Danske Bank A/S
CSE:DANSKE
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Danske Bank A/S
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Good morning, everyone. Welcome to the conference call for Danske Bank's financial results for the first quarter of 2022. Thank you all for taking the time to listen in on this call today.
My name is Claus Ingar Jensen, and I am Head of Danske Bank's Investor Relations. And with me today, I have our CEO, Carsten Egeriis; and our CFO, Stephan Engels.
Slide 1, please. In today's call, we will present Danske Bank's financial results for the first quarter of 2022. We will aim to keep this presentation to around 30 minutes. And after the presentation, we will open up for a Q&A session as usual. And afterwards, feel free to contact the Investor Relations department if you have any more questions.
I will now hand over to Carsten. Slide 2, please.
Thanks, Claus. Let me start by making a comment to the company announcement we published yesterday about our decision not to distribute dividends in connection with the announcement of our interim report for the first quarter of 2022. This is done in order to ensure prudent capital management as we have now entered into initial discussions with U.S. and Danish authorities in relation to the Estonia matter.
Our decision yesterday is consistent with our announcement in February 2022, and I'm not able to share any more details about the discussions with U.S. and Danish authorities, which are confidential. However, we are not yet able to reliably estimate the timing, the form of resolution or the amount of a potential settlement of finance, which is likely to be material. That said, I will now, together with Stephan comment on our financial results for the first quarter, which was published this morning.
Despite the tragic events in Ukraine following the Russian invasion in February, and the accompanying effects on the outlook for the global economy, we at Danske Bank have had a satisfying start to the year. As I mentioned during our conference call in February, we ended 2021 in a positive way as we started to benefit from several green shoots all supporting increased business momentum in many areas of Danske Bank.
I'm pleased that also in the first quarter, we've continued on this positive trajectory with improved commercial progress in our core banking activities. I'll provide more detailed comments for each of the business units later in this call.
The first quarter also marked the period in which the remaining restrictions caused by the pandemic were lifted and economic activity remained at a high level. However, we also saw a -- potential capacity constraints in the labor market and also rising inflation from the levels we saw already in the fourth quarter. Russia's invasion of Ukraine fueled an acceleration of the supply chain and energy supply issues. The situation is unlike anything we've seen for decades, and the uncertainty about how this will affect the economies and our customers remains high.
The significant investments that we've made to enhance our financial crime prevention and our compliance resilience over the past years have enabled us to respond swiftly to quickly changing environment. The sanctions implemented in response to Russia's invasion of Ukraine are complex and expensive and have impacted a number of businesses and apertures (sic) [operators] in various ways across the Nordic countries. And as a trusted financial partner, we've diligently focused on managing sanction risks while helping our customers navigate through this changing landscape.
In this turbulent environment, we saw good commercial progress, driven by strong customer activity and our initiatives in many segments of our business. Despite a slowdown in our capital markets related business from a very high level last year, overall transactional activity, including remortgaging was high. Adjusted for the fair value effect of loans at Realkredit Denmark, lending was up 2% from the same period last year due primarily to demand from our corporate customers.
And the good progress we've seen within our sustainability offerings continued in the first quarter. We've improved our green offering to personal customers, and we've maintained our position as a top ranked arranger of sustainability linked finance.
Financially, we saw progress in our net interest income due to positive effects from higher volumes and pricing initiatives, whereas fee income maintained the strong level from last year, benefiting from a diversified business mix. Turbulent and difficult financial markets had an adverse impact on net trading income due mostly to value adjustments whereas customer activity and trading income from our business units held up well relative to the same period in 2021. However, income from insurance business came in significantly lower despite a positive development in the underlying business.
In terms of operating expenses, we continue to make structural progress by reducing underlying costs despite continually high cost for remediation and AML. The cost-to-income ratio came in at around the same level as in the preceding quarter and higher than the level for the same period last year, mainly because of lower income. Credit quality remained strong with loan impairment charges at a low level as our customers' financial position remained healthy, and we saw limited impact from adjusted macro models in the first quarter and continue to have a prudent post-model adjustments in place. And Stephan will comment on the financial results in more details later on this call.
Despite the somewhat higher degree of uncertainty for the economies, we maintain our outlook for a net profit of between DKK 13 billion to DKK 15 billion for the full year, subject to uncertainty and does not include any effect from a potential settlement of the Estonia matter in 2022. Stephan will, as usual, comment a little bit more on the outlook later on the call.
Let's have a look at our business units in the first quarter. Slide 3, please. At Personal & Business Customers, we started the year strongly with good activity and improving income across all lines. NII benefited from a growing credit demand and the additional impact of the deposit repricing initiatives that we've taken.
In general, we saw a strong development for fees across segments, particularly within business customers, which also benefited from price initiatives to further encourage the use of digital channels. And in personal customers Denmark, we saw seasonally high refinancing activities combined with good contribution from remortgaging and also general high activity from healthy consumer spending.
