DNB Bank ASA (DNB) Earnings Call Transcript & Summary

Hello, and welcome to DNB Q3 conference call. 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 very much, and hello, everyone, and welcome to DNB's third quarter analyst call. Here in Oslo, we are a full executive team, including Kjerstin and Ida; and also Head of Personal Banking, Ingjerd; Head of Corporate Bank, Harald; and Head of Risk, Sverre; Head of DNB Markets, Alexander; and also Head of Wealth, Hakon. Ida will start giving you the highlights from the quarter before we open up for questions. Ida?

Hello, and good afternoon to everyone. So I think I would just like to start with a bit of the main topics from a macroeconomic point of view. The high activity level in the Norwegian economy has continued in the quarter. GDP growth was higher than anticipated by the Central Bank. And our economists expect the growth to come in at 3.3% in 2022, and then at 0.8% in 2023, and 1.2% in 2024. The corporate investments are expected to continue to grow, driven by oil and gas, but also mainland economy, and more importantly, also investments in sustainable transition. Unemployment levels remained low at 1.8% and is expected to come up somewhat, but still at low levels and more back to normalized levels, what we've seen historically in Norway, around 3% or below that. Core inflation is above the Central Bank's long-term target, and the expectation to the interest rate has increased. Our economists expect the Central Bank to increase the key policy rates up to 3.25%, to peak in January next year, and then slowly start to go down from the end of 2023 and onwards. If we then move to our results in the quarter, we had strong performance and solid asset quality. Return on equity of 12.7% in the quarter, and a rolling 12-month basis, 12.3%, driven by strong performance in the customer segments and increased fee-related income. Net interest income is up 25.5% from the third quarter 2021 and 6.3% from the second quarter this year. This is also driven by profitable loan growth and the acquisition of Sbanken as well as successful customer repricing. I thought I'll just give a bit of background in terms of the recent repricings that have been done, just to update you on that. We've seen the full effect from the third repricing in the third quarter. We only see partial effect from the core repricing implemented in August. The fifth and the sixth repricing that has been announced, and will be implemented at the beginning of October and beginning of November, respectively, is anticipated to have an effect of NOK 2.4 billion on an annual basis each. Net commission and fees is up 12% from the third quarter 2021. We have an all-time high third quarter result. There is a strong increase in income from money transfer and solid performance across other product areas, and in particular, in markets where we see a strong delivery both when it comes to investment banking -- M&A activity has been good as well as equity brokerage and securities finance. We have a robust and well-diversified portfolio. We don't see any adverse change in customer behavior, and the credit quality remains to be solid. We are also comfortable with the commercial real estate portfolio, bearing in mind that is -- 75% of it is in low risk. We have -- also 94% of the portfolio is in Norway, and we have continuously focused on a strict credit policy, whereby we finance corporate lending, stable cash flow, residual value and strong ownership with significant equity injection. Earnings per share came in at 11.2 -- up 11.2% from the third quarter 2021 is now at NOK 4.77 for the quarter. There has been some focus today on the market-to-market effects on own shares. That is a share that we hold due to previous restructuring cases. The total mark-to-market effect overall is NOK 858 million this quarter. If we were to exclude these effects, return on equity and earnings per share would have been above consensus. That's to show also that there is a high quality -- there is high quality in the earnings reported from the [ balance ] of this quarter. And with that, we'll leave the floor to questions.

Thank you, Ida.

[Operator Instructions] The first question comes from the line of Sofie Peterzens of JPMorgan.

So just to clarify, the additional -- the 50 basis point rate hikes that we saw during the summer basically is NOK 2.4 billion each, so NOK 4.8 billion annualized NII benefit. Did I get that correct?

Yes.

