Jyske Bank A/S (JYSK) Earnings Call Transcript & Summary

Hi, everyone. Thank you for joining us on [ Jyske Bank's ] Conference Call for the Financial Results for 2023. This is Simon Hagbart from Investor Relations speaking. With me, I have our CEO, Lars Morch; and our CFO, Birger Nielsen. [Technical Difficulty] and Lars will walk you through our prepared remarks, afterwards [Technical Difficulty] Q&A.

Good morning to everyone, and thanks a lot for calling in. 2023 was a year with several important milestones for Jyske Bank. Firstly, we recorded the highest profit in the history of the group with earnings per share of DKK 89 and a fully 61% above the previous all-time high, which was the year before 2022. Secondly, we acquired PFA Bank. And thirdly, and not least, we have a successful integration of Handelsbanken through a dedicated effort throughout the organization. This allows us to put an even greater focus on driving the operating performance in the coming years, and we expect to put further color on the future of Jyske Bank at the end of 2024. The result of 2023 was driven by a higher level of interest rates, improving our net interest margin significantly, while maintaining a solid credit quality and strong cost control amid low activity levels. Additionally, we saw a healthy contribution from the acquisition of Handelsbanken. For 2024, which my colleague Birger will comment on in more detail, we expect the net profit of between DKK 4.3 billion and DKK 5.1 billion. This is below the DKK 5.9 billion of this -- of this report, reflecting a more normal level of value adjustments following an all-time high level in 2023. Looking ahead, we are well positioned for the outlook of lower policy rates given a relatively low interest rate sensitivity. Furthermore, we expect cost synergies to mitigate inflation, [ maintaining a flattish ] cost outlook and post-model adjustments equivalent to approximately 3 years of normalized loan losses that provides a good caution for loan impairment charges. Lastly, I would like to highlight the second consecutive quarter with a DKK 500 million dividend. We have also introduced a new capital distribution policy targeting an annual dividend payout ratio in the region of 30% supplemented by share buybacks based on the capital position, [ obviously ]. Following a well-timed and executed new issuances of AT1 and Tier 2 capital in Q1, our capital position is fully rebuilt post the acquisition of Handelsbanken Denmark. If we take a closer look at the integration of Handelsbanken, firstly, the timetable, which you have on the left-hand side here, that timetable we announced in June 2022, and we've been able to keep to that timetable throughout. So during last year, we integrated and merged the optimizations. We merged the branches that we anticipated that we would merge. And we had the IT migration done according to a plan and budget by November last year. So far, financially, the case has outperformed our expectations. That is basically due to the fact that we've seen no major issues. And on sort of that, the higher interest rates have obviously helped us. We see a targeted cost synergies of DKK 0.4 billion. And we also still see that we'll be able to do the total integration below the anticipated DKK 0.5 billion. On the right-hand side here, you have the branches, we had [ 123 ] early in 2023, and that is now down to 89 branches. We've done it in a fashion where we have integrated the branches that were basically in the same cities, so that we have left no major geographies in Denmark behind, therefore have taken the synergies where it was possible to take the synergies. PFA Bank was acquired last year in June, and the acquisition was closed the 1st of October. That's a no lending bank, and it was established a little bit more than 10 years ago, has approximately 10,000 personal and private banking customers and has DKK 16.1 billion of AUM. The rationale is that they have a very strong customer base. There's a big cross-selling potential as PFA Bank is a non-lending bank. And as we have more investment products than PFA. It also supports the wealth management strategy and gives scale to that business. On the financial side, obviously, it's very important that there's neglectable capital consumption. And obviously, it's also important that we will have cost synergies in this case.

