Danske Bank A/S
CSE:DANSKE
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Danske Bank A/S
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Good morning, everybody. Welcome to the conference call for Danske Bank's financial results for the first quarter of 2023. My name is Claus Jensen, and I'm Head of Danske Bank's Investor Relations. With me today, I have our CEO, Carsten Egeriis; and our CFO, Stephan Engels. We aim to keep this presentation to around 30 minutes. And after the presentation, we will open up for a Q&A session, as usual. Afterwards, feel free to contact the Investor Relations department if you have any more questions. I will hand you over to Carsten, Slide 1, please.
Thanks, Claus. And I would also like to welcome you to our conference call for the financial report for the first quarter. There is no doubt that we have overall had a good start to the year. Despite the elevated level of global uncertainty, our customers have been able to navigate well in this environment, and we've seen good activity in many areas of our business.
A key observation in the first 3 months has been a high degree of variation among economist views on what direction the global and local economies will take. Earlier forecasts of a broad recession scenario have softened and despite central banks continuing to be in tightening mode given the underlying inflationary pressure. Despite a small increase in bankruptcies for specific sectors, employment continues to be strong and consumption is also holding up well backed by solid liquidity positions among households as well as corporates. However, housing market activity remains at a low level given the uncertain outlook for interest rates developments and house prices.
The first quarter was unfortunately also characterized by events in the financial sector that led to concern for financial stability. The failure of primarily Silicon Valley Bank and the takeover of Crédit Suisse by UBS led to additional volatility and speculation around the liquidity positions and the capital instruments issued by banks. The improved regulatory framework for banks in our part of the world post the great financial crisis has proven critical in maintaining confidence in the financial sector. And in this context, I'm pleased to note that our well-capitalized balance sheet and our strong liquidity position enables us to continue to help our customers navigate the macroeconomic uncertainty.
Under these circumstances, I'm also pleased with the continued commercial momentum that we've seen in the first quarter. We saw a high level of corporate banking activity that supported activity-driven fees, including also a good inflow of corporate customers in Sweden which is a clear strategic focus area for us. And in addition, we saw an improved trend in customer flow and personal customers in Denmark. We continue to adapt our product suite to a more normalized interest rate environment, and we provided significantly more green loans which I'll come back to in more detail later in this presentation.
Financially, the first quarter exceeded our expectations with a net profit of DKK 5.2 billion, equivalent to a return on equity of 12.7%. And on that basis, on the 13th of April, we preannounced the financial results for the first quarter, and we announced a revised net profit outlook for 2023 in the range of DKK 16.5 billion to DKK 18.5 billion for the full year. And that was up from previously outlook of DKK 15 billion to DKK 17 billion.
The result for the first quarter benefited from broad-based improvements across our business, and these included NII, net trading and insurance income, as well as continually strong credit quality. Net interest income benefited from the normalization of interest rates, whereas the higher trading income was driven by good customer activity and facilitated by our new fixed income strategy. Furthermore, supportive financial market conditions further contributed to income from our insurance business and impairment charges remained at a low level due to continually strong credit quality and also reversals in the quarter.
Operating expenses progressed according to plan and relative to the level a year ago. We have benefited from the efficiency measures launched over the past few years, and importantly, we have managed to significantly reduce our cost-to-income ratio. During the first quarter, we continued to see elevated but stable deposits, whereas lending was impacted by fair value adjustments as well as currency depreciation. And net of these effects, lending was up 2% from the same period last year and largely stable from the preceding quarter.
Our funding and our liquidity position remains strong and our capital ratio increased to 18%, again highlighting the balance sheet strength I spoke about earlier and which I'll also comment on in more detail on the next slide. But before we go there, let me conclude on the development in the beginning of this year. The positive financial traction and the continually good business momentum we've seen so far gives me a lot of confidence in the future direction for Danske Bank. And I'm really looking forward to presenting you with our plans on our investor update in June.
Slide 2, please. While we've started the year better than expected and are seeing the benefit of our diversified business model, we've obviously taken note of the turbulence in the financial sector following the SVB and Crédit Suisse events. So on this slide, I want to highlight how prudently managed our balance sheet is, including our strong liquidity position. We have a sound and also a structural advantage at Danske Bank given the fully funded pass-through mortgages at Realkredit Danmark. And this provides a structural deposit surplus and an effective loan-to-deposit ratio of around 0.9, thus reducing our dependence on wholesale funding.
