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

Good afternoon, and welcome to Danske Bank's Q3 2024 Pre-close Call. My name is Claus Ingar Jensen, and I'm Head of Investor Relations. With me, I have Nicolai and Olav from our IR team. And 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 our silent period on the 10th of October, ahead of the publication of our Q3 2024 report on the 31st of October. I will go through the P&L statement line by line and comment on capital at the end. Afterwards, we will open for a 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 information, unless otherwise noted. Connected to this, I wish to highlight 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 September. During 2024 to date, the Nordic economies have shown resilience, including continually low unemployment, decent growth and the path to normalized interest rate levels. As inflation is getting under control, there are prospects for more interest rate cuts, and this also lays the foundation for more stable growth expectations across the Nordic countries. Especially in Denmark, the macroeconomic indicators look healthy, even when adjusting for the contribution from the uplift in the pharmaceutical sector. Consumers have been reluctant to channel wage growth into increased consumption, but future real wage growth could provide a solid basis for increasing consumption and credit demand. The restoration of consumer purchasing power is helping the housing market recover from a somewhat low level, which can also be observed in the housing market statistics published by Finans Danmark. Having said that, the risk of a downturn is still looming. And although the outlook is relatively positive, uncertainty persists, driven by the geopolitical environment. Now let's have a look at the net interest income. Firstly, let me start by reminding you of the changes to Central Bank policy rates that we have seen in the Nordic countries in the third quarter. On the 20th of August, the Swedish Central Bank decided to lower its policy rates by 25 basis points and then again on the 25th of September. So it now stands at 3.25%. After the cut in June, ECB lowered its policy rates on the 12th of September by 25 basis points to 3.5%, which was also followed by Nationalbanken in Denmark, setting the policy rate of 3.10%. Following the cuts by Nationalbanken, Danske Bank has lowered our retail customer rates with effect from the 1st of August. And after the second cut, we again have lowered retail customer rates, namely on saving products in Denmark, which will be effective from the 23rd of October. Notably, we have kept the rate on regular transaction accounts at 25 basis points in Denmark, whereas in Sweden, the transaction account has been lowered to 0%, while saving rates have broadly been lowered by 25 basis points. Rates on Business Customers products have, in general, been lowered by 25 basis points, with varying effective dates. Regarding the recent volume development, we refer to publicly available data. In terms of lending, we know that overall credit demand remained generally muted. Although the sector has seen some pickup for private borrowing, corporate lending demand largely appears flat in Denmark according to the latest statistics from the 26th of September. In addition, we remind you that we cannot exclude continued attrition from the PC Norway portfolio, which may have a negative effect on NII. Kindly note that Q3 has one interest day more than Q2. The day effect is estimated around DKK 90 million. With respect to our NII sensitivity, we note that balance sheet effects continue to have an effect. Additionally, 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. Please note that, by far, most of our sensitivity relates to DKK and euro, in that order. In respect to what we communicated for full year NII in our Q2 release, please note that this was based on an as-is point of view at the time for forward rates, which reflected higher market rates and fewer rate cuts. Since then, central banks have cut rates earlier than expected, and we have seen a further decline in forward rates, which, all else equal, could impact NII in the second half of the year, with the effect in the third quarter being limited. Looking at funding costs, we note that NIBOR increased by around 2 basis points, whereas STIBOR is around 35 basis points lower during the quarter on the basis of quarterly averages. As always, please be mindful of currency fluctuations in the markets where we operate, pound sterling appreciated by up to 2% in the third quarter, while Swedish krona was flat and the Norwegian krone depreciated around 3%. In terms of wholesale funding, we issued around DKK 3 billion in the third quarter, progressing in line with our full year funding plan of between DKK 80 billion and DKK 100 billion of debt issuance across instruments. In late September, we also issued EUR 500 million [ 3 noncall 2 ] preferred senior priced at 3-month Euribor plus 45 basis points and $1 billion [ 6 noncall 5 ] nonpreferred senior priced at 114 basis points in euro equivalent, both of which were well received by the market, but will not settle until the fourth quarter, and thus do not impact NII in the third quarter. Please visit danskebank.com debt section for further details on terms and pricing for each issuance. In respect to fee income, we will start by noting that development is always subject to conditions in the financial markets, housing market activity and the general activity level among our customers. Moreover, the third quarter is a summer vacation period, which could have a negative impact on activity, for example, in capital markets. Let's then look at investment fees, which naturally are impacted by the development in asset under management as well as the investment activity among our customers. In the third quarter, we noted that equity markets globally continued the positive trend observed during the first half of the year, yet with significant periods of volatility, which may have affected the investment appetite among our customers. Turning to activity-driven fees. According to the latest consumer spending monitor from Danske Bank Research, we saw a slight increase in spending in real terms in July and August, meaning that the consumer spending may continue to grow, albeit at a slow pace. Consumer sentiment in Denmark, as measured by Statistics Denmark, however, remains in negative territory. Please also remember that in the second quarter, we recognized DKK 0.1 billion due to a nonrecurring reduction in fee expenses related to activity-driven fees. Turning to fees from our lending activities. We note that we have seen some positive signs in the Danish housing market, even though overall activity remains subdued. Regarding the refinancing of adjustable rate mortgages, we generally see lower activity in the third quarter. Remortgaging activity remained at a very low level in the third quarter. And finally, with respect to capital markets activity, in debt capital markets, we have seen a slowing of the positive momentum we witnessed in the first half of the year, while primary equity capital markets activity has remained at a low level. Now turning our focus to trading income. Market conditions and customer activity were constructive in the third quarter. Lower yields were the main driver in the Danish mortgage market during the third quarter, while spreads on 5-year noncallable bonds widened, mostly due to the risk of larger supply, and spreads on short-term noncallable bonds were broadly unchanged. In addition, in the third quarter, Danish government bonds continued the performance versus Germany. Currently, the 10-year spread is around minus 3 basis points, and it is the first time since 2019 where 10-year Danish government bonds trade with a negative spread to Germany. On Danica, we have no specific comments for the third quarter. Please be aware that Danica's result are always subject to developments in the financial markets and in the health and accident business. Other income has been affected by a low level of assets available for resale in our leasing business through the first half of the year, and this may effect -- may have continued in the third quarter as well. On cost, we have no specific comments regarding the quarterly development. Earlier this year, we announced DKK 0.6 billion of nonrecurring costs for 2024 related primarily to our new domicile and PC Norway. Firstly, we reiterate that DKK 0.1 billion was recognized in the second quarter. And secondly, we expect to recognize most of the residual amount in the third and the fourth quarters. In addition, we expect to recognize a positive one-off item in our expense line in Q3 of approximately DKK 0.2 billion related to a reimbursement of insurance costs. When it comes to impairment and credit quality, we, in the second quarter, guided for -- that we expect a full year loan impairment charge to be up to DKK 0.6 billion. We have no specific comments in respect to the third quarter, other than to note that the strong macroeconomic environment continues to support credit quality. We have no comments in respect to tax. And please note the one-offs that we have mentioned above. For a year-over-year comparison, we reiterate that the one-off items recognized in the third quarter of 2023, which had an effect on NII, trading income, net income from insurance, other income and the tax line. On capital, kindly note that as communicated in the second quarter of 2024, we have front-loaded most of the expected Basel IV impact from January 2025, with a DKK 20 billion increase in REA in the second quarter. That aside, we do not have any specific comments on REA, 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 on to the Q&A session, I would like to highlight that we enter our silent period on the 10th of October. At the beginning of next week, we will also start collecting consensus estimates, with a contribution deadline on Friday, 11th of October, at noon. Regarding consensus numbers, we reiterate that the number you input with respect to share buybacks should be the announced amount for the particular calendar period. Please note that we will publish the Q3 result on the 31st 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 Q&A session. [Operator Instructions] I can see that Johannes has a question.

