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 the fourth quarter of 2024. This is Simon Hagbart from Investor Relations speaking. With me, I have Jyske Bank's CEO, Lars Morch; and CFO, Birger Nielsen. Lars and Birger will walk you through our prepared remarks. Afterwards, we will open up for questions. I will now hand over to Lars.

Thank you, Simon. I would also like to welcome you to this conference call for Q4 2024. We had a strong end to a good '24, reaching the very top of our net profit guidance for the year. The positive operating performance is supported by significantly higher assets under management and inflow of funds from customers. On the back of this, net fee income grew a full 18% year-on-year in Q4 to the highest level on record. In addition, the underlying cost development is flattish and credit quality remains very solid. And today, we also announced the historical capital returns to our shareholders. We expect to distribute our largest dividend so far of DKK 24 per share in addition to our largest buyback of DKK 2.25 billion. The capital distribution sums up to DKK 3.8 billion, equivalent to nearly 11% of Jyske Bank's current market cap. In the second half of 2024, we improved momentum with our personal customers on a wide range of metrics. Most notably, customer satisfaction has increased substantially following more and increasingly proactive interactions with customers. This reflects very intentional efforts and has helped boosting volume development as Q4 mortgage growth reached the highest level for more than 5 years. For 2025, we expect to continue delivering a strong operating performance with a net profit in the range of DKK 3.8 billion to DKK 4.6 billion and continued implementation of our currently launched strategy. The net profit range reflects significantly lowering of the Danish policy rate, which, on the one hand, will lower our deposit margin and, on the other hand, could help activity levels. The guided range also reflects a slightly higher cost base due to targeted strategic investments and continued low level of loan impairment charges. And Birger, I'll hand over to you.