And then, my second question would be basically on your cost risk spreads on Slide 7. I know your net interest margin is improving, but it looks like your spreads in the customer segment is coming down and you're seeing kind of higher deposit spreads. This is just a temporary effect? Or should we kind of -- how should we basically read this slide? So if you could maybe just elaborate a little bit on that? And then my kind of final question would be on capital impact. How should we -- should we expect any regulatory capital headwinds going forward? Is there anything we should be [ aware ] of us? Could you just give us guidance also on IFRS 17, if that's going to have any impact on DNB?

Thank you, Sofie. I'll take the first one -- or the second. Ida already answered the first one, and Ida can address the third. I think with regards to margin, what is most important to look at is the NIM that factors in all the effects. The volume-weighted margin shows the customer pricing where you also see the movement of money market rates. But we continue to state that overall, we are more or less neutral to [ slighter ] fluctuations, which why -- what is important is to look at the NIM and the average volume development that leads you to the NII development for the quarter. And in line with what we talked about in terms of expected impact from already implemented rate hikes that haven't been seen yet, we, of course, expect the NIM to develop in a positive direction as we go forward.

And in terms of capital, first of all, I think it's just important to again highlight that when we talk about the capital planning, we assume a long-term capital expectation of NOK 17.7 million, which then includes the full pre-COVID countercyclical buffer across geographies, even though that has not been implemented as of yet. So that keeps into place in the first quarter 2023. In addition to that, in terms of regulatory developments, it has previously been a requirement that -- the Pillar 2 requirement was met using Tier 1 capital only. The NFSA has now come up with a new circular stating that part of the Pillar 2 requirement can be met using a combination of Tier 1 and Tier 2 capital. We are awaiting the final results from the -- for future requirements of DNB, that will be concluded through the annual SREP process that we expect to conclude later on this call. But we don't have any news in terms of that to deploy. In terms of IFRS 17, we have no further details on that, but are still working in terms of the assessment and the implication that will have, and the results from that will come in the end of this year. Having said that, that's something that we assess on a continuous basis.

The next question comes from the line of Omar Keenan of Credit Suisse.

I just had a follow-on question on rate sensitivity, please. Just looking beyond these rate hikes, how would you think -- how would you guide us towards thinking about kind of rate sensitivity going forward as a number for 25 basis points?

We are -- we need to talk about this in referring to historical developments, Omar, as we are prohibited by law to actually talk about future sensitivity, because there is no sensitivity in itself. The positive impact on rate happens actually if and when we reprice. Important to say that banks in Norway have repriced on every occasion when the Central Bank has changed rates, and that it is, as you well know, primarily a floating rate market, which makes the monetary policy very efficient, but with a lag effect compared to the development in money market rates. So I think the best reference we can give you is actually to talk about the historical impacts. And we have seen over now 6 rate hikes and impact in the area of -- for 25 basis points then between -- let me get my numbers right, NOK 1.2 billion, NOK 1.3 billion has been the impact historically for the previous 6 hikes. And I think that's the best estimate we can give you. We have talked about a tapering effect over time historically, but again, reiterate that we have a stronger position on deposits than we have had during historical times.

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

A couple of questions. First of all, I just wanted to follow up on sensitivity. I understand you are not providing the guidance on future moves. But do I understand correctly that, let's say, the main differential here -- because you're already passing through fully rate increases on deposits. It's just the ability to fully adjust rates on mortgages and for your [ borrowers ], assuming no changes in the deposit base. Can you maybe provide some color if competitors so far are through fully on mortgages, or it has been only DNB who was doing this? And then maybe on fee outlook, just a couple of certification questions and your color would be very appreciated. We've seen extremely strong fee contribution from money transfer and banking services. Just wanted to get a sense, is there any, let's say, seasonal spike because you can't travel more, or any other reasons, and that should come down? Or this is now, let's say, a new normal for your generation for this particular line? And then maybe in investment banking. It feels also quite strong considering overall market dynamics. If you can comment on FY --until the end of the year in terms of how you're feeling on investment banking fees in particular?

