DNB Bank ASA (DNB) Earnings Call Transcript & Summary

Good day, and welcome to today's DNB conference call. [Operator Instructions] And now I'd like to hand the call over to Rune Helland. Please go ahead.

Hello, everyone, and welcome to DNB's investor call covering today's exciting announcement. In the panel here in Oslo, we have our CEO and CFO, Kjerstin Braathen; and Ida Lerner. And from Stockholm, we are very happy to have the CEO of Carnegie, Tony Elofsson; and head of DNB market, Alex Opstad. Before we open up for Q&A, I'll give the word -- or Ida will give a short introduction to the transaction. But first of all, I'd like to give the word to Kjerstin Braathen.

Yes. Hello, and good morning, everyone. Just a brief introductory comments from my side, echoing Rune about our excitement today about the news we've launched this morning. Our view is that this deal is centered at the heart of the consistent strategy that we've been talking to you about for a year. Indeed, it strengthens our platform for investment banking and asset management and wealth management. It strengthens our fee and commission base, and it also strengthened substantially our position across the Nordics. Increasingly, we have been excited jointly, I would say, Carnegie and DNB about the degree of complementarity of our two business ventures that we are now looking forward to join together. And with that, I will hand it over to Ida to take you to some more of the details.

Thank you, and thank you to all of you that are taking time to listen in and participate in this call. Today, we announced that we have entered into an agreement to acquire 100% of the shares in Carnegie. The transaction is subject to approval from the authorities in the applicable jurisdiction and is expected to close during the first half of 2025. Carnegie is, as you all know, a well-known and recognized leading investment bank and asset manager in the Nordics, deriving 56% of its revenue from index and banking services and approximately 44% from wealth management. The revenue mix in which the wealth management business, which is more of a recurring income mix have been increasing in share into total revenue over recent years. Geographically, Carnegie has a strong position in all Nordic countries. The largest part of its revenues are derived from Sweden which accounts for approximately 64%, followed by Norway at 14%, Denmark at 12% and the remainder representing approximately 11%. 2024 has shown an uptick in revenues in Carnegie with a net income of SEK 535 million and a return on equity of 18% for the first 9 months ending 30th of September 2024. Looking ahead, Carnegie is expected to generate a net income in excess of SEK 1 billion in 2025. This is expected to be achieved through the full year effect from certain parts of the recently acquired businesses, which have not been fully accounted for in the first 9 months results year-to-date. Lower cost levels ahead in light of some extraordinary costs that were taken into 2 previous years related to IT as well as corporate finance and increased revenues from a strong and increasing recurring revenue stemming from wealth management as well as continued recovery in transaction and capital market activity. Through this acquisition, we are accelerating our Nordic ambition within investment banking, securities, wealth management and large corporates. In addition, we further increased the bank share of commission and fees and provided the unique position for further growth within high-margin products and services in the Nordics. Our analysis and dialogue leading up to the announcement of this transaction has shown that the two businesses are highly complementary, as Kjerstin pointed to both when it comes to product mixes geographical strength as well as sector expertise in addition to a strong cultural match. The purchase price is expected to be approximately SEK 12 billion. payable as cash consideration, subject to certain adjustments and assuming a normalized for Tier 1 capital ratio level in Carnegie at closing. Any excess capital will be normalized or adjusted for in the final purchase price. The [indiscernible] transaction is expected to be accretive to DNB's earnings per share and return on equity and generate a return on investment capital -- invested capital in excess of 15% on a fully integrated basis. The synergies in this transaction are predominantly related to further income opportunities through the improved product offering to our existing customers and opportunity to use our combined advisory competence even broader through geographies and sectors. There are naturally also some cost synergies, but these are not the main driver for the case as such. The overall risk portfolio and risk appetite of DNB will not change as a consequence of this transaction. And the transaction will further support the DNB's dividend policy and while reducing the core Tier 1 capital ratio by 120 basis points when being placed, this will not negatively impact our dividend policy in the short term. As mentioned initially, the transaction is subject to approval from authorities in the applicable jurisdictions and is expected to close during the first half of 2025. Until then, the businesses will be continuing to operate on a separate basis and maintain focus on business as normal. Summing up, Carnegie is a perfect fit in line with our strategy and the transaction marks a step change in increasing the share of fee-related income for DNB as a whole. Thank you. And now we open up for questions.

