DNB Bank ASA (DNB) Earnings Call Transcript & Summary

Hello, and welcome to the DNB Q2 Conference Call. My name is Valeria, and I'll 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, Mr. Rune Helland, to begin today's conference. Thank you.

Thank you so much. Hello, everyone, and welcome to DNB's Second Quarter Analyst Call. Around the table here in Oslo, we are gathered, most of the Executive Team, including Kjerstin, Ida, Ingjerd and Harald. And they are ready to answer your questions. Ida will start by giving the highlights from the quarter and then we will open up for question. Ida?

Yes. Thank you all for dialing in. I thought I'll start with a bit of the macro update. The Norwegian economy continues to show resilience and has continued to grow during the quarter, however, at a somewhat lower pace than previously. We expect growth to come in at around 1.2% for the year and driven by, amongst others, a healthy activity level in several industries across the geography. Inflation continues to surprise on the upside and came in at 7%. The core inflation came in at 7% in June, and the Central Bank has hiked interest rates on 2 occasions by 25 basis points in May and 50 basis points in June. The key policy rate is now at 3.75%, and the latest forecast from the Norwegian Central Bank estimates a peak at 4.25% towards the end of this year to remain at that level until end of 2024 and then slowly start to come down, but more to the levels around 3%. Inflation is expected to peak this year and then subsequently come down as we move towards the second part of the next year. If you look at the Norwegian households, they continue to show resilience. They are, on average, robust and have a good financial help. Unemployment levels remains at very low levels, 1.8%. And employment and the ability to service debt remains key in a country where a record number of employees own their own home and wages are primarily floating. We are also seeing that real wage inflation is expected to return to positive growth in 2024. Now turning to the second quarter results of the bank. We continue to show a strong performance across the board, across segments, as well as product areas and also show a solid asset quality. The profit for the period was NOK 9.5 billion, return on equity at 15.6% for the quarter, showing a solid result across customer segments. NII, net interest income is up 4.3%, well in line with what we've given in terms of expectations on NII effect from the repricing we've seen so far, up 32.2% from the second quarter 2022. This is primarily driven by profitable lending growth in all segments, as well as successful repricing, higher deposit volumes in personal customers and overall higher interest rates. Net commission and fees continues to deliver strong results also in this quarter, up 10.2% from the second quarter 2022. This is an all-time high second quarter with strong deliveries across product areas and showing a robust and well-diversified fee platform. Impairment provision is NOK 871 million. 75% or NOK 653 million is related to a legacy foreign currency portfolio in runoff. That impairment is stemming from the fact that the EU Court of Justice came with a judgment in June related to one bank foreign currency portfolio in Poland, which led us to set aside reserves for the increased legal risk associated with the legacy portfolio stemming from before 2012. In addition to that, there are some impairment provisions in corporate customers totaling NOK 215 million. That is related to a few customer-specific situations that were partly offset by reversal of impairment provisions in the offshore sector. The portfolio in corporate customer remains robust, and we don't see structural changes such as extraordinary drawings on available liquidity facilities or overdue payments. On the personal customer portfolio, the portfolio remains strong and robust also where we're seeing now. And our customers continue to be in dialogue with us, but then mainly seeking advice on how to manage increased costs and interest rates. Core Tier 1 capital ratio is 18.9%, 180 basis points above the regulatory expectations and leverage ratio at 6.6%. I think I'm set.

Thank you very much, and then we will open up for questions.

[Operator Instructions] Our first question is from Namita Samtani from Barclays.

My first question is just on net interest income. So as the Norges Bank keeps increasing interest rates, how does DNB's rate sensitivity stay at 25 bps equal to NOK 1.1 billion? I'm just slightly surprised DNB can keep the sensitivity as rates keep going back -- keep going up. So is DNB holding back on things to deposit holders or how are you able to uphold the sensitivity? And can you just confirm the rate sensitivity for the May hike is 25 bps is NOK 1.1 billion and then through June for the 50 bps, it's NOK 2.2 billion? And then secondly, just some questions on the asset management side and related to Page 66 of the Fact Book. Firstly, the retail commission margin used to be around 57 basis points to 58 basis points in 2022. And so far this year in '23, it's 50 basis points to 51 basis points. So why has the margin declined so much? And secondly, on the institutional side, the commission margin remained flat at around 14 bps quarter-on-quarter, and there have been outflows yet income from this product line has increased quarter-on-quarter.

