DNB Bank ASA (DNB) Earnings Call Transcript & Summary

Hello, and welcome to the DNB Q4 2021 Conference Call. My name is Ja, and I'll be your coordinator for today's event. [Operator Instructions] I will now hand over to your host, Rune Helland, to begin today's call. Thank you.

Thank you very much, and hello, everyone, and I'm very happy to welcome you to DNB's Fourth Quarter Analyst Call, here in Oslo. In addition to the CEO, Kjerstin; and CFO, Ida, we have also the Head of Personal Banking, Ingjerd; and Head of Wealth, Hakon; and also the Head of the DNB Market, Alex. So they will be here to answer your questions. Before we start the Q&A, Kjerstin would like to give you some of the highlights for the quarter. So please, Kjerstin?

Thank you, Rune, and thank you all for joining the call with us this afternoon for the presentation of our fourth quarter results for the year 2021. I thought I'd start by sharing a few highlights. All in all, the quarter reflects a continued strong recovery in the Norwegian economy, which is important for our business. We see a high level of activity across the group, but in particular, in the Corporate and Investment Banking area. Also, the outlook for the economy is solid ahead. We did have a somewhat slower start to the year due to Omicron, but we see for each wave that it has a less and less impact on the economy, and growth expectations for the year are at 3.6%. The Norwegian Central Bank has hiked rates on 2 occasions in the autumn, and they forecast another 5 rate hikes, whereas the markets are slightly more hawkish and believe in 6 additional rate hikes to come within the end of 2024. So a few comments then, just more directly on the numbers. Growth for the quarter is at 1.1% in total, stronger growth in Corporate Banking and stable volumes in Personal Banking. This lands our growth for the year at 3.6% for the group, well within the guided 3% to 4% interval. Net interest margin is up by 6 basis points to 142 basis points, reflecting the repricing done after the rate hike in September, which took effect early November. As a result of the growth and the margin increase, our NII is up by NOK 519 million compared to the previous quarter. More in detail. The effect of the repricing, you'll find affected by NOK 211 million in the quarter. We see a very high activity, as mentioned, so amortization and fees represents NOK 135 million in the quarter. And there is additionally a volume effect and a positive result from treasury. The fees are strong across the board with an increase of 22 -- slightly more than 22% to the same quarter last year. I'll mention only the 3 highest growth areas. Starting with Investment Banking, up by 53.5% compared to the same quarter last year, which was not a bad quarter thus either. And this is an all-time high with a robust and diversified earnings across geographies, industries and products. Asset Management, 19.2% growth, representing both a growth in market valuation but also a healthy net inflows in the quarter. The third category I'll mention is money transfer and banking services, up by more than 40%. This does reflect the higher activity. We were trending towards what we would call a normal situation in the fourth quarter, and we see people increasing spending and local traveling, I'd say. It also reflects that we have now consolidated the revenue for Uni Micro, the accounting company we bought a share in last year. And it also reflects more of a one-off effect from the renegotiation of certain contracts that had a positive effect in the area of NOK 30 million in the fourth quarter. Our costs, you may have seen are up by NOK 675 million from a low quarter in the third quarter. And a couple of items that are partially nonrecurring is the element related to variable pay. That goes up by NOK 136 million. You'll also see an increase of NOK 129 million in fees, and these are primarily related to initiatives in the compliance area. Several of these initiatives have been completed at the end of fourth quarter. You also see it's an increase in fixed salaries, reflecting an underlying inflation. It does also reflect the consolidation of Uni Micro, but also the strengthening of our competence in areas such as technology and compliance. Beyond that, pension are more normalized this quarter, and you see an uptick in IT costs from a very low level in the third quarter. We continue to build capital already from a very robust position, and our core equity lands at 19.4% for the quarter. On the basis of a very healthy capital situation and a positive outlook for the business, the Board now proposes a dividend for the year 2021 of NOK 19.75 per share (sic) [ NOK 9.75 ] per share. This is fully in line with our dividend policy, and we remain very committed to delivering on the policy through a combination of dividend and share buyback. And there is one change I need to finally end my introductory remarks with, and that is the change in tax guidance, where we previously had a guiding of 22% for the year. Now it ends at 23%, and that is also the guiding going forward. So I think with those remarks, we'll open it up for questions.

