DNB Bank ASA (DNB) Earnings Call Transcript & Summary

Hello, and welcome to the DNB Q4 conference call for investors and analysts. My name is Fryslan, I'll be your coordinator for today's event. Please note, this call is being recorded, and your lines will be on listen only. However, you will have the opportunity to ask questions at the end during the Q&A session. This can be done by pressing star 1 on your telephone keypad to register your questions. If you require assistance at any point please press star 0 and you will be connected to an operator. I will now hand you over to your host, Mr. Rune Helland to begin today's conference. Thank you.

Thank you very much, and hello, and welcome to all of you to this DNB's fourth quarter analyst call. Here in Oslo, we are represented by almost the full executive team, including our CEO, Kjerstin Braathen, and CFO, Ida Lerner. Before we take your questions Ida, I would like to give a summary of the main messages for the quarter. Ida?

Thank you, and hello, everyone, and thank you for taking the time for this call today. The Norwegian economy continued to grow more than expected in the fourth quarter, and we expect GDP to come in around 3.6% for 2022. The Norwegian Central Bank has increased the key policy rate twice by 25 basis points each in the quarter, and our economists expect 2 further hikes of 25 basis points each in 2023, 1 in March and 1 in June. Our economists project the key policy rate to then top out a 3.25 and then from mid-2024, gradually go down, but stabilized at 275 during this planning period. Consumption has remained strong, somewhat inflated though by some record sales in cars in November and December due to a change of tax incentives into 2023, but still the sign of resilience in household economy. Unemployment levels remained low at 1.6%. And even though we expect this to increase, it is expected to remain at low levels, just below 3% also in the years ahead. Now moving on to the Q4 results, which was a strong performance, which also enables deliveries on our dividend policy. Return on equity came in at 16.2% in the quarter, driven by strong performance in the customer segment, but also an extraordinary low tax rate in the fourth quarter 2022. When looking at this from a normalized tax level position of 23%, the return on equity was, however, still 13%. NII was up 14.8% from the third quarter 2022 driven by profitable growth and increased interest rates. Lending growth was 1.1% where of personal customers accounted for 0.9%. But when adjusting for an acquisition or repurchase of a portfolio from DNB Life, the underlying organic growth was 0.3%. In the Corporate Customer segment, we saw lending growth of 1.3%, where SME accounted for 1.9% of the growth and large corporates, 0.7%. When looking at the deposits, it was down slightly by 2.1%, but stable in personal customers. And we don't see any change in customer behavior there. And also, when looking at corporate banking, where the deposits were down by 3.4%. This was predominantly driven by lower volumes with our customers in oil and gas, who paid a petroleum tax in the beginning of this quarter. Net commission and fees were down slightly from an all-time high result in the fourth quarter 2021. And but solid performance from a diversified fee platform with strong contribution from asset management, money transfer and banking services, among others, but also a solid underlying performance in investment banking, predominantly in M&A and debt capital markets. Costs were up by SEK 1,075 million due to high activity levels in the quarter. There was an activity in variable-based expenses of SEK 323 million, nonrecurring effects of EUR 125 million and pension expenses were up EUR 199 million, approximately SEK 85 million above what would be considered to be normalized level. Salaries reflect higher activity level and also further strengthening our strategically important competence, but also as [indiscernible] to in the presentation earlier today, we are now at the level where we see that the number of employees is stable and is rather expected to decrease somewhat during 2023. When looking at the cost of risk, we have a diversified and robust portfolio with 99.1% of the portfolio in stage 1 and 2. We take some net provision impairment of SEK 674 million this quarter, but there are no significant structural change in behavior in -- among our personal customers or our corporate customers. It's actually rather the opposite. Stage 1 and 2 in Corporate Banking, we take an increased impairment levels in commercial real estate, retail industries and services, but that's somewhat offset by reversals in offshore and also in other parts. We're looking at Stage 3, where we also take some additional impairment, that's due to the fact that we're moving over to model-based impairments in stage 3 for small -- the smallest part of the small to medium-sized enterprises, and it's therefore, connected to the increase we saw in commercial real estate, retail and services in Stage 1 and 2 as well. As you also saw, the Board is proposing a dividend of NOK 12.50 and also, we have also announced a share buyback program of 0.5%, starting now. And with that, I think we open up for questions.