[Operator Instructions] Our first question comes from Shrey Srivastava from Citi.

I have two today. The first is what do you expect the integration costs to be for this acquisition? And what would the saving of these costs be? And secondly, on buybacks, what do you see as a sustainable level of buybacks now post this acquisition in 2025 and onwards relative to '24? And is the size and shape of your Nordic business now appropriately? Or could we look forward to sort of more bolt-on M&A going forward, strengthen your position outside the way?

Thank you. I believe that was three. I'll do the last one, and I'll hand the first two over to Ida. As for the size and shape of our Nordic business, this is certainly a substantial step change in strengthening our position, but we're also very focused on the value of that platform to grow further. There is a substantial potential that also derives in further developing our large corporate business, alongside now the investment banking and wealth management business, as well as the positions through Denmark and Finland. So we still see an attractive opportunity to grow and primarily talking about the organic opportunities that will be accelerated through the strength of this platform. With regards to our overall strategy and M&A and bolt-ons, I would say we're still consistent, primarily, we are about organic growth, but we will at times, consider bolt-ons are strategically valuable or at the scale to a business we already have. And today's transaction is an example of that, but primarily so for substantial increase strategic value.

Yes. Thank you. And when it comes to integration costs, we haven't specified either the synergies or the transaction costs. But again, I would like to say that comparing this to other acquisitions, there are less integration costs stemming from technological integration and so forth in this type of transaction than what it is in other types of transactions. So again, I would just point to the fact that this is primarily driven by income synergies and the potential that we see there and also transaction wise, there is lower integration costs than what you would see in other types of transactions. Our dividend policy stands. And we've been clear on saying that we will continue to focus on a nominal increased cash dividend year-on-year, and then we will continue using buybacks with the flexibility tool. And that is something that we will continue looking at as well. We are generating capital from a profitable business, and we are also seeing that bringing Carnegie together with DNB will further boost this also, going forward.

Our next question comes from Sofie Peterzens from JPMorgan.

Yes. Here Sofie from JPMorgan. So my first question would be around staff retention, staff is very important for Carnegie's business. How do you kind of ensure that you're going to retain key staff that we're not going to see any meaningful kind of meaningful departures in Carnegie? How do you plan to kind of merge the compensation structure and culture between Carnegie and DNB? And how should we overall, think about the kind of compensation? And maybe if you could also talk a little bit more in detail around the revenue synergies, because what I think is Carnegie's annual reports for the past 5 years, it seems that apart from 2021 when fees were exceptionally high in Sweden, Carnegie has really just generated around $0.5 billion of net profits, excluding any asset sales. How should we kind of think about that additional 500 million in net profits where will these come from, which products, which markets? So if you could give a little bit additional details.

Thank you, Sofie, for good questions. I'll briefly comment overarchingly on the first one and then ask Alex and Tony from Stockholm to comment on it and Ida will do the second one. And I'll just start by saying very generally that retention and culture has been top of mind all along, ever since we started the dialogue as it's the key element of this transaction and go through what we have uncovered and also the plans we have put in place, we feel that this is a risk that is contained and we feel comfortable with the platform we are moving forward on. But Alex and Tony, please chip in.

Thank you, Kjerstin. So this is, of course, the key question. integration risk and retention risk, and this has really matured for us over a 12- to 18-month period. But I'll start by saying that as part of the agreement, certain shareholders have commitments that is one sort of technical answer. But then the main answer is that, from our experience, what creates retention in this industry is about being the most competitive player with sort of the highest deal flow and then being the best place to work. And we think we are really creating a very competitive Nordic offering by combining our two firms. And as such, the process has been to look at our complementarity. And I can get into that, but that in itself is creating retention. Maybe you want to comment as well, Tony, on culture?