Thank you, Lars. And as you may well know, we announced back in October, higher earnings for '24. And here by year-end, we reached the very upper end of that interval of DKK 5 billion to DKK 5.3 billion after tax. The main driver was higher net fee income, up 18% year-over-year due to the higher AUM and inflow of private banking customers. Looking at the full year and the Q4 numbers, they are all aligned with a good start to the strategy period towards 2028. Return on tangible equity above 12% for the year. Cost/income ratio at 47% and for Q4 49%, below 50%. Cost of risk around 0 basis points, both in the quarter and for the full year. Earnings per share, DKK 80 and around DKK 20 for Q4. And finally, CET1 ratio of 17.6%, above our announced target of 15% to 17%. Looking at the left-hand side, you can see that earnings per share has been very steady going for 4 quarters in a row with the exception of Q3, where positive financial markets lifted the value adjustments to a high level. The profit and loss statement, one comment on the net interest income. You see a slightly downward movement during the course of the year and also here in Q4, driven by lower interest rates and therefore, lower margins and in Q4, the uplift from lending margins was outpaced by a fall in deposit margins. And on top of that, we made a preferred senior issuance of DKK 500 million in November. When I look at the right-hand side and look at volumes, you can see that there's been a steadily upward trend in asset under management due to markets, due to new customers and also due to business with existing customers. And the second line, the mortgage business is up 1% in Q4, driven by both private individuals and corporates. On the other hand, deposits are more fluctuating and large exposures have taken out time deposits in Q4, leaving slightly lower levels in Q4, but no worries whatsoever because it's volatile deposits. The next line is leasing, which was hit by one large exposure leaving in Q4, but otherwise, growth in the business for operating lease. And finally, when I look at the banking exposures, they are lifted by 2% here in the fourth quarter, and that is especially driven by corporate business. Going into '25, there is, of course, uncertainty, especially relative to the macro environment, but also financial markets, of course. That being said, we expect a more normalized value adjustment line in this year versus a very strong '23 and a strong '24. And we will, of course, to the extent possible, mitigate the negative implications of lower interest rates. And finally, for '25, we are in a positive momentum for AUM and that could, of course, trigger a decent development on that line in '25. Looking at core expenses, we have demonstrated, as we see it over a very long period, stable cost development. We could, however, see a slightly higher level in '25 compared to '24. The inflation and strategic investments could outpace lower integration costs and other cost initiatives and slightly lower average FTE levels. When I look at the customer base in general, it's a very resilient customer base. We demonstrated that with a 0 on loan impairments for the quarter and for the year and more or less unchanged post-model adjustment buffer of DKK 1.8 billion and also stable loans in Stage 3. Net profit for the year, DKK 3.8 billion to DKK 4.6 billion mirrors the uncertainty just mentioned, and that replicates DKK 60 to DKK 73 per share. Looking at the capital levels, we expect to stay in the lower end of 15% to 17% post Q1 and the implementation of Basel IV, and we will target going forward, still buybacks given the capital levels we have on top of a 30% dividend. We expect still another 3 rate cuts in '25 so that the policy rate in Denmark will go down to 1.6%. And looking at the chart, you can see that in the period with negative interest rate, we had on average deposit margin of well below 1%, 0.9%, then it peaked in '23, '24 around 1.4%, and then it's been decreasing a bit with falling rates here recently, and we can still see a slight compression of these margins in the next few quarters due to the lowering of policy rates in Denmark. We have now, for 3 quarters in a row, seen a positive growth momentum on nominal mortgage lending to personal customers, which is a positive and a turn if you do a comparison to the long period since 2019, where we have been struggling with the development in that segment. We have restructured our private individuals business. We have merged with Handelsbanken and PFA Bank, and we have then recently, over the course of this year, seen higher customer satisfaction and therefore, also higher volumes in the business for doing mortgages. We've also seen net inflow of customers in our focused segments of private individuals. So a strong and good momentum going into '25. Looking at the fee income and AUM business, AUM grew 17% year-over-year in '24. So also a very good momentum there with existing and new customers. So the recurring fee income is certainly on the rise here by the end of '24. Looking at the activity-driven fee income, it's more moderate. We still see low levels of loan application for mortgages. And sector-wise, we are still 1/3 below the last decade's average of loan applications. What we actually saw in Q4 was an uplift in our mortgage refinancing, and we expect that to also give a good momentum into '25. So both the recurring and activity-driven fee is certainly on a good note. The cost base, as I mentioned before, fully aligned with our '28 targets. Going into '25, we see inflation on the rise with more than 3% in the first half of this year and below 3% in the second half. On top of that, average-wise, FTE numbers should go low in '25 versus '24. And we also have lower integration costs and will, of course, execute still a stringent cost management. And in relation to stringent cost management, if you look at the graph from 2014 to 2022, we were more or less flattish nominal-wise during these 9 years. And then we acquired Handelsbanken and PFA, and we now are around DKK 6.5 billion, which we will do our utmost to keep relatively stable, but with a risk of slightly higher cost in '25. Looking at the risk side of the business, very solid buffer and especially supported by lowering interest rates. The customer base has shown very great resilience over the last many quarters. 0% in impairments during the year and the quarter. Stage 3 exposure is stable at 1.1%, unchanged from Q4 '23 to Q4 '24. And if we look at the post-model adjustments of DKK 1.8 billion, it is 4x normalized impairments, but it's also 4x total impairments booked in the last decade. And going into '25, we certainly expect low cost of risk for the year. We have announced a historical dividend and buyback program of, in total, DKK 3.8 billion, which is in alignment with our strategy of 30% dividend and the buyback program possible given the capital levels. And as you can see on the right-hand side, '25 is more or less double of '24, which was the highest level of payouts in the last decade, nominal wise. And we have today started a program, which will run until the end of January at the latest, servicing the need for and the possibility to buy back shares of up to DKK 2.25 billion. I think that ends my comments.

Thank you, Birger, and thank you, Lars. We will now open up for questions. [Operator Instructions] And the first question in line comes from Mathias Nielsen from Nordea.

I have three questions for now, and then I'll go back in the queue. So the first one on lending growth, it was quite strong in Q4. What's the expectations when we go into '25? Should we expect it to stay almost as strong as we saw in Q4? What is the expectation on that? That's my first question.

Yes, it's correct that we saw a very decent growth development in Q4. What we expect for '25, of course, is a mirror of the macro development. As I said, there is uncertainty to the activity level. But overall, downward trending interest rates could have a positive impact on activity as well as lending growth. We expect to follow the market more or less when it comes to private and corporate individuals or hopefully outpace a bit what the corporate development in the market. So very much in line with what we will see in the total market for '25.

