DNB Bank ASA (DNB) Earnings Call Transcript & Summary

Good afternoon and welcome to DNB conference call. My name is Anna, and I will be your coordinator for today's conference. [Operator Instructions] I will now hand you over to IRO, Rune Helland, your host for this call. Thank you.

Good afternoon, everyone, and welcome to DNB's investor call. I'm Rune Helland. And with me here in Oslo, I have the CFO, Ottar Ertzeid; and the CRO, Ida Lerner. We also have from Treasury, Thor Tellefsen. Due to DNB's participation in investor calls at Morgan Stanley's conference tomorrow and to uncertain times and high volatility in the capital markets, we decided to give all investors and sell-side analysts equal treatment and make ourselves available and give you all an opportunity to ask your questions directly to management of DNB. I'm sure we'll not be able to answer all your questions, but we will do our best. Before we start the Q&A, our CFO, Ottar Ertzeid, would like to give you some of our main messages. Over to you, Ottar.

Thank you, Rune. The foundations for handling volatile times are put in place when times are good. DNB benefits from entering this year better capitalized than ever, better financed than ever and with a higher credit rating than ever. Common equity Tier 1 at year-end was at 18.6% versus a requirement of 17.1%, including the management buffer or Pillar 2 guidance. We does have a higher headroom above requirements than ever before. After reductions in the countercyclical buffers in Norway, Sweden, Denmark and the U.K., the common equity Tier 1 requirement is now 15.7%, leaving a high headroom of 2.9% towards the actual level at year-end. We have AT1, Alternative Tier 1 call later this month, but this was the prefinanced -- prefunded in the fourth quarter last year, in line with our conservative policy of prefunding in order not to take any risk of market conditions. With regard to financing, we prefunded almost NOK 60 billion in senior notes in November and December, as these were grandfathered as MREL eligible requirements. Thus, we entered this year better financed than ever and with 0 long-term funding requirement for entire first half of 2020. Thus, the steps management took in the latter part of 2019 regarding capital efficiency and financing really pays off during these times. Last year, the bank received a AA rating from Standard & Poor's, in addition to the AA rating we have from Moody's. This means that we presently have the best possible short-term ratings of A1+/P1 from both the large rating agencies, and that's the same rating of the government of Norway. Our credit rating has never been better, and we benefit from this during these volatile times. We have each quarter reported the market value effects of the so called basis swaps and the U.S. dollar Alternative Tier 1s. As we have explained, these basis swaps are hedging instruments for volatile times. These days, this is really paying off and compensating for negative mark-to-market effects from credit spreads, CVAs and DVAs. The U.S. dollar Alternative Tier 1 will give significant positive gains with today's FX rates. To calm the markets, the Norwegian Central Bank last week stated that each week going forward, they will offer loans at attractive rates. We have no need for such loans and not ask for them. But we will print the covered bonds in the amount of NOK 50 billion, which we will use as collateral for such loans and deposits, the proceeds when the Central Bank at the same rate as for the loans and have this as extra liquidity reserves going forward. Thus, the liquidity of the bank has never been better, the solidity of the bank has never been better and the credit rating of the bank has never been better. Moving on to operations. These days with the virus environment, the bank operates fully as normal. Staff has been split on several geographical locations and number of critical functions are spread among these locations. A lot of staff is working at home to leave space for others at the ordinary office premises. In other words, bank is operating fully as normal and will continue to do so also going forward. At our Capital Markets Day, we explained that the monetary flexibility of the Central Bank with a policy rate of 150 basis points, it gives the Central Bank handling room or leeway should they feel that this is necessary. Last week, the Central Bank lowered their policy rate with 50 basis points to 100 basis points. At the same time, they guided for a 25 basis point additional reduction in the policy rate in June and a 20% probability for a 25 basis point reduction during the third quarter. However, market conditions change and the market currently expects a larger cut earlier than this. We have lowered our rates to -- on loans to personal customers up to 35 basis points from May 1 and deposits up to 30 basis points effective May 15. Certain SME loans have also seen a rate reduction of 35 basis points effective mid-April. Following the significant fall in interest rates and also in equity prices, the life insurance company of the group have postponed paying dividends, which was planned for the first quarter and we'll make a decision that later this year -- later in the second quarter. At the Capital Markets Day, we reviewed the uniquely strong financial and fiscal position of the Norwegian government. These muscles are now being used to assist businesses in Norway being impacted by the virus situation. The Norwegian government has launched a state guarantee for NOK 50 billion in new bank loans to SMEs suffering from operating losses due to the virus situation. The government has also stated that this amount may be increased. The government has reestablished the government bond fund, which will invest in bonds issued by Norwegian companies, initially NOK 50 billion there as well. They have also launched further initiatives, for example, unemployment benefits starting from the first day, and independent workers will receive 80% of the average income over the past 3 years. The government has also reduced the payroll obligation for employers making redundancies. These actions and also several others will reduce the negative impact on the Norwegian economy and also the negative impact of banks following the virus situation. We will now take questions and answers.

