DNB Bank ASA (DNB) Earnings Call Transcript & Summary

Good afternoon, and welcome to DNB Quarter 3 2020. My name is Anna, and I will be your coordinator for today's conference. [Operator Instructions] I will hand you over to Head of IR, Rune Helland, your host for this call. Thank you.

Thanks so much, and hello, everyone, and welcome to this analyst call for the third quarter. To answer your questions here today, we have with us the CEO, Kjerstin Braathen; CFO, Ottar Ertzeid; Head of Group Risk, Ida Lerner; Head of Personal Customers, Ingjerd Blekeli Spiten; Head of Corporate Banking, Harald Serck-Hanssen; in addition, the CFO of DNB Lease, Thor Tellefsen. Before we open up for questions, Ottar will give you a short summary of -- or introduction of the results. So please, Ottar.

Thank you, Rune. I will just start by reminding that more than 80% of DNB's income is coming from the Norwegian units. How DNB is performing is based, to a large extent, a reflection of how the Norwegian economy is doing. And the Norwegian economy has been performing better than expected. The pickup in activity has happened at a rapid pace, and the GDP in August was only 3.9% lower than in February. Going forward, we expect a rate of -- or the pace of the recovery to be somewhat lower but still positive. This has been helped by the central banks adjust in policy rate by 150 basis points. Most Norwegians have floating rate margins. So this has meant almost a 50% reduction in the interest rate bill and really boosted disposable income for households in Norway. This has contributed a strong development in the housing market with a more than 5% growth year-over-year. Also, the businesses have shown impressive resilience, an ability to adapt and has been further helped by the government's quick response and targeted support measures. As a consequence of this, unemployment has declined to only 3.7% at quarter end. And yesterday, it was announced it has fallen further to 3.5%. In line with most European countries, Norway has experienced an increase in COVID-19 cases. However, compared to most countries, Norway has been quite successful in containing the virus and not least, the effects of this. The impact on both the Norwegian economy and on DNB has been helped by a high degree of digitalization. For example, we closed branch network in 2016 and serve our customer mainly in a digital way, and we have been able to operate as normal as the third quarter numbers demonstrate. We acknowledge that there is still significant uncertainty around the macroeconomic development. At the same time, it's important to remember that Norway has ample ability to respond if the situation should turn out to be more challenging than currently anticipated. The use of the financial support packages from the government has been far less than expected. And in fact, the expected use of the sovereign wealth fund next year is estimated to be only 3%, which is in line with the fiscal rule for a normal situation in the economy. This illustrates that the government has significant financial flexibility should it be necessary to do more, and the government has proven both their ability and willingness to do so if necessary. Moving to our third quarter numbers. We saw a healthy growth in the loan book in the personal customer segment with 1.4% and even higher in SMEs with 1.8% and 6.1% year-to-date. With regard to large corporates, there was a somewhat reduction in loan volumes. But in this area, the volumes are more volatile. We maintain our guiding for the full year of around 3% to 4% growth in loan volumes. Year-to-date deposit growths are very strong, 14%. The loan volume at quarter end was 1.3% higher than at the average for the quarter and thus giving a positive momentum into the fourth quarter. The deposit-to-loan ratio strengthened significantly due to the high growth in deposits. With regard to margin development and weighted development was stable. Net interest margins is down 4 basis points, and volume weighted combined spread, 2 basis points. But this is purely the effect of our portfolio mix effects. More specifically, 2 items. First one being the high growth in deposits than in loans, and the margin for deposits are naturally lower than for loans, affecting the weighted average and also the fact that personal customers have become a larger part of the total loan book with lower margins than for corporate customers. Net interest income in the third quarter is unchanged, adjusted for the effect of the strong Norwegian kroner currency, which impacted net interest income negatively by NOK 151 million. Activity among our customers was stronger than expected in the quarter, reflected in a more than 2% growth in commission and fees year-over-year compared with the third quarter last year. And particularly strong within real estate broking, increasing 18%, asset management increasing 14% and also investment banking fees increasing 7%. The only soft area is money transfer and banking services, which is still significantly impacted by COVID-19 with very little use of cards internationally. This is the area with the highest margins and thus, money transfer and banking services are down year-over-year. Overall activity and commission fees have developed stronger than expected. I can also mention that both life insurance company and also other associated companies like saw a healthy growth in the third quarter. Operating expenses are unchanged for the quarter and nominally down NOK 8 million. Both the second and third quarter reflects a lower activity than normal due to COVID-19. And the third quarter, also some seasonal low effects due to the summer holiday season. With regard to asset quality impairment provisions is down to NOK 776 million, a significant decline from the previous quarters and in line with our guiding that we expect the majority of impairment provisions to be taken in the first half of 2020. For personal customers, we actually saw a net NOK 360 million reversal, reflecting the comments I made initially regarding Norwegian households and also the fact that the nonperforming portfolio among personal customers is actually lower than before pandemic. For corporate customers, we took reserves of NOK 1.18 billion, 91% of which within the oil and offshore segment. Offshore is now only less than 5% of our exposure, down from the previous quarter, but remains the most challenging segment. In other corporate customers, total provisions amounted to only NOK 100 million. We acknowledge that there are still significant uncertainties around the economic outlook, but we consider that portfolio to be very robust and well-diversified. Moving on to capital. Capital increased significantly with 70 basis points during the third quarter. The common equity Tier 1 ratio is at an all-time high. And also the headroom about the minimum requirement is at an all-time high. And this positive development is not affected by CRR2 or audit changes made in Europe in June. They will only be implemented in Norway next year. In these numbers, we have not included the proposed dividend of NOK 9 per share for 2019 proposed earlier this year. And we have also not included 50% of profits reserved for 2020 dividends on -- yes. The main contributor to the positive development is the profit generation in the quarter. To sum up the financials, return on equity and earnings per share are significantly impacted by the central bank's 0 policy rate. This has reduced return on equity by approximately 2% compared with the previous interest rate level in Norway. Nevertheless, return on equity ended at 9.5% for the quarter despite higher impairment provisions than normal and also despite higher average equity than normal since dividends were not paid as usual in the second quarter. Both the underwriting agency have previously highlighted the importance of resilience in earnings over time, and we are happy to demonstrate that this is also the case this quarter. Earnings per share ended at NOK 3.41 and year-to-date, NOK 8.76. Also worth mentioning before I conclude that the Board of Directors have called for an extraordinary general meeting to be held at the end of next month where to consider 3 proposals: the first one being simplification of the legal structure of the group; second, the proposal to authorize the Board of Directors to decide on the distribution of dividends for 2019 up to NOK 9 per share. This authorization is proposed to be valued from January 1 until the Annual General Meeting in the second quarter. At the same time, the Board of Directors is also asking for our authorization to buy back shares in the same amount as been the case for several years. It's worth mentioning that use of the share buyback authorization is conditional on the approval of the Norwegian FSA. And I think it's also worth to remind that in accordance with our dividend policy, we will give priority to deliver on the cash part of the dividend policy of paying out more than 50% of profits in cash dividends before share buybacks are considered. So with these first remarks, I conclude my initial remarks.