So Mathias, Lars here, if I could add a little bit also to this one. I think looking at Jyske Bank over the last couple of years, you've been looking at a fairly busy organization doing a couple of major acquisitions for us and implementations, integrations and data system changes also. Going into 2025, we come in with more business momentum, and we come in with an organization that will have full focus on running the bank during 2025. So we do think that we can be a little bit more optimistic in terms of our volume development during this year. However, as Birger said, the market and the level of growth in the market will, of course, have some limitations.

Sure. That was very clear. So the next one is on capital distribution. So this year, I think early part of '24, you also were trying to retain a bit capital and build up the capital to a satisfactory level. So what's the thinking about capital distribution in the future? Like one of your larger peers in Denmark says around 100%. You have another peer out today saying 99% for '24 and it sounds like it could be close to 100% in the coming years as well. So what's your thoughts around that? And especially also if you combine that with the comments you made on the post-model adjustments that it is quite high. So like, it seems almost impossible to see loan impairments being a cost for you in the near future.

Yes. First of all, I think -- we would like to be predictable. And we communicated a year ago that we'll do 30% of the previous year as capital payout and the rest will be share buybacks. And that is what we are doing now. We have rebuild our capital position and is in a strong position now, and we will be happy and pleased to be able to pay back to our shareholders over the coming years also. The formula will be the one with 30% cash and the rest will be share buybacks. We are not that eager to communicate about what kind of levels that you'll be able to see combined after 2025. That's a little bit too early now.

And when it comes to the post-model adjustment, I think we talked about that several quarters ago where I said you could expect us not just to build up the post-model adjustment reservation. And that is actually what happened during the course of '24. We saw a fall of DKK 100 billion. But I think you also need to be aware that when it comes to the FSA, they have a certain expectation that we have a decent level of post-model adjustments in order to take uncertainty into account, both macro uncertainty and process risks in the business. But of course, there are possibilities going into '25 also on that level, you're quite right.

And then the last question on the strategy that you announced a quarter ago, like how is that being received in the organization? And what was the feedback you get from employees and customers? And like could you give a bit of flavor on like how that has been received internally and on the customer dialogues?

Sure. Extremely positively. We had a management conference a couple of weeks ago with our 450 managers, and they rated it between 6.2 and 6.7, I believe, on scale to 7. There's a lot of support on the things that the strategy focus on, but also support to the fact that a number of the things in the strategy we have more or less prelaunched internally in terms of getting the activity level up, getting efficiency up and so on. So a lot of support internally. On the customer side, really not a big discussion item. No negatives. I think if anything negative, not every customer likes to talk about our strategy. Not all customers think it's extremely interesting. But the customers that normally do that will be the larger business and the corporate clients. And they basically noticed that we're doing more to be able to support the strongest and most interesting customer client segments, and they are happy to see us stepping up in that space.

Next question in line comes from Albert [indiscernible] from ABG.

All right. So a couple of questions for me as well. I saw in your slide package on Page 13, you write about your 2028 strategy or targets. And you're right about your -- that you have a cost target level of about DKK 6.5 billion. Do I interpret that correctly, exactly that slide down to the left? Do you target like flat cost in 3 years' time? That sounds ambitious. I just wanted to check in with that.

Yes. What we are saying is that we have a DKK 6.5 billion total cost realized in '24. And what I say for '25 is that it might go slightly higher due to what I just mentioned earlier. Longer term, we aim for a cost/income ratio below 50% and of course, to the extent possible to make the cost development as flattish as possible. If you go back, as I said, from '14 to '22, we actually were able more or less to counteract inflationary trends in the market. But of course, there are uncertainties to that development, but our aim is clear.

All right. Makes sense. Good. And then obviously, very strong asset under management and securities trading and such. Just wanted to check how sustainable it is? Has it been really boosted by the U.S. election and the trading related to that performance fees? And what's sustainable and what's not sustainable that is?

Well, it's difficult to say because in the end, it's up to the financial market development partly. But we can say that we are seeing a very strong inflow in terms of both private banking clients and general inflow of AUM funds. It's been a very good year in general id Denmark, and we've had our fair share of this. Going forward, probably 2024 shouldn't be extrapolated on given the very strong AUM growth, but we do expect that to be a major driver going forward as well.

