DNB Bank ASA (DNB) Earnings Call Transcript & Summary

Hello, and welcome to conference call for investors and analysts. My name is Susanne, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand over to your host, Rune Helland to begin today's conference. Thank you.

Thank you so much, and hello, everyone, and welcome to DNB's second quarter analyst call. Here in Oslo, we have a full executive team and with Kjerstin Braathen; Ida Lerner; and Head of Personal Banking, Ingjerd Hafsteen Spiten; Head of Corporate Banking, Harald Serck-Hanssen; and Head of Wealth Management, Hakon Hansen. Ida will start by giving you the highlights for the quarter. So please, Ida?

Absolutely, and thank you for taking time to participate in this call. Kjerstin pointed to in her presentation -- part of the presentation earlier today. Volatility is where that stands out. Volatility in capital markets and volatility in currencies. But having said that, we deliver a very strong result and solid asset policy. I thought I'll start with this -- give a brief update on the development we've seen on a macro perspective. We see a continued high activity level in the Norwegian economy. GDP growth for 2022 is expected to come in at 3.5%. And then normalizing towards 1% in the following year. Inflation has been higher than previously expected and core inflation is now at 3.6%, well above the long-term targeted level by the Norwegian Central Bank but still lower than most European economies. The Norwegian Central Bank has increased their rate by another 60 basis points in June to now 125 basis points and also increased the interest rate part ahead. We expect -- they expect to peak at approximately 3% towards the mid-2023. Unemployment levels remains to be low at 1.7%, and is also expected to remain low throughout the coming year. Investment levels is expected to grow in the years ahead, but it is important, of course, to acknowledge that Norway, even though being in a relatively strong position, still will be affected by the geopolitical and macro economical development. When moving on to our own results for the second quarter, we are very happy to see that we are delivering good and strong results across customer segments as well as product areas. The return on equity for the quarter comes in at 13.3%, and we have a profitable growth -- loan growth in both personal customers and corporate banking of now up 3.3% in the quarter. Net interest income, up 22.5% from the second quarter same last year and 10.3% from the first quarter this year. This is driven by profitable volume growth and higher interest rate. Net commission and fees comes in at NOK 2.8 billion, very close to the record high level we saw in the second quarter of 2021. And it really shows the strong performance across most areas despite the market turmoil we're seeing in the quarter. We see -- we have a robust and well-diversified portfolio where 98.9% of the portfolio is in Stage 1 and 2, and we are also acknowledging net reversals of impairment provision this quarter. Earnings per share comes in at 4.91% in the quarter, and our Tier 1 capital ratio is 18%, well above the FSA expectation at 16.7%, and we are still very happy with the strong capitalization and the solidity in the bank. With that, I think we'll open up for Q&A.

Yes, please.

[Operator Instructions] The first question comes from the line of Nick Davey from BNP Paribas Exane.

Two questions, please. Firstly, on capital. You mentioned you're being very happy with the level of capitalization. Obviously, your requirement is going up next year. And I think if a pro forma your capital base for a 60% payout ratio, you're about at your FSA target. So could I just ask you to talk about your comfort on capital from here? And are you getting close to the point where you have to choose between loan growth and buybacks. And the second question on the loan growth that you're seeing. It's been very dynamic in places like oil and gas. So could you talk us through a few angles on that? One, are there any caps on your lending exposure for some of those segments that become binding from here? And is there a bit of this loan growth you put down to bond markets being shut and just how sustainable you think the loan growth might be as a result?