[Operator Instructions] The first question comes from the line of Antonio Reale from Morgan Stanley.

I have 3 questions, please, if I may. The first one on cost. Your cost income ratio target of below 40% is an important commitment on cost control. And you've been historically best in class on cost efficiency. You're running at 43% cost income this year. Could you walk us through how you plan to reach your target, leaving rates aside for a second, which are clearly helpful, perhaps, in particular, focusing on the post-COVID cost base? If you could talk about some of the structural changes, automation, distribution, IT sources of efficiency that you plan also in light of what we've seen as salary labor market inflation affecting this quarter. That's my first question. Secondly, on the fees, please. Fees have been extremely strong this quarter, this year. You've confirmed your 4% to 5% growth. In the past, you've talked about quite a bit about your efforts in leveraging some of the expected growth in savings and investment segment. Could you give us an update on where you are here with respect to some of the initiatives, particularly in terms of market presence and product penetration, please? And also, what portion of the fee print do you think is sustainable also looking into the all-time high print in investment banking, taking full advantage of your wealth and DNB market heads there. And lastly, you've stated your above 50% cash dividend policy, with the ambition to increase the nominal DPS progressively each year. You also said that the level of buybacks will be used with flexibility and depending on business opportunities you see. Could you just give us an update on the expected time line for bank, please? That's all for me.

Thank you. And my colleagues made me very aware of a mistake. I have to start by correcting. Just to be sure and confirm that the proposed level of dividend per share for last year from the Board is NOK 9.75 per year, up from NOK 9 the year before that. Just to be clear on that. I'll comment on the 2 latter, and then I'll hand it over to Ida to comment on the first one. You're correctly saying that fees are very strong this quarter and fees are very strong for the year. They're up 15% compared to an expected guiding of 4% to 5% that we have through the cycle. We maintain our guiding of 4% to 5% through the cycle, but reminding you that we're starting from a very high level in 2021. With regards to the strategic areas we've pointed to for growth, they remain the same things we've touched upon before. Investment banking, asset management and non-life insurance, I would highlight particularly. In Investment Banking and across capital markets, of course, the market activity has an impact on our activity in this level. But we do have a brand and an activity across sectors and geographies that will continue to give us opportunity to grow. And I would say it's a higher robustness and resilience in the activity today than we saw a few years back. And also, if you look at the growth trend over time, you will see that the growth here has trended to be way higher than the fee growth in general. And there is more potential, in particular, building competence related to sustainability. We do increasingly transactions in renewable, in infrastructure and also on the TMT and property side, in addition to the more traditional areas where we have been strong, oil-related and shipping. So there is more potential given an active market. On Asset Management savings trend has been tremendously strong in Norway as in many countries. We do not believe the 15% to hold up. That has been the growth rate in savings, but we do believe in a saving rate that will be higher than the GDP in the coming years. And this is driven by the regulatory changes that my colleague, Hakon was pointing to earlier today in his presentation. We've had a good year with Fremtind and non-life insurance, consolidated the business, integrated all of our customers to the same technical platform. We do see very good results in sales, but have more potential on the corporate side and also to improve churn. Bear in mind, though, that '21 was from a net result point of view, a very strong year in Fremtind because of the low damage rate across non-life insurance companies. So you should keep that in mind when reviewing future performance. Dividends, NOK 9.75 per share, again, to underline, in line with our dividend policy of a minimum 50% cash dividend and a nominal share -- a nominal increase of kroner per share per year, and we optimize by buybacks as you are stating. So we haven't used the buyback tool in '21 due to a temporary ban on dividend and also due to the pending Sbanken transaction. Sbanken decision that was negative from the competitive authorities has been -- we filed a complaint with the entity dealing with these kinds of cases, and they are expected to give a view on March 18 as to how they view the case. So regardless of the outcome, we remain committed to our dividend policy and capital that is not reinvested into the business in a way we deem profitable for our owners, will be, over time, paid out to shareholders.