And I think, Simon, if I could add a couple of things. The performance in our business had been strong during the last 3 years. So the investment performance has been strong. And that's a positive for us meeting clients that they see that our development has been strong. Secondly, we acquired PFA Bank also and that case has been better than we anticipated and we see more of the clients becoming full clients of Jyske also. So just a couple of comments on top of your good comments here, Simon.

All right. Makes sense. And then final question for me. I thought I heard you say a bit earlier that you expect to take some market share on corporate clients. You have -- obviously, you can't name competitors, but you have a few competitors, if I can name them, then Sydbank and [indiscernible], who is also taking market share. So are you planning on gaining market share? Is it from the savings banks or from your even larger competitors? Or who are you -- which clients are you targeting?

I'm afraid that we have a little bit more boring answer to that one. So if you're looking at the business and corporate composition of Jyske bank, we tend to have a little bit larger clients than the average in the market and it's in particular within those client segments that you see the growth. So it is not about a lot of new acquisitions, but it is about -- we have a strong portfolio today that stays with Jyske Bank and like to work with Jyske Bank. And if they develop as we expect, they would ask for more credit than the majority of the market.

The next question in line comes from Namita Samtani from Barclays.

I'm just looking at Slide 7 where you say net interest margin is likely to gradually be approaching stabilization. But we still have rate cuts to come. So how do you come to that conclusion? Or is it that you expect some stabilization by June?

Yes. The latter part what you referred to here. I think we expect to see some -- 3 cuts and then properly around the summertime, well, that's what our economists expect, the cuts will stop. And at that point in time, we would also expect to see a more stable development in the margin. And if you look at the development since the peak of 1.4% in total, we are actually -- more than half of what we expect to see of compression on margins already.

And then just on the '25 net profit guidance, I was just wondering what's the scenario that you print a net profit of DKK 3.8 billion. And what's the scenario that you print DKK 4.6 billion? Is it, like, what could happen on the fee line or the impairment line? I'm just trying to see, like, the variation and the gap between the 2 numbers?

I think you should -- the DKK 800 million in interval with is actually a view of macro uncertainty, point number one; and point number two, financial markets. If you do a comparison of our value adjustment line, in '23, we were about DKK 1.5 billion; in '24, we are around DKK 1.1 billion and a normalized level will still be a few hundred millions below that level. So if we were in a normalized situation in '25 on value adjustments, we would see some decrease in the returns and performance. And then, of course, the uncertainty as to the extent of interest rate cuts here during the course of '25, we have put in, as I said, 3 cuts and if they were lower or higher in number, of course, that would give a different view on where to end in this interval between [ 3.8 and 4.6 ].

Okay. And just on the value adjustments, do you think we are in a normalized level now? Are we in a normalized environment?

That is a very good question. It all depends on credit spreads compression there. Other elements to it, sentiment in the market, macro, geopolitical issues. You know it all, and we know it all. I think it is, for us, difficult to project specifically the normalized -- whether we are in a normalized position. We know rate cuts will have some implications on the interest rate structure and also on credit assessment and credit spreads in the market for these bond issuances. And that all boils down, especially also to option-adjusted spreads in the market for covered bonds in the Danish market. So all this in common have implications for our value adjustment during the course of this year. I think it's fair to say that we have ambitions to deliver a normalized or hopefully slightly above normalized level in '25.

And I think I'm not sure to what extent you commented on the credit line here, but we thought it was the right thing to put in potential losses here also. But having said that, we see no weakness in our credit book as of now. So it's maybe a little bit on the conservative side.

Next question comes from Asbjorn Mork from Danske Bank.

Two questions, really. One, a little bit of a follow-up on one of the previous questions on the capital distribution and the payout ratio. So could you just -- maybe I just didn't understand the answer. Maybe you just didn't provide a real detailed answer, Lars. But what you said basically was is that -- should we interpret so that basically you have the capital in nominal terms, you have the capital right now that you would like to have sort of like midterm given the Basel IV effects, et cetera. Hence, with a couple of percent growth to the balance sheet and with your 10% return, we should expect 75-ish percent payout going forward, which is what you could also do for '24? Was that how we should see it? Or were you sort of talking [ Mathias ] up to 100%. I just didn't really get the full clarity on that one.