Maybe I can start and you can fill in, maybe a [ pro forma thing ] actually. But on capital, we are comfortable and I'm sure, as you know, we have a strong capital generating ability in our earnings. And we have a strong lending growth in the first half. And we've said that we will continue to prioritize growth in the personal customer sectors as well as SME. But on the large corporates, we expect the growth to be substantially less in the second half than it was in the first half. With regards to our dividend policy and capital position, we prioritized cash dividends and paying an increased cash dividend per share per year. With regards to buyback, I would say that we prioritize profitable business with our customers and buyback is a tool that we use if we have excess capital to optimize around the desired capital position. But given what we see, we are very comfortable that we will be able to continue to serve customers as well as delivering on the dividend policy to our customers. With regards to our activity across the various business sectors, we have, over the past year, substantially rebalance and reduced our activity to cyclical industries. It's been more a sideway development but also continue to reduce over the past few years, our closure to oil and gas offshore and shipping. This quarter, again, we had increased for the first time in a long time, somewhat the exposure to shipping, but we're still only slightly above 2%. We do not have caps in these areas. But we do not foresee overall substantial growth towards cyclical industries such as Maritime and Offshore. I'm sure you might be aware that we've also set targets for reductions of indirect emissions from these portfolios. Our intention is to achieve those through working with customers and not reducing exposure, but it doesn't either sort of pave the way for substantial growth across these sectors. Our growth will be diversified across all of the sectors that we are against.

I think, Nick, it's Harald, Head of Corporate Banking. I could add that if you're looking at the exposure of the full figure, it's affected mainly by 2 things. First of all, the exposure on oil and gas is all basically dollar-related. So we have a strong currency effect on those numbers. And secondly, we have, as we also referred to in the previous quarter, we have negative mark-to-market effects on derivatives exposure on gas. It's important to emphasize these are not trades. These are E&P companies with real production and diversified production. So it's the right way to risk. So -- and it's also partly pass-through with the rest of the debt. So it's not a credit issue, but it is kind of blowing up our -- or showing increasing our exposure on oil and gas, but it will run off largely within the next year.

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

Yes. Here is Sofie from JPMorgan. And apologies if my question was already answered. But I would just thinking the customer margin in your presentation and although it's up 2 basis points quarter-on-quarter, it looks very flat year-on-year. So it was also 1.18 in the second quarter last year and now is just 1.2. So I'm just wondering, why it didn't actually go up more than 2 basis points year-on-year and the rate rates have gone up 1.25%? And then my second question would be on the Sbanken synergy. Earlier today, you didn't give any details on the level of synergies. But when should we expect it to kind of get a better idea around gross synergies and capital synergies? Is it at your Capital Markets Day or earlier? So if you could just share some color on that?

Thank you, Sofie. I believe your first question was related to the volume weighted to customers. And you're asking why that doesn't increase more. It's important to say this is the cost -- the pricing phasing the customer has measured towards the money market rate. And that should stay more or less stable. We've seen somewhat an increase, more meaningful maybe to link it to the actual NII revenue is to look at the net interest margin because there, you will also find the revenue related to amortization and fees, that reflects the activity level in the business and also the increased income on the equity, the capital employed by the business units. And this is why you see a higher increase in that part of the margin. So I hope that was clear. And I'll hand it over to Ida for Sbanken.

Well, when it comes to Sbanken, first of all, we are very happy to see the developments and the work that we're doing together with them and deciding on how Sbanken will continue to flourish under the ownership of DNB. We have said that we will come back with a bit of more details in terms of numbers and synergy, like to run during the fall.

But is that with the third quarter results? Or is it with the Capital Markets Day? Or is it kind of from the fourth quarter results? We just see how helpful it'd be to everyone if we get a little bit more details.

That we haven't decided yet. You will see. We have a Capital Markets Day on the 15th of November, and then we also have the third quarterly results during your call and seems like somewhere there we should expect more information for it.

Okay. And related to that at the Capital Markets Day that you have on the 15th of November, what should our expectation be? More of the same? Or is something kind of more transformational?

We will come back to you with that. Now it's just save the date.

The next question comes from the line of Alex Dimitriou from Credit Suisse.

Just 2, if I may. In the fact book, it says you have about NOK 9.3 billion of total loan impairment provisions. Are you able to disclose how much of those overlays? And just secondly, in the past, you are talking about a level of capital headroom just above the regulatory requirement. Are you able to just remind us what that level is?

Well, if we start with the impairment provisions, we have previously said and reiterate that we don't see any exact numbers in terms of the management overlay. But as pointed to also in the presentation, we are, of course, making adjustments in terms of what we're seeing, where the uncertainty has more impact on what part of the portfolio and it's something that we follow very closely and also met changes quarter-on-quarter. When it comes to the headroom on top of the FSA expectation, we are also saying that we are specifying that more concretely. That we want to have some room for maneuver to make sure that we also are having an acceptable level in terms of -- to handle potential short-term fluctuations, such as FX rates.