With the necessity of the green transition becoming increasingly more important for our society, we continue to implement products and solutions for all our customers, for example, through new loans that give personal customers an incentive to change their heating source and further also investing in our advisers' ESG abilities. We continue our challenger strategy in our personal customer Nordics business with a positive trend in home financing meetings and also approval of mortgage applications in Sweden, which has supported the trend in lending.
For business customers, we have strong relations with our customers. And although strong credit demand came primarily from our large corporate clients, we continue to increase ancillary business with SMEs across our other offerings, where especially cash management and also FX product categories showed a strong development from the same period last year.
And as part of our tiered service model, we continue to enhance our allocation of resources through the investments that we make in our digital solutions. So in the first quarter, this resulted in a further improvement of relationship managers' ability to fully approve credit applications for small businesses digitally, which now accounts for 60% of our approvals.
So coupled with good traction and further innovative digital offerings, we're really excited about the opportunities that lie ahead. And we now also welcome Christian Bornfeld and Johanna Norberg to the executive leadership team as the new heads of our new Personal Customers & Business Customers unit with the aim of really fine-tuning our focus with a dedicated split of P&BC, and this takes effect on Monday.
Slide 4, please. If I turn to LC&I, we continue to build on our strong relationships with our customers as a leading wholesale bank and have been able to support customers through a wide range of product offerings and advisory services which resulted in our financial performance holding up well despite the volatility that characterized the quarter. And in particular, we saw a strong development for lending volumes, which increased 4% from the same period last year. And this was driven both by our activities in Denmark and in line with our strategic priority in Sweden as well. Together with our leading everyday banking solutions, this volume growth mitigated the lower activity seen in capital markets where primary markets slowed significantly during the quarter.
Asset under management saw a decline in the quarter due to financial markets correction. However, AuM was supported by continued constructive net sales and our efforts to strengthen investment products, including also award-winning sustainability offerings. So even without adjusting for a landmark ECM transaction last year, our diversified business model resulted in NII, and net fee income combined being stable in the quarter despite the volatility and the negative effects of the decline in AuM.
As volatility hit the financial markets, we supported our customers with risk management expertise, which underpinned trading income despite the challenging market conditions. And so when excluding negative value adjustments, trading income at LC&I declined 14% from the same period last year. However, net trading income rose 29% compared to Q4.
Next slide, please. Let's briefly take a look at our insurance activities in Northern Ireland. At Danica, the result of the first quarter came in significantly lower than both the year earlier level and the level in the preceding quarter, and the turbulent financial markets had a negative impact on the investment results on life insurance products where Danica holds the investment risk as well as on the investment result in health and accident business. And in addition, the result from the health and accident business included a negative valuation effect from an adverse development in hedges relating to inflation risk. The underlying business saw a positive development in the first quarter due to a continued growth in premiums from the same period last year as well as the health and accident business where our preventive efforts have contributed to a decline in new cases.
And in Northern Ireland, the core banking operations performed well with NII and fee income combined up 16% from the same period last year, supported by sound underlying activity, higher U.K. rates and also diligent pricing adjustments. This positive development was, however, offset by trading income being affected by mark-to-market adjustment of interest rate hedges. And given the nature of this hold-to-maturity hedging, this adjustment is, however, expected to reverse in the future.
So before I hand over to Stephan, let me round up by saying that, all in all, I'm confident with the increased progress we've made in the first quarter across all our business segments. And despite the fact that in many ways, the first quarter was a turbulent one, we have, as we saw during the pandemic benefited from our diverse and our resilient business model and have been able to focus on continued execution of our 2023 plan.
Next slide, please, and then I'll hand over to Stephan.
Yes. Thank you, Carsten. As Carsten just mentioned, we had a satisfying start of the year on the back of good progress from the end of 2021. Our income from core banking activities performed well and was in line with expectations. NII was up 3% from the same period last year as deposit repricing initiatives and higher volumes more than mitigated the margin pressure we saw from primarily higher funding rates in Norway.
NII was up 1% from the preceding quarter despite the negative day effect as a result of yet another quarter with an increase in lending and a positive impact on deposits from recent repricing actions and higher short-term rates. Net fee income was in line with the level in the same period last year when fee income benefited from strong customer activity and 1 significant ECM transaction, in particular. The slowdown we have seen in primarily income from our capital markets business was almost fully mitigated by higher activity-related income, including an increase coming from remortgaging activity in Denmark. When comparing Q1 with the preceding quarter, fee income came in lower, primarily because of the annual booking of performance fees in Asset Management in Q4.
Trading income came in lower compared to the same period last year due mainly to valuation effects, whereas underlying income from customers held up well despite the turbulent financial markets. Relative to Q4, income was lower as the fourth quarter last year benefited from a one-off gain of DKK 0.2 billion. However, underlying trading income from the business units was up because of good customer activity at P&BC and LC&I.