First of all, thank you, Asbjorn, a clever way to follow up here. Much appreciated. Yes, I think I did not say a percentage. And what I said instead was that we think that we are in place now in terms of capital levels, and we are in a strong position. And we will stick to what we have communicated, 30% of the previous year -- the result of the previous year in cash payouts and then the rest as share buybacks. And then I said, we are happy and we can return money to the shareholders. But we will not give you a percentage, a full year ahead now, Asbjorn.

But then that actually brings me to the second question, which is obviously one of your problems versus your peers is you have a lower profitability. And Lars, you said very clearly at the Q3 report when you came with the strategy update that this is not everything we got back then. There could be changes to the structure in Jyske Bank. You had, I think, 5 or 6 different potential structures going forward, one being status quo. Could you give us a little bit of an elaboration now? It's basically 6 months since the -- close to 6 months since the consumer authority ruling. I guess you've had time to look into the long report. We've seen some M&A in the market. One of your bigger competitors is obviously growing and I guess, entering your market when it comes to large corporates in Denmark. So what are you sort of -- what is going to be your next step going forward? What should we expect since we didn't get anything in Q3, I guess, we're still waiting with anxiety in terms of what we should expect going forward?

Yes, I think in Q3, you did not expect to get it either as far as I remember, Asbjorn. And I think that was also just after the Competition Authority's report. After that, obviously, we read it immediately. And there are a number of things that we now know is possible for us. So we can take part in mergers and acquisitions going forward. That was impossible for us in the past. But we believe that the mergers and acquisitions that are being done needs to make sense strategically, financially and so on. And now we have the opportunity in terms of those changes to the model that was in place, but we will not do acquisitions just to do acquisitions. We'll do them when they make sense from, again, strategic and financial perspective. Then there are other opportunities also in that report that could, in the end, mean that we are considering different structural changes, and that work is also being done. I think you would understand that even though that we've been reading the report immediately, there are a number of things in the report that you need to understand better in order to act on the report. So there are definitions and so on that we would like to have full clarity on. But we are working on the different possibilities here and are very mindful that we'll try to get the best out of the possibilities. But we also want to make sure that they've done a good job on exploring the different opportunities.

When you say the opportunities for different structures given that report, could you elaborate a bit on that?

Well, I think prior to that agreement, the things that were, in particular, important to Jyske Bank was the fact that we could basically not acquire a bank with Totalkredit mortgages because we will not get any future income. And that kind of structural changes or acquisitions are now open for us. Secondly, it was impossible for a Totalkredit bank to leave the Totalkredit set up or at least they could not leave it without losing all future income. Now it's possible for them to leave. And that obviously also makes new possibilities or gives new possibilities that we're exploring in terms of cooperation.

And last question in line comes from Martin Birk from SEB.

Maybe just following along the lines of the strategic questions now that we are talking about them. So what do you -- Lars, what do you think about mortgage pricing? And what do you think about the 25 basis point that Totalkredit is offering, which is in my book is very strong argument for why you should stay with Totalkredit and making your life even harder. I guess your NII is still record high. Isn't it -- and it will be relatively cheap to match TK pricing on Jyske [indiscernible] credit. Isn't it now the time for you to look into those tools and then return to market growth rates?

I'm not sure I fully got the last part here.

I mean, is it the time that -- isn't it time for you to lower your mortgage margins and thereby also perhaps returning to a front book market share, which is higher than what you currently have? Or given that...

Yes. Sorry, Martin, I didn't get it the first time. Yes, I fully understand. We are looking at the pricing and considering the pricing basically all the time. For the time being or at least up until now, our view has been that we are competitive. And if you look at some of the ways to compare the pricing, we have the lowest prices. And if you also look at the development that we have had the last 3 quarters on the mortgage book, you would see that our value proposition -- combined value proposition is strong enough for us to generate growth. Then one could obviously ask if we would have even higher growth with lower prices. But again, it's about striking a balance here so that we get volume and price to an optimum. But we believe we are competitive now and have believed that up until now. If we start to feel differently, we would obviously have to look at the pricing.

