DNB Bank ASA (DNB) Earnings Call Transcript & Summary

Hello, and welcome to the DNB Q1 2023 Conference Call. My name is Priscilla, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, Rune Helland, to begin today's conference. Please go ahead, sir.

Thank you very much, and hello, everyone, and welcome to DNB's analyst call for the first quarter. We have an almost full Executive Board team here in Oslo, including the CEO, Kjerstin Braathen; CFO, Ida Lerner; Head of Corporate, Harald Serck-Hanssen; Head of Wealth Management, Hakon Hansen; and also Head of Market, Alexander Opstad. As usually, before we start and open up for questions, Ida will give you some highlights for the quarter, please?

Thank you, Rune, and a warm welcome to all of you listening. The activity level in the Norwegian economy continues to show resilience. Both on the corporate banking side, with still good activity level as well as on the household side, where we see continued strong construction pattern. GDP growth is expected to come in at 1% in 2023 and 2024. Core inflation was 6.2% in March and expected to come down towards the end of this year and end up at 5.6%, which is far more, of course, still than what the central banks and the long-term expectation is from their perspective of 2%. Wage growth in 2023 is expected to come in at 5.5% and then 4.5% in 2024. That means that real wages are expected to increase towards the end of 2023 as well as in 2024. This leads our macroeconomist to forecast further increases in the key policy rates from the Norwegian Central Bank. A total of 4 additional is topping out at 4% in September and then remain at this level until the end of 2024, before then gradually decreased to stabilize at [ 2.75% ] in mid-2025. Corporate Investments was up 14% in 2022 and is expected to decline by 0.7% in 2023. Investments, however, is sustainable transition is expected to continue to increase, so as petroleum sector. Unemployment remains at low levels at 1.8% and is expected to remain at historically low levels, even though upping up towards 3% in the end of 2025. House price growth is expected to be 1% in 2023. And we've seen increases in house prices from December until March of approximately 5.8%. Moving on to the first quarterly results. I thought I'll just start by stating that we have now implemented IFRS 17, the new accounting standards for reporting of insurance contracts. It is important to highlight that IFRS impacts consolidated figures, but there is no change in the DNB Life at company level, solvency, tax and dividend capacity is unaffected, and so is also a core Tier 1 capital ratio on DNB level. However, return on equity is impacted and some of the other key numbers are also impacted, such as for instant net commission and fees. So when you just get our restated numbers for 2022, you will see that those differ somewhat from what we saw before. Among other things, commission and fees are down by approximately NOK 320 million, which also explains the deviation from the consensus from our analysts, which is approximately NOK 320 million above where we came in to date. Return on equity was at 17.2% in the quarter, solid results across the customer segments as well as product areas. We saw a good growth on the lending side of 2.1% and the personal customer segment, 0.6%; and in the corporate banking sector, 3.7% growth. On the deposit side, we also saw a strong growth in the quarter of 6.9%. Personal customers, fairly stable with a modest decrease of 0.6%, while corporate banking increased the deposit base by 12.3%. We have also seen a positive development when it comes to savings, where we're seeing that our personal customers continue sticking to the savings schemes and actually increasing the monthly savings amount on a last 5-month basis, which is also positive. On NII, we've seen an increase from the fourth quarter of 3.8%, driven by profitable growth in both lending and deposits as well as higher interest rate. We will also announce a further repricing following the Norwegian Central Bank increase of their interest rates from March, which will be implemented from mid-May, which we announced today is expected to have an annual NII effect of NOK 1.1 billion. In terms of the net commission and fees, it's up 1.8% from the first quarter of 2022. It's an all-time high first quarter with robust and diversified fee platform. It is a strong contribution from investment banking, money transfer and banking services as well as trade finance, which shows increased demand from our corporate customers. We have net reversals of impairment provisions, showing the robust asset quality and also a diversified credit portfolio across the board in addition to successful restructuring in offshore. 99.2% of the exposure is now in Stage 1 and 2. We are not seeing any changes in customer behavior or systemic change in segments or sectors. Earnings per share is up 38.2% from the first quarter 2022 and is now at NOK 6.6 for the quarter. A strong core Tier 1 capital ratio of 18.6%, over 60 basis points above the long-term expectation from the NFSA, as well as a strong leverage ratio of 6.5x. The Annual General Assembly gave authorization to the Board of Directors of up to 3.5% of share buybacks. We have subsequently sent an application to the end of the day and await their approval for that. And with that, I think we open up for questions.

[Operator Instructions] We will take our first question from Sofie Peterzens from JPMorgan.