Net income from insurance business came in lower due to a lower investment result and an adverse effect from an inflation hedge, as Carsten mentioned earlier. Other income amounted to DKK 0.7 billion for the quarter, including the previously announced gain related to the sale of our business activities in Luxembourg.
Operating expenses came in 2% above the level in the same period last year, driven by an increase in regulatory cost and elevated remediation costs. Good progress with the reducing underlying costs as well as lower transformation costs mitigated part of the increase. I will comment on the cost development in more detail later on this call.
Loan impairment charges amounted to DKK 0.2 billion in Q1, down from DKK 0.5 billion in the same period last year. The level continues to be well below a normalized level, confirming over strong credit quality and our very limited direct exposure to Russia and Ukraine. We continue to have sufficient buffers in place, which I will also comment on later. Net profit for the period, thus amounted to DKK 2.8 billion, down from DKK 3.1 billion for the same period last year.
Next slide, please. Now let us take a closer look at the underlying development in the net interest income for the group. For NII, we saw a good improvement compared to last year with an increase of 3%. Deposits are clearly benefiting from 2 factors: firstly, the repricing initiatives for deposits we launched during 2021; and secondly, the higher short-term rates.
On the lending side, we are pleased to see the positive impact from an increase in volume, whereas the negative impact of lending margins is due primarily to higher NIBOR rates as the associated pricing adjustments for customers in Norway announced this quarter awaits implementation due to the notice period. Relative to the preceding quarter, NII was up 1% despite fewer interest days in the quarter. This development can mostly be attributed to the same factors I just explained for the year-over-year development, namely higher volumes and margins.
In addition, we saw 2 opposite effects in Q4 related to the TLTRO and a negative one-off related to the NII impact of taxation of business travelers.
In respect to wholesale funding activities, we have, as usual, been active during the first quarter in order to meet our funding need, primarily by issuing covered bonds and nonpreferred senior bonds. The uncertainty caused by the Russian invasion of Ukraine kept the market at low activity for a period. However, in early April, we issued a sizable nonpreferred senior debt issue in U.S. dollar, confirming that we have full access to the market, and we are in a comfortable position for now.
Let's have a look -- next slide, please. Let's have a look at fee income. As we have discussed on some of the previous slides, fee income maintained a strong level and came in at an almost unchanged level from the same period last year when fee income benefited from high activity driven by more benign financial market conditions. In the first quarter of this year, we saw a more turbulent market due to rising interest rates early in the quarter and significantly higher uncertainty as a result of the Russian invasion of Ukraine. Hence, we have seen a decline in income from activities subject to financial markets' conditions. However, this has been mitigated by strong commercial momentum in our business units. Fees generated by investment activities were impacted by lower investment appetite among our customers. However, fees were relatively stable from the same period last year as we continue to benefit from the increased momentum on investment sales we have seen building throughout last year.
When comparing with the preceding quarter, please note that Q4 included the annual booking of performance fees of DKK 0.3 billion in Asset Management. Both year-over-year and relative to the preceding quarter, activity-related fees were up, reflecting the strong underlying economic activity, and now exceed the level before the pandemic. In combination with our own customer initiatives, this translated into higher customer activity, for example, through corporate daily banking services and was further supported by adjustments to our fee structure for corporate customers. For lending and guarantee-related income, we also noted higher activity driven by remortgaging activity and the semiannual refinancing of FlexLåns. The higher long-term rates resulted in strong interest for remortgaging among our personal customers in Denmark. And the good traction we have seen recently for our FlexLån mortgage product further added to remortgaging activity.
Next slide, please. Trading income came in at DKK 0.6 billion for the quarter, significantly impacted by market value adjustments of group treasury's mortgage bond portfolio, mark-to-market movements on an interest rate hedge in Northern Ireland and xVA adjustments in total amounting to DKK 0.5 billion. Despite the turbulent financial markets' customer activity held up well at both P&BC and LC&I. The combined income of the 2 units exceeded the level from the preceding quarter by 28% and was down 7% from a high level in the same period the year before. When comparing trading income for the period, please note that the first quarter of last year as well as the preceding quarter included one-off gains from the sale of VISA shares and Aiia.
Next slide, please. Now let's take a look at our operating expenses. The headline number came in higher than the same period last year due mainly to the planned ramp-up of AML compliance we implemented last year and continually elevated costs for remediation of legacy cases. In addition, the new Swedish Bank tax and in-sourcing of IT explains the increase. We continue to see an improvement in underlying costs in the form of lower staff costs as a result of decline in the total numbers of FTE of 3%, driven by a decrease in nonfinancial crime FTEs of 6% since the peak in 2020.