I'll start on the first one. I think the important -- the first important thing to state is that we are -- we have a competitive position. I think this is visible through our growth, both on the lending side as well as on the deposit side, across both of the customer segments during the quarter. With regards to the impact of rate hikes implemented, we have stated that we have passed through up to the full 50 basis points of lending and up to 50 basis points on deposits, but not been specific on, to what extent is being passed through in average on the portfolio. But it's been a higher pass-through on lending than on the deposit side. I think the key point for us is to remain competitive in the market, and we see that we have as strong a competitive position, if not stronger. So the market behavior is rational and that makes it relatively consistent across -- But rate hikes are positive to us, and they will continue to be so, also because we benefit more, of course, on the equity capital side when money market rates are up. On money transfer and banking services, you rightly point to the fact that there's been a significant increase. First of all, it's important to highlight that the third quarter is seasonally a strong quarter when it comes to money transfer and banking services, due to the fact that people are out traveling a lot during the summer. And then, more importantly, international travel activity picks up. Income from money transfer has recovered, and was actually above pre-pandemic levels in the third quarter. And of course -- first of all, it's not something that would be equally spread out throughout the year, but higher -- seasonally higher in the third quarter, and then, of course, dependent on the activity level and the people spending on international traveling, not the least. Moving on to investment banking services. We see that it has been a very good result in challenging markets, I would say as well as seasonally in loan markets. So I believe this is actually a good proof, a solid proof of the thorough and long-term investment that has been made both in market operations in Norway as well as internationally, and not the least a very good cooperation that exists between markets and corporate banking in terms of actually working closely together, originate and distribute, but also on the more M&A driven transaction. Anything to add on the answer, Alex?

No, for the -- if the question was the fourth quarter, of course, it will be the market will enroute, but the echo was -- as Ida is saying, that we have made investments in the business over time. We try to accelerate those investments when times get a little bit tougher, and we feel that we're taking market share, and we sort of have growth this year to short-term -- So a combination of structural and cyclical factors as always. The cyclical will be anybody's [ gets ] -- the structural factors seems to be [ appealing ] for us.

And just maybe one question, if I may, more broadly on the corporate activity and corporate credit demand. I understand you maintain your kind of medium-term outlook between 3%, 4%, but maybe in, say circumstances, with continuous investments expected to see more opportunities in corporate lending?

We've seen a very consistent and robust growth on the SME side, and we expect that to continue. That's basically across all regions in Norway and across all industries. On the large corporate side, the growth is more erratic, driven by market opportunities, and our focus on profitable growth. And because we also have this originate and distribute model, it also depends on the time that we distribute the risk and the activity in the capital markets. As you said, there are a number of good opportunities in today's market. That's why we grew very rapidly in the second quarter on the large corporate side. We've had a slower growth in the third quarter, and we expect to maintain fairly stable volumes in the fourth quarter on the large corporate side. But we were able to address that as we go along.

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

Just to clarify, at least to me, the NOK 2.4 billion slide on Slide 8. Basically, the further pricing -- NOK 2.4 billion, we see it. The further pricing from mid-August, another NOK 2.4 billion, we see part of it so far. Then there will be the NOK 50 billion repricing, another NOK 2.4 billion. And then, there's going to be the other one in November, another NOK 2.4 billion more or less on an annualized basis. Do I get it right?

Well, I'll just repeat what you said. So in terms of the last 2 repricing that has been announced, the one that will have an impact in October and November, those are not included in the numbers, the NOK 2.4 billion that we just announced on each of these today. The fourth, which had a partial effect from mid-August of NOK 2.4 billion is also included in -- as of mid-August -- NOK 2.5 billion [indiscernible]. Well, you see the full effect of the third repricing, a partial effect of the fourth repricing and no effect yet of the fifth and sixth repricing. We've done 6 in total…

And each of these…

And each of the 2 [ numbers ] are NOK 2.4 billion. The fourth is NOK 2.5 billion, and the one before that is NOK 1.2 billion. Because that was only [indiscernible] increase. So that's important to note.