Thank you Ida...

Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question or make a contribution on today's call, please press 1 on your telephone keypad. We'll pause for a moment to allow everyone an opportunity to signal for questions. We will proceed with our first participant, Omar Keenan from Credit Suisse. Please go ahead sir, your line is open.

Hello. Thank you very much for taking the time. Could I please ask a question on net interest income. If I look at the other NII, which includes interest on equity, it seems to have had a more positive performance this quarter, last quarter that would have been explained by the increase in the interest on equity. So could you help us a little bit with the moving parts around that and just explain why the performance in other NII has been so strong? And my second question is just on lending margins. Could you perhaps help us a little bit think about lending margins and what repricing lags may still be there. Thank you.

Yes. If you look at the spreads, first on interest or interest on equity, the main driver there is, of course, that you've seen that the north money market rate has increased more than what we have done in terms of repricing towards customers, which is an effect that you will see on the interest on equity this quarter. And due to the fact that we have seen the continued increase, I think the [ note ] money market rate increased on an average by 92 basis points in the quarter, and that's the effect that you will see on interest on equity. The effects from the repricing is actually in line with what we have communicated previously, actually a little bit above that if you look at our numbers on both the spreads and the combination of spreads and interest on equity. [Unknown] When moving over more to the lending margins in terms of -- as you rightly point to, we have a lag effect. When the Norwegian Central Bank raised the key policy rate, which they have done twice this quarter of 25 basis points each debt and we only reprice a -- or the repricing effect comes in the first quarter of 2023. This gives the lag effect, which gives temporary reductions in lending spreads, while we have a temporary increase in deposit spreads. And this is also what you'll see in the spreads in consumer, in the customer segment. So therefore, what we're seeing in an increasing interest environment where we are today, it's really the NIM and the combined spreads that are important to look at. And maybe just to add with a couple of more words. The other net interest income has a higher contribution this quarter than previously. It tends actually to have a higher contribution in the fourth quarter, and it's really hard to be coupled completely and give transparency. But there is a higher result in -- from treasury also having a positive result in a market where bases are moving as fastly as Ida is saying as they did during the fourth quarter. But overall, I think the picture is a very strong execution of the interest rate increases and price increases that we have done as a result of the Central Bank's rate increases. We have done 70% roughly of the impact from the previous 3 rate hikes. There's 30% left to be had in the first quarter, which will positively impact the NIM and then the latter -- the last rate hike completely remains to be seen in our numbers next year.

That's great. Thank you.

Thank you. We'll move on to our next participant. Sofie Peterzens from JPMorgan, please go ahead your line is open.

Yeah Hi! I'm Sofie from JPMorgan. My first question would be on the share buyback time frame. On the first conference, it wasn't entirely clear to me at what the time frame for the share buyback. Is it only the first quarter? Or is it going to be on the AGM. So if you could just clarify the share buyback time frame? And then the second quarter -- second question, sorry, would be on IFRS 17 impact. So you say that the impact on core equity Tier 1 or it doesn't impact the core equity Tier 1, but your equity will go down by CNY 10 billion. Could you just kind of let us know when the equity will go down by CNY 10 billion and will it have any other P&L effects? And then just a final question. In other management, I see your performance fees were around EUR 161 million compared to BRL 30 million plus the previous year. Was there something extraordinary with the performance base or is EUR 160 million the new run rate? Thank you.

I can do quickly the latter, and I can do the first 2. There is an extraordinary -- I mean it's a solid performance in Asset Management in fourth quarter. There is a one-off effect of approximately SEK 40 million that is resulting from closing out the private equity fund, and we will do more of these, but you can't expect them sort of gradually on a quarterly basis. And there is another 70-ish contribution from performance management fees due to the outperformance on several of our fund projects that materializes in the fourth quarter. Yes.