Very good. Thank you so much, Ottar, and then we will open up for questions.

[Operator Instructions] And the first one is from Adrian Cighi from Crédit Suisse.

Adrian Cighi from Crédit Suisse. Two questions from my side, please, one on NII and one on capital. On NII, you've described the moving parts in the margins this quarter is driven by mix and higher inflow of deposits. How do you see these moving forward? Are there any repricing efforts that you can undertake to defend and improve your margins? And on the capital, clearly, you're, I don't know, all-time high in terms of management buffer. Can you provide us with sort of any moving parts into the next year? And how do you think in terms of time frame for distributing this excess capital. Is this sort of a 1- to 2-year period? Or is it a longer time period?

Thank you, Adrian. I'll do the NII and then Ottar can do the capital one. I mean it's difficult for us for many reasons to be very specific on the margin. So we can try to shed a little bit light on where the business is going. And I think, first of all, to reiterate that during this quarter, the customer margins overall are stable. And we see the opportunity to grow profitably in all the sectors we are involved in. I think that's an important statement. On the personal customer side, I would say, performance has improved. We are defending our market share better, and we are actually taking a new business now on prices that are higher than the average prices of our book. So there is no margin pressure as such. SMEs, you can see that there's a slight margin improvement. That can also depend on the lending mix as such. But SMEs, if the bank depends on sector, and that will depend on the competitive situation in the market. As for large corporates, there are variations depending on the sectors. Some sectors more competitive than other. What you would find today is a high competitive environment, for instance, in renewables and infrastructure and less so if there's anything that involves cost of fuel related or also maritime, where you can see somewhat higher margins. So the bulk and the mix of it, I think what we can say is that we would always try to optimize and work to improve on our pricing while staying competitive towards customers. Deposit wise, we would always consider whether it's beneficial to take on deposit or whether it's more beneficial to fund ourselves in the open market. So this is the way that we think and manage. But in the short term, of course, we don't expect any changes to the reference rate. So that really influences the personal customer part. And then what influenced the larger corporates is really the spread in the capital markets overall, and these have been to a very large degree normalized, and there is a lot of capital in the market itself. I think that's just a few comments. We tried to add some color.