[Operator Instructions] The first person who will flag up the question is Geoff Dawes from CG (sic) [ SG ].

Thank you very much for taking the time to do this call. A quick question. You mentioned about the basis swap impact and the AT1 impact offsetting some -- potentially more tricky areas on the trading line. Can you give us a little bit of color around that? And are there any specific parts of the trading line that you see going in the other direction? I think that would be very good to clarify. And then second of all, very, very early to speak about loan losses. I know, but can you give us an idea of how much generic provisions or upfront provisions could be driven by the change in the oil price that we've already seen? And over what kind of period and what kind of moving average you used to factor that again into the model?

With regard to the first questions on market value changes, we expect that the market value changes on the U.S. dollar AT1 and on the basis swaps will be higher than any negative impact from, for example, credit spread widening on our bond holdings, which give a negative mark-to-market on bond holdings, and also any negative credit valuations on counter-party derivative exposure.

Okay. That's clear.

Yes. And as you rightly say, when it comes to potential impairments going forward, this is still very early days. But what I think is important to highlight and what we've said before is that, overall, we are comfortable with the portfolio that we have and the quality of that portfolio. And as you could also see, we are moving into this rather challenging position from a very good and solid part, our portfolio. When we look at the changes that we will see going forward, it's important to differentiate between what is the different stages in relation to the IFRS 9 model as well. So of course, when we look at the models for Stage 1 and 2 impairments, there are several macroeconomic variables, of which the oil price is one that has an impact. So it's important to keep in mind that the models incorporate an average of future expectation of several macroeconomic variables. So -- and I think it's probably good to also highlight that the IFRS 9, it's also -- it's built in the way that the majority of the impairments the bank expects will come from what's currently in Stage 1 and Stage 2 should be taken early on in the credit cycle. I can't really give you any more numbers in terms of how much the oil price -- what the effect of the oil price will have, but that's one variable of several macroeconomic variables.

[Operator Instructions] The next question comes from Johan Ekblom from UBS.

I was on mute. I guess, it's reflective of everyone working at home, et cetera. Just very, very quickly. Continuing on the asset quality theme, if you go back to the last time we had oil at around $30, you guided to about NOK 18 billion of loan losses over a 3-year period. I guess that time around, we didn't have the same, I guess, broad-based stress in the wider economy as we do this time. Is there any reason we should think that this time around should be a materially better outcome? Or how would you compare those 2? And maybe relating to that, if I remember correctly, at the time you said that when we entered the last downturn, kind of a $50 a barrel was where you started to see pain, and clearly we've seen a lot of efficiency measures in the oil industry since then. So at what kind of levels do you see your clients running into material problems today?