Should I start with the NII sensitivity? It's important for me to emphasize that we are not giving any guidance on future repricings or interest rate changes. But what we commented on in the presentation was the effect, the annual effect on NIIs that we expect when it comes to the latest 2 repricings that we have announced. But in all in all, it's 3x 25 basis points. And for that, we've said that per 25 basis points, we assessed that we will have an annual NII effect of NOK 1.1 billion, in line with the latest repricing that we saw late last quarter. When it comes to sensitivities overall, I think it's important to point to, first of all, that we're seeing a continued profitable growth in personal customers as well as in corporate banking also in this quarter. In addition to that, it's important to point to the competition and the competitor's behavior. We see that our competitors behave rational. And we're also seeing that, that continues in the quarter. Even though there's definitely a fierce and strong competition in the market, we are also seeing a rational behavior and focus on profitability above growth, as well as their loyalty to return on equity targets. And as to your question on asset management and the margin for the various segments, let me just firstly start by saying that we have an attractive growth in assets under management in total for the period with a 13.5% growth, stemming from both net positive flows and increasing market valuations. So, that is positive for the revenue in total. As for the retail segment, which is a segment that we prioritize and where we see recurring increases on a monthly basis stemming from both the defined contribution pension schemes as well as our discretionary agreements on the savings side. The change that you see in the margin from the fourth quarter to the first quarter is related to a change in pricing structure, where we have introduced a platform fee for our customers and slightly reduced margin for the product. So the revenue to DNB as a whole is intact, but there is an increased revenue in personal banking and a reduced revenue for asset management. The slight reduction of 1 bps from the first to second quarter must be seen in context of the trend from actively managed fund towards retail fund, and this is something that we have commented upon over time. But it has a very small and gradual effect, and it seems to be leveling off. Margins on institutional volumes, less attractive, as you're saying, 14 basis points. We did see some outflow in the quarter, but that has a lesser effect to the revenue in total. So all in all, increased revenue from the fact that assets under management are growing with positive net inflows and increased valuations and margins are overall, I would actually qualify them most stable.

We have another question from Sofie Peterzens from JPMorgan.

Yes. Here is Sofie from J.P. Morgan. So, I'm just going back to the legacy provisions for DNB Bank Polska. You have NOK 4.8 billion of these FX [ earned ] on NOK 944 million of provisions, which is around 20% coverage. The other Polish banks or European banks with Polish operations are all guiding to reach at least 80% to 100% coverage on the FX mortgages in Poland. Could you just give details why you think kind of 20% coverage is the right level for DNB and kind of what court cases you have already had? And maybe also if you could give what the peak loan book for Poland was in the past? So that would be my first question. And then the second question would be that inflation was a little bit higher in June at 7%. How should we think about the cost outlook? Are you kind of reiterating your previous cost guidance? Or how should we think about the salary increases to come? Is there a kind of risk that salaries coming in higher than expected next year? And then the final question would be, could you just give the date when you did the re-submission for the 1.5% share buyback program? That's all for me.