And on costs, I think I just want to start by reiterating that our overriding target is a return on equity above 12%. And one important instrument in reaching that is, of course, the cost income ratio below 40%. We are continuously working on efficiency and cost initiatives, and we've had good progress on the initiatives that we launched in combination with the Capital Markets Day in 2019. As you can see from the numbers, the increase in cost that you see this quarter is related to a high activity level, especially when looking at the variable salaries, but also looking at costs related to travel and training. We know that we are most likely moving into a period with higher inflation and cost inflation. And of course, that will have an impact in terms of the fixed salaries as well. But we also know, as we pointed out, that we have a strong generative ability within the income side as well, and there are significant potential there going forward as well.

The next question comes from the line of Maria Semikhatova from Citi.

Several questions. First of all, on net interest income impact from the repricing that you've done. I believe you now guided for the effect of the secondary pricing similar to the first one, around NOK 1.5 billion. So I just wanted to confirm, first of all, if all the competitors are moving in the same direction, and if you've seen any impact on customer behavior from the secondary pricing? And if we look for future rate hikes, is the average historical NOK 1 billion benefit is the kind of best guess for the future impact? Or taking into the account that we've seen already, much higher impact for the first 2 moves the following changes, if any, should bring lower benefit. Then on costs, thank you for these details on the variable compensation in the fourth quarter, but could you disclose what was the increase in variable compensation for the full year? What was the effect in 2021? And just a minor clarification question. I've seen that your contribution from Luminor and Fremtind was negative in the fourth quarter. I think Fremtind was actually quite strong positive contribution. So I just wanted to check what that was. And if there is any impact expected from Vipps merger.

Thank you. Yes, on NII, we have communicated that the expected impact from the second repricing, which became effective at the end of January is similar to the first one with NOK 1.5 billion. We have seen competitors broadly, I would say, communicating similar messages and moving in the same direction. And the market continues to show signs of being rational. Last year, there were a few smaller entities who were out there with interest rate guarantees. Beyond that, I would say larger players have actually signaled the importance of profitability more in their communication. Now with regard to future rate hikes, it's not only difficult, but actually forbidden for us to give any comments as to what we may or may not do given future rate hikes. Hence, the allusion to what has been the historical trend. So again, all we can say is remind you of the fact that there is a floor effect once you approach and go back from zero. And historically, we have seen a tapering effect with each interest rate hike giving a lesser impact. With regards to Luminor, Fremtind and Vipps, I think it was a very good quarter for Fremtind, less so for the 2 others. There is a one-off cost in Vipps that leads to a negative result for Vipps in the fourth quarter due to a shift in supplier with regards to one of their main product areas. So this is a nonrecurring event. With regards to cost variable pay for the full year, I don't know if we've been able to aggregate the numbers, but we can come back to you on that.

I mean if you compare it, the fourth quarter is generally a more active quarter. And as you can see, if you compare it to the fourth quarter 2020, there is an increase. So if you compare it to the fourth quarter 2020, which was NOK 421 million, we're now up to NOK 482 million.

The next question comes from the line of Sofie Peterzens from JPMorgan.

Here is Sofie from JPMorgan. About a year ago, you were kind of guiding for underlying cost saves of somewhere between NOK 1.5 billion to NOK 2 billion. How much of these has already materialized? And should we expect any further cost saves to come, just considering that your cost base grew by around 5% in 2021? So that would be kind of my first question. Then a second question, your mortgage loan book was relatively weak, down slightly over 1% quarter-on-quarter. Does that reflect higher interest rates? And how sensitive are your customers to kind of the rate hikes? So should we expect as rates go up, potentially weaker mortgage volumes? If you could just comment here. And then my final question would be on the presentation earlier this morning, you mentioned that on fixed income, asset management products, you make something like 15 basis points; on equity funds, you make 60 basis points. Could you just remind us the split of your assets under management that are fixed income? And how much is equity? And what does it historically has been?

