DNB Bank ASA (DNB) Earnings Call Transcript & Summary

Hello, welcome to the DNB Q2 conference call. My name is George, and I'll be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I'd like to hand the call over to your host today, Mr. Rune Helland, Head of IR to be [indiscernible] this conference. Please go ahead, sir.

Thank you very much, and hello, everyone, and welcome to DNB's Second Quarter Analyst Call. And here also to answer all your questions, we have in addition to Kjerstin and Rasmus, we have Maria [indiscernible] from [indiscernible] Corporate Banking, Norway, [indiscernible], MCI, Alex; and [indiscernible] Before we open up for questions, Kjerstin will give you the highlights for the quarter.

Thank you, Rune, and thank you all for taking the time to be with us today. Just a few highlights on the quarter that we believe is a good quarter, demonstrating high activity across all of the business areas with also DNB Carnegie and Wealth Management as the strong drivers on the fee side. The backdrop of all of this is a very resilient and robust Norwegian economy that continues to demonstrate the same, even though there are still turbulences in the world economy and the Middle East around us. We continue to see a sound development, continue to expect the GDP growth in the mainland economy of 1.5% and continue to see low unemployment. As you probably already have noted, there was an increase in the key policy rate by the Sun Bank during the second quarter and expectations of one more, most likely in the third quarter of this year before the key policy rate again is expected to come down in the second half of 2027 to stabilize around the level of 4%. So resilience in the economy as previously indicated and a sound growth level driven by consumption as well as a high savings rate among the population. Coming into key specifics of our numbers this quarter, we delivered a return on equity of 14.6%, growth in both fee-related and interest-related activities are the drivers for the results. You may have noted that our net interest income is down by 1.1%. So the growth is offset by some elements of competition and product mix effects. To be more specific, if you look at the spread development, net of revenue related to interest on equity and treasury elements, it's a reduction of NOK 264 million, which is evenly spread among product mix effects as well as competitive pressure. It's also worth noting that the volume growth that comes primarily in corporate customers, Norway and LCI comes towards the end of the quarter. And as such, the average volumes are down or stable, I would say, in the quarter, whereas the end-of-quarter numbers shows a growth of 1.4% for the group as a whole. Net commission and fees up by 4.6%. Key drivers, Investment Banking where corporate finance growth by close to 20%. The other strong driver for growth is Asset Management that is up by 13% with a record [indiscernible] A very robust development of... [Technical Difficulty]

Ladies and gentlemen, this is the operator. We appear to be experienced temporary interruption to the conference. Could you please stay connected and we'll wait for speakers to read out. Please do stay connected, do not hang up. I believe the speakers have rejoined.

Yes. We can hear you now.

Okay. Could you please proceed the [indiscernible] drop about 3, 4 minutes ago?

So proceed, have they gotten the highlights?

It was the lady with speaking, sir, and it was before we went to Q&A.

We should just continue with the Q&A?

Well, if you want to pursue the highlights again or do you want to go to Q&A sir?

We're asking if the highlights were heard or not.

In part, you were speaking, then the line went silent.

Okay. Approximately at which point, would you be able to share that? So I don't do a repeat of the whole thing.

I would say you're safe about 3, 4 minutes into it?

We'll go directly to the Q&A. It's all available anyway.

Let's go just directly to the Q&A.

Our first question today is coming from Shrey Srivastava of Citi.

This point has come a bit earlier than I expected. My first question is on the competitive dynamic in the large corporate segment. I understand it's the margin decline this quarter is to do with the mix of the business and you are pursuing, but it's clear, not only from yourselves, but also from what your peers have said that, that environment is becoming increasingly more competitive. So is there anything you can share on the outlook going forward? For margins potentially across the Nordics, as you particularly highlighted outside of Norway. And my second one is, you've seen an interesting dynamic where you obviously have this pressure on margins in personal customers, but you also have this very, very strong flow dynamic as well. But obviously, that's margin dilutive since you've learned a lot more on deposits certainly current accounts. So I just wanted an update sort of from a sector perspective on how the customer is thinking about the decision between sort of deposits and fund savings and how it affects your sort of margin outlook [indiscernible]?