A couple of questions from my side. So Handelsbanken already paid for transaction accounts in Norway. What is DNB's view on kind of paying for transaction accounts? Is this something you would consider? Or do you think Q3 suggest that we will go there? And then I can see on Slide 3 that you expect rates to come down in Norway. How should we think about the potential net interest income headwinds for run rate fall and kind of with slower loan growth as well? How should we think about the NII trajectory? Should we expect NII to kind of peak in '23 and then start to drift down in following years? Or if you could just talk us through how you think about it? And then the final question would be like how long should we expect FSA to take for the share buyback approval? And when should we expect to get details around that?

Thank you, Sofie. In relation to transaction accounts and the pricing on our account products. We are not really in a position to talk about what we may or may not do in the future. I think what is most important for us is to follow very closely our position and our ability to compete and attract customers. And the report from this quarter is that, that is a very positive picture. We have 25% of the deposit in personal customers on transaction accounts. There are no movements to speak of. But within the savings account products, we see that customers are somewhat more aware of how they are placing their deposits. We do not relate to the movements in the quarter to a change in the competitive environment, but more the fact that people are spending more of their income. But while there is a slight reduction in deposits in personal customers, there is a correspondingly an increase in assets held under savings or assets under management from retail and amounts that retailers are saving in other type of savings products. So those 2 categories together, we continue to grow. So we will follow the situation closely, but we are very comfortable with our competitive position in the deposit base. With regards to the key policy rate and future development, as Ida also touched upon in her introduction, the interest rate path in the future has now been further hiked with an additional 2 hikes of 25 basis points each, compared to the trajectory after the fourth quarter. So the interest rate is now expected to keep at 4% and to stay there for larger parts of 2024 before gradually moving down towards 3.5 percentage points. So we are talking in the current trajectory that interest rates will remain 50 basis points higher than what they are actually today. We have not indicated a slower growth overall for the bank. We still believe that we can deliver 3% to 4%. We grew by 2% in the first quarter. And we have said that we, in the event there is a slower development in the personal customer side with somewhat lower credit growth to be expected. We will compensate for that by capitalizing on our broad and diversified platform in the corporate sector as well as the very attractive growth that we continue to see in the SME market. As for the FSA approval, I mean it's hard for us to speak on their behalf, but speaking from experience, it does take a few weeks. Historically, you have taken a few weeks before we have received approval. So that is not to be the case also this time around.

[Operator Instructions] We will move on to our next participant, Riccardo Rovere from Mediobanca.

Two or 3, if I may. The first one is on reversals on oil and gas. I mean at the time of, I think it was Q1 or maybe Q2 2020 at the time of COVID. When we had the COVID crises, You moved the chunk of oil and gas stocking to Stage 3 immediately, I mean, if I remember correctly. And since that the Stage 3 exposures have kept going down, down and down and credit loss has started to show reversal, not every single quarter, but quite often. What I note is that Stage 3 exposures are down NOK 3 billion -- NOK 2 billion or NOK 3 billion this quarter, quarter-on-quarter. So I was wondering whether, let's say, the reversal on the oil and gas, can we assume this has come to an end? Yes or no? The other question I have is on the buyback. You got approval for 3.5%, but you will ask the Norwegian FSA for 2.5%. I was wondering why not going for 2.5%? Given that -- if I take into account the 2.5%, I don't know if my calculations are right or wrong, but it should be kind of NOK 7 billion or so is less than the profit you posted in one quarter. So I was wondering how can you reduce the 18.6% to a more normal level if the buyback is less in the profit of quarter or at least at best as large as the profit of a quarter? And the third question is just curious, where NII is burdened by resolution fund fee. Is it supposed to disappear in '24? Or how should we think about it?