So just to clarify, now that rates are kind of approaching 2%. So they're not 0 anymore. You expect the fifth and the sixth repricing to be still in the NOK 1.2 billion, NOK 1.3 billion region, despite the rates not being at 0% anymore, right?

Both the fifth and the sixth repricing was done on a basis of 50 basis points each, not 25. So yes, we do expect each of them to have an estimated impact of NOK 2.4 billion.

The other thing I wanted to ask a little bit more is with regard to the deposits outflow and wholesale funding, do you -- are you still experiencing fairly good deposit growth? Is it going to impact your funding strategy, which means will you issue less than originally planned in '23 and maybe '24?

We do experience very good inflow still of deposits. The main driver this quarter being the corporate banking part with a cyclical small reduction in -- for small customers. Our deposit-to-loan ratio has strengthened significantly since pre-COVID and also strengthened further this quarter, and is now in excess of 78%. So our funding program is more related to the funding -- the buildup of MREL as required in the capital structure and not so much the need for liquidity. But I'll ask Thor Tellefsen, who is Head of Funding, to comment on '23 and '24.

Yes, that is correct. All our funding this year has been related to regulatory requirement. So we haven't reduced the funding this year due to the higher deposits. But since we are now getting closer to fulfilling all regulatory requirement, means that our funding need next year will be substantially lower than this year. And next year, we can also go back and potentially use cohort 1, which is then significantly cheaper than senior and senior non-preferred.

Final question if I may. In one of your slides, you showed the unemployment, which is now 1.8%, which was below natural attrition, expected maybe to go to 3%, which is still probably less than natural attrition. Real estate prices in Norway not going down -- right or wrong, are not going down. As -- speaking of your mortgage book is 50 something -- in the 50% region. I remember that you posted some provisions on the retail side, only when unemployment overshoot to kind of 12% or 15%, but it lasted 1 month during COVID, that you took NOK 760 million, if I remember correctly, in one quarter on the retail side, which is -- and then all of a sudden, the country started the reopening and all these provisions were reversed over the following 2, 3, 4 quarters. Now if the unemployment remains below natural attrition at 3%, and if real estate prices did not go down, your LTV is kind of 50%. Why should you have a book any loss on the retail side, aside from statistical provisions on a book that is growing? And related to that, in 2020, when COVID erupted, you moved -- you charged NOK 8 billion or NOK 9 billion of provisions in a semester, mostly related to oil and gas and offshore, and you moved a substantial amount of exposure to Stage 3 related to oil and gas and offshore. In those days, the price of oil was not exactly the one today. And since then, we have been seeing reversals and reversals and reversals. And now, if I remember correctly, you have moved NOK 2 billion out of Stage 2. If the situation remains as it is what do you think, what is the path of provisions that were charged to oil and gas and offshore in 2020, that can still be reversed? Also, qualitative comments. I know you will never give me numbers, okay, I know that, but just a qualitative indication would be enough.

First of all, I think your reasoning around the mortgage portfolio is in line with our -- why our level of comfort is so high as we are trying to express that it is. And we're very comfortable with our mortgage portfolio, a conservative leverage and a solid outlook and solid platform in the Norwegian economy to meet the emerging challenges in the world economy, more than Norway specific. And I would advise you not to draw a direct link between the unemployment that was reported during some weeks in -- during the pandemic and the reserves that were taken in that initial phase on the personal customer part of the portfolio. They have also at a later stage been reversed. As you correctly also point out, a large part of the reserves was related to offshore. And we have, for the past few quarters, been taking reserves back, but have also cautioned to say that -- you should believe this is a trend that will continue on and on. I think markets are better, more driven so by the activity than the exact oil price -- and there are still some cases that we are working on. But we believe that the numbers that we put on the table today, those are the best estimates of the actual risk, and that's really what we provide you with in terms of guidance at this stage.

The next question comes from Jacob Kruse of Autonomous.