving salary increases of 4.5% this year and 3.7% in 2024, if approved by the members. In conclusion, we reiterate our cost guidance for the full year. In general, we remain comfortable with our credit quality. As I previously mentioned, the risk of recession appear to be easing. However, as uncertainty remains high, it is still unclear for now to what extent that will affect model-driven impairment charges in Q1. And this concludes our comments on the P&L. Finally, we note that the AGM has approved the Board's proposal not to pay out any dividends for 2022. We do not have any specific comments to REA or risk exposure amount, besides noting that market risk remains subject to volatility in the market. And this concludes our initial comments in this pre-close call. Before we move to the Q&A session, I would like to highlight that we enter our silent period on the 7th of April. And shortly after today's call, we will also start collecting consensus estimates with a contribution deadline on Tuesday, 11th of April, end of day. Please note that we will publish our Q1 interim report on the 28th of April at 7:30 a.m. CET and that the conference call for investors and analysts will take place at 8:30 am CET. We are now ready for the Q&A session. If you wish to ask a question, please use the Raise Your Hand function on Teams.

I think we have a question from Jakob Brink.

On your last comment around asset quality remaining uncertain and how the lower risk or macro risk is -- will play into provisions in Q1, could you maybe just -- so in Q4, you obviously booked up built up quite significant model-driven provisions and also post-model adjustment provisions. So what you're saying now is just you don't know if the more positive macro outlook would lead to reversals. Are you saying that you could continue to book more despite models -- or despite macro actually improving? .

I think you should read it in the first example you gave that we have noted that recession is easing. Uncertainty is however still high, and it is still too early to say whether that will impact model-driven impairment charges. But it is, of course, correct. Just to make a reference to our guidance in the full year report, that our outlook for impairment charges this year is very much linked to changes in macroeconomic forecasts impacting model-driven impairment charges.

Great. And on guidance specifically, I remember we talked about it in Q4 and whether -- or how the sort of more strict Danish FSA guidelines on when a company needs to upgrade or downgrade. I think you said back then that given you have the 8.5% to 9% ROE target, at the time you didn't feel you had to come out before. How is that now with your sort of 2023 guidance compared to also you having a more longer-term target? What would you -- if things have changed, would then have to come up and come out and change the guidance before the result? Or do you feel that the long-term guidance is enough in that case?

I think I would try to erase a misunderstanding here, and that's maybe something which is a common perception in the market. The DKK 15 billion to DKK 17 billion outlook replaced the previous longer-term guidance of the upper end of 8.5% to 9% . So yes, so that is how it is. The DKK 15 billion to DKK 17 billion is what we are having in front of us.

Okay, okay. Understood. And then just lastly on your net interest income sensitivity guidance, that figure is at DKK 850 million, is still the level for 25 basis points for the next 100?

Well, I think we said DKK 700 million to DKK 800 million, right, down from DKK 800 million to DKK 900 million from our previous guidance. But the DKK 700 to DKK 800 million were also the interest rate sensitivity we provided at the Q4 report.

Yes. And is that down because you think that the as you said in your initial remarks, that clients will start migrating towards savings accounts. Is that the..

Yes, that was what we said at Q4. There are essentially many moving parts when you are trying to model your rate sensitivity. But the fact that we are -- we have moved quite well into positive territory means that some of the floor effects we had previously are now gone. Secondly, we also expect that there will be a higher migration from transaction accounts into savings products. And that's the 2 reasons why we have lowered from DKK 800 million to DKK 900 million to DKK 700 million to DKK 800 million. I can see the next question is coming from Sofie from JPMorgan.

I was just wondering about the risk of recession easing because, I mean, if you look at the market, it seems that the markets are kind of assuming that the opposite, that recession risks have actually quite significantly increased over the past month or past 2, 3 weeks. So could you maybe just elaborate a little bit what you think that the risk of recession is easing for Danske?

Yes. I think that if you look at the combined inputs from economists and even analysts over the quarter points to a more common perception in the market that recession -- the risk for recession has eased. And it is, to some extent, also backed by facts. We got employment numbers from the Danish economy out, I think it was yesterday or the day before. And they were surprisingly in a better shape than what we have seen before, meaning that employment in Denmark is still increasing. So that's just one number to back my -- what we are stating here around that we feel that recession risk is easing in the market. And then it is, of course, also based on collecting input from various economists, including our own macro team.

Okay. And what about IFRS 17? Some of the other banks in Europe with large insurance operations are guarding for some changes in the insurance accounting. Should we expect any impact for Danske first quarter results?

Only a minimal impact, I'm not able to guide you to a specific number. But overall, IFRS 17 is only having a limited impact on our insurance business.

Okay. And then my last question, could you just confirm that there are no one-offs in the first quarter?

Yes. Well, I can confirm it in a way that not that we know of. right? But the quarter hasn't ended yet. And -- but if there would have been any known one-off, I would have informed you on this call. Thank you, Sofie. And then I think we have Jan from ABG with a question.

Could you just remind us what you have said about the full-time employees number after the Q4? And if this has happened anything during this quarter that you can mention, so to speak.

No, I'm not aware of any changes to the number of full-time employees in Danske. If you are referring to whether there has been any layoff rounds in Danske Bank during the quarter, no, we are not aware of that. So that, we cannot confirm. And -- but I do not have any specific information on how the number has developed during the quarter. But there shouldn't be any significant changes.

Okay. On the insurance side, you said it was constructive if that was you mentioned on the income side.

Yes.

Could you shed some more light that were constructive in that sense?

No. I mean, of course, the quarter hasn't ended yet. But I mean, at least up until now or at least for January and February, we have seen quite constructive market conditions. So that should be perceived as positive for Danica.

Okay. Finally then from my side. On the Basel IV implementation from 1st of January 2025, what have you said on the topic? And how could that impact you negatively in the sort of the coming years? How should we read that into your numbers and risk-weighted asset levels?

Well, we have front-loaded EBA guidelines. I think it's now more than a year ago, where our REA amount increased by a little more than DKK 90 billion over a year. And that was in order to front-load the Basel IV impact. So we are not aware of any significant impact from that part of the regulation going forward. We know that there are 2 issues they are still dealing with in EU. One of them is risk weights for retail mortgages, where there has -- where we have been provided extensions to the plan -- to the original plan. So it's now coming even further out in the future. Secondly, there is also an issue that concerns Nordic banks in general, as far as I know, and that is the requirement for having higher risk weights for nonrated corporate exposure. And that's something we have a lot of in the Nordic banks, but that's also under negotiation. So I really do not see any Basel impact until very much later in the future. I can see that Jakob Brink still has his hand raised.

Sorry, mistake.

Okay. Good. It seems to be the end of the questions. Thank you so much for your interest, and looking forward to receive estimates for Q1 that would be highly welcome. So have a nice weekend, everybody, and goodbye.