Thank you, Lars. Looking at Q4, we had a strong end to the year, strong operating performance in Q4 with the highest ever earnings per share of DKK 27. Looking at Q4 at a glance at the left-hand side, you can see we brought down the cost income ratio to 41%. Loan loss ratios were at a very low level of 1 basis point. We listed earnings per share 16% year-over-year. We delivered return on equity [ 16.70% ] and the capital ratio CET1 ratio was at 16.9% and the total ratio at 21%. Looking at the upper end in the right-hand side, you can see volumes for Q3. And the overall impression is that deposit, deposit base, both for private and corporate clients has grown and migration to saving products has also picked up a bit for private individuals. We saw bank loans slightly lower, but that was due to public authorities. We have seen AUM, growing by -- growing by 10% due to the inclusion of PFA Bank, but also due to performance and inflow customers. And finally, we saw the mortgage portfolio slightly up 1% in the last quarter driven by corporates. So all in all, if we take a Q4 year-on-year look, we lifted our core income by [ 33%; expenses, including integration ] cost was lifted 21%, and the net profit was up 15% year-over-year. If we then dig into earnings per share, you can see that from 2014 to 2021 in the period with negative interest rate, we had an average earnings per share of DKK 31, and it's now more or less tripled to DKK 89 in '23. And as we write here, driven by, of course, the pricing and cost initiatives we've done, but also acquisitions, high interest rates and higher corporate exposures. The cost income ratio is, of course, crucial in performing better. And from 2018, '19 to 2021, '22, it was a cost management gain more or less. Then from '21 onwards, we have been supported also by income growth. And now we've been able to deliver a drop in the cost income ratio to 43%, 20 percentage points down from 2019. Looking at the accretion on the book -- of book value, and I take a very long history here from '20 -- from year 2000, we've seen a steady increase over many years, and it's natural that it's been accelerated in the latest years due to buybacks, due to acquisition, but also, of course, due to the stronger earnings capacity in the group. Looking at 2024, we estimate a net profit of DKK 4.3 billion to DKK 5.1 billion. And looking into a little bit more detail, we can say that it's expected that the core income line in total will show up lower in '24 than in '23, especially due to the very high level of value adjustments. In '23, core expenses will be approximately unchanged. We had synergies to be reaped. We have a lower one-off cost, but -- and it will probably counteract the impact both from the inclusion of PFA Bank, but also the obvious inflation, which is still in the market. Loan impairment charges will expectedly be higher in '24 after a very low level in '23. We saw a very resilient customer base in '23. And of course, at the beginning of '24 is still the case, but there is also higher uncertainty in the market going into '24, and we have lifted our post-model adjustments to an all-time high level of DKK 1.9 billion. Net profit, as I said, and we as announced in January, DKK 4.3 billion to DKK 5.1 billion, and capital levels in the 2 defined intervals, which are well known in the market, but new to the market, we have now target a 30% dividend payout ratio, and we supplemented by share buybacks depending on the capital position. And maybe just a few words on a few important lines and topics before we open up for Q&A. One is the NII. And it's a busy slide. We admit that. But the point here is, #1, that we have a mortgage portfolio which is unaffected by changes in the interest rates; #2, that we have partly hedged our deposit risk in the banking book; #3, and we have a higher pass-through rate than our peers of the Central Bank interest rates, which came into place in '22 and '23; and fourthly, that our mix with a higher corporate and lesser private individual share than our peers, we naturally will have a lower interest rate sensitivity. And that all sums to the point that we are talking about DKK 500 million per 1 percentage point down year 1, and it will gradually grow as you can see here on the left-hand side, as the hedging effect diminishes due to lower rates in the portfolio as time passes. Looking at '24 in gross terms and in net terms also, we expect them to be largely stable. We will see a slight decrease quarter-by-quarter due to the rate changes and of course, also the deposit migration, as I alluded to before, but we have a significant positive overhang from '23, which will, of course, support the total NII for '24, despite the lower rates. And our assumptions is 3/4 down in '24 and 1 percentage points down in '25. We had an uplift in our fee income in Q4, supported by the acquisitions by 12% year-over-year. And as we look into the numbers, we can see there was a tax incentives to close out transactions in Q4. That being said, activity was low. And as you can see on the slide, the level in '23 of numbers of lending office from Danish mortgage institutions was 37% lower than 10-year average. So we expect a somewhat slow start to the year regarding transaction related fee income. Costs, expectedly unchanged all-in inclusive of integration costs, '24 versus '23. We have back-end loaded synergies, IT platform costs and also a number of FTEs from the inclusion of Handelsbanken. And we still expect to deliver total integration costs of around DKK 500 million plus up to DKK 50 million regarding integration of PFA Bank. So we are fully on track when it comes to those elements. Looking at the credit quality, it has been very stable and resilient during the course of the year, and we have an unchanged balance of impairment charges of DKK 5.1 billion from Q3 to Q4. And you can see in total in '23 that we saw write-offs at the lowest level in more than a decade. And the post-model adjustments, as we mentioned, is at an all-time high of DKK 1.9 billion, lifted by #1, a switch from model adjustment to post-model adjustments of some of Handelsbanken's customers, approximately DKK 300 million, and then a further cushion against macro risk in property markets close to DKK 200 million. So in total, the DKK 1.9 billion sums up to 37 basis points of total loans and guarantees. Then my last topic will be on capital. And if I look at Handelsbanken, we acquired on the 1st of December, we acquired that without raising equity. And then we have spent 2023 rebuilding capital. We saw in [ total area ] growth of 2% in 2023, supported by higher interest rates and therefore lower fair value assessment of the mortgage book. We retained earnings after tax of DKK 5.9 billion, and we have announced another DKK 500 million dividend payout here to be decided at the AGM in March on top of the DKK 500 million in December. And that in total sums to the development on the CET1 ratio from 15.2% to 16.9%. Then looking at the situation for the total capital ratio at 21% in the middle of the range by year-end, we issued AT1 and Tier 2 in the level of EUR 300 million and EUR 500 million in the start of '24, lifting as of now, the adjusted -- the capital ratio to 22.4%. So as of now, we have a CET1 ratio and a capital ratio that is at or slightly above our targeted intervals. And so from '24 onwards, we have stated now that we want to pay out a dividend in the region of 30% and supplement with buybacks depending on the capital position, given that we now here in Q1 is fully -- [ has fully rebuilted ] our capital levels. And our aim and ambition is to stay in the other part of that interval due to the CRE buffer and due to the Basel IV inclusion of input floors on the 1st of January '25, and we are very comfortable with those levels as we speak. And secondly, when it comes to Basel in Q1 of '25, the effect is up to 1.5 percentage points and its input floors that hit us on the low default portfolio. And we expect the input floors to be the binding constraint for several years ahead, expectedly until 2032. And capital levels from '25 onwards will then naturally be in the lower part of the interval given that we have a CRE buffer still in place. I think that concludes our initial comments.