And if and when the Central Bank raises policy raise again, we see no forecast to happen 2 years from now that will, of course, be helpful. With regard to capital, any changes from the 18.9% level, will be driven partly by quarterly profit generations, which has historically been 20 to 30 basis points each quarter after 50% tax. And then, of course, it will depend on the rate of growth with regard to the loan book. And there could also be effects from credit migration or FX impacting the numbers. But I think this is the general drivers for the development in common equity Tier 1. We expect a small positive effect next year from the implementation of CRR2 in Norway. With regard to distribution of the excess capital. Even if the countercyclical buffer requirement is Norway has switched on to the maximum level again, which should not happen until 2022 at the earliest. The capital requirement will be 16.9%, 2 percentage points below our actual level at this point in time. So it means that the -- based on this level, there should be a potential for distribution over time. What -- how long and to what extent remains to be seen. But we have clearly stated that we do not intend to just sit on excess capital over time more than we deem necessary.

The next question comes from Sofie Peterzens from JPMorgan.

Here is Sofie from JPMorgan. So my first question would be on the dividend and buybacks that you announced today. Could you just run us through what authorizations you need from both the Ministry of Finance in Norway and also the Norwegian FSA? And have you had any discussions either authority around potentially paying a dividend and doing buybacks in the first half of 2021? That will be my first question. My second question would be on your loan growth guidance. Historically, you have guided for 3% to 4% loan growth. Loan growth slowed down a little bit in the third quarter, but how should we think about loan growth in 2021 and 2022? Is it fair to assume that the 3% to 4% loan growth still holds?

Thank you, Sofie. With regards to dividends and buybacks, I'm sure you're familiar with the signals that the authority in Norway have given as of today, and that has been an alignment of the signals from the systemic risk board in Europe where they have cautioned banks with regards to paying dividends during the year 2020. This is the main reason why the Board is proposing to ask for an authority from the extraordinary general assembly in November. What the Board will have to consider, of course, is -- when considering a dividend is the -- amongst other, the position of the company, the economic outlook. And also if there is any signs from the government as such or the authorities, whether the FSA or the Department of Finance. With regards to approvals, there is no requirement for any formal approval for us in order to pay dividends. There is a requirement to inform if we should decide to pay more than 50% of our results in cash dividend. However, when it comes to share buybacks, if that is an authority given by the general assembly, that would have to be followed by -- is considered an application to the FSA who would need to approve it. As for any dialogue, I don't think we can say that there hasn't been any other signs than the one that you are aware of as well, namely to align the Norwegian signals with the European Systemic Risk Board. That is what we can say. With regards to loan growth, we are maintaining our guidance also longer term, 3% to 4% profitability still is more important than growth. But across the mix of our portfolio, we are comfortable that we will be able to deliver on that also in the longer-term picture.

Okay. That's very clear. But just in terms of the dividends and the buybacks, when I read Ministry of Finance press release, That as long as you have that increased uncertainty in the market. At the moment, you have got the second wave in most European countries. So how should we kind of think about this? Do you believe that end of the year, the Norwegian Ministry of Finance will basically say that now uncertainty has reduced so much that you can pay, given that you have a higher -- such a high capital position? Or how should we think about the uncertainty? Because I think compared to other regulators, the Norwegian Ministry of Finance was a little bit more vague given that they only call it uncertainty. I knew that FSA then talked about end of the year. But how should we think about that?

I think that's a good question, Sofie, and you are right. The FSA was specifically clear in their statement. However, if you look to the announcement from the Department of Finance, the answer is twofold. It's net number one, replying on the request from the Systemic Risk Board, whether they will comply with the advice from the Systemic Risk Board. And on that, they are ticking off, yes, they will comply. And then we read their commentary as an additional comment to the fact that they will comply. And the systemic risk board was specific on dates. So this is the way we have interpretated the comment.