So I start with the reversals. I think if I start really comment in relation to oil and gas, it's important to distinguish between oil and gas and offshore. The impairments we took in 2020 as well as we've been talking about in terms of having worked on the restructuring side is related to offshore and not oil and gas, which is important for us to point to. It is right. As we said, we have taken reversals over the past few quarters and actually quite a few quarters, relating to finalized restructuring of offshore customers. We have worked diligently and thoroughly in corporate banking with these customers over a long time. And these are long -- not called projects, but situations where you start with a long restructuring processes also in the U.S. in Chapter 11. So these are long processes that takes quite a long time. So you need to take that into account when looking at the reversals also taken quarter-on-quarter. These are -- when you also talk about the reduction you see in Stage 3, these are now companies that are being moved from being fit as they are called under in Stage 3 to moving into the healthy part of the portfolio in Stage 1 or if they are being not refinanced, and we're not part of that. I can't comment on that in more detail. When looking at the reversals also in offshore as well as other parts, due to the fact that we worked diligently with our customers, you can -- you also need to look at what's in the -- in terms of the more financial positions that we -- where we've converted debt to equity. And there, you also see some positive developments in terms of valuation of the shares that we are now -- have been sitting on. We don't intend to be sitting on these for a long time, because we aren't an offshore -- the back offshore owner or owner of these companies. But that's also an element taking into account when looking at the reversal side. We aren't making specific comments in terms of future output for reversals, but we have said before. And I think that even though that hasn't been turned out to be completely accurate that we don't foresee further reversals. This is the best assessment we have today relating to the impairment provisions taken in this portfolio. Should I -- talking about the share buybacks as well, you are right in saying that the general assembly gave an authorization of up to 3.5%. What is important here is also looking at what we've done historically. Historically, we haven't asked for as much as 2.5% either. We've actually split this into smaller chunks also when asking for an approval from the NFSA. So this is a larger share than what we have historically done in terms of asking for, which is also an opportunity for us to continue using this as a flexibility tool throughout the year and depending, of course, also taking the uncertainty we see around us into account. But again, looking at what we've done historically, this is actually a larger application towards the end of the day than what we have done before. That doesn't mean that we can't do -- that we can't come back to the end of the day and ask for any more to come up to the overall limit of 3.5%. I hope that answers your question in relation to that. And in terms of the resolution fund fee, we have the full year resolution fund fee in relation to Poland. That is always taken in the first quarter, which is NOK 66 million. And then in addition to that, there is a slight increase in the resolution fund fee from Norwegian standpoint. That is more amortized to last year.

And just adding one small -- little thing is I'm sure your calculator is a high-quality Riccardo. And we remain committed to pay out excess capital to shareholders over time. And we have a very comfortable capital decisions, but nothing has changed in terms of our message to reinvest part of the profit, but also pay back excess capital over time.

Just on the back on the resolution fund, is this supposed to go away in '24?

No. No. Okay.

We will move on to our next participant, Maria Semikhatova from Citi Group.

A couple of questions. First of all, on NII, the impact of the last year pricing that will be applicable from mid-May is slightly lower than the last -- the previous repricing, it's not that material, just NOK 100 million, but I wanted to check with you what's the main differentiating factor here, shifting to term deposits or lower overall deposit balances? And then you mentioned that you are seeing private customers switching to all the savings products. If I understood correctly, in your fact book, the inflows to your asset management from retail customers adjusted for dividend was a minor negative number. I just wanted to check if those inflows are captured somewhere else? Or you are seeing actually outflows of these deposits to competition? And then question other on the cost in the presentation, you attributed roughly NOK 100 million to temporary cost. Just wanted to clarify what this -- why you think this is not recurring? And maybe more generally, I know you don't provide cost guidance, but let's say, wage negotiations settled a bit higher, inflation is stickier in Norway, and you now expect higher rates for longer. Kind of what -- how changes you're thinking about cost growth this and next year?

I can answer the middle one, and I'll leave the #1 and 3 to Ida. But you are right, in terms of asset management. Our assets under management in total grows by a little more than NOK 40 billion for the quarter, but there is a slight negative outflow. This is, however, stemming from institutional investors. And if we look at retail investors there, we see an inflow both from the defined contribution scheme as well as for discretionary advisory mandates as well as for the mass market retail customers. So there are no outflow of deposits that is related to any change that we observed in the competitive situation. But of course, the saving rate overall is also going down and people are spending more of their income in view of higher prices.

And on the NII, you are right in saying that we are now communicating an expected annual effect from the latest repricing of NOK 1.1 billion, which compared to NOK 1.2 is a minor adjustment, and I really just want to highlight that, that is a minor adjustment also when looking at historical levels that have been the NII affect from repricing. So we are still in a situation where we see a very kind of good strong competition, but rational behavior among our competitors. We see that our competitors are focusing on profitability above growth, and they are focusing on also delivering a strong return on equity and also the deliveries to their owners. So we are -- there's no change in terms of the competitive landscape. There's also no change in terms of our competitiveness. It's more a reflection of where we see this that this is heading and our assessment of the situation today. When it comes to costs, you are right in terms of that we are pointing to one nonrecurring expense of NOK 100 million this quarter. It relates to a cancellation of a leasing contract, an early termination of a leasing contract, which is an office we have in Norway, which is definitely a -- could be seen as a one-off. In addition to that, we are also pointing to the fact that pension expenses are approximately NOK 70 million above what we would call normalized levels, which reflects the higher return on the closed defined benefit scheme. We are continuously working on cost efficiency, and we are seeing, just as you point to, there is a strong [indiscernible] pressure. We have a wage increase or wage is expected to be 5.5% this year and 4.3% next year, which is, of course, something that will continue to drive the cost base unless we work actively on it. We are working on our cost base, and we'll continue to do so, but at the time, our cost-income ratio target below 40% remains, but it is seen as a long-term target, which means that we need to work on our cost base also in times of higher income.