Yes. Well, first of all, I think it's important to say that we are in a completely different situation when it comes to the portfolio and the way that it's being structured today compared to what it was when we entered into the last crisis. We have rather radically decreased exposure towards the cyclical industries if you compare it to last time around. I think it's also important to say that the companies itself have adjusted their fixed cost base to -- and also the variable cost base to completely different picture than what was the case during the last oil crisis. So I would actually say that there is a -- the customers themselves are in a completely different situation than what they were at that point of time. Having said that, of course, as we've indicated before, offshore is and will continue to be the main challenging part in the portfolio, but it only accounts for 1.8% of total EaD in the bank as of today. I think it's also important to highlight that even though we made impairments within oil and gas last time around, we didn't experience any actual losses.

The next question comes from Martin Leitgeb from Goldman Sachs.

Yes. First of all, many thanks for hosting this call. It's really helpful particular in these times. I was just wondering if you can comment a little bit on the prospect for capital distribution, just given the comments made by some of the central banks in different jurisdictions of not using reduction in countercyclical buffers to increase payout and so forth. So just looking back at 2019, the total payout ratio of DNB was around 78%, of which obviously dividend was slightly below 60% and the rest was buyback. How should we think about distribution this year? Should we think that the buybacks could come to a halt just being conservative and be revalued once there's more clarity? Or is there also the possibility of a dividend capital to be posted, but giving the dividend is not only probably -- there's a bit of time to think about that? And secondly, I was just wondering, you mentioned offshore as one of the risk areas you see. I was just wondering if you see which part of your loan book, otherwise, would be most worried at this stage. Is that travel, hospitality or any of the other sectors? And if you could help us size how big these sectors are as a percentage of your total EaDs?

With regard to distribution, I think, our dividend policy is well known of paying more than 50% of profits in cash dividends, combined with an ambition of increasing nominal dividend per share every year. On top of that, we have said that we will use -- consider using a buyback as a flexible tool to paying out capital, but it means that buybacks will vary from year to year. That is the residual, the flexible tool. With regard to distribution, we are, of course, aware of the statements by the Central Bank, that reductions in the countercyclical buffer shall not be used to increase further dividends from financial institutions. The Norwegian FSA have also written a letter to all financial institutions in Norway making the institutions aware of the fact that there has been a change of circumstances and asked the Board of Directors of each institution to consider if the original proposals are still valid. And the banks' Board of Directors will do so within the deadline set by the FSA, which is March 23.

And when it comes to the loan book and the portfolio as such, of course, as you've also rightly pointed, oil-related exposures are, of course, have a direct impact of the decrease in the oil price. In addition to that, we would say that, of course, shipping as also being part of our portfolio, but only accounting for 3.1% of our target EaD is also exposed. But it's, however, important to highlight that it's also different segment -- subsegment within shipping, whereby some segments actually have an uptick in activity. And we also see the fact that if China now recovers slightly in terms of production levels coming up again, shipping might also have a positive impact of that. And those areas that -- such as the areas that otherwise have been slowing down over the past few weeks. In addition to that, of course, cruise, hotels and leisure is something that we follow very closely. We don't have a significant exposure to those -- to cruise and also large part of it is hedged by ECA guarantee. So that's also important to highlight. When it comes to commercial real estate, this mainly then hotels and shopping malls that will be affected. Having said that, we still feel fairly comfortable with the part that we have today and also where the type of customers we have in our portfolio. But it is important to highlight that this is naturally situation that could develop in either way and we've -- but the strong support that the Norwegian government have shown helps massively in a situation like this. In addition to that, of course, airlines is a sector, which is struggling at the moment. DNB has minimal exposure to the airline industry as such.

[Operator Instructions] The next question comes from Jacob Kruse from Autonomous.

So can I first ask about the response from Norwegian SMEs to what has been seen so far, as far as you can see with the banks and the corporate? So are you getting request for help? Are you getting material drawdowns on your credit lines? So just anything you could offer there in terms of understanding what you're seeing? And then I guess my second question. You mentioned these guarantees and the hedging exposures on cruise, hotel and leisure. Could you just add a little bit more detail to what that is and how -- to what extent your exposures there are hedged?