Your next question comes from Jan Gjerland from ABG Sundal Collier.

Yes. Jan Gjerland here. Just a follow-up on Sofie's question on the dividend. So you can actually pay out a dividend below 50% without getting any permission at all, except for that you could be sort of unpolitical if you do it before year-end? Is that the real question here?

Well, I...

The ordinary dividend regulations are that we can pay out between 50% and 100% of annual profits without FSA approval on limited notification. Well, if you're going to pay out more than 100% of profits, you need authorization from the FSA. And if you are going to do buybacks, we need authorization from the FSA. On top of that, we are in a special situation now with this recommendation from the Ministry of Finance, which the CEO just mentioned, we also have to consider.

Okay. Very clear. Then back to the margin question. And if I can ask a question a little bit different. How is your sort of -- when you saw the mortgage lending statistics in August, it looks like the mortgage book -- well, the new lending was 14 basis points lower than the back book. And you're saying that your new loans are actually higher than your back book currently. But just wondered, what is going to change during the quarter that the front book and back book was fully aligned. And how should we think about the margin going forward from here?

No, this -- I believe this is also in line with our commentary in the past quarter that for some time, we have seen a better match to put it that way with regards to the new pricing compared to the back book. So I'm not sure I recognize your statement on the 14 basis points lower, but we confirm that what we are taking in on in terms of new business is at somewhat better pricing than what we have in average on our books currently.

Okay. And will you still consider profitable growth will be the mantra, meaning that you will not go for a lower margin in the market really? .

Overall, we maintain that profitability is more important growth. We do believe that we can grow profitably. It's also important to say that we look at customer profitability across all of the sectors. And really believe that we currently have competitive prices towards our customers. Looking at the finance certificates, as an example, we have more than 30% growth in the third quarter this year compared to the third quarter last year and actually a record conversions. So there's been a record level of activity particularly towards the end of the quarter, and we get the sense from the market that some of our competitors actually struggle with the level of activity, but see that we are very efficient, and that, together with a competitive price and overall offering is working, if I should put it that way, with customers.

Okay. Perfect. Just a final question on your loan losses. You commented in your writing report that you have written further down on the offshore side because the collateral values are falling down. How far have you come down on loan loss provision in the offshore book? Have you written it fully down to collateral values? Or are you above the collateral value when it comes to all of your assets in offshore supply vessels, rigs, et cetera, if you can just comment any more detail on those levels, that would be great.

Well, first of all, I don't want to share into complete details in terms of the values, but I can just confirm what we've said before that are scrutinizing the portfolio very slightly. We are looking at it on an individual basis and are assessing each customer based on that. As you can see, we are increasing the coverage ratio in Stage 3 and is now above 40% there, which I think is also an indication of that -- what our assessment has been. So -- and if you see that in the more than 60% of our maximum exposure towards the offshore segment is now in Stage 3.

The next question comes from Maria Semikhatova from Citi.

I have several questions. First of all, on loan growth. Thank you so much for reiterating the guidance, but just talk about specifically the mortgage book. Do you expect any impact from the return to the regional mortgage regulation quarters from the next quarter? And also if you see any potential impact from further plant reduction to 5% throughout Norway? That's question number one. Second on provisions, you had reversals of provisions on stage 1 and 2 on both corporate and retail portfolios. Maybe you could provide a bit more color what drove that? If I look at the macro assumptions that you disclosed in the report, I see that there was actually -- there was quite a bit of worsening in terms of global GDP growth and unemployment in Norway. And maybe specifically on consumer finance, since you mentioned that, that was a big proportion of reversals. Could you maybe provide a little color what coverage you have there, why you think that despite high uncertainty that remains you feel comfortable for the recent provisions here? And finally, a small question on -- I see that there was a quite strong contribution from investments accounted by the equity method, around 300 million. Is it mostly fronting? And what do you expect is this new sustainable level of contribution?