Thank you, Sofie. I'll do the one in the middle and leave first to Ida, and then the third one to Hakon. You're quite right, we had a stable development in our mortgage book in the fourth quarter, hence the weaker development as we saw a 2.7% profitable growth in the book during the year of '21. I wouldn't say that we see it as a pure sensitivity to pricing. We are the largest player, and we do get more attention than the others in moments when the level of attention is shift, so that there's a change in growth pattern. We see it as quite normal. Still, we are targeting to grow at a higher pace than we did in the fourth quarter and profitably so. And we also see that we have to do some tweaks on our customer journeys more from a technical perspective as there seems to have been more of them not succeeding due to some hiccups in the fourth quarter. I just am saying that we're comfortable that we will be able to grow profitably in the market also in 2022 in this area.

And on cost, I think you're referring to the announced potential savings -- or cost savings we launched during the Capital Markets Day in 2019, which was followed up last year in the fourth quarterly results. So -- and as mentioned before, we've had good progress on those initiatives. And they were outlined, as you said, between NOK 1.5 billion to NOK 2 billion. And we continue to have good progress on those during this year and are really delivering in line with what we communicated last year. And then we also announced that we had some part of it that we are going to deliver in 2022, which is still definitely the case. What we are seeing is that these aren't fully compensating for the investments we've made in specific areas such as technology and compliance. So of course, there are more that we will be doing in terms of working more on efficiency and continuously working on cost initiatives.

Yes. When it comes to the volumes, you have to divide it into retail and institutionals. And institutionals, you have much more volatility in the underlying assets. So on a very broad basis, what I mentioned earlier today that is within the retail segment, we have increased the share of equities from 68% to 79% over the last 10 years. So we have approximately 80% equities in the retail segment. In the institutional segment, you will have much more volatility. So there, you have the equation the other way around more or less as a general rule.

Okay. Just a quick follow-up on the cost side. So how much underlying cost saves should we expect in 2022? And how much of the NOK 2 billion has been realized?

Well, in terms of what we've communicated, the same -- I know that we had a bridge on the fourth quarterly presentation in 2020, and that still applies in terms of what we're going to deliver on in 2022. And it's in the area of NOK 500 million to NOK 650 million.

And out of that NOK 500 million to NOK 600 million, how much have you already delivered?

Well, that's what we're going to be delivering in 2022. What we said we would be delivering in 2021 was NOK 500 million, and that has been delivered.

The next question comes from the line of Namita Samtani from Barclays.

I have 2 questions, please. On the commission margin on the retail asset management side, it's declined in 2021 versus 2020, and I see on Page 64 of the fact book. So I was just wondering what's the reason for this? Is it a general margin pressure or something can be specific? And secondly, when you talk about cost control measures, which is part of the pathway to reach the above 12% ROE target by the end of 2023, is this different to the NOK 1.5 billion to NOK 2 billion cost savings that you've just been talking about? Or is it the same thing?

The latter is the same thing. And the development on margins is at least related to a trend for increased purchase of index funds versus actively managed funds.

Yes.

Is there other elements to talk to materially, Hakon?

No. Not in this quarter, no.

Okay. And not DNB specific?

No.

The next question comes from the line of Riccardo Rovere from Mediobanca.