Yes. Thank you, Lars; and thank you, Birger. We will now open up for questions. [Operator Instructions] I think the first question in line comes from Asbjorn Mork from Danske Bank.

Yes. If I may just start on the last slide you had on the capital, just to make sure I basically understand what your thinking is here. So basically, you're at the upper end of the 15% to 17% range. You're saying that there will be the impact from Basel IV and from CRE. But as I hear you don't want to sort of exceed the 15% to 17%, even with those headwinds coming. You just want to be in the upper end. And now you're issuing AT1 capital, you did recently AT1 capital and Tier 2 capital, and you're above the 22% total capital target that you have. So maybe if you can give a little bit of flavor on sort of what should we expect in terms of capital distribution buybacks for '24. Is it so that you basically think that with Basel IV with commercial real estate that you are basically where you want to be on sort of nominal capital, and then your CET1 ratio will obviously decline with Basel IV. But hence, you don't need more capital, so we should expect you to basically buy back shares worth whatever you don't need for growth in '24. Is that the right way to look at it? And is that the reason why you're front loading capital to get that approval from the FSA? That would be my first question.

Yes. And you're quite right. Yes. Our ambition is to stay around these levels in the upper -- at the upper end of 15% to 17% in 2022. And as you say, we have rebuilt both capital levels here in Q1. And -- so as the nominal capital level, yes, is in place going into both the CRE buffer from 1st of July and the Basel IV requirements 1st of January next year. Distribution from here onwards is, as we said, point #1, we aim for a 30% dividend from fiscal year '24 onwards, and we'll top it with the capital level that is excess -- in excess of what we aim for, as we said here, and we will pay it out in due time when we get approval from the FSA.

