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

Good afternoon, everybody, and welcome to the preclose call. I think we are on time, maybe 1 minute too late just to give other participants the chance to call in. But once again, welcome to the Danske Bank Q3 2023 Preclose Call. My name is Claus Ingar Jensen, and I am Head of Investor Relations. With me, I have 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 in via the Teams app or your browser. If you participate 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 the start of the silent period on the 6th of October, ahead of publication of the interim report on the 27th of October. I will go through the P&L statement line by line and comment on capital at the end. Afterwards, we will open up for a Q&A session. For the sake of good order, I would like to highlight the following. I will only answer questions related to already disclosed information as well as publicly available data as of the 25th of September, unless otherwise noted. In this connection, I wish to stress the development in specific indices may not always have the same effect on our performance. Finally, before we start, I would like to point out that we have an unusual high number of one-offs this quarter, which I will comment on separately after the income lines. Let's start with the macro. I would like to start by commenting on the current macroeconomic backdrop before we go through the line items. In the euro area, inflation is coming down but looks sticky, increasing the likelihood for higher rates for longer. Short-term economic sentiment has improved recently. In Denmark, growth is driven in part by the pharmaceutical sector, although some cyclical sectors are more vulnerable. Also, the housing prices have stabilized faster than initially expected, although the number of transactions remains very low. Our main scenario is a soft landing with modestly higher unemployment, albeit with high uncertainty as we have not yet seen the full effect of the interest rate hikes that have been made over the last year. The risk of a worse scenario before therefore remains considerable. We refer to our most recent economic outlook from the 5th of September. With that, let's have a look at the net interest income. As always, please note that -- the impact of currency fluctuations in the markets in which we operate. In the period from the beginning of the quarter until the 25th of September, we have seen appreciation in exchange rate of the Swedish and the Norwegian kroner of approximately 1% and 2%, respectively, whereas the pound sterling has increased less than 1%. Also, please further note that Q3 has 1 more interest day than Q2 with an estimated day effect of around DKK 80 million, 8-0 million. Regarding volume developments for both lending and deposits, we refer to publicly available sector statistics as the only externally available source of insight. The most recent data as of the end of August '23 points to a largely flat volume development compared to the second quarter. Overall, we note that the housing market activity remains subdued. Since the second quarter, the 3-month STIBOR and NIBOR have risen by around 30 and 70 basis points, respectively, on the basis of quarterly averages. Please be aware that when we observe increases in NIBOR and STIBOR, the immediate impact on our NII is negative as higher customer rates, in particular in Norway, are subject to notice periods of up to 6 weeks. In the second quarter, both the ECB and the Danish Central Bank hiked rates by 25 basis points in May and by 25 basis points on the 15th of June. In the third quarter, the ECB hiked by 25 basis points on the 27th of July, which was followed up by the Danish Central Bank also raising the rates by 25 basis points on the 28th of July. Finally, the ECB hiked the rate by another 25 basis points in September, which was followed by the Danish Central Bank and both the Swedish and Norwegian Central Bank. Further to the increase in policy rates, on the 14th of September, we have announced that we will start paying 25 basis points on retail deposits in Denmark of up to DKK 50,000. This will take effect on the 1st of October and will not have any impact on NII in the third quarter. Additionally, we have raised the interest rates on several saving products effective from 18th of September. The net annual NII effect from the rate hike and our subsequent price adjustments is around DKK 0.1 billion. With respect to our operations in the other Nordic countries, we continue to adjust pricing on the basis of Central Bank hikes and local market competition. We confirm our current NII sensitivity of approximately DKK 700 million or 25 basis points uplift across all currencies on average over the next 100 basis points within a 12-month period. In addition, there is an uplift of approximately DKK 300 million in the subsequent 12- to 24-month period caused by various balance sheet effects. Please note that, by far, most of our sensitivity relates to Danish kroner and euros, in that order. Turning to wholesale funding. We remain comfortable with our overall funding position. We have issued in various formats, including senior covered bonds and private placements, bringing the total amount of debt transactions to more than DKK 80 billion year-to-date. Activity in the third quarter included a GBP 350 million, 5 noncall, 4 preferred senior bond priced equivalent to 3-month Euribor plus 111 from the 16th of August and USD 1.25 billion, 3 noncall, 2 preferred senior priced equivalent to 3-month Euribor plus 89 issued on the 19th of September. On the 26th of September, we have made a dual-tranche covered bond transaction in total of CHF 300 million. Note, this has no effect in the third quarter. Please see danskebank.com, Debt section for further details on terms and pricing for each issuance. Finally, on NII. As discussed in