Sorry, if we could start with the SME, of course, this is still very early days, considering the fact that the government proposal only came out on Sunday evening, and we also have the kind of full closure of Norway as such late last week. But we haven't seen any massive drawdowns or changes in terms of customer behavior as of today. But we are looking also at the tools that the banks have in terms of supporting our customers in extending amortization periods or reducing the requirements for amortizations as well. So this is something that we are, of course, following very closely and are supporting the Norwegian and our companies -- our customers as well with. But generally, it's too early days to see any radical changes in customer behavior. We haven't seen that as of now.

I can mention that the state guarantees being announced on Saturday -- Sunday is specifically target at this area to help these SMEs going forward and will thus be very helpful.

I'm sorry, your second question was related to ECA guarantees?

Yes, exactly. Just to understand what the volumes are there and what the impact will be of those if in a more difficult scenario?

Well, if you say that we have less than 1% of total EaD in cruise, it's a very, very small amount just as such. In addition to that, we then have export credit agency guarantees, which means that that's 50% of the amount that we have as exposure is guaranteed by most often the case state-owned guarantee agencies. So that means that we essentially have a government risk on that rather than actual customer risk.

Okay. And sorry, those governments are -- they are not very -- if rates are flagged, it's where the...

It's well-rated governments.

Next question comes from Sofie Peterzens from JPMorgan.

Here is Sofie from JPMorgan. I was wondering if you could just talk a little bit about your view on kind of the interest rates and what your expectation is. How low do you think the Norwegian interest rates go? Do you expect them to go to 0? And could you also give a sensitivity on what every 25 basis point impact or every 25 basis point cut in the interest rate, what impact it has on your net interest income? And then my second question would be on fee income. How should we think about fee income in the coming quarters? How much are your assets under management down both on the kind of -- also on the life insurance side? And kind of how should we think about any potential impact on fees from payments? Also your corporate finance activity was very strong last year. So if you could just talk a little bit about the fee outlook.

With regard to the rate outlook, on Friday, the Central Bank said that their path going forward is a 25 basis point further cut in June and a small 20% probability of a second rate cut of 25 basis points in the third quarter, which will leave the rate at a level of 0.5%, but then most likely having the bottom of 0.75%. The market currently expects more. On the other hand, the Central Bank has previously stated that they do not look very positively on a too low interest rate environment, but it remains to be seen what they actually do -- their guiding is for a 25 basis point cut from today's level. With regard to interest rate sensitivity, the situation is still as we have communicated before that we have a little direct interest rate exposure, a small exposure towards -- a positive exposure towards falling interest rates, LIBOR, but the major impact will be from any adjustment of the customer rate. So until we adjust the customer rates, the impact will be limited. With regard to fee levels, of course, the investment banking area, as you mentioned, they will temporarily see a decline in activity since the markets are very slow for the time being. Traditionally, this will pick up at a later time as we probably know as the underlying financing needs are still there. With regard to fee income in other areas, the decline in market value of equities will have a negative impact on asset management and also on part of the -- on the life insurance company, the defined contribution area. From the starting point, the sensitivity is approximately NOK 12 million per percentage point decline in equity values, NOK 12 million annually.

Okay. That's very clear. Just on the interest rates, one more follow-up question, if I may. So when rates were going up, you guided that every 25 basis points roughly has NOK 1 billion or NOK 1 billion plus initially impact on your net interest income. Is it fair to assume that when rates go down 25 basis points, we should assume NII to be NOK 1 billion lower?

It sounds a logical way of thinking. At the same time, it's very important to stress that both money market rates and credit spreads are very volatile for the time being. So we will not give any precise guiding for the moment, but your reasoning is easy to follow.

[Operator Instructions] The next question comes from Ulrik Zürcher from Danske Bank.

