DNB Bank ASA (DNB) Earnings Call Transcript & Summary

Hello, and welcome to the DNB '23 Conference Call. My name is Caroline, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand over the call to your host, Rune Helland, to begin today's call thank you.

Thank you very much, and a very welcome to all of you to DNB's third quarter analyst call. Here in Oslo, around the table, we are gathered with, of course, Kjerstin and Ida; Ingjerd Blekeli Spiten, Head of the Personal Customer; and Harald Serck-Hanssen, Head of Corporate Banking; Alexander Opstad, Head of Markets; and Sverre Krog, Head of Risk. Ida will start by giving you the highlights for the quarter before we open up for questions. So please, Ida?

Thank you, Rune, and thanks for everyone dialing. I thought I'll start with a bit of a macro update. That's also something that is on everyone's agenda, including ours. The Norwegian economy has continued to show resilience to higher inflation and rates. But we are now seeing signs that indicate that the monetary policy is having effect with the latest inflation numbers coming in lower than anticipated by the Norwegian Central Bank. Headline inflation was down by 1.5 percentage points from August and came in at 3.3% year-on-year. Core inflation was also down from 6.3% to 5.7% in September. Household construction fell by 0.2% in August and is expected to decline by 0.6% in 2023, driven by weaker purchasing power. Unemployment remains low at 1.9%. And even though it is expected to increase somewhat, it is still expected to remain at historically low levels at around 2.4%. Wage growth is expected to be around 5.5% in 2023 and 5.2% in 2024, with real wages started to increase again in 2024. House prices is holding up well with only a small drop of 0.2% in September. House prices have year-to-date increased by 3.7%. Following these latest news from the Norwegian Central Bank -- news, the Norwegian Central Bank has hiked the key policy rate twice during the quarter and has also ended now at 4.25% and has also indicated that they look to increase the key policy rate in December by another 25 basis points landing at a peak at 4.5% and then expect it to remain at that level until end of 2024 and then to gradually come down towards 3.25%. If we look at the results delivered from DNB today for the quarter, return on equity comes in at 16.3%, driven by strong performance across customer segments as well as product areas. Net interest income is up 3.2%, driven by repricing effects. We are also seeing a strong development in the underlying portfolio. Loan growth was down by [ 0.3% ] in the quarter, a tapering credit demand from the personal customers driven by a slower housing market, increased amortization and less refinancing as is also natural given the situation we are in today. Corporate customer had a lower activity coming after the summer months, but picked up towards the end of the quarter, and we see a good pipeline moving into the fourth quarter. The profits were stable during the quarter with a seasonal decrease in the personal customers and an increase in corporate banking. Even though we are not giving a nominal guidance on the 2 latest repricings that will be implemented or will they have an effect in the end of October and end of November, respectively, we can confirm that they are expected to have a significant positive tailwind and annual effect on NII also going forward. Net commission and fees came in high this quarter. It was a record high third quarter, up 10.5% from the corresponding quarter last year. It's driven by strong deliveries across product areas, and we see that we benefit from the robust and well-diversified fee platform. Impairment provision came in at NOK 937 million this quarter primarily driven by customer-specific events in corporate customers with corporate customers that we've followed very closely for some time and has been on our radar. There is a modest uptick in request for installment holidays and early past due payments in personal customers, but they still are at historically low levels, even though they are increasing today. We, however, remain very comfortable with the portfolio, both in personal customers that remains very solid, but also in corporate customers where we don't see a structural change or negative development and also see good diversification. Earnings per share was up 7.8% from the second quarter 2023 and 31.2% from the corresponding quarter last year. Core Tier 1 capital ratio comes in at 18.3%. This is 110 basis points above the long-term expectation. I thought I'll just give a bit of brief in terms of what we're seeing this quarter as there are several moving parts. First of all, we see a deduction of the finalized share buyback program that we finalized yesterday of up 1.5% of total outstanding shares that reduces the core Tier 1 capital ratio by 50 basis points. In addition to that, the core Tier 1 capital ratio is reduced by the new share buyback program that we are announcing and initiating today of another 1% for 30 basis points in the core Tier 1 capital ratio. In addition to that, there is a new accounting standard and accounting practice. That means that we are not changing the way that we are taking the retained profits into account when withdrawing the -- when adding the profits to the core Tier 1 capital ratio. That means that we previously have retained profit of 50%. And we are now instead looking at or appropriately on the last 3 years -- average last 3 years. That is then the adjustments that you will see. First of all, the first 2 quarters where we previously did a 50% deduction. Now you will see an added effect from this quarter of 30 basis points. We will, however, just want to point to that this is a pure accounting practice. This does not change our dividend policy. And you would also then see that this is in the fourth quarter results once the Board has decided on what cash dividend they are proposing to the annual general assembly, you will then see a finalized situation relating to the actual cash dividend.