If you look at our deposit composition, it is well diversified and not concentrated towards any particular sector. Our retail deposit base is largely covered by the deposit guarantee schemes, and there's a high degree of operational deposits across industries from our diversified corporate client base. So despite the turbulent headlines caused by market events in the first quarter, deposit flows remained largely unaffected. Our sound funding structure also means that we're comfortable with operating at lower LCR levels as we have ample abilities to take additional measures and enhance our liquidity position further, including through issuance of covered bonds.
So for 2023, we have a total funding plan of DKK 80 billion to DKK 100 billion, which in addition to covered bonds includes unsecured senior and non-preferred senior bonds, which have the sole purpose of fulfilling our MREL requirements. And in total, we've already executed and completed around DKK 40 billion of our funding plan with the majority being MREL-eligible unsecured bonds. And therefore, we have the flexibility to assess how spreads are evolving going forward.
Finally, we continue to operate with ample liquidity reserves, as highlighted by our coverage ratio of 169%, which is solidly above the regulatory requirements and factor in a stress cash flow -- stress outflow scenario. A significant part of this ratio also includes a strong cash position that is able to cover a significant part of our deposit base. I remain very comfortable with our low risk and our prudently managed balance sheet, and this is true both for our asset and liability management and also our funding position. But also when we talk about the de-risking of our credit portfolio and the commercial property exposure, which I'll outline on the next slide.
So Slide 3, please. As focus has shifted to the commercial real estate sector yet again, it is important for me to address that. Our commercial property portfolio represents 11% on our total credit exposure. And this measure of commercial property also factors in letting of residential assets, which accounts for more than 40%. So if you benchmark the actual nonresidential part of our portfolio as a share of total exposure, we're well positioned compared to our Nordic peers.
And this follows prudent credit policies with concentration limits and caps that we have in place, particularly for the nonresidential segment that have resulted in a negative CAGR of 4% since 2019 and kept the total commercial real estate exposure flat and below market growth in the Nordics. Of course, our prudent and cash flow-based underwriting policies cannot rule out that we could see a downward migration of exposures if the sector, for example, in Sweden, takes a severe downturn. However, as we're carefully monitoring and stress testing our portfolio and individual exposures, we remain comfortable with the asset quality and the healthy LTV levels of our book.
We have yet to identify any material deterioration and associated rise in expected credit losses, but to mitigate any risk not currently evident in our portfolio, we've also added a sizable amount of about DKK 6.5 billion post model adjustments to the commercial real estate. And as you can see, more than half of the allowance account for commercial property now consists of a buffer. So to sum up the main messages on this and also on the preceding slide, our deeply rooted risk management practices, coupled with a robust balance sheet and strong capital and liquidity positions support our comfortable position and also enable us to importantly further assist customers in navigating the current uncertainties.
Let's now have a look at the commercial highlights in our 3 main business units on the next slide. That's Slide 4, please. Overall, we continue to see a good financial performance across all business units with strong commercial momentum among corporate customers, in particular. So if we start at personal customers, profit before tax improved to the highest level in 2 years. In the current environment, we have seen a shift in customer demand towards more stable saving products, which has also contributed to a 3% increase in deposit volumes for PC Denmark relative to the same period last year. Along with normalization of interest rates and repricing initiatives, this supported the strong uplift in profitability driven by a 76% increase in NII.
At PC Denmark, we also saw healthy demand for bank lending with an 8% increase from the same period last year, driven primarily by Danske Bolig Fri home loan product, which was up 53% from the same period last year. Lending volumes in Norway, Sweden and Finland were negatively affected by a slowdown in the housing markets, as well as, of course, the depreciation of currencies. Fee income held up well on the basis of solid consumer-related activity and a recovery in investment fees compared to the previous quarter, which mitigated the slowdown in the housing market and the impact from lower remortgaging activity which contributed positively in 2022. The significantly improved profitability is accompanied by our continued focus on enhancing the value propositions for our customers. So we've recently launched new higher-yielding saving products, and we've enhanced self-service investment solutions with what we call Danske Monthly Investment, which is easily accessible on the mobile banking app.