Thank you, Maria. I'll do the first one, our CRO, Ida, the second. And I think our CFO can help with the last one. In terms of loan growth, we don't specifically guide per business area or segment as such. So again, I reiterate that 3% to 4% profitable growth across the business, that is how we see it. In terms of the mortgage book specifically, growth in the past 12 months has been at 2.4%. I believe when you're talking about changed regulation, you're talking about the proposed new framework from the FSA that further tightens the regulation for the providing of mortgages. And I think it's fair to say that we don't have full clarity, but there is little -- the market believes it not to be very likely that, that will be sanctioned as this severely would worsen the ability for young people who are entering the adult life actually to be able to buy their own house or apartment. There has been a further flexibility for a period as to how many could be exempt from the rules, and that will be tightened back to normal. At the end of this quarter, this could have a certain impact, but it's nothing that we would highlight in terms of a material impact on the growth of the group as such.

And on the impairment side, I'll just start with just kind of the personal customer segment, which has proven to be very robust and even more so robust than what we foresaw when we went into this. And in Q1 -- we presented in Q1. And as you're right to point out, the bulk of the reversals in the personal customer segment is related to consumer finance. And it's important to highlight there that we haven't seen any negative development on that part of the portfolio, rather the opposite. It's actually performing better than it was a year ago. So we haven't seen any indications also when looking at our customer portfolio of any negative development, that would then lead us to believe that we would have future impairments in this part of the portfolio. So that's that side. If we move on to the corporate customer side, it is a mixed picture. And if we look at the corporate customers, we have seen a positive development in most of the sectors, if we set aside offshore in the oil-related industries and the travel-related industries. But it's important there to highlight that offshore-only accounts of 1% -- 1.5% of our loan book. And also that the travel-related industry is also a very small portion of our portfolio. If we then move on to the macroeconomic outlook, it is actually a bit of a mixed picture there where some parameters are actually have been worsening. But actually, some of them have also been outperforming. So when we're looking at, for instance, housing prices, that has actually improved if we compare it to Q2. And Norwegian GDP has also proven to be a positive about. So I think it's -- that is a bit of both. And also, we have far more comfort in the oil price level and the activity levels that we're seeing related to oil-related industry. So if we look at the macroeconomic outlook for oil price, for instance, that has also been improved, looking into the future.

With regard to associated companies, these are mainly the Fremtind nonlife insurance company and partly also our ownership in Luminor in the Baltics. Income from these units were unusually low in the first half of this year. In this quarter, we have seen a normalization of activities, a very positive development in nonlife insurance.

Could the listeners please mute. Someone's typing on the line.

The performance in the third quarter is NOK 310 million. It's probably a bit on the positive side, somewhat a pickup from the first half. So going forward, a bit lower than the third quarter, but definitely a positive trend from particularly the Fremtind nonlife insurance activities.

Maybe just another small question. There was a positive contribution to your capital development from credit migration. Just want to hear your thoughts on expectations going forward. Do you still think that, that will be actually a headwind to your capital?

It was negative. We have approximately the same amount, both in the second and in the first quarter. So of course, there can be fluctuations from quarter-to-quarter. And I think we should expect that going forward as well that there could be fluctuations with regard to credit migration and FX with the profit generation being the positive -- more consistently positive item.

The next question comes from Jacob Kruse from Autonomous. [Operator Instructions] The next question is Martin Leitgeb from Goldman Sachs.

I hope you can hear me. Just 2 follow-up questions, one on NIM and one on risk cost, and then a broader question on the term. And I was just wondering, first of all, on NIM. Obviously, the impact of the multiple rate cuts early in the year, has the full effect, the full negative impact of the rate cut now come through? And would it be fair to assume that from this third quarter level onwards, NIM should stabilize, if not improve somewhat as we progress from here? Secondly, on risk cost, you pointed out that risk cost is obviously front-loaded in the first half of this year. From today's perspective, how should we think of risk cost as we head into 2021? Should those normalize further? And then on the third question on returns, you pointed out that, obviously, returns this year were impacted by lower rates as central bank rates and by higher level of capital, with the Central Bank expecting rates to stay at the current levels, still at least sometimes into 2022. What the turn should be possible for DNB? And the target remains 12%. Could you give us a feel of what kind of level should be achievable? And is it fair to assume that the core Tier 1 ratio would stay broadly at 19%, as I believe consensus has it over the next few years. So it's a possibility that it could come down.