Lower costs for our transformation, which is progressing according to plan, also contributed to the decline in costs from the same period last year. If we look at the quarterly development, the continued progress on structural cost reductions more than absorbed the introduction of the Swedish Bank tax and continually elevated remediation costs. The seasonal decline in performance-based compensation, we normally see in Q1 was partly offset by a reversal of severance pay in the preceding quarter.
Next slide, pleas. Turning to credit quality and impairments. Our direct exposure to Russia and Ukraine is very limited and we, therefore, continue to see an improving trend in credit quality and impairment charges below normalized level. Actual single-name credit deterioration and individual impairment charges remain very modest. And despite added macro model charges and additional post-model adjustments to account for the current uncertainty, we ended the quarter with an annualized loan level of 5 basis points for the group. While some sectors will undoubtedly be impacted by the rapidly rising inflation and the economic implication from the war in Ukraine, we remain comfortable with the quality of our loan book. We have done a diligent bottom-up review of exposures that might be impacted by second order effects and will continue to prudently assess our portfolios.
With the current uncertainty, we have made prudent adjustments to our macro scenarios, which drove the additional DKK 0.4 billion impairments this quarter, which is in line with the level we saw in Q4 that was ascribed to the uncertainty at the time related to COVID-19 restrictions and the Omicron lockdown risk. This uncertainty has clearly been reduced since. And as such, parts of the post-model adjustment that was put in place to cover COVID-19 related tail risks have been repurposed towards segments particularly affected by the global tension with an additional add-on of DKK 0.2 billion.
With that, we ended the quarter with provisions of around DKK 1 billion for any Russia and Ukraine impact not yet measurable on single name level or captured in our macro models. In addition, we have kept around DKK 1 billion for any COVID-19-related tail risks that could emerge.
So overall, we remain comfortable with our well-provisioned position and the additional PMAs we have put in place to account for the current uncertainties. While we expect impairment levels to normalize going forward, we are reassured by the robust household finances and the lower LTV ratios, which we see across the Nordic countries, coupled with our specialized risk officers in place to cover the more complex parts of our portfolio, and the significant derisking of our balance sheet in recent years, for example, in relation to oil and gas support our view of a normalized loan level -- loss loan level of around 8 basis points.
Next slide, please. Now let's take a look at our capital position. Our total capital ratio decreased due to the recent call of AT1 capital. Our reported CET1 capital ratio decreased slightly to 17.6% as the increase from retained earnings and lower REA were offset by an increase in deductions related to Danica and a small increase in intangible assets. REA came down slightly in the first quarter as the increase in market risk following higher volatility in the financial markets in Q1 was more than mitigated by lower credit risk.
In our capital planning, we remain mindful of the regulatory landscape, including the announcement to raise the Danish countercyclical buffer to 2.5% by the end of Q1 2023. Danske Bank's leverage ratio was 4.7% according to transitional rules and 4.6% under fully phased-in rules.
Next slide, please. Finally, a comment on the outlook for 2022. As Carsten mentioned, at the beginning of this call, we confirm our outlook for net profit between DKK 13 billion and DKK 15 billion. As it appears from the financial report we have presented today, we see a good traction on our income from core banking activities, a stable cost development and the continuation of loan impairment charges below a normalized level. As the observed decline in income from insurance business and net trading income was predominantly caused by value adjustments, we remain confident in our ability to meet the outlook for the full year. However, it remains clear that the ongoing geopolitical tension and the potential risk from the pandemic are both factors that could further affect economies. Consequently, the outlook is, of course, subject to a high degree of uncertainty and limited visibility and does not include any effect from a potential settlement of the Estonia matter in 2022.
Next slide, please, and over to Claus.
Thank you, Stephan. Those were our initial comments and messages. We are now ready for your questions. [Operator Instructions] And finally, a transcript of this conference call will be added to our website in the -- within the next few days.
Operator, we are ready for the Q&A session.
[Operator Instructions] Our first question comes from the line of Jakob Brink from Nordea.
I have 2 questions. The first one is on costs, please, and your guidance of around DKK 25 billion. Our costs were a little above consensus and my expectations in the first quarter. Also looking at the sort of the cost split over the past 2 years, it's been somewhat lower share in the first quarter than this year. Why is it that you think DKK 25 billion is still the level? Is there any sort of big sort of AML-related costs in the first quarter that would fall away in the next 3 quarters or anything else you can help us with here?
And my second question is on loan losses. I see that your Stage 3 loans are coming down in the quarter. We've seen the same in other banks, obviously, still strong credit quality. What should we expect, do you think, for the remainder of the year regarding P&L provisions? Will you keep reducing the COVID buffer to offset potential provisions or move more to the Ukrainian buffer? Or what should we expect?
Yes, Jakob. Thanks for your questions. Let me just briefly touch on the asset quality questions, and then I'll hand over to Stephan on the cost question. We still see in our asset quality and in our customers, both across personal and business, quite benign asset quality trends. There's no question, of course, that there is uncertainty, but we're not seeing any concerning trends in our books as we look today.