I just want to, first of all, agree with everything, Alex and Ida said. And it's been quite a long process leading up to this, where we have discovered clear similarities in key culture and to the point where we are extremely excited about this opportunity, and we remain very motivated to make this work, and we see a lot of revenue synergies over time between us. The complementarity is just fantastic. And I think my staff is truly excited about this.

And if I can add, Sofie, just to make a point of the fact that DNB Markets is sort of an independent business area within DNB. I think I made the point that our last CMD in 2022 that our culture, in my mind, is somewhere between an international investment bank and a boutique. So this is very much a business that we are already in. And we believe we have good credibility in that area from the business that we've already built. So this is a very natural expansion and we are very excited about the growth opportunities that the two combined firms will have ahead of them. not least related to rolling out our broad product portfolio to our combined set of clients.

If I answer the second question of revenue synergies, I think the first thing to look at is you are right in saying that 2022 and 2023 were lower markets also shown in Carnegie, which is also natural bearing in mind that they historically had more income stemming from equity capital markets, for instance, which has further lower activity both years. But looking at this year and year-to-date and rolling 12 months as well. Year-to-date, they have a net income of SEK 535 million. If you annualize that, you're up to around SEK 700 million. In addition to that, they've grown quite significantly and impressively, I would say, in Wealth Management, a bit of a more recurring income stream both organically from a strong platform and strong growth that they've seen in both Asset Management, but also private banking, but also recently through some add-on acquisitions on the asset management side, where we haven't seen the full effect in the year-to-date numbers. So those are important to keep in mind as well. In addition to that, it's the third element, which is more a normalization of the capital markets activity. I mean we all know that we're still not at the more normalized levels that we have seen before and looking at an average of the 10 years we're still significantly below that when looking at the activity in the capital markets. And this is, of course, an element that we do bring in here as well. And then on top of that, we have the income synergies just stemming from the fact that we have a broader product platform to offer our customers we have more customers to offer a more advisory service too that will, we believe, will also boost income further going forward. But it's important to say that we've been quite conservative in our assessment also of the income generation going forward compared to what we -- what the business case from the standard side has been.

Okay. And maybe just -- sorry, a quick follow-up on in terms of the staff retention. Do you have any kind of bonuses guaranteed for kind of the years to go on for key staff?

Alex?

I think that we will not comment beyond the shareholder commitments that we've already have in marketplace. And we are used to there being a very competitive market for all our talents. So we're very comfortable in how we're going to address this going forward.

We will now move to our next question from Jan Erik Gjerland from ABG.

First one, back to the incentives, et cetera. So how many people have you tied up in the new sort of organization versus the level of Carnegie employees and level of your own employees in the same units? If you can start with that?

I think I'll just echo what Alex then just said, Jan Erik, that there are some shareholders that have commitments beyond that, we are not commenting specifically on retention structures. But we are jointly in our excitement of the opportunities ahead and see the excitement across both organizations in terms of what this can create in the future. And bear in mind that we're talking revenue synergies and increased opportunities that we are very, very much common in terms of how we evaluate further. So we believe this will be a very attractive place to be.

Okay. If I understand the transaction correctly, you will sort of integrate DNB to get to Carnegie on the market side. And so Norway will we sort of stay at all DNB markets and you integrate the Carnegie to in the DNB markets. But in Sweden, it looks like they keep on continuing on their own, but under your name with DNB, Carnegie has a name, but with separate units as such. How could we be certain that you are keeping your hands off the good work you're doing in Carnegie versus keeping your hands on and destroy value here. So how are your incentives when it comes up to how many millions they will earn down the road versus how successful this could be? That is the question then.