So you're effectively confirming the focus on cost to income. We shouldn't just include another 4 hikes on NII, and there will be some pressure on the cost side as well.

Yes. But we will continue working on costs and nominal costs and also on -- as communicated in connection with the fourth quarter, we are also looking in terms of the number of employees and are following this slightly and are expecting that we will, during this year, decrease slightly when it comes to number of FTEs towards the end of this year. But still, it is important for us to continue investing in strategically important competence, and that's something that we will do, for instance, within [ tax ].

[Operator Instructions] We will move on with our next follow-up participant Riccardo Rovere from Mediobanca.

Just have a curiosity on the balance sheet. I've seen the debt securities issued that has gone up by NOK 70 billion or so. So I was wondering, which is a fairly large from NOK 730 billion to more than NOK 800 billion. I was wondering whether it's been a prefund in a year before rates go even higher, and this is going to cost you even more? Or it's just, let's say, a seasonal factor or maybe commercial trade business short-term dated staff that may have inflated the number on a quarterly basis?

Sorry, Riccardo, which I can line in about...

I am referring. If you go on your fact book, I think it's table, yes, table 1.1.5 and you go that securities issued. It was NOK 737.9 billion in December and now it is almost NOK 804 billion. And I was wondering why is that considering the deposits go up by NOK 130 billion or so under NOK 25 billion and the loan book goes up by NOK 40 billion or so, NOK 40 billion, NOK 50 billion or so. And in the meantime, the cash and deposits with central ventures explode by NOK 200 billion. So it's like saying that you have gathered brand new funding that this has been deposited at the central banks either notable with Norway or ECB or et cetera [indiscernible]. And I was wondering what's the point of gathering brand new funding when the loan book is not growing or it's growing nicely, but normally, it is pretty this way?

[indiscernible] will answer your question on the funding.

Remember that this line consists of both short-term funding and long-term funding. So -- and we often reduce short-term funding ahead of year-end. This has also to do with the leverage ratios, et cetera. So the volume of short-term funding can arrive within a year. This is not kind of something we issued due to long-term funding needs. This is more short liquidity reserves. When it comes to some other bonds issued, this is also related to requirement from the regulator in order for DNB to build up senior nonpreferred bond and senior. So for instance, this year, we are actually issuing long-dated bonds. We don't need for liquidity reasons, but we need them for capital business.

Right. Okay. Is that along some much more ground to be covered to be completely MREL compliance on the front?

No. We are getting pretty close now. We have around EUR 2 billion, EUR 3 billion left to be done this year, and then we have built it all up. Then in the future, it will just be talking about refinancing bond.

We'll move on with our next participant, [ Alex Dimitri ] from Credit [indiscernible].

Just a quick one on net gains on financial instruments for fair value. During the quarter, we saw quite a large increase in the other mark-to-market adjustments. Can you just give a bit more color on that and whether we're likely to see a reversal in coming quarters? Or is that just a one-off that we're going to see there?

The majority of that item is increased value on our equity shareholding. And it's difficult to -- part of that, we talked about as being related to exposures previously restructured that we will sell over time, but we have a higher holding in these kinds of assets than normal. So that introduces the volatility. It's very hard to give any type of guidance as to how they will move going forward, because that depends on the market development and to the development in our holdings of this type...

[Operator Instructions] Speakers, it appears there is no further questions at this time. I'd like to turn the conference back to the host for any additional or closing remarks. Thank you. I'm sorry, we have one more question. Is that okay?

Yes, of course.

All right. We will take a question from [indiscernible] from Societe Generale.

Congratulation on your [ sales ]. I just had a question with -- which is actually not so far related to results, but rather to understand that the creditor hierarchy in Norway, I know is different than Europe. So if you could just highlight whether we currently have in Norway, full depositor preference versus senior securities?

I'm sorry, I'm not sure if we heard your question correctly. Could you repeat it, please?

Yes. So I'm just talking about depositor preference in insolvency and resolution, meaning that we saw 2 weeks ago Europe inflation come up..

Excuse me, there is someone who is not muting, so there is noise on the line. Operator can you help that?

Okay. The noise is coming from the participants. Just give me a minute.

I think if you are asking about the depository hierarchy in the resolution. I think the very short answer is that for all retail customers, their deposits went up to NOK 2 million is guaranteed. So it's a higher amount than what you would see from most European banks. And beyond that, it's a traditional creditor hierarchy.

I think we have answered the question. Operator, are there any further questions?

Currently, there is no questions on the line. I'd like to turn the conference back to you for any closing or additional remarks. Thank you.

Thank you very much, and thank you for participating and for all your valuable questions. We will wish you all a nice day. Thank you very much.

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