Thank you for your questions. As a general statement, I would just reiterate that we do see and live with competitive pressure across all the parts of our business. At the same time, my assessment is that all of the areas is managing this competitive pressure in a very rational manner, and we can confirm that the growth that we take on our books also in this quarter represents profitable volumes to the bank. And just to reiterate the movements in NII, when you consider the movements on spreads, you have to look at a movement net of increased interest on equity and treasury, which leads NOK 284 million as a movement and approximately half of this is related to competitive pressure. So approximately 1.5 basis points across the entire book. For large corporates, in particular, when asked and Harald, he can develop if he feels like it. But we are winning transactions, not purely on price. We are winning transactions on areas where we have industry expertise, where we combine this with products and services on the advisory side from DNB Carnegie or in other areas such as commodity derivatives or trade finance or value chain, supply chain -- supply value chain financing were areas where we find that we have differentiating offerings to competitors. So we are talking about part of the product mix effect coming from the fact that the growth being delivered this quarter in large corporate comes from lower risk volumes than we have in average on the portfolio. This can be seen twofold in our numbers in other areas. One is through then a positive migration and a lower share of high-risk exposures in the LCI book. Secondly, through the fact that the growth is capital efficient this quarter, a 3% growth in large corporates, but only a 20% sort of consumption of capital net of migration and other instruments applied to increase efficiency of the growth. So again, these are lower margins nominally, but profitable to the bank. In relation to personal customers, if you look at the segment in isolation, there are lag effects stemming from the movement in the money market rates coming prior to actually the rate hike from the Central Bank in expectation of it and then a notice period after -- from the repricing being announced up until it takes effect. So there was an announcement of a repricing towards customers, but this will start taking effect from from mid-July only. We are, as a group, more or less LIBOR neutral. So this will have a different impact if you look at the different segments as such. And personal customers is really the area that gets the increased funding cost before they get the impact from -- for the repricing. But above beyond this neutrality, it's really the repricing impact of the customer that gives a positive effect for the bank as much. Maybe just a last comment on clients. We find that our clients are very rational and focused on, in particular, the rates on their mortgages. We have seen also an increased awareness of the type of accounts that they hold their deposits within. But I would say the Norwegian market is very immature when it comes to considering savings in interest rate funds compared to bank savings, it's very much still a bank savings environment. And even we see an increasing interest and activity in saving in mutual funds. It's not so much driven by the price difference as such, but more sort of an increasing pattern of behavior, but movements are relatively slow on the deposit side and the mix still roughly 25%, 75% transactional accounts versus savings accounts.

Now we'll go to Gulnara Saitkulova, calling from Morgan Stanley.

A follow-up on the spreads. As the rate hike through with another rate hike possible later this year. Could the high rates help is the competitive pressure? Or do you think the pressure and the customer switching will continue to intensify around the period change in interest rates? And what means to change in your view for spreads to begin recovering? And do you think the net interest margins have not bottomed? Or is there still further downside to come? [indiscernible] you sort of elaborate how DNB is responding to more competitive environment across the different areas and divisions and what actions can the bank take to mitigate ongoing margin pressure?

Thank you for your question that revolves around competitive pressure and margins. I would start by highlighting that we are very clear in prioritizing profitability over growth as a starting point. But then also add that, of course, it's important for us to see that we are competitive and win customers also in an increasingly competitive environment. We do get confirmation that this is indeed the case. One example of this is if you look at personal customers, we have the same volume of inflow of requests for financing certificates this quarter as we had in the same quarter last year but we are more selective on the business we decide to write as we do focus on profitability. Another testament to this is talking about the record number of new customers in the large corporate area in the Nordics outside of Norway. We already see that these customers use our products more broadly and all on average, have a return that is above the return requirements. So I would say our way to respond to a competitive environment is to be very targeted in terms of focusing where we believe we have our competitive advantages. And this is also how we win businesses through preference and not price in its entirety. On the margins, it's limited how specific we can be. But of course, as you know, an announced repricing will have a positive impact to our net interest income. The fact that the volumes added this quarter comes late in the quarter should also have a positive impact on our net interest income, all being equal in the third quarter. As for customer behavior, we have also stated that this quarter is more related to house swapping or actually customers buying new homes than bank swapping as such as people are sitting a bit more still when we are in the announcement period of a rate increase. how this will develop. It's a bit difficult to say. It depends on when -- if and when there will be another rate hike from the Central Bank. But all in all, I think, we continue to expect Norwegians to be very focused and interested in how much they pay for their mortgage but we also continue to expect the Norwegian market to be a rational market and all the major players being active in this market is targeting return on equity as their most important financial metric and, of course, competitive pressure will vary somewhat from quarter-to-quarter. But over time, we still definitely continue to expect this to be a rational market.