But basically, my question is also that since you have already deducted your dividend in the 16.9%, your CET1 will obviously grow the next couple of quarters. So does that mean that you will adjust accordingly, so you will not be waiting until late '24, but you will do buybacks as soon as possible as you get the approval from the FSA. So we should expect something, for instance in the first half of this year?

We will do buybacks as soon as possible, given approval from the FSA, you're quite right.

Okay. Perfect. Then on your Slide 11 on your net interest income hedge and the deposit betas that you mentioned you've seen. I was just wondering if you sort of put that together with your view on assumptions on rate cuts for 2024. I guess that still leaves you with a higher NII for '24 versus '23 full year '24 versus '23. Is that also what you have in your budget?

Yes. Well, as I alluded to before, I mentioned, is, well, largely stable. I think I put it that way. And it's just the fact that you're quite right, we will see an implication of the 0.75 percentage downwards on interest rates naturally during the course of the year, but we have a significant overhang. And we also have to accept the full effect from Q1 onwards from the rate changes we made on the 25th of November. And then finally, an important point to mention here, which we've been talking about on several occasions formally, that the migration -- [ private individuals ] migration to savings accounts has slightly picked up in Q4. And of course, that is, so to speak, a risk for our net interest margin going forward if private individuals become a little bit more aggressive in that field.

All right. That's clear. Final question from my side. I think last, it was you that mentioned something about more, you would put more color on the future Jyske Bank at the end of '24. Could you just enlighten me or us a bit on what does that actually mean?

Sure, Asbjorn. Yes, we have a strategy in Jyske Bank that runs until the end of 2025. We expect now that we will be able to do this a little bit faster. And we expect that by the end of 2024, we will renew the strategy, and we'll probably have a communication in one of the last 2 months of the year on this. This year will be very much about a good solid run of the business after a year with a lot of integration work, so we want to optimize the organization here and optimize how we stand, get back to the clients, make sure that we have the housing order. And at the same time, we prepare the next round of strategy. So by the end of this year, Asbjorn, we will be able to show you the details of this work.

So that would also be sort of midterm financial targets, return on equity targets, something like that?

We will have some the financials included in our strategy.

And next question in line comes from Albert Moller from ABG.

All right. Albert here. So I was just wondering, you will be hit twice this year on your capital by the systemic risk buffer and the Basel IV input floors. So I was wondering if you have had any indications from the Danish FSA that you will be allowed to be a bit lower than your capital target range or even lowering the capital target range if they would be okay with it since last year, you had some discussions with them regarding the stress test. So I was just wondering how the discussions are going. If you have -- if they are sympathetic with your position here that you will be hit twice quite drastically.

Yes. Good question. When looking at capital targets, it's decided by the Board. And of course, we have an ongoing dialogue with the FSA regarding our -- the prudency of our levels. But by the end of the day, that -- all that matters when it comes to buybacks and distributing capital is the stress test in a severe stress. And of course, that is the dialogue we have internally with the FSA, and that actually is the driving force behind our ability and capacity of distributing capital and buying back shares. But capital target range is, of course, up for debate in the board simply because we have got a new CRE buffer. We have a Basel IV effect that will be seen now in a year's time. And then we can reassess, of course, the overall level that is needed going forward.

Yes. Sure. Makes sense. All right. Very good. Then I was just wondering about the new seasonality for refinancing mortgages that you wrote about. Could you just explain the -- what's the underlying effect is that is driving that? And if it would affect like the full year numbers or if it's just like seasonality?

Yes. So we have some yearly refinancing of, for example, adjusted full rate mortgages with 1 year to maturity interest rate [ refixing. So that's called F8 or F1 ] loans in Denmark. And we have -- as you might be aware, we have quite a bit of those due for refinancing in Q3 normally. We have decided to sort of even out part of the seasonality in 2023 by some new loans being refinanced in Q4. So what you saw in 2023 should repeat more or less in 2024. That should be the normal refinancing seasonality going forward.