Just a simple one. As you said, you can only comment on previous statements. Would Q3 still be the peak of NII under your assumptions as previously stated? Or have we seen the peak in Q2 already?

Yes, that would force me to say what the number will be in the third quarter. And I do not know, Johannes, but I know exactly what we stated at the Q2 conference call, where we said we expect NII to peak in the third quarter. Please note that as we just stated in the pre-close call, that we expect only a modest effect from the rate cuts in the third quarter, as most of that will come through in the fourth quarter. So I think that's the closest I can get to making comments in respect to what we said at the Q2 conference call. And then Sofie Peterzens.

Yes. So I also had 2 questions related to net interest income. So in your comment, basically you alluded to that DKK 37 billion net interest income guidance could be, maybe a little bit at risk for 2024? Was that a correct understanding?

Yes, that was a correct understanding. If we, of course, include what will come in the fourth quarter, which is still unknown. But based on what we can see right now, meaning that you look at the forward rate curve, if you look at the market view on how many rate cuts we will see, that has definitely changed compared to when we made our comments on the 19th of July. So of course, I would say, all else equal, that points to a risk of a lower full year NII, of course, subject to how the volume development will -- what kind of number that would show for the second half of the year.

Okay. Very clear. And then the second question related to net interest income is the hedge. How should we think about the net interest income tailwind from the hedge in the third quarter?

I think you should -- when we made the comments on the deposit hedge at Q2, we were in a situation where the average yield on the portfolio were still lower than the reinvestment yield. So I would expect that we will still benefit from the deposit hedge. And that is, in essence, the nature of the deposit hedge and how it will impact us, it will limit the impact from lower rates. But on the other hand, if you look back in time, it will also delay the effect when we are in a period of higher rates.

And could you just remind us how that hedge works? Is it the same as Nordea, you basically pay floating and receive fixed?

No. To my knowledge, Nordea's hedge is in a derivatives format. That is something we are not allowed to use in Danske. So we have an old-style traditional bond portfolio, where we, in our recent reports, have disclosed the average or the interest rate duration, and also provided some information around the maturity profile for the hedge. But it is, in essence, highly rated bonds that are also eligible for our liquidity coverage ratio.

Okay. But that hedge is basically in form of bonds?