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

Good afternoon, and welcome to the Danske Bank Q2 '24 Pre-Close Call. My name is Claus Ingar Jensen, and I'm Head of Investor Relations. With me, I have Lewis West and Olav Jørgensen 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 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 before the start of the silent period on the 28th of June, ahead of the publication of our Q2 2024 report on the 19th of July. I will go through the P&L statement line by line and comment on capital at the end. Afterwards, we will open up for the Q&A session. For the sake of good order, I would also like to highlight the following: I will only answer questions related to already disclosed information as well as publicly available data. Committed to this, I wish to stress that developments in specific indices may not always have the same effect on our performance. Before going through the income lines, I would like to start with a brief comment on the most recent macroeconomic development based on our Nordic outlook from June. Through the second quarter of '24, the Nordic economies have continued to show resilience in the higher rates environment. Recent economic data have furthermore been better than expected in early 2024, and expectations for some growth are now back across the Nordic region. In Denmark, the outlook for the second half has improved, and we now expect a moderate expansion even outside the already strong pharmaceutical sector. Household finances remained solid, supported by high employment and higher real wages. The expectation that growth will continue combined with potentially lower interest rates are likely to be positive factors for housing market activity. However, the effect will probably only be visible in the second half of the year. Although the outlook has turned more positive, uncertainty persists, driven by the geopolitical environment. Now let's have a look at net interest income. We will start by reminding you that during the second quarter, there have been 2 Central Bank rate decisions. On the 8th of May, the Swedish Central Bank decided to lower its policy rates with 25 basis points to 3.75%. ECB lowered its policy rates on the 6th of June, which was also followed by Nationalbanken in Denmark. Following the cut by Nationalbanken, Danske Bank also lowered rates across our product portfolio as relevant. Changes to retail customer rates will be effective from the 1st of August, while changes to business customers rates will be affected from the 1st of July and mid-August. As these changes have no impact in the second quarter, we will not go into further details on this call. Kindly note that the second quarter has the same number of interest days as the first quarter, the day effect is estimated to around DKK 90 million. Regarding recent volume developments, we refer to publicly available data. In terms of lending, we know that overall credit demand remained muted. In addition, we remind you that we cannot include further continued attrition from the PC Norway portfolio, which may have a negative impact on NII as we saw in the first quarter. Looking at funding costs, we note that NIBOR has been flat, whereas STIBOR has been lower during the quarter. As always, please be mindful of currency fluctuations in the markets where we operate, both SEK, NOK and British pounds appreciated around 2% in the second quarter until now. In terms of wholesale funding, we issued around DKK 57 billion during the first and the second quarter, with around DKK 27 billion done in Q2 alone, progressing in line with our full year guidance of between DKK 80 billion and DKK 100 billion of debt issuance across instruments. Our issuance in the second quarter included a SEK Tier 2 benchmark transaction of SEK 4.25 billion priced at 3-month EURIBOR plus 166 basis points executed on the 16th of May. Please visit danskebank.com, the debt section, for further details on terms and pricing for each insurance. Finally, on NII sensitivity, we reiterate our guidance of approximately plus/minus DKK 500 million per 25 basis points change across all currencies, on average, over the next 100 basis points within a 12-month period. As the balance sheet effects from our hold-to-maturity portfolio and unhedged fixed income or fixed rate assets are gradually taking hold, we would, all else equal, expect to see a year 2 and year 3 impact of another DKK 300 million and DKK 200 million, respectively. Please note that, by far, most of our sensitivity relates to DKK and euros, in that order. In respect to fee income, we will start by noting that development is, as always, subject to conditions in the financial markets, housing market activity and general activity level among our customers. Having said that, in general, we can note that the underlying positive drivers for our fee income that we saw in the first quarter are likely to continue in the second quarter. Let's then look at investment fees, which naturally are impacted by development in assets under management as well as the investment activity among our customers. In the second quarter, we have noted that equity market globally have continued the positive trend observed during the first quarter with, however, some uncertainty related to development in June. For Danske Invest, we note the public available statistics from Finans Danmark that point to a positive development in market share for Danske Invest and a positive trend in inflows. Turning to activity-driven fees. We note that the Danish consumer sentiment as measured by Statistics Denmark continues its upward trend from the first quarter, though still negative. Looking at the latest consumer spending monitor from Danske Bank Research, we saw an increase in spending in real terms, meaning that consumer spending continues to grow. Turning to fee from our lending activities. We still note that activity in the Danish housing market remains subdued. Also, please be aware that we saw a positive seasonal effect from refinancing fees in the first quarter of DKK 0.1 billion. In the second quarter, we expect broadly the same level of refinancing fees from, for instance, short-end floating rate mortgages. We have not seen any significant remortgaging activity in the second quarter. And finally, on capital markets activity, we see good financial market sentiment overall, with debt capital market especially having good customer activity. Equity capital raising activity, however, is still low. Now turning our focus to trading income. Noting that the main driver of our trading income is customer activity. Overall, bond spreads have been unchanged during the second quarter, with some volatility driven by elevated political risk in France. The strong sentiments on Danish government bonds have continued in the second quarter and spreads to euro peers have tightened further. Please be reminded that as mentioned in the Q1 '24 interim report, we have fully aligned our reporting to IFRS 17. Therefore, we reiterate that this has changed our general expectations for normalized trading income from previously around DKK 4 billion per annum to now around DKK 3 billion per annum, subject to market conditions. In respect to Danica, we have no specific comments for Q2. Please be aware that Danica's results are always subject to developments in the financial markets and in the health and accident business. For other income, kindly note that in the first quarter, other income was lower, driven by asset finance, primarily due to lower sales of assets. Assuming a continued low level of assets available for resale in our leasing business, we expect this to continue in the second quarter. We have no specific comments regarding the quarterly development in costs. In terms of the announced DKK 0.6 billion of nonrecurring costs for '24, please note that most of these costs relates to our new domicile, and will be distributed over the rest of the year, with DKK 0.1 billion recognized in the second quarter. We have no specific comments on impairments and credit quality other than to note that the benign macroeconomic environment continues to support credit quality. We do not have any comments with respect to tax. And in respect to one-offs, there are no new one-offs to be communicated for Q2 '24, except as mentioned above. When comparing year-over-year, we reiterate the one-off items booked in the second quarter of 2023, which had an impact on other income, trading and the tax line. We do not have any specific comments on REA, besides noting that market risk remains subject to the 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 28th of June. At the beginning of next week, we will also start collecting consensus estimates with a contribution deadline on Monday, the 1st of July, at noon. Regarding consensus numbers, we reiterate that the number you input with respect to share buyback should be the announced amount for the particular calendar period. Please note that we will publish our Q2 results on the 19th of July 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] I can see we have one question from Jan Gjerland.