All right. And final question now then. This might have been earlier in your communication, but headcount level going forward. Have you extracted all the synergies from all your mergers? Or should we expect it to be net stable or, yes, the financial crime prevention or any guidance there?

Yes. We saw in '23, the need for investing in further financial client prevention around 60 FTEs. And we put on top of that, 40 FTEs with the inclusion of PFA Bank. And if you extract them from the numbers, you see still a small decrease in the overall [ FTE ] development in the group in '23. We also said that we have a back-end loaded synergy case going into '24 after the IT migration of Handelsbanken and eventually also the migration of PFA Bank here expectedly in the second quarter of this year. So yes, there is more to be reached on that note. But we haven't specifically named or mentioned the explicit number in the market, but there is more to be reaped. And as you can see, we estimate DKK 400 million as a total runoff -- run rate in effect of synergies, which is the combination of FTEs and especially IT platform called group services, cheaper group services, et cetera.

Next question in line comes from Martin Birk from SEB.

Perhaps just coming back to the distribution and touching on the DKK 500 million and still reporting 16.9%, why wasn't that DKK 1 billion or DKK 1.5 billion given that you are well in place on your total capital ratio by yes, in mid-February.

Sorry, sorry, Marty, we were muted, I think we are on now. You're quite right. 16.9% CET1 ratio at the end of the year was at the very high end of the interval, whereas the total capital ratio stood in the middle of the interval. And that was also the guidance for our issuance of instruments here starting early this year. That being said, we kept the DKK 500 million, which we found was an appropriate level, looking at '23 and the total capital levels that we wanted to rebuild to these levels. So as we stated before, from Q1 onwards, we are free rebuilt on all, both capital levels and able to do what we find appropriate of distributing excess capital going forward.

Okay. So assuming your CET1 guidance of 15% to 17% and then, of course, the commercial real estate buffer, so let's call it, 16% to 17%. Given that we are probably likely to see very little risk-weighted asset growth over the year. How should we think about capital distributions from here on? Should they be -- I guess they should be 100% from Q1 on, right?

Well, we haven't put out any specific numbers on the total payout ratio. But you're right in the assessment that we expect relatively low growth [ in REA ]. That being said, of course, if the interest rates dropped significantly from here, as we saw the opposite in '23. It will have an impact on the market value of our mortgage book and therefore, also on REA. But looking at volumes, you are certainly right in your assessment. We also expect that we will see slow growth in volumes, especially at the outset of the year. And market risk is a smaller part of the total equation. So it's [ fully manageable ]. We are not in a position to be more specific now. But as we said before, as soon as we get the approval from the FSA, we'll, of course, release it to the market and start a new program.

But on your CET1 target, are you willing to walk the talk, I mean, are you willing to bring that down to 16%.

The CET1 target of 15% to 17%, as we said now, we want to stay in the upper end, simply because of a CRE buffer and the Basel IV inclusion from [ again next year ].

Okay. But -- okay, that's -- are you willing to go -- you also earning money in Q1, right? Is this going to be -- are you targeting 17%? Are you targeting 16%? Or how should we think about this?

Well, if you take the full effect from the CRE buffer and up to 1.5%, these points on the Basel IV, we talk about 2% plus in effect. So we want to stay around the [ 17% ] or the other half of the 15% to 17% interval as of now.

Okay. Got you. All right. Then just coming back to your [ PMAs ] close to topping DKK 2 billion. Your guidance is still [ cyclically ] a pretty positive outlook for 2024. How do you view that buffer? When is it going to be turned into -- well, what is it going to be used for actual losses? Or when will it be turned into actual positive P&L performance?

Yes. You're referring to the DKK 1.9 billion?

Yes.

Yes. We -- I explained that why we -- why it was lifted to DKK 1.9 billion here by year-end. There are uncertainties we need to attend to, and that's the reason why it's been lifted also uncertainties in the property market. That being said, it's natural that there is, of course, a strong buildup of the buffer is 37 basis points relative to loans and guarantees. And we haven't had -- haven't seen it that high ever. So yes, you're right in our assessment that it's high. When we see development in '24 and if it's of a temporary nature, we could bring it down. But of course, if a crisis or a scenario with more financial malaise will hit the market, we need to keep the management buffer high, but that is to be seen in the course of '24, but it's obvious that we have a strong cushion against uncertainty going into '24.