And as part of our sharpened focus on capturing market share and expanding our revenue stream, we further expanded our collaboration with insurance provider, Tryg, including a new insurance product covering home loan payments if customers lose their regular income. We've also launched the new Global Private Banking organization, gathering the private banking units of the Nordic countries, ensuring scalability of product offering and sharpening our value proposition. And this remains a high priority segment for us, and I'm really looking forward to seeing good traction with our customers there as well.
If we look at business customers, we got a strong start to the year. Rising deposit margins constituted a main driver of the 48% uplift in NII. Non-NII income remained stable, including the effects of fee repricing initiatives and new service-based fee service model. This was, however, slightly mitigated by the continued slowdown in activity in the property market. In general, we saw good activity, although our customers are still navigating high uncertainty in a challenging environment. Our expert financial advisory and targeted service model also helped manage customers' working capital needs, supporting the lending uplift compared to the same quarter last year.
Sustainability remains a high priority for us, and the key focus area for the business customer segment is specifically emission targets for commercial real estate and agriculture. And in this context, we're really pleased to see that our green lending volumes increased 49% from the same period last year. Aligned with our better bank strategic target of supporting new business and creating sustainable growth, we've set a focused growth team for the Nordic scale up business customers, and this is really a dedicated effort to serve our customers even better and provide advisory services on increasingly important and complex topics such as ESG and increasing legislation.
Then if we go to LC&I. At LC&I, the first quarter of 2023 marked another period of high activity for our corporate and our institutional customers. Our strong balance sheet, combined with our position as a leading risk facilitator and advisory expertise enable us to support our customers with relevant risk management solutions. We saw an increase in reported lending volumes of 15% and 21% when adjusted for currency effects from the level at the end of the first quarter of 2022, reflecting customer demand and our ambition to grow in Sweden.
Deposits were down slightly from the same period last year and remained stable at an elevated level compared to the preceding quarter. And total income was up 20% from last year driven by higher NII and trading income. Trading income benefited from our new fixed income strategy, and the increase more than mitigated the decline that we've seen in fee income. In combination with flat costs and net reversals profit before tax was up 69% from the same period last year and 9% from the preceding quarter and was achieved on the basis of lower capital consumption.
Moreover, we're delighted that our continuous efforts to expand our leading pan-Nordic wholesale bank offering are paying off as our M&A franchise was ranked #1 in the Nordic M&A league table. And in the market for sustainable finance, we've supported issuers and investors and a substantial number of transactions in the first quarter of 2023. This is a good start to the year, and it affirms our position as a leading Nordic arranger looking at, for instance, the Bloomberg Sustainable Bond League table. We also continue to invest in our sustainability advisory offerings and we've staffed up in our project finance team to build competencies and contribute to a more sustainable society.
So finally, and before I hand over to Stephan, being at the last stage of our 2023 Better Bank Strategy, cost enhancements and efficiency gains are coming to fruition across our business. Units and the strong foundation only adds to the strategic potential of our franchise, which I again look forward to updating you on in June. So Slide 5, and then I'll hand over to Stephan.
Thank you, Carsten. I will now briefly go through the reporting lines in the income statement and reserve comments that are more detailed for the following slides. As Carsten just mentioned, we had a strong start for the year, driven by good commercial momentum, costs under control and normalization of interest rates, which had a positive impact across our business units. Income from core banking activities performed well and was in line with the expectations. NII was up 43% from the level a year ago as the normalization of interest rate had a strong positive impact on deposit margins as well as from modest lending -- modest increase in lending volumes. The improvements accelerated in the first quarter, where NII was up 8% from the preceding quarter as the effects from normalized interest rates continued to materialize in our numbers.
Adjusted for the adverse depreciation of currencies, NII was up 48% and 9%, respectively. Net fee income came in lower than the latter a year ago. The decline was primarily driven by lower housing market activity and from lower investment fees primarily from lower assets under management whereas activity-related fees maintained a strong level. In Q1, which benefited from refinancing of variable rate mortgages and higher investment fees in personal customers. Income was almost stable compared to the previous quarter as customer activity held up well.
The recovery in net trading income from a low level a year ago when financial market uncertainty was even higher reflects stronger customer activity and more supportive market conditions. Relative to the preceding quarter, we saw a further pickup in customer activity underpinned by continued supportive market conditions and furthermore benefited from the new fixed income strategy. For that interest income as well as trading income, the numbers include reclassification of income, which I will comment on later. Net income from insurance income came in at a strong level and significantly higher than a year ago when financial market uncertainty led to negative valuation effects.