Okay. Very clear. And then just coming back to your rather forward leading comments on loan growth and perhaps also taking market share on lending. You forgot to mention a number, and I'm particularly interested in your thoughts around sort of general banking loan growth.

Yes. I think what I said was that looking at the composition of business and corporate clients, we believe that we are in the subsegments of a little bit larger clients that normally request more lending. And for that reason, we believe that we could be slightly higher in terms of corporate lending growth. We'll see if that plays out. We are still very careful in terms of our credit policies and will not compromise on credit quality in order to get growth in a couple of quarters or a little bit more growth. So we want to be able to stick to the credit policies that we have in place in general. But still, we believe that we have good possibilities in the business and corporate market, predominantly due to the fact that some of the larger business and corporate clients are starting to look more in our direction. On the personal customer segment, we don't know how much will be requested during the next year, but we believe that will come up to speed compared to where we've been in comparison to the market and believe that we should be able to be close to the market development on personal clients.

Okay. So please help me here with your sort of semi long-dated NII sensitivity and given your, I would say, positive forward-leading comments around loan growth in general, when would you expect to start to see sequential pickup in NII if the EU Central Bank is done cutting by, I guess, the market right now is pricing in September?

I think you have a very relevant question because if we see a downward trend still on interest rates and cuts are being in place for several occasions going forward, of course, that is a difficult task to outweigh with even a decent growth in the market because it all depends on the market development. That being said, of course, as we close in on the rate cuts well around the summertime and going into the autumn, I think the momentum both on private clients and corporate clients is that good that we could see a more stable development in the second half of this year.

But the sequential growth will have to wait until H1 2026, I presume, right?

Given that rate costs are the name of the game for the coming quarters, you're likely to see some lag effect on some asset pricing that will entail that we'll see decreasing NII for the most of this year. I agree with that.

For the most of this year.

Towards the end of the year. I wouldn't rull out the fact we could see sequential growth, but it will be mainly in [indiscernible].

Please understand that what that moment we see now, if that is able to be managed properly during the course of '25, we could see also a strong end to '25.

Yes. I mean, that was -- I guess, that was the reason why I was so keen on getting Lars to commit to a loan growth number, but...

That is understood, Martin.

And next question in line comes from Mathias Nielsen from Nordea.

Just a couple of follow-up questions. Now there's no one else in the line, and we have the opportunity to ask questions. So on the bond portfolio, you have like -- could you maybe put a bit of flavor on like, what's the composition of that? Has that changed over the past years? And what should we think about the tailwind from that? When you look on rates development over the past couple of months, it has downward sloping in the short end of the rates, of course, as central banks cut, but the more midterm to long-term rate has been fairly stable. How much does that benefit then? And could you put a bit of flavor around that?

Yes, I think the best flavor I can put on that is basically looking at the overall yields to NII from the overall bond portfolio. Currently, we are at 2.7%, 2.8% annualized in Q4. And yes, we are likely to see this further decrease as short-term rates continue to decrease because we do have a fair share of bonds with 6 months or 3-month interest rate resetting. So it's natural as policy rates go lower, that will impact that bond portfolio. But that's, of course, part of the overall NII sensitivity.

And that 6 month bonds, like is that Q1, Q3 or when is that hitting the numbers?

So good question. So the majority of our bonds have interest rate resetting on the 1st of January and the 1st of July. So historically, that's where we've seen the largest jump in terms of coupons on the bond portfolio.

And then my last question on capital. Is there any updates to the expected developments in your capital ranges from the upcoming regulations, Basel IV and what else? Is there any updates to that?

No update relative to what we announced when we announced the strategy. We tend to stick to the lower end of the 15% to 17% on the CET1 ratio. And post Basel IV it's in Q1 this year is still up to 1.5 percentage points, inclusive of a CRE buffer of 0.9%. But when we get behind well -- when Q1 is behind us, probably we will be able to be more precise on that. But as of now, that's where we stand.

So that -- sort of just the last -- you said that, was that meaning that we should expect you to do a capital update or something updating the targets after -- or in connection with the Q1? Or how should we understand?

We can't guarantee you that. But of course, when we get the very big chunk of regulatory charges behind us, we will be able to be more clear on that. And of course, that requires a good dialogue with the authorities.

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