Okay. Thank you for very good questions, Sofie. If I start with the DNB legacy portfolio that is in runoff and has been in runoff for a very long time, actually from 2012. It now amounts to NOK 5.8 billion in total, and NOK 4.8 billion of that is related to currency loans. The currency loans is in all -- the absolute majority of that is euros and not is Swiss francs as is the case for some other banks operating in Poland, which I understand also has a larger effect on impairment levels. I can't naturally not comment upon other banks' assessments, and I haven't heard the numbers that you're pointing to. I know that the Polish FSA has done a stress test that indicates the impairment levels of up to 80% to 90%. Having said that, both they and the other external consultants as well as auditors have been clear in saying that they see that as highly unlikely to be the outcome. The assessment that we've done is our best estimate as of today, both based on our composition or our portfolio, the historical development in that portfolio in addition to the fact that it's predominantly euro loans. We are also -- if you look at the number of customers that are seeking contact with us because that's really what's important here as well, we aren't seeing an increase or a massive inflow of request or dialogue with -- increased dialogue with customers. So this is, in our view, the best estimate assessment based on the knowledge we have today. And we would also say that it's fairly conservative, bearing in mind what we're seeing today. And as you rightly point to, we have already previously taken some reserves based on this portfolio. But now due to the new judgment coming from the EU Court of Justice, we deemed it necessary to increase those impairment debts. On inflation, then Kjerstin, if you want to point on that?

On inflation, we haven't still given any cost guidance. So that's important for me to just reemphasize. We are focusing on the cost/income ratio below 40%. And bearing in mind where we are today on the income side, that could perhaps not be seen as being less ambitious. But I need to emphasize that we are continuously focusing on our cost base and are always, as you know, also actively looking at efficiencies, automation and where we can decrease costs. And that's also why we highlighted that on the Capital Markets Day. When it comes to cost or wage inflation, the wage inflation is still expected to be around 5.5% in Norway this year and 4.7% next year. We haven't changed the assessment based on that. And if you look at the negotiations with the trade unions, actually, the number they're talking about is more in line of 5.2%. So, we've actually have an assessment higher than that from our macroeconomists and therefore, also in our assessment. We continue to work on the number of FTEs as well as costs overall, and we'll naturally continue to do that. But apart from that, I don't have any more comments or cost guidance. As to the date, I don't think that we are -- I mean, that was a couple of weeks ago. It's more than a couple of weeks ago. So, I don't think we comment on the specific date. I mean, this is a process that the FSA manages. I think that's the most important comment. Yes.

[Operator Instructions] Our next question is from Ulrik Zurcher from Nordea.

I was also wondering, what was -- why did you lower the buyback amount, even if you had to subtract the whole 2.5%? Because you should have more than enough headroom to be far above the requirement even with a full subtraction. And also, given that you are very overcapitalized, you have very good earnings, if the buyback applications should like drag out in time, unless if, would you consider a special dividend at year-end instead? And lastly, I was -- it's a bit technical, but I was just wondering if you had some sort of sensitivity you could share with us on, let's say, house prices fall with 10% and commercial real estate prices falls 20%. Like what is your risk-weighted asset sensitivity to such a scenario?

I think the comments we made on why we lowered the amount is, we would agree with you, we are very comfortable in our headroom on the capital situation, but we view the share buyback as a flexible tool. And in order to maintain that flexibility, the intention is to split up in somewhat smaller portions in view of the subtraction from capital. As to what we would or would not do, if we do not receive the approval, I think it's too soon to say. The important thing is that we are very committed to delivering on our dividend policy and our commitment to pay out excess capital to shareholders over time, and we're comfortable that we will have the ability to do so. In terms of sensitivity, I think that's a difficult one. Ida?

Yes. I think what's most important for us to point to, we aren't -- first of all, I should start by saying that we aren't providing any sensitivities. And the main reason for that is that housing prices, as well as valuation of real estate properties is not the main driver for the risk-weighted asset changes in the portfolio. It's actually underlying credit quality of the portfolio. And therefore, I would say, point to unemployment as being one important area to look at in addition to when it comes to commercial real estate is, of course, the vacancy rates and rental prices, as well as the underlying cash flow development in those companies. We predominantly -- or we have a very strict credit policy, whereby we focus on corporate lending to commercial real estate and have a very, very limited exposure to special purpose vehicles with financial owners that are more sensitive to these kinds of fluctuations. For us, cash flow, strong owners and corporate lending are the main focus areas and also has the main impact on impairment levels in commercial real estate.