Next question comes from the line of Omar Keenan from Credit Suisse.

Could I please ask you on deposit beta? So when you look at the rate path going forward, you flagged that the Norwegian Central Bank rate is going to be above 3%. Can you talk about the evolution in the competitive environment for deposits and how you would think about the rate sensitivity perhaps over the next 100 basis points of hikes?

Thank you for your question, Omar. As we've said, the economic effects with rate increases only comes from our actual repricing in the market, and we are not really at liberty to speak about that going forward. But just maybe to comment a little bit on the competitive situation. There is -- we believe and we find that even after the latest repricing and what we see from behavior in the rest of the market that we have competitive pricing. There is also a higher -- much higher retention levels in general on lending margins than deposit margins. But it's, of course, important for us to have competitive pricing on both and our position, the competitivity in -- the competitive situation in the market and our overall assessment are factors that we will consider on every -- in every situation where there -- if there were to be any changes in rates.

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

I have 3, if I may. The first 1 relates to -- the chart is shown on Page 4 of your presentation, the one in the middle of the slide, where you showed the investments in Norway expected to increase. Aside from the fact that petroleum investment seems to be kind of flattish. But beside that, if I look at where we are and trying to reconstruct the size of the year of 2021 is above that, the NOK 642 billion at the end of '25 doesn't seem to be compatible with your 3% to 4% loan growth. At some point, those investments will have to be financed by someone. So I was wondering whether the 3 -- over the next few years, you might eventually think that your loan book could grow more than 3%, 4%. The second question I have is probably for Harald, I would say. I'm not 100% sure if before you stated you will keep shrinking exposure to oil and gas, offshore and so on? And if that is the case, I was wondering why would you do that given what's -- continent probably needs all the gas that you can extract out of the Norwegian shelf, given what's happening? The third -- the other question I have is on credit losses. We've seen reversals again in oil and gas and offshore. If I remember correctly, in 2020 you charge an enormous amount of provisions in Q1, partially Q2 '20, and that was mainly related to oil and gas. Now that the outlook has completely changed, can we expect, let's say, if prices remain where they are, that this -- the level of provisions in oil and gas will continue to be extremely -- eventually extremely low? At least we have stopped seeing any kind of provisions on the oil and gas and offshore. And the last question I have is how should we square the fact that you are posting reversals of provisions in some areas? Well, NOK 200 million in this quarter, with a fact that you have NOK 2.8 billion of shortfall to expected loss charged on your common equity Tier 1 ratio, if I remember correctly, if I remember the number correctly.

Thanks for very good questions, Riccardo. I will comment on the first 1 and leave the next 1 for Harald to start and then Ida will answer 2. Round up with the last one. The chart on Slide 4 in our presentation is related to investments across the mainland economy in Norway and the petroleum-related sector. And I don't think you can extrapolate that to our 3% to 4% growth, which is a mix of personal customers, SMEs that are very bank-dependent on one side and our large corporate activity. We're actually 50% of what we do is outside of Norway and very sector specific. So I think our main message with regards to our growth opportunities on the platform that we run is that we expect we should be able to do 3% to 4% profitable loan growth on an annual basis, even with some fluctuations in the economy, and we continue to say that. I think what the shot on Page 4 shows is that there is a supporting environment in the Norwegian economy for that kind of a growth scenario. Now can there be opportunities to grow more? Yes, in some periods, there can. And I think this year is one of these periods where we're saying given the strong and profitable growth we have seen in the first half of the year, we believe that we're likely to end up somewhat above 4%. But our key priority is really for the growth to be profitable. Harald, maybe you want to comment on...

Yes. No, I think it's a good question, Ricardo, because I think what you're alluding to is that there are a lot of very good risk rewards now on the hydrocarbons. And it's no secret that it is a profitable market. Having said that, I think what we've said is, as our CEO said, we reduced our oil-related exposure by 50% over the last 5 years. And what we've said for the time being is that we want to keep that stable. That is the plan we have today, but we are going to shrink our exposure outside the North Sea, and we've already done that. So 80% of our activity on the oil and gas side is now related to the North Sea, where we see the best risk reward and also the best players from an ESG point of view.