Thank you, Martin. With regards to NIM or maybe to start with the rush on the net interest income. We said that in the second quarter, really the bulk, the vast majority, practically all of the effects of the repricing were already reflected into the second quarter results. You may see some movements. If you look at the volume-weighted margins, that is a lay over due to the fact that the repricing was done during the second quarter. But due to the lag effect and the repricing of deposits at a different time than lending, the full nominal effect was implemented before you see it actually on the volume weighted margins. So the impact you see on the margins this quarter is really due to mix effect, deposits versus loan and also the mix effect between the various business segments. I think going forward, we aren't specifically guiding on the margins. But as the CFO previously stated, when at some time, but that's a while until we expect the rates to start moving, that is a big trigger effect. Until then, of course, we will look for opportunities to optimize and improve while staying competitive, but there is nothing that we can highlight that would materially lead to a change as we see it today. I think in terms of cost of risk, we have been very clear that we aren't specifically guiding on that. We did do so a few years back, and it's extremely hard to guide. So I think we can only reiterate what we have said that the bulk of the losses were likely to come in the first half. We don't see anything in the development that leads us to change that statement as of now. But of course, in addition to calling this quarter's activity normal in a very unnormal world, we are also very aware that the situation outside of Norway is far more challenging that we actually do experience in our environment. And that has to be factored into account. And we should be humble that none of us have really experienced a scenario like we're in before. We need to acknowledge that. Returns, we haven't changed our longer-term ambition, but I believe we've clearly stated that until rates start moving, it will be hard to get to a 12% return. But we have -- we have not made any changes to that. And I don't think we have set any sort of milestones or benchmarks on our way there, other than saying that we do believe that we can grow profitably by 3% to 4% per year. We've also stated 4% to 5% growth for fees, even though we've said it's difficult this year around. And we continue to work hard on optimizing costs in accordance with our messaging during the previous Capital Markets Day in London. In terms of capital, Ottar?

Of course. 18.9% is a much higher headroom than under normal circumstances. When the Central Bank starts to increase interest rates. Again, I think it's fair to assume they might also increase the countercyclical buffer requirement. But even if they switch down to the maximum level, we will still only have a 16.9% expectation and already being 200 basis points ahead of that. And then excluding the dividends I mentioned. This is a much higher headroom than under a normal situation, meaning that we plan to operate long term with a lower headroom than that. That will also be important in order to be able to approach the more than 12% return on equity target.

The next question comes from Oleg from Nordea.

Most of my questions have been asked, but I was wondering if you could comment on the SME lending growth. Are you still taking market share there? And to existing clients that are SMEs, what do they need the money for? Is it investments or external liquidity or any comments would be helpful.

I can try to comment. This is Harald, the Head of Corporate Banking, Rick. We don't have the market numbers yet. So we are not sure if this strong growth we experienced on the SME side is reflecting that we actually gain market share. But -- so we'll have to come back to that. I would say, overall, we both benefit from the strong emphasis we have on start-ups and the strong position that we have in terms of both combining a physical presence with 45 offices across Norway, together with the continuously improved service on the digital solution towards the clients. So it's very gratifying to see that we have actually maintained this growth of approximately 7% on the SME side for several years. And as we stated at the Capital Markets Day last year, it's our ambition to maintain that growth on the SME segment. So I think that -- and it's also obviously a reflection that there is a lot happening in the Norwegian economy. And you can also see from the deposit ratio we have and the increased deposit volumes across our corporate banking business, but also specifically on the SME side, that they do have a healthy liquidity level despite being 7 months into this special situation.

So there's actually a lot of economic activity there among the SMEs that we don't really see in the large ones? Okay.

Can I just qualify that? Because it's not -- we do see a lot of activity on the large corporate side as well. So I would like to make that point because when we have a slight reduction in lending volumes in the third quarter, that must be seen in connection with the strong increase we had from the second -- in the second quarter, partly based on currency fluctuations and the fact that we had to be careful with our use of capital in March, April, May, because we were uncertain how the world would develop. And there is a time lag between when we kind of increase activity again, that you will see it on our balance sheet. So I'm very confident that we have enough growth opportunities across industries on the large corporate side to pick up any slack on the personal banking side or the SME side to deliver on the 3% to 4% growth target for DNB in total.

I can also add that the large corporate customers also use the debt capital markets as opposed to the SMEs. And the debt capital markets has been very active, as you see in our commission income line and also means that volumes in large corporates will be somewhat more volatile than in the SME segment.

[Operator Instructions] Next question comes from Riccardo Rovere from Mediobanca.