Thank you, Ida. We will open up for questions. Please?

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

So I have 2 questions. The first question would be on the net interest income guidance going forward. I understand that you didn't want to give any more nominal NII guidance. But could you maybe just focus through what the different moving parts are and what the uncertainties are? And how you see kind of the deposit beta? How much repricing you're doing on the funding side? And also how much you're able to pass on the asset side, just to kind of help us forecast this number a little bit better going forward? And then my second question would be around NOK 800 million or slightly more than NOK 800 million of stage 3 provisions in the corporate customer segment. If I look in your fact book, it says that it's linked to commercial real estate, residential properties and a little bit of fishing. Maybe just on the commercial real estate and residential property companies where you increased your stage 3 provision, could you maybe just let us know if these exposures are in Norway? Or are they outside of Norway? And maybe if you could just remind us how much commercial real estate exposure you have both inside and outside of Norway?

Thank you. I'll try to address the NII question as much as I can Sofie. But again, to reiterate, we have not provided nominal NII guidance previously either, but we tried to guide you on the nominal effect as to the repricings, everything else being equal. I would like to start by reiterating Ida's points about the 2 latter repricings that you have yet to see in our numbers, have substantial positive effects on our business. And as you know, they both impact the equity as well as the volumes across the bank. And there is some tapering effect, but there's still a substantial positive impact to the business. Now what are the moving bits and pieces and here it becomes difficult to be very specific. But obviously, the moving different pieces are growth in deposits and lending on both personal customers and the business side and also the product mix of such. We have talked slightly differently about the development that we see in personal customers versus corporate customers. On the lending side, we have expected for some time that credit demand from personal customer to become somewhat more muted. And I think this is what we see this quarter and also factor from customers deploying savings to prepay loans is playing into the growth number. And this is a development that is not unlikely to continue to put it that way. If you look at the deposit development in isolation, keep in mind that there is a seasonal effect also over summer. There was a negative development in the [indiscernible] to personal customers also last year, and fourth quarter is slightly different. On the corporate side, I'd say it's much more dependent on the magnitude of business that we are working on at the moment and to what extent that actually materializes. Slightly more muted demand on the SME side, but we're still in a position where we are taking market share, but the larger volumes would be in the large corporate side, where again, we confirm that there is substantial activity, but more uncertainty as to how the deals will close and what time the volumes may potentially be drawn. But I think the trend you've been seeing for quite some time in terms of NII will continue as we have not seen the full effect from the repricings and the market expects [ a last ] and final rate hike in December, but somewhat more tapered effect compared to what we have seen previously.

Sorry, just a quick follow-up on the net interest income. So I mean previously, we saw between NOK 1.1 billion and NOK 1.5 billion higher net interest income from a 25 basis point kind of improvement. Should we expect that maybe I realized you can't give or even give a nominal number, but maybe it's like very similar to what we saw in the past of around NOK 800 million? Or would you say that's still a little bit overly optimistic?

We haven't given a nominal number, Sofie. So we try our best to give the guidance we can. But part of the reason why we're not giving it is because there are some more movement in bits and pieces. So really, you would have to make your own assessment. I just reiterate that there is a clear tailwind and that we feel quite good about the business overall also in terms of activity and development going forward.