That was for me. Jan Erik, I'm happy to answer. First of all, I respect that I've had 12 to 18 months thinking about this, and it's a lot to take in this morning. If I did hear you correctly, the -- so what we are planning to do in this integration is to have DNB Carnegie as the global brand name for our Investment Banking and Capital Markets operation. And that is to signal how important this is to DNB to retain a very strong brand name in Sweden and to signal that what's important to us is for these two organizations to combine into one. Going back to retention. The daughter company currently named Carnegie Investment Bank AB will remain in this structure going forward. We will transfer our equities, fixed income sales, credit research and investment banking operations in Sweden into that unit, and we will also do so in Denmark and Finland, but that's a combined three people. And that unit legally will be operated by the current CEO, Tony Elofsson. So that's also a retention strategy in itself that Carnegie will continue to operate the majority of their business as they do today. and I will become Chairman of the Board for what will be renamed DNB Carnegie Investment Bank AB. And then I'm not sure if I agree on the premise that we are superior in Norway in the sense that we can't -- that the additional Carnegie won't make us stronger. And similarly, I believe that we will make Carnegie in Sweden stronger by the addition of our people. And we think about this really across three axis. One is the geographical one, which is obvious. A second one is across product, which I guess also is obvious. I believe we've built credibility over the past in 15 years that we can offer a very broad range of products to our clients. And Lastly, it's also a point we'd like to make on the sector complementarity. So as you're intimately familiar with, DNB has their DNA in sort of asset-heavy sectors, where typical debt financing is important. And Carnegie, you could say, have their DNA in somewhat more asset-light sectors being TMT, health care, business services and so forth. So we also believe that we're very complementary on that topic. I hope that helped partly at least answer your question, Erik.

Absolutely. I have one final one on the asset management units, which seems to have SEK 436 billion under assets. If my investigation on the website is correct, it seems like the i.e., Real Asset Management in the Asset Management division is some SEK 150 billion at 6 months. So I don't know the 9-month number, and then SEK 264 billion in private banking asset management units. Could you shed some light into what is the difference between the Private Banking asset management in things and what's inside the asset management? Is it more than the funds in the asset management and then in the private banking, it's more assets you hold for the clients? And how is sort of the income stream coming from those assets, please, if you can shed some light to that?

I think, Jan Erik, we will have to come back to a lot of the more detailed questions later on. But I think the most important element is that I also pointed to that there are some recently made acquisitions that you aren't seeing in the numbers as of yet. Didner & Gerge is one of them. And that's also one of the reasons why you don't see the numbers being added up.

Agree. But the SEK 500 million extra that you pointed to Sofie about, could you shed more light into the latter of that? Because it seems like a big number from G&G, so to speak.

I don't think I've said anything in relation to asset management on that. I said that if you add all everything that we're talking about in terms of income synergies and revenue synergies going forward, I pointed to three areas. First of all, the annualization of the SEK 500 million year-to-date, which gives you a SEK 700 million approximately wealth management that has grown organically very strongly over time based on the private banking side but also on the asset management side. In addition to add-on acquisitions such as Didner & Gerge that has been made recently, Erik Penser Bank is another one that has been adding further income that you aren't seeing with the full effect of the year-to-date numbers. Then in addition to that, the normalization of the capital markets activities, which we expect will come in the years to come. And in 2025, starting to pick up already from what we've seen in 2024. I hope that answered your questions.

Our next question comes from Thomas Svendsen from SEB.

Yes. So first question on this SEK 1 billion sort of pro forma adjusted normalized net profit. So could you say how much of this profit stems from investment banking services and how much is from Wealth Management approximately?

I think we will just say that we will -- we have a Capital Markets Day on the 19th of November. We will provide more details and information on that. I can just say that Alex will be on stage then as well as Hakon Hansen in relation to wealth management. So we will provide you with more details going forward of all different aspects, but I'm not sure I'll give you as many details as you would like to. But I think it's just important to say that we are looking at more of a recurring income stream going forward as well. And so that's important when you're looking at year-to-date numbers and compare that to the numbers Carnegie had in previous years, there is a larger portion of the income stemming from more recurring business than what has been the case historically. And that's also something that we've been looking at in this case year-to-date, but also when assessing the opportunities in 2025 of amounting to SEK 1 billion.