Sorry, just -- sorry to interrupt. So basically, you're saying that out of your oil and gas exposures in general part is "Norwegian", part is out of Norway. The part out of Norway breaking down the overall will stay kind of flat, which means that the Norwegian part is going to go up? Do I get it right?

Yes, that's a good way of saying. But we shouldn't say Norwegian. We should say North Sea because we're also [ very active ] sector of the North Sea [indiscernible] the market, and that's handed from Howard college in London, so yes. And the reason it's always tempting when you have a super profitability in an area to expand. But I think we have to take a long-term perspective. We don't want to have too much exposure in the cyclical industries, and we also pay attention to the EU taxonomy and the emission targets that we set as a bank, and that's another reason why we want to keep this exposure stable even if there are attractive business opportunities. In terms of net write-backs, we have taken write-backs on the oil-related and in particular, on offshore over the last few quarters. As you point out, there are more provisions there in the bucket. But all I can say is that we do loan loss clearance at the end of every quarter and the loan loss provisions of the write-backs we've taken now, they reflect our best assumptions on a company-specific basis, and it reflects the activity level and the day rates we see on offshore supply vessels and oil rigs at the moment. So if the -- so it's basically the development in the market from now, that will determine whether we will be able to take more write-backs within the segment.

And also just to point to Ricardo, in 2020, the main impairment which was not related to oil and gas, but offshore. So it's important to distinguish between oil and gas and offshore as such. And we...

Sorry to interrupt. But the outlook on offshore versus 6 months ago has completely changed. Maybe it has changed for quite a long time ahead of us. I mean the confident need -- one way or the other needs to replace who want to replace the gas coming out of Russia, right or wrong. That is what is happening. So I mean, there is only 1 country that can provide that and it's huge.

There is the strength and you're quite right. There is a strengthening sentiment in the sector, as Harald has also commented to. I think all we can say is that currently, the outlook is reflected in our numbers. We have already taken back substantial amount compared to what was taken. But there are also still an oversupply of certain assets, in particular, in the supply industry of vessels that are so-called in cold layup and the cost of remobilizing that puts the limit to how quickly the market actually can scale back. The rates for now, they are very attractive. But I think we've said, you can see the quality of the work that is being done both through reversals on company-specific situations that are done and also by the fact that we have positive market values on some of the equity positions that we're taking, but we are saying that you should be cautious. I mean these are hard to know how they will develop in the future. And we would like to caution and say that you shouldn't expect those just gradually to take in every quarter. This will vary from quarter-to-quarter and depends on how the market situation has developed. Now if I may, just quickly on your fourth question, which is more of a technical nature, if I got you right, you're asking how can we take reversals when, in our calculation of required CET1, we haven't -- we are adding capital because our reserve base is lower than what's in the capital regulation, a view that's normalized losses. I think it's important to say that these are 2 different rule set what is related to core equity and required capital on the one hand and on IFRS 9 related to reserves on the other hand. And they shouldn't be mixed together. Under IFRS 9, we do take the reserve at any given time in accordance with our models for Stage 1 and 2. There are 2 factors that impact these reserves. That is the macroeconomic situation and the outlook for the coming 3 years and the quality of the credit portfolio. Now the quality of the credit portfolio has somewhat actually improved in the second quarter, and there is a change on the retail customers that is more a technical that leads to the reserve in the second quarter. And the other factor -- and for stage 3, these are individual assessments of individual companies. So how that moves has nothing to do with the aggregate level that is on our books at any given time and wouldn't impact the calculation of required for core equity alone.

[Operator Instructions] The next question comes from the line of Namita Samtani from Barclays.

I've got 3, please. Firstly, can you tell us the average LTV on the commercial real estate book? Secondly, when is the next salary negotiations set to take place? And what are your expectations in terms of wage inflation going forward for DNB? And lastly, just on the asset management revenues, I see they grow quarter-on-quarter, but the AUM has declined. So just wondering how that works?