The underlying business improved due to an increase in premiums resulting from an inflow of new customers in earlier periods. Other income amounted to DKK 0.3 billion in the first quarter. This is lower than last year where we had a positive impact from the sale of our business activities in Luxembourg and also lower compared to the preceding quarter, which benefited from the gain on the sale of MobilePay. Operating expenses came in almost unchanged from the level a year ago. Through further efficiency measures and lower transformation costs, we have been able to mitigate the impact from elevated remediation costs and higher inflation. Expenses were also lower relative to the preceding quarter due mainly to seasonality effects and a one-off effect in Q4. Our cost/income ratio saw a very strong improvement and amounted to 46.8% against 62.5% a year ago.
Loan impairment charges reflect continuous strong credit quality and amounted to a modest amount of DKK 0.1 billion for the first quarter similar to the level in the same period last year. New impairment recognized in the quarter were driven by updated macro scenario and lower property prices, which were, however, offset by net reversals which I will comment on later. Finally, the tax expense of DKK 1.8 billion mainly reflected an increase in the Danish tax rate for financial institutions. Net profit for the year, thus amounted to DKK 5.2 billion, up 89% from the same period last year and up 13% from the preceding quarter. The result represents a return on shareholders' equity of 12.7% up from 6.2% a year ago.
Slide 6, please. Let's take a closer look at the positive trajectory in the net interest income for the group. Overall, NII saw a significant improvement of 48% year-over-year adjusted for currency depreciation. The improvement was driven by the reestablishment of deposit margins as well as growth in lending volumes, primarily driven by our corporate customers. The positive effect was partly countered by various lending margin effects, including floored credit facilities, where margins momentarily were impacted as rates move from negative to positive territory. The solid credit demand we have seen over the last year includes liquidity facilities to some of our larger and better rated corporate customers, which is contributing positively, but at the same time, lowered our average lending margin. Additionally, we continue to see a lagging effect due to notice periods and the timing of repricing of loans in general when you are in the middle of a rate hike cycle.
As expected, the trend in lending volumes slowed at the beginning of this year, but repricing initiatives, particularly at PC, supported lending margins Q-over-Q. Total deposit volumes remained elevated throughout the year with a slight varying development between quarters and segments. In PC Denmark, for example, we have continued to see inflow. Finally, the management of our interest rate risk in the banking book contributed negatively to the net interest income. This is shown in other and should be viewed in light of the significant contribution from the improved deposit margins. This impact is from Q1 2023, reclassified from trading income to NII.
As Carsten mentioned, deposits overall remained stable at an elevated level. During the first quarter, we continued to see further customer demand for savings products in Denmark, in particular, where we have launched a new time deposit account at the same time as we have raised deposit rates for other saving products following further Central Bank hikes. Our interest rate sensitivity for rate hikes remains unchanged at DKK 700 million to DKK 800 million per 25 bps and but trending towards the lower level, reflecting that we are now firmly in a positive rate environment but also that we expect increasing migration to savings account and potential effects from quantitative tightening.
Slide 7, please. Next, let's have a look at fee income. The continued uncertainty in the financial markets and the unusually low housing market activity led to a decline of 13% in fee income when comparing to the level from last year. The development was primarily driven by lower investment fees due to lower assets under management despite positive net sales in asset management in the first quarter of 2023.
An increase in our customer invest activities, however, had a positive impact on investment fees when comparing to the previous quarter. Substantially lower housing market activity driven by interest rate uncertainty and lower remortgaging activity was a key driver for lower fee income from lending and guarantees compared to a year ago. However, refinancing of variable rate mortgage loans had a mitigating effect when comparing to the previous quarter. Fee income related to customer activity within everyday banking services, such as cash management maintained a good level and also benefited from repricing initiatives as well customers moving to the new service-based fee model implemented in 2022.
Slide 8, please. The last income line for me to comment on is trading income. Trading income in the first quarter came in at DKK 1.6 billion, a significant improvement from DKK 0.7 billion in the same period last year, primarily due to strong customer activity in LC&I, more supportive market conditions and a positive effect from the implementation of the new strategy for fixed income at LC&I. At personal customers and business customers, the combined net trading income held up well compared to the same period last year as good demand from corporates was able to mitigate lower income from retail customers.