the second quarter call, centrally booked interest rate risk management costs related primarily to demand deposits hedging are allocated to the appropriate business units from the second quarter with full impact within PC and BC deposit margins for the third quarter. Please note, this move does not affect group NII. Also with full effect from the third quarter and onwards, lending margins at BUs will be reduced due to internal allocation of funding costs previously booked as other interest expenses. Again, this will not affect group NII. Let's turn to fee income. In respect to fee income, the development is subject to market conditions in the financial markets, housing market activity and the general activity level among our customers. Let us start with the development in investment fees. This will always be subject to asset under management and the investment appetite of our customers, which could be negatively affected by the decline in the Danish OMX C25 Index of more than 6% and negative valuation impact on fixed income portfolios in our Asset Management business as a result of higher interest rates. Turning to activity-driven fees. We note that in the past month, consumer sentiment, as measured by Statistics Denmark, is still negative although stable. According to our recent Spending Monitor by Danske Bank Macro Research, we have seen a slight increase in nominal spending growth recently, although real spending fell for the second straight month. Turning to fees from lending activities. Housing market activity in Denmark has improved, however from a very low level, and remained significantly below the peak in 2021. Also, please be aware that we do not have any refinancing auctions of flex loans in the third quarter. In addition, remortgaging activity has been very low in the third quarter. Activity in the capital markets have improved during the third quarter. However, uncertainty remains. Activity in the ECM started to pick up in the third quarter, and we completed several transactions. Within DCM, activity has been low with small signs of improvement in the latter part of the third quarter. In M&A, Nordic market activity has been subdued with relatively low market volumes compared to volumes in previous years. Now turning our focus to trading income. Please note that the continued uncertainty about central bank rates has continued to drive bond yields higher in a volatile market environment. Yields and spreads on Danish callable mortgage bonds have been more or less unchanged during the third quarter with relatively low volatility. Spreads on 5-year noncallable bonds have tightened close to 10 basis points due to low supply, while spreads on short-term noncallable bonds have widened somewhat. Regarding our insurance activities, please be aware that higher longer-term interest rates may have a negative valuation effect on investment portfolios. We have no comments in terms of other income. Now let's turn to the one-offs I mentioned in the beginning. In this quarter, there are a number of one-offs which I will go through now. The first one-off relates to NII. Interest compensation from a tax dispute regarding valuation methods has a positive effect on NII by around DKK 0.3 billion. Please be aware that this one-off is exempted from tax. The second one relates to trading. The impact comes from the release of a loss of DKK 0.8 billion from other comprehensive income related to the CET1 FX hedge attributable to personal customers business in Norway, which was also announced in the outlook presented at our Q2 2023 conference call. The third one-off relates to net income from insurance related to a potential customer compensation case with an estimated impact of DKK 250 million. This was published on our website Tuesday this week. The fourth one-off relates to other income. The sale of Danske IT to Infosys will have a positive impact of DKK 0.1 billion. The last one-off relates to tax. This is a reversal of a tax payment from 2019 related to the tax dispute regarding valuation methods I mentioned in the first one-off. There will be a positive effect of around DKK 0.5 billion to DKK 0.6 billion. When comparing to 9 months of 2022, I would like to remind you that a number of nonrecurring items related to income from insurance expenses and impairments were booked in the third quarter of 2022. Let's turn to costs. We have no specific comments regarding the quarterly development in costs, but would like to note that the new collective agreements for employees in Denmark took effect on the 1st of July with an annual salary increase of 4.5% in 2023 and 3% in 2024. Tax, we do not have further comments. We refer to our previous comments regarding the tax-related one-off. And then impairments and credit quality. We remain comfortable with our credit quality. However, please note that while the overall macroeconomic outlook in Denmark has improved recently, some sectors of the economy are becoming more vulnerable, which will be reflected in our model scenarios as we continue our prudent approach, including when it comes to our PMA buffers. We would like to iterate our guidance of loan impairment charges of up to DKK 1.5 billion for the full year. And this concludes our comments on the P&L. On capital, we do not have any specific comments on arrear besides noting that market risk remains subject to volatility. This concludes our initial comments in this preclose call. And before we move on to the Q&A session, I would like to highlight that we enter our silent period on the 6th of October. Shortly after today's call, we will also start collecting consensus estimates with a contribution deadline on the 6th of October end of day. Please note that we will publish our Q3 interim report on the 27th 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. So if you wish to ask a question, please use the Raise Your Hand function.