Three, if I may. First, the one, first of all, again, on the NII sensitivity, you have been clear on what the impact of the first and the second one should be. If the Norges Bank keeps hiking rate for the third and maybe the fourth or whatever will come in the future, should we then assume a number not to be similar from the original guidance of roughly NOK 1 billion, should -- because maybe you will pass more into the depositors or anything like that? This is the first question. Second question I have, this morning, you mentioned with regard to risk cost, you mentioned, is going to be less than -- lower than normalized. If you could give us a rough idea of what you consider normalized? And the third question I have is on capital, just for me to understand the way the sequence of -- potentially the sequence of events. On -- in mid-March, you will have an answer on Sbanken. Whatever the answer is going to be, that will be the end of the story, positive or negative. Can I -- is that fair to assume? And if it is positive, given that Sbanken should erode something like 100 or a little bit more than 100 basis points of capital, will this rule out any additional capital return? Or if Sbanken does not go ahead for whatever the reason is, should we assume that immediately you will ask regulators and AGM a mandate for a buyback? Or would you look for something alternative to Sbanken?

Thank you, Riccardo. I will leave cost of risk to Ida and maybe start with the capital and Sbanken. What will happen on March 18 is that the unit that considers, because this is not a court appeal, but the units that is considering the complaint will give their view. And if their view is agreeing with us, they will hand the case back to the competitive authorities, who will have until the 18th of May actually to come with a revised decision. So if it goes in the positive direction, we will have to wait a few more weeks before having the final decision. Now if it goes through, the immediate effect on capital is around 120 basis points. What we've also said earlier today is that we will, this year, yet again, ask the general assembly for a proxy to buy back shares. But keep in mind that, that proxy needs to be approved. And in order to initiate a buyback program, we also need approval from the Norwegian FSA. So it would take some time after the general assembly before we theoretically could start one, and whether we do or not would depend on how we view that situation at that point in time. But clearly, we have a very solid buffer to both the required and the expected level. With regards to NII, I'm afraid I'm not going to give you -- going to be able to give you much more guidance than -- other than repeating what we've already said. We can't comment on the expected impact of what we have already done. And yes, as you're correctly saying, it's NOK 1.5 billion for each of them. This is higher than the historical average we've seen. And in addition to that, we've commented that in the previous rate hiking period, we saw a reducing effect over time.

And on cost of risk, I just kind of want to reiterate that we are not giving any guidance in terms of what we expect going forward. What we're saying is, looking at the portfolio composition today gives us reason to believe that there should be a lower level of cost of risk compared to what has been the historical average of around 20 basis points.

Yes. Okay. If I may just make a -- has a little bit of a follow-up on Sbanken and the capital? Are the buyback at Sbanken are 2 events that are completely uncorrelated, meaning even if it will -- Sbanken will eventually only affect the size of a buyback, but not the existence of a buyback?

I think I can only comment that our dividend policy consists of cash dividend that is with a target to increase the cash dividend per year and buyback. And whether we do buybacks or not depends on how we view the situation at all times. And one of the reasons we like buybacks is because it's more flexible and we can consider it over time and during a year. And we've said that it's important for us to use this as a tool to optimize around our capital position. We believe we can be paying capital that is not employed back to our shareholders, and this is also an important element for us in order to deliver on our targeted return on equity.

The next question comes from the line of Jacob Kruse from Autonomous. Jacob, please go ahead. Your line is unmuted.

We heard you for a tiny second there, but not -- hello? There you are.

Okay. Great. Okay. So just 2 quick questions. First, on the net interest income. The other element in the bridge, could you just give some idea of what that movement is? I think it was NOK 70 million or so quarter-on-quarter. And secondly, the amortization and fee income, how sustainable is that? Is that basically very high corporate activity driving that? Or is that just growth over time that we should assume continues? And then on the cost side, just to understand, you talked about the gross cost savings. Are they coming then out of the non-staff expenses? Because it seems like you're still hiring more people and they are more expensive and you have wage inflation. Or is this a kind of gross number that we will have a hard time tracking with other investments?