Okay. And then perhaps just a quick final question, just [ moving off ] the P&L again, sorry. On your NII, you specified 1 year sensitivity of being DKK 500 million. But could you please -- could you please also specify the 2 other boxes? Or do you need to pull out my ruler for that?

Yes. Well, we haven't provided exact guidance, but I think you will end up about the DKK 0.7 billion in sort of a long-term year 3 effects from a percentage points, if you pull out.

Next question the line comes from Namita Samtani from Barclays.

Can you just repeat your comments on the 2024 net interest income? Do you expect it to be largely stable from the fourth quarter of 2023 level or stable from the full year 2023 level?

Yes. As I said, we expect them to be largely stable, plus and minus. The reason being that, of course, there will be a decrease due to the change on the interest rates from the 25th of November last year where we lifted both loans and deposit rates by a quarter. Transaction account was put -- we put a quarter on the transaction deposit accounts. And we also saw the migration from private individuals slightly higher in Q4 than expected. So those elements, of course, is a headwind going into '24. But on top of that, we have a very significant positive overhang from '23. When you look at the quarterly NII development during the course of '23, which fully supports our estimates of a largely stable NII for the full year. And included in our estimates, our expectations of 3 cuts of the quarter in this year and a further 4 cuts in '25 on the Central Bank rates.

Okay. So it's stable versus 2023 level?

Yes.

Okay. Cool. And my second question is, I just noticed my credit taking like 60% of new mortgage flows. I was just wondering how you position yourself to that and if that's impacting you at all?

Yes. I think there are several ways to answer the question here. One of them is short term and short term, we make sure that we have an offer those attractive to the market. And we have that some of the products we are attractively priced on both on the traditional Danish mortgage products, but also on the banking-based mortgage products. So we have good solutions for our clients today. Secondly, we expect the competition authorities to reach a conclusion this year on the [ total Danish corporation ]. And it is our belief that we will see a change to that agreement, and that will allow potentially new opportunities and we'll communicate about how we'll handle that at that point in decline. Lastly, it's probably worth noting that, yes, it's 60%, 60% to 70% now. But it's a small number of the mortgages that are being moved every quarter. So, it doesn't have those very large short-term stock implications.

Next question -- our last question in line, I should say, is from Michael Macnaughton from UBS.

Just the first question on the NII. As you mentioned a couple of times, you started [ paying on transaction ] accounts in November. Can you give us an indication of the impact of that in Q4 or maybe the expected run rate into Q1?

Sorry, could you repeat the beginning of the question, [ Mike, sorry ]?

Yes. Just on paying on transaction accounts in [indiscernible] yes, just the impact of that in Q4 and potentially the run rate for Q1 as well.

Yes. So a simple way of looking at the impact from lower rates in the quarter would be looking at our deposit surplus. That's a quite [ crude way ] of looking at it. But learning and deposit rate simply increased [ 25 basis points ] on the 27th of November. And we'll see a full quarter impact from that in Q1. And in banking activities, we, in fact, have a deposit surplus of DKK 73 billion. So you should expect an overall negative effect on the rate changes of up to DKK 0.2 billion annualized as a crude measure.

Great. And then secondly, just on capital distributions. For the 30% payout, is that -- should we think of that on an annual basis? Or is there a potential that you would pay interim dividends at [ 30% ] on a quarterly basis as well?

Our aim is to do it on a yearly basis, of course, we could stand in a position where interim dividend could be relevant, but we aim for a yearly dividend.

Are there any further questions?

Maybe just also add that share buybacks will still be an important part of the strategy.

Okay. [ As I said ] there are no further questions in line. Thank you for participating in today's conference call. A recording of the call will be available on our IR website in the coming days. Please do not hesitate to contact us if you have further questions. We appreciate your interest in Jyske Bank, and wish you a nice day.