Couple of questions, if I may. The first one refers to the -- to your dividend aspiration. When you think about your capital position, room to pay dividends or buybacks or whatever, do you use, as a reference, the capital requirement as it is today, so after everything has been reduced? Or do you think it would be more appropriate to think about the capital requirement ahead of COVID-19? So let's say, the 1 of December, maybe just to better understand how you think about it. The second question I have is on -- to get back one second on releasing personal customer provisions, if I'm not mistaken, and please correct me if I'm wrong, in Q1, you charged NOK 750 million related mostly to consumer finance. If I'm not mistaken, in those days, you were referring to a spike in unemployment in Norway in March and April. Now I see that the reversal is about NOK 170 million in the quarter in that, in personal customers. And unemployment has got back to more normal levels. Should we expect -- on the back of that, should we expect some more reversals of the consumer finance portfolio provided clearly, unemployment remains where it is? And very, very final question, if I may. Can you guide -- can you tell us if you see any material headwind or tailwind in the short term, and maybe the software update of software intangibles, the SME supporting factor, these kind of things?

I can start with the capital level. As I mentioned, there, the capital expectations we have presently from the authorities is only 15.7%. But since the Central Bank has stated that the forecast increase rates in only 8 quarters from now, we believe that it's reasonable to assume that it will coincide with an increased countercyclical capital requirement, so we actually take into -- are planning the maximum rate of 16.9%. And we need to operate with some headroom towards those -- that level, but we do not need a 2 percentage point headroom. So that gives some potential. With regard to software assets, as I said, the CRR2 and the quick fix from the European Union to CRR, which they implemented in June, really means some capital -- with some improvement in capital ratios. We expect some positive effect from that next year but not a material positive effect from that. But there is -- there will be, according to proposals, benefits from infrastructure loans from a larger discount on SMEs than presently and also more attractive handling of software assets, as you point to.

Yes. And when it comes to the personal customer segment, I mean, it is definitely consumer finance that is the largest bulk of that. Having said that, that's probably not everything in total. So you will see discrepancies in terms of numbers. But you are right. Unemployment is one of the factors, but we have several different macroeconomic factors that has an impact on this as well, in addition to the GDP development and also, of course, other factors such as the world GDP and things that affects the environment outside of Norway. When looking ahead, I would say that we would just reiterate that the personal customer segment is very robust and has proven to be so. And that also goes for the consumer finance part of the portfolio, which is still a very marginal part of our portfolio. It is important to emphasize that the absolute majority of the personal customer exposure is related to mortgage lending.

But I think it's important to be clear that the reversals are higher than I think you mentioned, Riccardo, NOK 170 million. The net results for the quarter is NOK 380 million. So that means the reversals are even higher than that. I don't remember the gross number. The gross number in Q1 was NOK 405 million. If you look at it on an industry segment perspective, so we took NOK 405 million in Q1, and the reversals are now NOK 380 million and in Q2, which is reversal of NOK 24 million.

Okay. Okay. Okay. That is very clear. Another thing I wanted to ask you, if I may, and here is a qualitative comment, in general, do you think that the profit that the bank has been showing over the past few quarters are somehow supported by all the various initiatives that the government is putting in governments and the central banks in Norway and outside of Norway are putting in place making available to the various economy because that could be an argument eventually to keep being cautious on the dividend payment, if you see what I mean?

Not to comment on your reference there towards the end, I would say, overall, I believe, very crafty authorities with measures that have been implemented quickly into the economy has been very favorable to the economy overall. And as such, I guess, you can clearly say also that they have benefited us and our performance over the past couple of quarters. I don't think I would specifically highlight that there are specific measures that transfer directly over to our performance or results as such, nor do we feel that there is a buildup of structural tension to put it that way because the use of guaranteed loans has been very limited. The use of cash compensation has been very limited. And there is not a concern for us that the installment relief that have been given on the personal customer side that, that creates kind of a wave of defaults further down the line. I mean there can be individual exceptions to what I'm saying. But in general, we're comfortable with the development, and we feel that the initiatives have been working in accordance with plan, I would say. And one of the particularity, again, is that we feel they've come quicker to the market through execution in Norway, maybe than we've seen in some other countries.