And on the share buyback, it's a very good question, and it's important to highlight that the 0.5 is up until the general assembly. And when we move into the next phase, that's also why we indicate that the Board is expecting to ask for a similar frame as they have done previously and historically. So, the 0.5% is expected to hopefully be done before the general assembly in March ---

Tenth of March…

Tenth of March. When it comes to IFRS 17, you are right in terms of this has an effect on the equity of CNY 10 billion. But not on the core Tier 1 capital ratio as we pointed to before, and therefore, does not have an impact on our capacity to pay out dividends. It will, however, reduce the equity base by CNY 10 billion, and therefore has an effect on for instance, return on equity. In addition to that, you have some accounting standards in terms of how we distribute or account --- book, both income as well as costs going forward, that could potentially have an effect in terms of the P&L. But we've said that we'll come back to that later on. And this has an effect from the first quarter this year in 2023 with a backward-looking effect for 2022. So, you will have a comparative landscape from 2023 to 2022, but that will come in the first quarter.

And since we have the head of our life insurance company, maybe you can add some more flavors to fiction...

Yes, I can -- what I can add is that the EUR 10 billion charge that were due to the accounting records of equity will, over the time of the portfolio be reversed? I mean, it's not the money that's lost. It will come back over the time. It's just a matter of when you -- I mean, when you accrue the income on the guaranteed contracts.

Okay. That's very clear. And then, sorry, just one final question. When you close the Asia or the Singapore office, does that have any impact on future costs or revenues or the DAX was just a one-off and we don't need do to think about any P&L impact from exiting Asia?

You don't need to think about any extra things connected to Asia. This was a one-off related to the closure of the subsidiary. And we still have an office in Asia and Singapore, we will continue to do. And we've taken out substantial cost effects over the previous 6 months period. So, you've already seen those numbers.

Right, thank you.

Thank you. We will move on to Mr. Riccardo Rovere from Mediobanca. Please go ahead, your line is open.

Thanks for taking my questions and good afternoon to everybody. If I may, just a quick follow-up on Sofie question on the buyback. So, what I understand is, from now until the AGM in, say, a month or a couple of months, you can execute 0.5% of your share count. But you got permission by the Norwegian FSA for 1%. So, you theoretically can ask for a Monday at least for another 0.5%. And if you ask for more than 0.5%, then you need to get back to the Norwegian FSA and have an ask for permission and wait for their permission. Do I get the whole process right because that was what I remember when you were used to --- to do buybacks before pandemic. This is my first question. The second question I have is on the guidance on the loan growth and also on fee income. I mean these numbers are always the same. Those have been the same for such a long time. We got Pandemic, -- we got a war. We got oil prices going to up and down. The whole world goes upside down, and these numbers never changed. And so I was wondering, with the situation that you're seeing today, what should we do with this 3%, 4%? And given the stronger fee income that you posted in this quarter against expectations, maybe what should we do with the kind of 5% in fee income? Why that still stands? What that's never changed? And the final question I have is was a bit confusing at least to me, this more during the press conference. When you were asked about is Q4 cost base, the run rate, is this -- is the answer a yes? Or the answer is no. I don't need more than that. Just yes or no. Thanks.

Thank you for your questions, Ricardo. It is true that we have approval for a 1% buyback from the FSA, but we had to accomplish what we can during this program until March 10 before we move into a period where we're closing first quarter. And we believe that we will, at most be able to do the 0.5%. The current approval is based on the previous property given by the general assembly, which expires when they have another meeting, which is why technically we have to renew that and then we ask the FSA to relaunch potential other buyback programs in the future. Guidance, you are quite right. We have kept both on loan and deposit growth and on fees quite stable and our thanks through the cycle. We've also said that this year or not this year, but 2022, we had a higher growth, both in loans and deposits, which we've indicated throughout the year, a little more than 6% on loans and even beyond that for deposits, if we exclude Sbanken, which obviously even takes it higher. The reason for saying that we can have it is that we have a flexibility in the platform and the mix of growth. So obviously, 2022 was a year with somewhat slower growth in the personal customers, and we have sort of made -- more than made up for that with a very positive growth momentum in the corporate area, in particular, record growth in SMEs. So, we have the flexibility by also actively managing the capital that we deploy in the large profit area and believe that over time, it is healthy to have a certain growth momentum in the business, but are also very clear that we will continue to prioritize profitability over growth. But all in all, over time, given our platform nationally and internationally, we believe we should be able to deliver through different economic conditions, a growth in the area of 3% to 4%. Fees, 4% to 5% also through the cycle, an indication that we are looking to grow fees more than volume. We are looking to grow our fee base. That is tough when interest rates are moving up and NII is moving up to the extent it is. But I think we are systematically continuing to build strength in the platform and having a fee growth in the year '22 of 4% after such a strong year in '21 is a testament to that. Well, why can't we do even more? I think we'll stick to the 4% to 5%. The strong contributors will continue to be, we believe, asset management, overall investment banking relative to how the market is performing. Transactionally, there were strong reopening effects in money markets and banking transaction category last year. So, I think what we show is that we have an increased resilience and a broad platform on the PSI, but all of this is systematic work which requires higher growth than 4% or 5% in order to deliver that on the whole. So, sorry for sort of sticking to our gantries that we continue to say 3% to 4% and for define over time, and we have delivered on this. On the cost base, the question is no because we are pointing to seasonal and one-off effects that hit the quarter. And we are pointing to the pension costs, which are approximately SEK 110, SEK 115 million higher than what you would consider a normal market. But it is a mix. The alert of the cost increase that is recurring.