And can I follow up with the second question? With your Capital Markets Day coming up later this year, could you give us an early sense of the key strategic themes and priorities you expect to address? Should we anticipate an update to your financial ambitions? Or is the focus [indiscernible] to be more on reaffirming the strategy?

I think there is nothing new to to provide at this point in time with regards to our Capital Markets Day. We do them every second year, every Capital Markets Day, we review and look at our financial ambitions for the coming period, and we try to give you a more detailed guidance as to the outlook. So I think you can expect us to address our future ambitions as well as building up to our strategic initiatives in order to deliver on those.

Next question will be coming from Namita Samtani, calling from Barclays.

My first question, you commented on corporate customers Norway and commercial real estate growing strongly there. I just wanted to understand the rationale for that and do you see good pricing there. What attracts you to that segment as I would have thought it's quite a competitive space to be in. My second question, I understand growing in large corporates is lower margin business and now it's impacting NII, but the rationale is that it's high ROE business. Is this a strategy that you expect to persist for some quarters? I'm just wondering how you think about the strategy and whether it's a long-term strategy? Or are you being opportunistic here? My last question, when you think about rate sensitivity to 25 bps, and I think just previously, over the past few years, it's been in the range of NOK 0.8 billion to NOK 1.2 billion, do you include interest on equity and the treasury impact on that? And what are the factors in the past have made at NOK 0.8 billion or NOK 1.2 billion? Is it just purely competition? I need to think about that.

Thank you. I'll ask Maria to comment a little bit more on detail in detail. corporate customers Norway. But please bear in mind that we have talked about this growth as a combination of increased volumes across commercial real estate as well as the growth across the various regions in Norway. With regards to large corporates, I would say, of course, we have an overall strategy of maintaining a very strong asset quality and diversified exposure in our book. But we do not specifically target specific buckets of risk or our strategy is based on profitability. But after Maria, maybe Harold also can comment a little bit more on that, and I can come back to the rate sensitivity.

Yes, we can see the growth certainly whole Norway, and it reflects the market in Norway as a whole. There is growth in all different areas directively and also in the industry concerning both in the seafood area, the finance [indiscernible] and also in the industry concerning the coastline of Norway. So we can see it through all sectors and all geographical areas of Norway and to reflects the market as a whole.

And I think on the large corporate side, I think you're correct, Namita, because we focus on total risk-adjusted return on the client over time. So as you point out, the margin is slightly down, but you will see that the cross-selling or the non-lending income is up in the quarter. So that means, although the average margin is down, our return on equity is up on the large corporate side in the quarter. So -- and that is really what is our primary ambition.

A short comment on its sensitivity that we do not comment specifically as such, but we have said that the historical movements should be a good reference, and I think you're correctly referring to what the movements have been. With regards to the various moving bits and pieces in the P&L, we've said that we are more or less neutral to LIBOR movements. And in order to achieve that neutrality over time, it impacts also interest on equity and treasury, which means that the net impact to us as a bank, stems from the actual repricing towards customers and only that. And that will be the combined impact from repricing loans and deposits towards personal customers. We're still 90% and more than 90% of the lending book is floating and a large part of the deposits. And in corporate customers Norway, also a portion -- a larger portion of the deposit, and it's small portion of the loans are floating-based prices. But these are the impacts that will hit our book movements on interest on equity and treasury needs to be seen in context with the LIBOR neutrality.

Will now go to Markus Sandgren, of Kepler Cheuvreux.

So I was also having a question around margins, but not so much for the quarter, but more big picture. So I mean margins in Norway has always been much higher than in Sweden and Denmark, for example. And I get it totally that you have much higher rates. But nevertheless, the margin seems to be much higher regardless of what the level is. So how is your thinking about when competition is picking up and you have several of the other big banks in the Nordics that wants to go into Norway and they can apparently live with much lower margins in the other countries? What do you expect that to bring to the competitive situation in Norway longer term, that is not for the next quarter? That's my first question.

Okay. I'm not sure what data points you are referring to my knowledge, we've had periods where margins in Norway have been more competitive than in in Sweden, and we've had also vice versa for a certain period. Most recent statistics we were looking at, I believe, the mortgage margins in Norway dropped below the level that we have seen in in Sweden. So I'm not sure that I have the exact same data points as you have. Again, we have everything else being equal, a higher level of capital than certain of our peers. We have been having that, and we've dealt with that for years. Beyond that, there is a harmonization of risk weights being applied. So we are confident that we are able to compete in this market as rational levels. Again, we understand that this market is attractive because it is a rational market. And I think the closest comparison would be Sweden because Finland and Denmark are a bit atypical on mortgages. But we continue to expect fierce competition both from local and Nordic players but are also confident that we will be able to continue to grow profitably in these market circumstances as we feel that we show in this quarter as a testament to that. It was also maybe worth noting what many of you probably also saw after the release of the first quarter earnings, a narrative from some of these players that they were seeing the competition in the Norwegian market as fears and indicating maybe an increased focus on profitability.