The interest rate hedge in Northern Ireland led to a positive impact year-over-year, reflecting a combination of the interest rate expectations and the reduced remaining life of the hedging instrument. However, market volatility had an adverse impact when comparing to the previous quarter. Trading income in group functions was positively impacted by the reclassification that I mentioned previously related to the management of our interest rate risk in the banking book that took effect this year. From 2023, this effect will no longer impact the trading. Instead, it has been reclassified as described in my comments, on the development in the net interest income.
Slide 9, please. Now let's take a look at our operating expenses. Overall, our cost development continues to show progress as a result of our efficiency measures, and I am pleased to report a decline of 1% from the level in the same period last year and a 9% decline in the headline number when comparing to the preceding quarter. Net of remediation-related one-off we booked in Q4, costs were down 5% quarter-on-quarter as the last quarter of the year include usually some seasonality effects.
Compared to the same period last year, we saw a positive contribution from lower staff costs as a result of initiatives launched during 2022. Lower planned transformation costs also had a positive impact on costs both year-over-year as well quarter-over-quarter. The cost of our continued work with legacy remediation remained at a slightly higher and elevated level. And increase in our contribution to the resolution fund and higher bank tax in Sweden had a negative impact on operating expenses. The uplift we have seen in inflation throughout the last year also had an adverse impact on our cost base. However, I'm pleased to report that our continued focus on cost efficiency has been able to more than mitigate this impact and thereby contributed to an improvement in our cost income ratio, which came in at 47% for the first quarter.
Slide 10, please. Let us take a closer look at our strong credit portfolio and the drivers behind the provisions we recognized in the first quarter. Generally, our credit quality remains very strong and we continue to see modest downward migration of exposures in our portfolio. The associated expected credit loss, thus remained low in Q1 with net 0 single-name impairment.
We ended the quarter with charges of DKK 147 million, equivalent to just 3 basis points of our lending. The modest charges in the quarter were related to a further adjustment of our macro models including a more uncertain outlook mainly related to a more adverse housing price development. Our management buffer was kept around DKK 6.5 billion, accounting for about 1/3 of our total allowance incurred, which provides additional comfort in the light of uncertain macro picture. So while we remain comfortable with our asset quality and the well diversified and low-risk credit portfolio, the post model adjustments provide an additional cushion if unforeseen risks emerge in parts of our portfolio that are not yet reflected in our portfolio or captured through our macro scenarios.
And to be clear, in our recent profit upgrade, we kept a conservative view of impairments for the remainder of 2023. And as such, not a reflection of any release of PMAs nor any guidance as to why we are actually seeing -- or what we are seeing actually in the portfolio. I will touch more on the outlook for '23 in a moment, but let us have first a look at our robust capital position on Slide 11, please. Our capital position continued to improve in Q1, and our reported CET1 ratio rose to 18% from 17.8% at the end of the preceding quarter. The increase included the retained net profit in the quarter after accrued dividend of 60% in line with the high end of the range of our dividend policy as per normal practice.
Additionally, lower arrear from reuse credit and market risk contributed to the increase in CET1 ratio. Our CET capital requirement increased to 13.5% as the countercyclical buffer was fully activated in both Denmark and Norway. The fully phased-in CET1 requirement stood at 13.7%, reflecting the last part of the implementation of the countercyclical buffer in Sweden that is to take place in Q2. In respect of the recommendation made by the ESRB a couple of weeks ago to reciprocate the systemic risk buffer implemented by the Norwegian authorities. The impact on Danske Bank depends on what approach the Danish authorities will take. Currently, we do not have any estimate regarding the timing of a potential implementation. However, please be aware that it has been part of our ongoing capital planning process why a potential implementation will not have any implication for the group's capital target. We remain comfortable with Danske Bank's solid foundation and a healthy buffer to current and future regulatory requirements.
Slide 12, please. And then I would like to comment on our outlook for 2023, which on the 13th of April was revised upwards to a net profit in the range of DKK 16.5 billion to DKK 18.5 billion from our previous guidance of between DKK 15 billion and DKK 17 billion. We continue to expect core income lines to grow driven mainly by a higher net interest income following normalization of interest rates, and our continued effort to drive commercial momentum, whereas fee income is expected to be slightly below the level in 2022.