Yes. Okay. In terms of the impairment levels, as you say, there are -- as you can see from the fact that there are different areas where you see increased impairment. That is, however, also driven by the purely macro factors. As we've talked about previous quarters, we moved to a model-based stage 3 impairments in the smaller segments in the small and medium-sized enterprises. And that would also then -- if we change the macroeconomic, economical factors or a management overlay that means that you will also see that to some extent in phase 3 related to the smaller -- small and medium-sized enterprise company. If you look at the commercial real estate, in particular, this quarter, you see increased impairments in all 3 different stages. And that's also taking into account that we are seeing further uncertainties related to commercial real estate and also thought that, that would be prudent to look into in terms of potential further increases in impairments going forward. We have said, and we confirm, that we are -- 93% of our portfolio is in Norway in commercial real estate. We only have a very limited exposure in Sweden 5% in a very selective part of the commercial real estate business in Sweden. We remain committed to that proportion. And I don't think we have explicitly said, but we can say that the impairments taken in commercial real estate this quarter is related to Norwegian exposure. We have a conservative credit strategy and have had for quite some time in commercial real estate. We focus on cash flow, residual value and ownership. We have a high share of corporate financing and very limited exposure towards [ SPVs ] or financial owners.

We will take the next question from line Riccardo Rovere from Mediobanca.

Three, if I may. To get back 1 second to the fact that you don't want to provide us a nominal amount for NII repricing for the recent hikes. On Slide 27, presentation Q4 2020, [ Ottar ] was saying that historically, a 25 basis point change in key policy rate and subsequent repricing has impacted NII by approximately NOK 1 billion actually. Is today completely different from the history that [ Ottar ] was referring to 3 years ago. That's the first question. The second question I had is, if you have -- will you please tell us if you have an edge in place, where in case of rates had to go down? Or do you feel that this is an insurance that you don't need at the moment as rates are supposed to stay around 4% for a while according to what the Norges Bank says. The other question I have is, this quarter, we see NOK 900-something million provisions, and we also see trading at NOK 1.7 billion. So you have a lot of trading and, by magic, provisions go up by NOK 900 million. Now maybe I'm going too far. But is there a sort of relationship between the 2 things? You see that you have the room on the trading side to [indiscernible] some exposures here and there? And maybe the very last question, what is the logic of change in the calculation of core Tier 1 using a payout, average payout over the past few quarters instead of 50%, why changing it? What's the logic of doing it?

Thank you for your very good questions, as always, Riccardo. Taking us back to 2020 and the remarks made at that time, there are no huge changes to our business, nor the market that makes the reference point substantially different. I would refer to the increase that we have seen in our deposit to loan ratio. If you are referring to third quarter 2020, we were probably closer to the 60% profit to loan ratio rather than the 75% deposit to loan ratio that we are today. Beyond that, I wouldn't say that there are structural changes to the business or the market as such that changes that point of reference. As for your second question in terms of hedging of our deposit [ base ], we do not do any hedges to our deposit base. So there is no sort of edge or cliff points that makes a material shift in any way on the deposit pricing. Now on to the financials, please keep in mind that of the NOK 1.7 billion, there is a limited part of that, that is related to trading. There is quite a high component of what we would call quality earnings in that number because all of the customer-related revenue in [ FICC ] related to interest rate hedging, FX swaps and FX hedging as well as commodity derivatives are also in those numbers. There is also a meaningful contribution this quarter from a positive market-to-market effect on equity positions that we've taken in cases that we have restructured over time, and we have also realized some of those positions with additional gains, which plays into the overall quality of our credit work over time. That being said, there is also a larger component from trading, lesser so than the previous quarter, but a meaningful and higher contribution, where we see that we are able to benefit from a more volatile market. But keep in mind that we only do this related to Norwegian interest rates and currency. We do not have a very broad trading activity. Having said that, there is no link at all to the number NOK 937 million in terms of losses. Those are purely related to credit-related losses to specific customers and not related to the trading losses related to that trading activity. They would actually appear in the exact same line on the financials. So if that shows up as a negative contribution, you should read that as a poor performance and loss on that activity, and you will not find it elsewhere in the account. Why change and make, you might say life more difficult for those who are looking into our numbers on the core equity side. I don't think we are the right ones to answer. This is something that is desired and might be following guidelines from the point of view of the [ FSA ]. Again, we reiterate, it's purely technical. It will have no real life impact, and it will be sort of settled, if I may use that kind of a word, at the end of each year where our capital position is viewed against the actual dividend paid, just like it has been in previous years. But we appreciate that it makes life a bit more difficult for those of you who are following us and comparing with peers.