Okay. And the second question from my side is on share buybacks. So will you continue with the plan, your initial plan from before you decided to do this deal? Or will you move slower just to sort of prepare for the closing of this, I guess, in second quarter next year?

I think Ida pointed out that our dividend policy remains consistent, and we have not announced a plan for share buybacks. Our primary target and goal is to pay out more than 50% increasing payment per share per year. And then we use share buybacks as a flexible tool and you have seen us doing that year-over-year in a consistent way to endeavor to optimize around the desired capital position. This is clearly still extremely important for us to deliver to our shareholders, but also to optimize the return on equity in the business. So there's no change in relation to our thinking around share buybacks.

We will now go to our next question from Patrik Nilsson from Goldman Sachs.

I appreciate you've been touching on this subject a bit already, but I was just wondering in terms of moving from that above SEK 1 billion net income number to the excess of 15% return on invested capital. Could you just elaborate a bit how much of that comes from pure revenue synergies? How much of that is from higher capital markets and banking activity? And what's your assumption there compared to sort of the long run average on the activity? And what's the other sources that helps you move from that SEK 1 billion to that 15% return on invested capital?

Well, I think, first of all, it's important to say the SEK 1 billion is our assessment of the 2025 earnings, and that's also where you see the multiple of 12 times. So that's really just kind of to start there. And then I think we said that we won't go into details in terms of the split. But I think again, just emphasizing that we've done a very bottom-up analysis of the potential going forward in the business case. We've been thoroughly looking through what we believe are the more recurring part of the business and what is more related to underlying capital markets activity and are trying to be as conservative but realistic as we possibly can. And the 15 plus relates to return on investments fully integrated and then to reiterate on Alex's points in terms of extracting and reaping benefits from our complementarity, both on geography products and industries, we see tremendous opportunity to deliver better to our existing client base and to a growing client base, and we will revisit this on later occasions to give you more flavor.

Okay. And just in addition to that, will you have any sort of upper limit in terms of how much of your RWAs that you will allocate to the Investment Banking division? Or is that still pending?

We do not allocate RWA to investment banking. We have a broad corporate banking venture and a broad investment banking measure, which is now strengthened and it's too cooperating between these two entities that we've been quite successful at generating value and grow across the DNB brand. Now we hope to expand on that model and believe that we will be able to expand on that model into that's fair that Carnegie has also been working on, but it doesn't work in the way that we're allocating the balance sheet. We will still focus on having a balanced activity across retail, SMEs and large corporates. But I think we've also shown how we are able to accelerate the turnover of the balance sheet allocated to large corporates through our originate and distribute model and find that these capabilities will also be just further strengthened with this transaction.

We Will now take our next question from Riccardo Rovere from Mediobanca.

I have a couple, if I may. First of all, it is quite a while that you're trying to expand the fee income side of your revenues have been investing in investment banking. We have seen investment banking fees going up quite significantly over the past few years. Now that you're buying Carnegie, are you happy with the rebalancing between fee income and NII? Or do you think you will have to rely even more on fee income than how the bank will appear after the completion of the deal? And the reason why you are buying Carnegie has it got to do with the fact that from a purely organically you expanded up to a certain point where you could not really remit rebalance again with the incomes versus the NII just organically. The second question I have is -- sorry to get back again on capital. Now you start from 19 take out 120, you land at 17.8 on a pro forma basis, more or less. Capital requirement is 16.9. You want to buffer on top of that, if I'm not mistaken, you have never really said what the buffer is. But clearly, you are in the day one with the transaction or pro forma basis, you are still 100 basis points above what your requirement is. So Carnegie solved the part of the problem, but does not solve the whole problem. Now with the share price at 1.5x tangible equity is, again, should we think about cash EPS as the main tool and buybacks being left without a receivable role at 1.5x the tangible assets. It is -- the problem still there at 17.8.