I think we have -- first question is coming from Sofie from JPMorgan. Sofie?

Sofie from JPMorgan. So you raised the salary accounts in Denmark by 25 basis points. I think in Sweden, you pay 50 basis points. Am I correct? And are you paying anything in Finland? And if so, when was that change made?

No, we haven't decided on Finland yet. And you are correct that we pay 50 bps in Sweden for up to DKK 50,000 as well.

Okay. And the 50 basis points basically will hit now the third quarter results?

Yes. I don't remember the exact implementation date, but that was implemented during the third quarter. So it will partly hit the Q3 result. Yes, you're correct. But please also note that our deposit base in Sweden is rather limited compared to the group's overall deposit base.

Okay, okay. And then just a follow-up. The other tax positive of DKK 0.5 billion to DKK 0.6 billion, that will be booked in other income or already be booked in the tax line?

That will be booked in the tax line. Any further questions? I can see one from Jakob Brink. Jakob?

Claus, just on your comment regarding asset quality. I think you mentioned that you're seeing some segments becoming more vulnerable, and you would potentially capture this in your model provisions. But you started out saying that macro had improved, which is also what Danske Markets' estimates indicate, that higher GDP growth for this year and actually also for next year and lower or neutral unemployment estimates. So typically, you would referred to those for your model provisions comments. But is there any reason why that is sort of not being used this time and you choose to look at the other thing?

Well, we are just flagging that we see some sectors becoming vulnerable. So how that will be reflected in the impairment number, we will have to see at Q3. But I think it has been quite a standard procedure, if you look back in time, that the charges in the quarter can be made up of, let's say, charges related to macro adjustments but also reversals based on improvement in single name credit quality. And the vice versa is -- can of course also be the case, that there will be some sectors where we will need to do charges against, and then there could be a potential reversal from a macro. So this is not stating anything around the third quarter but just serving as an example.

Okay. Fair enough. And then on your comments regarding lending fees. I think you said that you had seen an improvement from a low level. But on what metric? Because I think everything I look at for the market as a whole and trade credit Denmark is negative Q-on-Q.

Yes, I think it's -- there has been some comments around that within pockets of the Danish housing market, there has been an increase -- slightly increased activity over the third quarter related to the tax issue in Denmark around new valuation methods for properties. That has triggered a little bit of an increase, as I said, in certain pockets. That's quite clear from the -- what you can read in the media, and that has essentially been driving the slightly higher activity in the latter part of the third quarter, I would say. Whereas all other indicators, including also indicators in the Swedish market, are pointing to a very, very low turnover. I think one should not expect such a development to continue simply because, as everybody knows, there are certain process time related to buying a property and getting the loan and getting all the practical details in order. And the Danish rules are so that you should own the property on the 1st of Jan before you are under the old rules and not the new rules. So that was essentially what the comments were reflecting.

Okay. And I thought I had a last one. Yes, one of your peer Danish banks have talked about a slump in lending in Q3 expected due to postponement of tax -- corporate tax payments. Is that anything we should expect for you as well?

Well, I know that's not something that I am aware of, but there will always be some kind of seasonality in the corporate lending driven by corporate taxes but also by VAT payments. So if it's impacting part of the sector, it would of course also impact us. I think we have a question from Alex.

Just double check, on the trading one-off, that's a positive DKK 800 million benefit there?

No, it's a net negative.

A negative?

Yes.

And then secondly, just on the...

But just to make sure, this is a kind of watched through the OCI. So there will be an opposite effect on the other comprehensive income from the P&L effect on the trading line.

Okay. That makes sense. And then just on the capital requirements in Sweden, moving the commercial real estate risk from Pillar II to Pillar I., is there any impact for Danske there?

I am not able to tell so far. So we will have to comment on that in our Q3 conference call later. I think we have a question from Namita from Barclays. Namita?

Just a quick one. On the Norwegian personal customers unit, is that going to go into like discontinued operations? Or is it still being in the group numbers?

For the third quarter, it will continue to be in the group numbers. If there isn't any more questions, thank you for your participation, and I wish you a very nice weekend. Goodbye.