Kjerstin, if I may follow up just 1 second on the trading and credit losses. My question was the items at fair value, that line of the P&L this quarter was particularly strong. And I was wondering whether maybe this could have allowed you to make some [ mortgage ] thinking on the credit lines, given that you had this, I don't know, some hundreds of millions more than expected or than average or whatever. That was the sense of the question. My understanding...

Okay. I understand what you are thinking about. I must say that we have a very sort of stringent policy in terms of how we evaluate our risk positions and reserves, impairments that we take every quarter. And as Ida already alluded to, these are customer-specific situations primarily. There is very different model based, and I think it would be very hard for us to argue model-based reserves based on an active quarter in trading. But I think I understand what you were referring to. But trading is more based on volatility and general market sentiment. And again, I reiterate, close to NOK 800 million of that revenue is customer-related dependence on the activity. But I would also agree that there is a higher quality in the bulk of the NOK 1.7 billion compared to the contribution we saw last quarter in this area.

We will take the next question from line Ulrik Zürcher from Nordea.

Three questions from me. First one, is the FTE increase Q-on-Q, is that fully reflected in salary costs for the quarter or is it like timing effects that we should be aware of going into Q4, for example, that FTEs came in late in the quarter? Second, how should we think about the lending growth, the mix going forward? Is the best case like around flat for households and then we have to see the corporate demands? Or do you think we will get an uptick in household lending, for example. And three, the last time I checked, you hadn't actually posted on your website the changes for the mortgage back book on the back of the last rate hike. And I was just wondering if the customers have gotten up price hikes in their e-mails or whatever or if you haven't decided yet?

I'll just quickly do the latter. We have announced and informed customers of the price changes related to the most recent rate hikes, but it has not yet been implemented into our portfolio and thus not yet visible in our numbers, which it will be partially in the fourth quarter and then fully in the first quarter. And then I'll leave the 2 others to Ida.

And in terms of FTEs and salary costs. First of all, we have an increase in number of FTEs this quarter also due to the fact that we are, as we saw in the second quarter, shifting some of the short of what has been hired help before into full-time employees due to regulatory requirements from the Environmental Working Act that came into place, and we referred it to in the second quarter. So when it comes to overall costs, there is not such a significant increase in number of employees that I would say that, that would have a significant bearing in terms of the salary costs for the fourth quarter. So they come in throughout the quarter, but you have also then this quarter seen a negative or a reduction in costs associated with hired help as you should then also see in the fourth quarter. In addition to that, we have also converted, as we've talked about before, engineers in terms of external consultants into internal engineers that would then also reduce the costs associated with external consultants and add-on in terms of salary costs. In terms of the lending growth, and if you could just talk about what we're seeing today, as we commented on before, we are seeing a dampening effect in the personal customer segment, which is very natural as we are today. And that was also expected and anticipated given the macroeconomic development. In terms of the corporate customer side, as I pointed to, we saw an uptick in activity towards the end of the quarter and a positive development also going forward. We reiterate our long-term expectation or target of having a profitable loan growth between 3% to 4% on an annual basis through the cycle, and we still mean that, that would be possible given our platform particular in the industries that still have growth potential also in the macroeconomic development that we see today and also in terms of renewable financing and sustainability also going forward.

Okay. So just a follow-up on the operating costs. So your operating cost is sort of -- it reflects a normalized level. There is nothing...