Okay. And then secondly, on capital. So now you -- with the new buyback program, you're coming down to 1% in CET1 buffer. Is that what we should use as a buffer going forward? Or are you heading somewhere else?

We continuously work to optimize our capital position to return excess capital to our shareholders. We do not provide or have spoken buffer on top of the capital requirements from the FSA. But when you see that we are initiating share buyback programs, it is signal that we are more than comfortable with the buffer that we do have.

Yes, okay. And there's no known head or tailwinds on capital requirements?

We see no headwinds or tailwinds to know in the future, correct.

Our next question will be coming from Sophie Peterzens of Goldman Sachs.

Here is Sofie from Goldman Sachs. So I would just going back to the competition. When I look at your fact book, on your market shares, it seems that you have been quite consistently losing some market share in Norway, both on lending and deposit side and retail customers and corporate customers. Like how should we think about the market shares going forward? Do you expect market shares to stabilize? Or is it fair to assume that you will continue to kind of give up some market share to ensure that you just capture the profitable growth? That would be my first question. And then my second question would be on the press conference earlier today, you mentioned that 50% of your corporate loan growth comes from outside of Norway. Could you just elaborate why you wanted to grow CII outside of Norway and what kind of where the focus is? Is it mainly Sweden? Or is it also some of the other Nordic countries, U.K., maybe or U.S. If you could to say comment a little bit around 50% of the corporate land growth that comes from outside of Norway?

Sure. Sophie, thank you for your questions. With relation to growth, our focus number one is really on profitable growth. And of course, we are also focused on keeping the relative value of our position, which is a leading position across all of the markets we are active in within Norway. And from that perspective, there has been no material weakening of our position. On the contrary, we are able to deliver growth. And we capitalize on the diversity of our growth platform in order to deliver on that throughout different cycles, I would say, with varying competitive pressure. With regards to the growth in the quarter in the large corporate book and internationally, I will hand it over to Harald but you are right. It's a diversified growth across Norway and international. And I think this robustified the growth platform also above and beyond the pace of economic growth in Norway, where the Nordics also has been an increasing strategic target for us, but Harald can comment some more on this quarter specifically.

Yes. Thank you, Kjerstin. I think if you look at the first half of this year, there's been a strong growth in the Nordic, and it's not limited to Sweden. We also take advantage of the strong position that DNB Carnegie has in Finland and Denmark. -- to grow our business there, albeit from a lower level than we started in Sweden. So -- but we have a lot of success stories also in Denmark and Finland, and there will be more to come. When it comes to the rest of our international platform, we aim to maximize returns over time and to support our clients. So it will vary. If you look at 2024, we had a very strong growth in North America. If you look at 2025, we had a strong growth in the U.K. and and the countries handled from our London office. So I think that will vary and beyond based also on which industries are most active in that period.

Okay. That's very clear. And if I may, just one final question. On Luminar, could you just comment what your plans are with Luminar and really consider kind of buying back the company?

We -- as you all know, we are a 20% owner in Luminar, where Blackstone owns the other the other 80%, I still believe that there is strategic attractiveness in those markets, but have no comments beyond that as to future plans for that investment.

We'll now go to Johan Ekblom of UBS.

Just two quick questions. First, on asset quality. We're clearly seeing lower-than-expected credit losses in the income statement. But if we look at this development in Stage 2 loans, there was a very big increase in the quarter that looks to be broadly spread on kind of everything except for personal customers. So is there any methodological change or anything that's driving that? Or is this just kind of quarterly volatility? I think it's a 20% increase in overall and 40% increase in corporate Stage 2. So that's the first question. And then maybe quick on margins, I know we've spoken a lot about it. But if I look at the waterfall you provide in your fact book and add together the margin on lending and margin on deposits, it used to be kind of a NOK 100 million headwind in the quarter. It's been NOK 500 million a quarter the last 3 quarters. And if you're LIBOR-neutral, I guess we can kind of ignore what happened to market rates there. Is it only a step-up in competition that has driven that change over the last 3 quarters? Or is there anything else we should bear in mind when we think about the kind of walk forward on NII?