And I think from a corona perspective, we're right in the middle now of seeing how the -- particularly in Denmark, how the corona loans phase out. The first loans were due here in April. Again, we don't see any material concerns at this stage. So I would expect that during the second half of the year, you would slowly see a further phasing out of the corona buffer, if you will, I think in terms of the global tensions post-model adjustment that we put forth of about DKK 1 billion, that is still highly uncertain. So we'll have to wait and see how things play out.
But again, I'd reiterate that we have very limited exposure as such, of course, to the war in Ukraine and to Russia, Ukraine, more generally. And that's also why we call it a global tensions post-model adjustment because it is -- it is there for more general concerns, of which we don't really see anything come through in our book at this stage. And then on costs?
Jacob, I would make 2, call it, pretty simple comments. One is there is obviously further plans for to take cost takeout throughout the year, as much as I do agree with your seasonal argument in a way. And also keep in mind that in Q1, we have seen costs up partly to in-sourcing of IT that has kind of had some, call it, one-off start investment that we don't think is recurring. So that's why we still believe that our cost trajectory is fully in place.
How much has that -- those one-off costs been, please?
It's roughly DKK 80 billion -- million, sorry.
Sorry?
Roughly DKK 80 million, sorry.
Okay. Yes, DKK 80 million. Okay. And just, sorry, on the losses, Carsten. Is the -- you said that you would potentially phase out the COVID buffer in the second half of the year. Given the uncertainty, do you think you'll continue to be adding them to the Ukraine buffer? Or do you think the likelihood of reversals is larger?
Yes, I think that's a very difficult question to answer, Jakob. So I'm going to remain cautious and say I'd like to wait and see how the current macro tensions and uncertainties play out in Q2.
And the next question comes from the line of Maths Liljedahl from SEB.
Yes. Looking a little bit into NII sensitivity since that's a major topic among the Nordic banks. How do you see -- first of all, we got the rate hike in Sweden yesterday? Do you have any estimates for your interest rate sensitivity related to the rate in Sweden?
And also, how is the path in Denmark considering that the ECB would move a little bit later during this year regarding repricing of deposits, et cetera. I know the modest product, but on the deposits with the pricing charges there, if you could allude on that.
Yes, Maths. Just on NII more generally, we look at a 25-bps increase, and this is mostly really driven by ECB and DK rates, a 25-bps increase in rates would probably give around DKK 500 million to DKK 600 million, all else equal of NII just to state that first of all, and that's for the next 25 bps. Then we would expect subsequent increases to be around DKK 800 million of NII sensitivity. Just so you all have that as sort of a high-level view.
Then your question on Denmark, and then I'll come to Sweden at the end. Your question on to what extent rate expectations and rate moves would change pricing on deposits as I understood your question. And clearly, I can't say anything about future pricing. But obviously, current rates in Denmark are still negative and short rates are still negative. And we haven't charged negative rates to our customers for a long time, and roughly 2/3 of our deposits are still not covered by negative interest rates in Denmark.
Clearly, as rates potentially increase, and there is, of course, a likelihood that euro and DK rates will increase towards the end of the year and into next year, then we would look at how we reflect that both in deposits as well as in lending rates. But too early to say anything about that. And then on your Sweden question, we don't disclose NII sensitivities for Sweden.
Okay. Regarding these investigations in, yes, especially the U.S., you say it likely could be material, whatever that means. And we can do the calculation backwards here in terms of capital requirements and where you are, et cetera. But how much do you -- have you stated anything, how much could you withstand in terms of a potential fines if we really sort of paint a bearish picture here. Have you estimated that or said anything?
No. I mean first of all, and I know this is not what you're asking directly, but I might as well say it. So it's out that I can't say anything about the timing, the outcome or the amount of any potential settlement or fine. And then to your second question, we haven't done -- to your direct question, we haven't done any direct calculations of the nature that you mentioned there. But obviously, we disclosed our capital and our minimum requirements and so forth.
The next question comes from the line of Maria Semikhatova from Citibank.
A couple of questions. From my side, first, on costs. You recently noted that the resolution of legacy issues is likely to be delayed beyond 2023 and that you are now looking into alternative approaches. Just wanted to check with you what it means for the outlook of remediation costs. If I'm not mistaken, you previously guided that remediation costs should amount to DKK 400 million this year and then dropped to 0 in 2023. That's the first question.
And second, just was wondering on outlook for Danica earnings. I think previously, you said that normalized is around DKK 1.5 billion to DKK 1.7 billion. So just given the results of the first quarter, what you think would be the appropriate level for this year?