If I can also add, I think it's important to remember that the unemployment rate in Norway is down to 3.5%. And it means that almost all the regions are actually much better off today, financial-wise than before COVID-19 because of the significantly reduced interest rate bill after interest rate reductions. So I think that helps the general sentiment in the economy and creates much more tension than if you had a high unemployment rate, and the general population was worse off. So this is quite a normal situation in these abnormal times.

The next question comes from Vegard Toverud from Pareto Securities.

I have 2 questions or clarification. As I understand your comment here now multiple times, you have higher margins on your new mortgage lending than on the back book? And as far as I can read my comments from last quarter, most, if not all, of the effect of the repricing on the lending side was already in the numbers in Q2. Despite this, it seems like the lending margins are down in Q3 in the supplementary information, down to 170 from 181 last quarter. Could you just help me understand this seemingly discrepancy? .

Absolutely, Vegard. I understand where your question is coming from. First of all, I would advise you also to look at the volume weighted margins in the -- in the personal customer segment, in the fact book where you would see that the volume-weighted margin is close to stable. I think it's a 1 basis point reduction. And I think you could allocate that to the change in asset mix. I tried to talk about it a little bit earlier, but the nominal effect from the repricing was fully reflected in our second quarter numbers. This was due to a one-off because we repriced the loans earlier than we repriced deposits. So since that was done during the course of the quarter, you would see some of the effects on the margins in the third quarter. However, nominally, they affected fully in the second quarter. I think the shift that you do see in NII on personal customers, there is some effect that is related to how we internally price the funding and allocate return to the capital deployed by the various business segments. So I think the focus should be on the business going forward. And externally, we have seen stable customer margins. There is no back book pressure at the moment, and we have been very successful, hence, the growth in finance certificates and conversion and really benefit from an even improved cooperation between the real estate brokerage activity and the bank.

Okay. So just then look forward, is then the 170 level an okay starting point for Q4 and Q1 next year?

I'm sorry. I can't be that specific in terms of number guiding, it's impossible.

But let me rephrase. There is no repricing going on from Q3.

Exactly. Yes. Yes, if you put it this way, I think we can confirm that nominally, it was fully in there. Margin-wise, you would see a mix effect in the third quarter. There is nothing left from the previous then reprices that should be visible. And there's always sort of smaller moving bits and pieces and of course, how the markets develop. But I think that sounds like you have the picture clear.

Okay. And then on the -- or the 2019 dividend. So say that you pay out NOK 9 a share in January. And then you would like also to pay out 50% of your 2020 earnings, say, for instance, NOK 12 or you would like to pay out NOK 6 on top of that later next year. Isn't there a risk that the FSA then says, "Hold on, that is 125% of your 2020 earnings and you're only allowed to pay out 25%."

I think it's very challenging to go into a hypothetical discussion. If we do this, then that and what would a third-party say or mean. I think the regulations are quite clear. I think our communication as to the proposal from the Board is quite clear, and that is to ask for an authority to consider a 2019 dividend also after year-end. And doing so, they would have to consider all of the elements they traditionally do, of course, financial situation, economy and if there are expectations, advice from government. And beyond that, of course, considering 2020 is also a natural process in the ordinary course of business. I think we can only comment to what are the facts and won't speculate as to what will happen.

But there's a form of distinction between paying less than 100% of each year's annual profits, rather, and for example, not paying anything from 2019 and are trying to compensate by paying more in 2020. If that means paying out more than 100% for the accounting year 2020, that would require authorization from the FSA also under normal circumstances.

Yes. So my question is really how comfortable you are with them paying out for an accounting year, even a calendar year? So my understanding is that as long as you pay before your next AGM, you are comfortable with that being attributed to 2019, whereas my uncertainty was whether the FSA, with another agenda, would like to attribute that to the calendar year.

It follows our Norwegian Company Acts and also Norwegian regulations that we are talking about profits for 2019 and distribution potentially of profits for accounting year 2019.

And now we are coming up to the hour. We have 4 people left in the queue. Two of those has not been able to ask their questions and 2 are follow-up questions. Do you want me to push in those 2, who has not been able to ask their questions.

I suggest that the people who have more questions will call or e-mail to the IR, and then we will answer your questions. And we would like to just say thank you for participating today. And we, of course, wish you a good rest of the day. Thank you so much.

Thank you, ladies and gentlemen, we will now end the Q&A, and thank you for joining this meeting. To end the call, please close your handset. Thank you.