Yes. Well, I was wondering if you want to suspend down payments for mortgage clients, could mortgage regulation pull along for this. Could that get in your away? Does that need to be suspended? And two, I was wondering what measures, if you have any thoughts on that, would you like to see from the Norwegian government on Thursday that would help you.

With regard to the first question, the government has made very clear that the regulations apply for new loans and that it will not prevent us for existing customers by deferring installments on existing loans. So we have stated that we will actually help customers in the situations you mentioned as going forward without impacting underway the regulations we abide by. The second question was on...

The measurements on the Norwegian government...

Yes. We are very happy with the steps and initiatives launched by the Norwegian government. We believe that they are very relevant and address the needs of the business community and also the households in adequate way. So we have no further proposals beyond what is actually being launched by the Norwegian government.

The next question comes from Peter Kessiakoff from SEB.

So just 2 quick questions. And one is a follow-up from before when asked on kind of the credit facilities and the drawdowns. And I guess the question previously related more to SMEs. But looking at the large corporates, are you seeing any trends there? And I guess, there's a lot of articles out saying that owners are telling their companies to make sure that they draw down the facilities in order to sit with liquidity in this environment. So that would be the first question. And then the second one is just on IFRS 9. I guess kind of coming back to one of the questions previously in terms of the implications on the declining oil price and perhaps macro scenarios. When looking at loan loss provisions going into, say, 2020 or in general the sensitivity, to what extent do the macro forecast or scenarios have any meaningful impact on the loan loss ratio in a given year?

Would you like to start with the first one on, Ottar?

Yes. So far we've seen very little change in behavior from corporates. I think it's still early on. So when the government guarantees come into place, I would assume that it will be more attractive for SMEs to use this going forward. But so far, we see very little change in behavior.

Yes. And that also goes for the larger customers in the former LCI segment. When it comes to IFRS 9, and I'll try to see if I understand your question correctly. We report this in 3 different stages, where the first and the second stage is kind of come -- the impairment comes from a model-based scenario, whereby the third stage is individual impairments. This is based on the individual assessment of each company or customer. So when we look at the different scenarios and also the macroeconomic variables, that is both an indication of this year, but also taking into account the next 3 years.

I guess my questions partly relating to that. If you look at the kind of given year, I mean, the number of or the list of clients going into Stage 2 and perhaps Stage 3, I would assume that, that has a more meaningful impact on the loan loss ratio compared to perhaps changes to the assumptions and perhaps the amount of provisions being made in Stage 1 and Stage 2.

Well, the assumptions that we make in the expected credit loss model has an impact on how the customers moves as well within the different stages because we also look at different sectors and different segments within the bank. So that in itself has an impact. And in addition to that, you, of course, have the fact that the bank -- we are -- banks aren't taking -- or we aren't taking all impairments upfront, but we should take the majority and being based on the best estimate at every -- or at a given point of time.

[Operator Instructions] The next question comes from [ Roy Mikovich ] from [indiscernible]

It's Jan Erik Gjerland from ABG. The installmentary period, is it so that those clients who are offered a installmentary period, either a household or corporates, will they move into the Stage 2 part of your credit line under the IFRS 9?

Yes. If the customers are marked with forbearance, which they will be, then they move into Stage 2.

Okay. And secondly, on the risk-weighted asset side, on the migration, could you give any light or shed some sensitivity on how much your client must migrate to see any effect on your credit side? Have you given any sensitivity how much that would mean in your risk-weighted asset side?

No. Well, we have done internal estimations, but we aren't providing any guidance on that externally.

Okay. So the substance you will be granting will go into Stage 2 as a higher loan loss base than the Stage 1 as such?

Yes. But what's important to emphasize there as well and then we come into very model technical things is that it also depends, of course, on the credit quality of that customer. So even if you would have a large amount of customers within the retail portfolio, that's private individuals moving into Stage 2, that wouldn't necessarily mean that you would have a massive increase in impairments related to that because that's sort of based on what we expect from the creditworthiness of those customers overall.