Yes. Thanks, Maria. Yes, on the remediation costs around the debt collections case, which I believe was your question, a little difficult hearing it just at the start. But we guided to higher remediation costs. They're probably a little bit higher in Q1 than expected, also because of the increased magnitude of the case. But we are looking, as you also alluded to, at alternative solutions to basically address and get the case resolved towards our customers. And therefore, we don't believe there is an impact to our 2023 cost guidance, which I think was your question.
And then Stephan, I pass over to you on Danica.
Yes. Let me maybe shed some light on what impacted the quarter. Simply speaking, with -- in total, like, call it, DKK 600 million. There was probably 1/3 related to inflation hedges that we have put in place to meet future liabilities mainly for the loss of ability to work, insurance in our health and accident segment. These inflation hedges are not completely available in DKK. So they are also taken out in euro since inflation expectations at the end of Q3 between several countries in Europe have been quite widely apart that has led to this valuation effect. We would expect that to come back or at least normalize to a certain level over the coming quarters.
1/3 was basically related to widener of credit spreads on our interest rate hedges. As these hedges approach maturity, they also would, by definition, start to come back over time. And around 1/3 is from financial market correction, which is -- and our asset allocation. This is where Danica has the investment risk and where we need to see how the market develops throughout the rest of the year.
So to sum it up, our underlying performance assumption for Danica still is around DKK 1.5 billion. It now remains to be seen how much of the mentioned effects will come back through the year and how much possible further deterioration might come from our asset allocation risk.
Just to quickly follow up on the remediation costs. I understand your outlook for 2023 -- but is it fair to assume that this year, these costs are likely to increase above your expectations given your efforts to speed up the cases?
As I said, the costs were slightly higher in Q1. I think it's too early to say what the impact is. As I said, we're looking at alternative approaches and we'll come back as soon as possible on that.
Next question comes from the line of Sofie Peterzens from JPMorgan.
Here is Sofie from JPMorgan. So just a quick follow-up. In terms of the NII that you make on the negative deposits, I understand 1/3 of your deposits are -- only have negative rates. But could you remind us how much of your annual net interest income comes from the negative deposit base that you currently have?
And then my second question would be around your dividend outlook. Yesterday, you said you're in a good debate at the first quarter dividend -- interim dividend. How should we think about the further interim dividends? Should we expect them to be canceled as well? Or is first quarter got a one-off? And how should we kind of think about the interim dividends? That would be for me.
Sofie, thanks. On the further interim dividends, again, can't say anything about the timing, the outcome or the amount of the potential settlement fines and any potential dividends are at -- subject to a decision by the Board on a quarterly basis. So I can't say anything other than that.
Then I think your question on NII was specifically whether we disclose or can say anything about the income that we receive on the roughly 1/3 of DK deposits that are impacted by negative rates. And I'm not sure we disclose that, but can I just...
I think as a sum total of our deposit repricing initiatives across P&BC and LC&I we have also quite done something. We have disclosed DKK 400 million to DKK 500 million last year on several equations. But you need to keep in mind that, that has been factored in and only covers for P&BC, 1/3, as Carsten just mentioned.
On a more general note, I think you need to keep in mind that the rate hikes will obviously have different effects on different currencies. As Carsten said, our main sensitivity is probably around the euro and the DKK part. And you need to keep in mind that you will see different levels of impact on segments. LC&I probably who still kind of benefits from the flawed loan agreements will see a lesser to neutral effect, whereas P&BC from deposit repricing might or might not see a positive effect also obviously, being a reflection of how the market will react to any changes in pricing.
Sorry, just a quick follow-up on the negative deposit rates because I think last year, you at least guided for 2x DKK 500 million more in NII from the negative deposit rates. So I'm just wondering where the DKK 500 million then disappeared from one of those kind of...
The DKK 500 million will not disappear. You will see that in a year-over-year effect, but it will also affect, Sofie, the sensitivity going forward because last year, we were looking at a DKK 800 million sensitivity for a 25-bps shift. This year, we will -- as Carsten mentioned earlier, we will more go to DKK 500 million to DKK 600 million because some of that has obviously been captured by quite some measures and also some smaller rate hikes in Norway and Sweden as per yesterday.
But didn't you introduce that negative rates first time in January 2021 and the NII by DKK 500 million? And then you had a further negative rate introduction in mid-2021, which was another DKK 500 million?
So I mean, just kind of struggling a little bit to get at that DKK 1 billion versus your DKK 500 million to DKK 600 million NII improvement from a 25-basis point hike.
No. I think the confusion might be that when we gave the effects of these repricing measures, we clearly said there is a full year impact, which we will only see in 2022, and that is what we are also seeing in Q1 and there was obviously a smaller effect than last year because measures only kicked in throughout the year and only come to full effect this year.
On top of that, we are seeing rate hikes, for example, in Norway and as of yesterday, also in Sweden.