Thanks, -- thanks for the new -- thanks...

Thank you. We will move on to our next participant, Johan Ekblom from UBS. Please go ahead your line is open.

Thank you. Can we maybe start on net interest income? I mean the last many rate hikes, the sensitivity has been broadly unchanged. And I guess, conventional wisdom would say that deposit betas will rise at some point. So how should we think about the fact that you're reiterating SEK 1.2 billion for the latest hike as well. Is there a kind of hangover from this to come once rates stop going up, but deposit rates will continue to creep, be it repricing or mix shift? So that's the first question. The second question is just on the other operating income. It was an extremely strong quarter, and you mentioned specifically the new bits mobile pay. Is there a one-off effect in there? Or is this the business doing better? Or change of kind of the accounting treatment due to the changed ownership structure. So if you can help us understand that, that will very helpful.

We will try -- John, thank you for your questions. I think on the NII side, it's difficult to answer what you're asking for, what will the future look like? I think there has been a strong -- certainly a strong execution of the price changes so far, and we see positive results from that. In addition to that, we have kept the extraordinarily high deposit base that we have built up during the pandemic and still have a deposit to loan ratio of 65%, 75% way higher than when we went into the pandemic. Now you're basically asking about 2 things. Will the deposit base. Last year, will people start people and businesses start spending the money. I think that's extremely hard to say. What we can say is that we have not seen that to a large extent as of yet. And we believe that the Norwegian economy is going into a soft landing with a [indiscernible] not in any way a very sort of severe recession in any way. Then you are talking about the competitive dynamics. I think one interesting point is to look at our volume risk margins, which is the average of our margins out to customers. And largely, they are in line with what they were before the pandemic, indicating what is the average price out there to customers. We will continuously focus on having competitive pricing. -- we are operating in a very competitive market, but also a rational market. We have seen that other peers in this market have followed our direction and raised the bar for their return on equity. And we believe this will be disciplining both in terms of how and where they allocate capital and what kind of margin mix they will be able to get from the market. But how it will develop, we will have to wait and see as you will. But are very confident that we will be able to be competitive and we'll manage this as best we can. In relation to operating income, it is a very strong market. And you are quite right, there is a one-off effect for VIP holding that is related to the merger with VIP and Mobile Pay of SEK 430 million or something...

39 million...

SEK 399 million has to say cost of depreciation. This is an accounting gain and reflect -- reflects the value of the companies at closing time. In addition to that, we have considerable value appreciation from our stock holdings from restructurings of more than SEK 800 million in the quarter. And through that, also absorbed a negative of 1.4% from basis swaps and AT1. So it's a strong quarter from both ancillary companies as well as the stock holdings that we had from restructuring.

Thank you. And then just a clarification. Am I right in that the buyback will be deducted from capital in Q1? Or has that been done in Q4?

That has been done in Q4. So the 18.3 million is after deducting the dividend and the share buyback of 0.5%. Thank you for that question.

Excellent, thank you very much.

Thank you. We'll move on to Ali Dan from Morgan Stanley. Please go ahead, your line is open.

This is Elie Dan from Morgan Stanley Credit Research. I wanted to ask a question about your 3 outstanding DISCO bond. Do you plan to take any action on these now that the EBA has expressed concerns with in—[indiscernible] risk? And would you consider calling them on their upcoming call dates this year?