[Operator Instructions] The next question and the only question in the queue is from Christoffer Adams from Kepler.

DNB has communicated a reduction in mortgage rates of up to 35 basis points following the 50 basis point Central Bank rate cut. But typically you reduce much less than the up to level you communicate. So can you give us an indication or an estimate of the average rate cut? And secondly, I believe the -- yes, sorry ahead.

Sorry. Go on.

Second question, I believe, the FSA has signaled a review of the bank's IRB models, but the industry organization for the finance industry in Norway has asked for that to be delayed, if you can update us on the status of that?

Yes. With regard to the first one, the 35 basis points, it's the same burning we have used when we increased rate. So again, I think you should think about it in the same way as we -- you saw the rate changes when the rate went in the opposite direction. On the second question, any proposal from the FSA with regard to how they look at IRB models, they have posted a statement on the FSA website stating that they will not go forward with any such proposal at this time.

And we have 2 more questions coming in. The next one is from [ Tom Ackerman ] from Fidelity.

Could I just ask you to repeat what you said on generating extra liquidity and the transactions you're planning with the Central Bank, please? I missed part of that.

Yes. No, we entered into this year with the best financial situation ever since we prefunded almost NOK 60 billion in senior debt before year-end, partly due to the MREL requirements going into effect and this debt being grandfathered. This means that we have no long-term funding requirements whatsoever in the first half of this year. But the Central Bank offered, before the weekend, attract -- loans to all banks on very attractive terms. So we will use those attractive terms to further bolster liquidity reserves. And even though we don't need the money, we will just put that money on our account with the Bank of Norway.

The next question comes from [ Roy Mikovich ] again. This is the second time we do ask your question. So please see if you can just keep your question short.

Just wanted to shed some light on the cost side. What happened to the cost in this situation here? Is it so that some cost that is reduced due to your reduced activity? And how do you sort of thinking about taking down the cost base further due to the circumstances?

We have not made any new cost guiding going forward. So I don't think we have much to add on that, except that there will, of course, be some exchange effect from the weak Norwegian krone in the cost number.

And bonuses, et cetera.

No changes in that area.

All right. If there are no more questions.

There is 2 more question, if they can keep them to 2 question each, which you want, I think to get pushed through, there is 2 persons who would like to ask a question.

Okay. Great. We'll take 2 more questions.

And this will, ladies and gentlemen, be the last 2 question in this meeting. The next one is from Joakim Svingen from Arctic.

Just regarding provisions in the retail segment. Could you perhaps shed some light on how quickly the model adapts? If you look at unemployment rates and house prices, do you use monthly data, quarterly data? Or how quickly will we see changes in the expected loss model?

Well, as I'm sure you understand unemployment rates and housing prices are parameters in the model as such, so that's rightly said. We have an update of the model every quarter, and that's made on a quarterly basis. If there should be any reasons to adjust that and change it quicker than that, we will naturally look at that. We followed the scenarios and have different scenarios whereby we update constantly. And -- but I also would like to highlight that at this point of time, we have very low provisions in retail and in the personal customer segment.

And the last question for today is from [ Nora Lidna ] from E24.

I would just like you to ask you if you could clarify if there will be paid out any dividends for the year of 2019. And if so, how those dividends will be paid out?

We haven't -- we have not paid out any dividends as the general assembly of DNB is in late April.

Yes. Yes. I understand that. But have you decided if those will be paid out? And if so, how?

The Board of Directors have put forward a proposal that in February, which has been communicated to the market. The FSA has sent a letter to all banks and all financial institutions in Norway to asking the Board to consider if those proposals are still valid. And we have stated, of course, that we will reply to that letter by the deadline set by the FSA, which is the 23rd of March.

Okay. But you can't say anything as of now on how we will consider the letter from the FSA?

No news in that area.

All right. Thank you all for participating, and I hope you all will have a nice afternoon. Thank you.

Thank you for joining today's conference. You may now replace your handset to end the call. Thank you.