And part of the measures that we have taken throughout the '21 decisions plus the rate hikes that you have seen over the last couple of weeks, including, for example, U.K., obviously, eat a bit into the sensitivity for the 25 basis parallel shift concept where we expect DKK 500 million to DKK 600 million rather than DKK 800 million.
So there's quite some upside still from rate hikes. And as Carsten mentioned, there is a different, call it, sensitivity between the first 25 basis points, amongst other things, reflecting flaws, for example, that we have a loan agreement than with the next 25 basis points, which will then go up again to DKK 800 million.
Okay. And could you maybe -- sorry, just a quick follow-up. In your annual report, I think you have the rate sensitivity is negative DKK 1.5 billion for 100 basis points increase in rates. So how does that then square in to the guidance, DKK 500 million to DKK 600 million for the first 25 basis points and then DKK 800 million for the subsequent rate hikes?
Yes. I think -- this is Claus, Sophie. I think you should be careful because the rate sensitivity you are referring to is under the risk management part and where we apply completely different assumptions -- so the DKK 1.5 billion negative is essentially based on a gone-concern view. So that is -- as I said, this is from a risk management point of view whereas the DKK 500 million to DKK 600 million replacing the previously DKK 800 million guidance is in a...
Constant balance sheet model basically.
Exactly. Yes.
But I mean, what assumptions do you then have for the DKK 500 million to DKK 600 million that you repriced all the loans and nothing on the deposit side?
No, I think, let's reflect back, Sofie. These 25-basis point rate shift sensitivities were originally kind of driven by regulatory prudency questionnaires. And that assumes simply no change in customer behavior, constant balance sheet and a number of other things, and obviously, some pass-through assumptions that you make. And in that sense, I think it is a bit of a theoretical concept to begin with. And I think if you look across the market, there is very different views on what this will do and these very different views, in many cases, reflect also the different business models, which obviously have different sensitivities.
And again, if you look at Danske Bank, there is obviously a higher sensitivity in, call it, our Danish business because we are structurally overfunded by deposits given the way the Danish market is set up and that makes for quite some sensitivity in this market. Part of that is kind of covered by our thresholds and the negative pricing. But as Carsten said, 2/3 of the deposits are in that sense, unpriced.
You are welcome, Sofie, to give us a call afterwards.
Okay. Yes, sounds good.
Your next question comes from the line of Jan Erik Gjerland from ABG.
It's regarding Northern Ireland and the hedges you have in trading. Should we think about those to trending towards the net interest income and see that, that is in a comparison versus the trading? So the NII gets you sort of overstate it versus your trading loss? That's my first question.
And just to clarify on the NII sensitivity. I see 2/3 in the personal customer and SME division rather than in the large corporate division that is sensitive to your Danish interest rate changes?
Jan Erik, no, on Northern Ireland, I mean you should simply -- these are interest rate hedges that normally would be hedge-accounted but are not due to the systems that we have in Northern Ireland, so they're mark-to-market and you should look at it in the sense that this income will come back over 2022 and into, I guess, early 2023.
And then on your NI (sic) [NII] sensitivity question, the 2/3 is really focused on the personal customer book in Denmark. So it doesn't impact the business banking book, and it doesn't impact the large corporate and institutions book.
So to put it in another way, all deposits in Denmark, except for the 2/3 of the retail deposits are priced negative.
Yes. And again, those are the ones where customers have under our DKK 100,000 of deposits with the bank.
The next question comes from the line of Martin Gregers Birk from Carnegie.
Just following the lines of the announcement yesterday. So assuming this is a -- assuming you guys reach a settlement this year, what would that mean for costs going forward?
I mean the way I would look at it, Martin, is that clearly, there are costs associated with this case, not least lawyers, et cetera. So I mean, in terms of operating expenses, there will be some cost benefit, but you should not see that as a material cost benefit.
Okay. Now you only write Danish and U.S. authorities in the company announcement yesterday. So should we still interpret that as other authorities that are involved in this -- there still -- you guys are still waiting for them?
Yes. I mean, again, I can't comment on discussions with authorities. They are confidential by nature. So I can't say anything more on that, Martin.
But if you go into the contingent liability section, Martin, you will find what kind of authorities we have a dialogue with. That's disclosed in that section.
Okay. All right. Appreciate it. Then maybe just very final question. On -- after a potential settlement, it's also fair to assume that the DKK 10 billion Pillar II relief is going to be removed and then potentially also the CET1 ratio, short-term above 16%, should also be maybe a percentage point lower?
I wouldn't -- that is a very -- that is a question I think we can only really answer once we know what the world looks like at the end of the day. And again, it's not for us to decide on any Pillar II buffer requirements. I don't want to give any guidance what are my expectations are. But I think that in this part, there is many moving parts, and I wouldn't start speculating on that right now, to be honest.
The next question comes from the line of Johannes Thormann from HSBC.