Sure. When it comes to average loan-to-value ratios in the commercial real estate, we have not stated that explicitly, but we are very comfortable with those levels across the different subsegments as well. When it comes to wage inflation, we have -- we are anticipating or the Norwegian economy as such is anticipating wage inflation in the region of up to 3.8%. And we expect to be in the region of that or slightly above that due to the fact of the compensation of our staffing. Assets under management growth, would you like to comment on that, Harald?

Yes, I can do that shortly. You're right, assets under management declined, but it's basically due to asset mix. We kept the level of assets more or less flattish on the retail side, which is the most important for the margins. And the drop in outflow from the institutional part is mainly in both funds with lower margins.

And I think what you need to -- there's also an improvement in the custody revenues, Namita. So when you look at this category, in the commission and fee side, a big part of the increase actually comes from better results in our custody activity.

The last question comes from the line of Johan Ekblom.

Maybe to pick up on that last comment. I mean, the huge increase in custody fees. I know it's a small overall contribution. But is that a large growth in assets under custody? Or is there anything else there we need to think about? And then just 2 brief questions. The Nordea Bank recently put out a financial stability report and seem to be forecasting a 20% drop in commercial real estate values, what impact would you expect that to have on your ECL? I'm assuming you'll still be well covered, but some impact would surely be expected? And then finally, just on the volumes, if I compare period-end and average volumes, it looks like there was a very strong growth into the end of the quarter. Is that an FX effect? Or should we expect to see a higher run rate in terms of volume growth into the third quarter?

I'd like to do the first one and then Ida for the second and Harald for the third.

Sure. It's Harald from DNB markets. So the uptick on custody fees is largely driven by an increase in assets on the custody and it mainly relates to 1 particular client relationship.

Yes. And on the commercial real estate for [ prior year ], first of all, I just want to highlight that we are very comfortable with the portfolio that we have and also the fact that it's diversified across sub-segments. We've also seen that later value levels have been reduced in parallel with the falling yield levels, and we are also very comfortable with the fact that our portfolio will sustain also a shift in terms of valuation. Of course, should that have a significant impact that would have an effect in terms of migration, but we do significant several stress tests and scenario analysis and are comfortable with that portfolio also from that point of view.

And your last question, Johan, regarding volume growth. Yes, you're correct, there has been an increase in loan volumes through the quarter. But we expect that to slow down in the third and fourth quarter. There are 3 main reasons for that. One is that actually 1/3 of the loan growth in the second quarter came from increased drawings on overdraft, which is a seasonal effect that we haven't seen in the last 2 years because of COVID, but that normally occurs in the second quarter. So that accounts for 1/3 of the increased volumes. We've also had a weakening of the Norwegian kroner and assuming a stable currency, we would not have a recurring effect on that in the second half of the year. And then we also expect the somewhat reduced loan demand, and we will manage, as our CEO referred to, we will manage our large corporate exposure to reach the desired growth rate of DNB, and we will continue to grow on the SME side in order to maintain or even increase market share in the market that's very valuable long term for DNB.

Maybe just to come back to 1 different aspect on the fees. The money transfer fees you saw were, I think, the second highest quarter ever. Is there any -- is that purely a normalization of activity levels? Or is there any kind of extraordinarily positive impacts there?

There is -- I think that's well spotted view, Johan. It's a multitude of effects, but I don't think that we're highlighting any single effect. But in addition to the market actually normalizing, I think the team has also done a great job over the past 2 years in increasing efficiency and reducing the cost related to these kind of services. So there's an impact both ways, and I understand that the impact on the cost side are actually higher than the revenue side, which means that if people are traveling and using their cars and using services from abroad also in the summer, there should be more potential on the revenue side.

We have another question from the line of Riccardo Rovere.

With regard to AT1, you have -- if I remember correctly, you called 1 instrument right at the end of March. Are you okay with the capital structure as it is today?

We are okay with the capital structure as it is today, but we are also saying that we are looking to fund ourselves in AT1 and Tier 2 during the [indiscernible].

There are no further questions. So I'll hand back to your host to conclude today's conference. Thank you.

All right. Thank you. We'd like to thank you for the questions. And we would like to also wish you a nice summer holiday, whenever that is coming for you. So thank you very much.

Thanks. Bye.

Thank you.

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