Yes. I have a couple of questions. The first one is, previously you have sort of stated that you were sort of happy with the NII for the full year and also the cost guidance or cost level into the IR consensus. Is that still valid for comment? Or is that something that it's rather forward-looking, so we cannot comment on?

We are comfortable with both -- issues of both statements, you can say, both the NII of full year expectation and also the cost outlook. Yes.

Okay. Perfect. Second, on -- you have moved some FX-related fees to -- or trading to the fee line. Did you really comment anything on that specific line in the fee comment you gave? Or was that forgotten?

No, we did it in Q1, Jan Erik. And in Q1, we also made an 8-month restatement of both fees and trading. So the reason why...

Sorry, it was more about what was the comment? Is there any comment on that specific line this time around, the one that you have moved to the fee side?

No, no. It's unchanged compared to the last quarter. And then we have Sofie Peterzens, please go ahead.

Yes. Sorry, trying to see if I get it very good in office. So I also have just 2 questions. The first one is on capital. You previously alluded to that we should expect a capital update with the second quarter, is that still the case? Should we expect kind of some additional details on kind of your capital targets, minimum levels? And also on the risk rates on commercial real estate exposures in Denmark, could you just remind us what the latest is here?

Yes, we are now approximately 6 months into the new strategy period, and we are planning to do an update with the Q2 result on what we have achieved so far. And that includes also an update on the capital issues from the 7th of June of last year. So that is what you should expect. Of course, at this point in time, I cannot go into further details what exactly we are going to say, but -- so I think, Sofie, that we have to wait for the 19th of July. So our communication is essentially unchanged from Q1, we will do an update. And I can only point to the relevant slide in the slide deck from the CMD of last year, where we have a number of moving parts in our capital bridge, and that will also be part of the update on the 19th of July. So I think that is how far I can go, which is...

And can you just remind us what the commercial real estate risk rates are?

Yes, it will have an impact of approximately 30 basis points taking place in Q2. Okay. It doesn't look like there is any other questions. So thank you for listening, thanks for the questions, and I wish you a very nice weekend. Goodbye.