Johannes Thormann, HSBC. Two questions from me. First of all, on Danica. You basically put all the negative performance towards the valuation and market effects. Can you comment a bit more on the underlying or the technical result of the unit and try to put this in a quarterly and year-on-year context?
And secondly, as you canceled your dividend due to the talks with -- regarding the potential fines, will you do any acquisition before this is settled or you will only do acquisitions after the talks are finished?
I think on your last question, again, I would see it as -- if you're talking about sort of larger acquisitions or larger activity on that front, I would see it as unlikely that we would enter into that until we have more clarity on the current process.
And then Stephan, do you want to comment on the underlying technical results and run rate, which I think you alluded to before, but maybe give a bit more detail.
Yes. The underlying performance of Danica is doing fine. We are seeing increase in premiums and asking -- and your question about whether we're seeing risk trends, we have seen far better risk trends in our health and accident part. So the underlying part is really strong. It is indeed the DKK 600 million of valuations, which drive the result, which I alluded to earlier.
Next question comes from the line of Jacob Kruse from Autonomous.
So just 2 questions from me. Firstly, just on your capital, you have 17.6% CET1 versus the 16% target, which I think you say is inflated a bit due to the uncertainties. But that's about DKK 13 billion of excess capital. And then you have, I guess, some of the Pillar II buffer of DKK 10 billion. So just given those capital resources, the decision to cut the dividend to save, I guess, about DKK 1.5 billion. Can we at all think about this as the sort of scope of outcome that you see in these regulatory discussions? Or is there anything you can just say about how you think about that -- the capital resources that you have?
And then my second question was just on cost. I think for 2023, you're targeting DKK 23.5 billion. Does that mean that the compliance ramp-up that you've done needs to be reversed? You noted that the impact on cost of a settlement may not be that material in an earlier question. Or how do we -- especially given inflation that we see now, how do we go from the DKK 6.3 billion quarterly run rate this quarter down to a full year DKK 23.5 billion.
On the -- on your capital question, again, given that we can't say anything about the timing outcome or size of a potential fine, I don't want to comment more on the question other than the fact that we also clearly say in the company announcement that we do this to ensure prudent capital management given the fact that we've entered into these initial discussions and that we mentioned clearly that we cannot reliably look at any timing, the form of resolution or the amount, but also that the fine is likely to be material.
On the cost piece, I'm not sure the DKK 23.5 billion, I mean the outlook on the cost this year is around DKK 25 billion, right? Were you asking on the DKK 23 billion number?
Yes, sorry, DKK 23 billion, so the next step from here?
Okay. But I guess there are several moving parts in terms of the cost out. As you said, there are some reductions in compliance as part of that cost reduction. There are reductions planned from a remediation perspective. And then there are underlying costs, so a continuation of the reductions in salary costs, driven also by the automation and digitization efforts that we continue to see quarter-on-quarter, for example, now that we can open up automated account opening in the mobile bank here in Q1 is a good example of how we're freeing up frontline resources. And then there are also cost savings on non-salary cost of premises and other costs. So that would sort of be the main components driving the cost from the around DKK 25 billion to the DKK 23.5 billion.
Okay. And just back to just I understand you can't comment on the size of the fine. But would you agree that your -- at least that the available capital resources are starting DKK 0.13 billion and then some potential uplift from the Pillar II buffer becoming smaller once the settlement is done?
I'm not sure I understand. Again, given that I can't comment on the outcome, the likelihood, the size of the fine, I don't want to comment on the question. I mean, I can say more generally, when we look at our capital position, as we've said previously, we have a strong capital position. So if that was your question, then yes.
I think Jacob, I think we have to refer you to the interim report where we have put a number of what we see as being the excess capital and limited by that for now.
The last question comes from the line of Robin Rane from Kepler Cheuvreux.
So 2 questions on NII, I guess. So we saw some Nordic peers reporting benefits from the rate hikes in Norway and U.K. already. Is there anything of those visible in your numbers this quarter? Or if not, when do you expect there to be some visible benefit from this?
And then secondly, you mentioned that you called the AT1 capital. Should we expect the AT1 payments that are currently deducted from the net profit should go to 0 in the course ahead?
Yes. I mean on the NII question, on Norway, there will be a lagged effect. So we will expect NII to increase in Norway as we reprice there. And the impacts in the Northern Ireland business, we are already seeing, and you'll see an annualized benefit of that. And overall, we remain very comfortable with our NII trajectory. We've seen increases 5 quarters in a row now. We also note -- which we also show you in the bridge that there's less days in Q1 versus Q4. So we see good trajectory, and we will see that further flowing through in subsequent quarters.
And then, Stephan, do you want to take the AT1 question?
And the answer to your AT1 question is, yes.
Unfortunately, we're just out of time, but thanks again all for your interest in Danske Bank. And as always, you can contact Claus and our IR department if you have any questions and look forward to speaking with some of you over the coming day and into next week. Thanks very much.