Thank you, Jacob. In NII, there's always a basket of other that tends to fluctuate from quarter-to-quarter, not saying that it's the full NOK 70 million, but there is a material contribution in form of a positive result from treasury this quarter in the bucket of NOK 70 million. The bucket of other net interest income will vary from quarter-to-quarter. With regards to amortization and fee income, you are quite right. This is connected both to the growth and the activity. Roughly, I mean, when we -- for every new transaction we do, we would book a portion of the upfront fees that is then amortized over the period of the loan. So new business leads to increased fees in this area. And also when we refinance, we would book whatever is left of fees to be booked on that transaction. So fourth quarter, there's been both a very decent growth and also a lot of refinancing activity. And this category of NII will vary from quarter-to-quarter. And I guess we can add to that is that we've had also an active start to the year. But seasonally, fourth quarter is a quarter with high levels of activity. In the cost savings, I'll just quickly say that it is a gross and net also with people. That means that we have people leaving in many areas. You may recall that Ingjerd, if you saw her presentation, pointed to a 10% reduction in our call centers. Typically, the call centers increasing our use of machine learning, and chatbot activity is one source of increasing efficiency, improving the efficiency in the sales force. Also in the operations side, we are using more technology to reduce -- to automate and reduce number of people. And we are hiring in other areas. We've talked about wanting to boost our in-house competence on tech, meaning we are laying off certain consultants and hiring people internally. And we've also strengthened our competence on the legal and compliance side. So net, it is an increase, but there are gross and net movements beneath that number.

Right. But to some extent, you're saying we're replacing cheaper staff with more expensive staff, and that transition is a gross cost saving. Is that basically the right way of reading it?

It is true that we are replacing. The newer staff tend to be more expensive than the one that leaves. That is not a new trend. I mean there's been a vast competent shift in finance going on for years, but it's been somewhat higher activity in the staffing up in the recent year than you've seen before. That is right.

So then just conceptually, when I think about your staff cost growth, if you started with a couple of percent increase to the headcount and then a mid-single-digit wage inflation, I kind of end up with, I don't know, 6%, 7% staff cost growth on an annual basis. Is that conceptually right without talking about the guidance itself?

I'm afraid you're going to have to do the math yourself. But of course, the development ahead will depend on what is the mix of our cost initiatives, what extent is it staff related and to what extent is it in other areas. Like last year, we had the full effect of exiting the postal agreement. We sold the machines that we used for payments on the one hand, and then we restructured Poland on the other hand, which is a reduction in staff. So conceptually, yes, I mean number of staff and inflation gives you a gross number, but there will be movements to that. So it's really hard to -- it's not a fully transparent picture. And what we're talking about when we're talking about initiatives or initiatives on a gross basis, that will partly compensate inflation that is to be expected in an economy running so well.

We currently have no questions in the queue. [Operator Instructions] And the next question comes from the line of Riccardo Rovere from Mediobanca.

Just a quick -- very, very quick follow-up. With regard to variable compensation in '21. Over the past 10 years, variable compensation has always accounted between 15%, 16%, 17%. There was only 1 year where it accounted for 18% of total compensation. Is this number is 2021 much different from these levels, something around 15%, 16%, 17% of the total?

I'm afraid we're going to have to come back to you, Riccardo. For the year, it didn't -- we actually didn't manage to find through all of our documents here, the aggregate for the year. We only have -- so we'll come back to you. But maybe one thing that I could comment is that there is -- the component of variable pay across our activities varies. And we do grow areas where you tend to see a higher portion of variable pay to put it that way. Investment Banking, to mention one, that's certainly an area where it is an important component, and part of asset management, the other. And these are both areas where we have substantially grown our business. I mean you can look historically at our DNB Markets business. And what you will find is that what we would see as high quality revenue have substantially increased over time. And this is related to investment banking, but it's also related to fixed and customer revenue, which is also strong this quarter. So these are areas that leads me to believe that actually we will find to a certain extent that this is impacted in the numbers.

There are no further questions in the queue. So I will hand the call back to your host to close today's call.

All right. If there is no more questions, we really like to thank you for your participation, and we'd like to wish you a good rest of the day. Thank you very much.

Thank you for joining today's call. You may now disconnect your lines.