Income from trading and insurance activities is expected to recover towards normalized levels. The outlook is, as usual, subject to financial market conditions. We maintain our outlook for operated expenses in the range of DKK 25 billion to DKK 25.5 billion, including continued elevated remediation costs of approximately DKK 1.1 billion. The outlook reflects our continued focus on cost management and despite inflationary pressure. We now expect loan impairment charges of up to DKK 2.5 billion due to continued strong quality and recoveries in the first quarter of 2023. Loan impairment charges will primarily be driven by a weaker macroeconomic outlook affecting model-driven impairments. Slide 13, please hand back to Claus.
Thank you very much, Stephan. Those were our initial comments and messages. We are now ready for your questions. [Operator Instructions]. As usual, a transcript of this conference call will be added to our website within the next few days. Operator, we are ready for the Q&A session.
[Operator Instructions]. And your first question comes from the line of Sofie Peterzens from JPMorgan.
It's Sofie from JPMorgan. I guess if you could give a little bit more details around this interest rate risk management impact because if I take on net interest income line, it seems that other was almost close to DKK 0.7 billion negative quarter-on-quarter over DKK 1 billion year-on-year. But then when I got to the trading line, the kind of improved functions, it was a positive of close to DKK 0.5 billion quarter-on-quarter, but only around DKK 200 million year-on-year. So how should we think about this interest rate risk management swap or hedge. How should we think about the kind of negative drag on NII going forward? What's a good run rate to assume, should we assume that trading income will not be kind of higher by how much so if you could just give a little bit more details around this. And then my second question is that we see that your deposits and loans were down. You moved businesses quarter-on-quarter. How should we think about the kind of what you're paying for deposits? Are you going to -- are you planning to pay more for deposits? One of your competitor is already paying for transaction deposits in Norway. So how should we think about that? And then the last question would be with the new banking tax in Denmark, how should we think about the tax rate going forward?
Thanks, Sofie, let me answer a couple of the questions and then I'll turn over to Stephan on the NII reclassification from trading to NII and also on the tax. Your -- one of your questions was around trading income. We've significantly reduced our inventory risk and in fact, also utilization of lines and capital consumption in trading since mid-half year where we clearly saw a lot of significant volatility in rates. So we've repositioned the business to be lower inventory, lower risk business but have really been able to capture market share and really seeing strong activity in our fixed income business across the Nordics. And I think this is really a testament to the strong relationships we have with corporate institutions and our ability to distribute that risk and facilitate that risk. And so both Q4 and Q1 were strong quarters on underlying trading income. And we continue to see a good environment, and we expect a good environment for the trading business given the interest rate environment that we're in.
Then you asked about deposit and loan trends. I think you need to be very careful here. So we don't see -- we actually see a slight increase in core deposits and core operational deposits, and you also see that on the second slide of the presentation. So when you think about the core insured deposits and the core operational deposits in our personal and business bank, that remains very robust, and as I said, sort of slight increase in Denmark and slight increase in the operational deposits. And you should really see sort of the reduction in overall deposits as more sort of non-sticky, nonoperational deposits in the institutional large corporate space. Then I think 1 question is perhaps also sort of how do we think about deposit movements from transactional accounts to saving accounts. And there, we have seen movements from transaction accounts to saving accounts but probably a little bit lower than expected and well within sort of the NII sensitivities and deposit betas, if you will, that we expect. On the other hand, we do expect to see movements towards saving products pick up in line with what we're seeing in the market dynamics. Stephan, I hand over to you.
Yes. Sofie, I think if I got your question right, at least let me start with the easy one. So for the tax rate, I would just simply assume 26% going forward, that should be a good indicator of what we will see at group level. Then the reclassification, if I got your question right, yes, I can confirm that in the previous quarter, that number would have probably reduced trading and elevated NII. Year-over-year, the effect is more or less flattish. The reason why we have reclassified is because these are really interest rate risk management costs, which we are basically managing in treasury. So the way to think about this going forward is as the book that creates the interest rate risk management is running off, this number in tendency should flatten out over time. And then the interesting part obviously is what happens if interest rates move up and down going forward. So there will be a bit of a -- at least that would be my guidance for now, there will be a bit of a negative number for the next quarters to come. I think that were the 2 parts.
Yes. Maybe just -- could you just give us detail around how large is the interest rate risk book that you're running? And kind of it would just be a little bit more helpful to have maybe like the magnitude of the potential headwind? Will it be another DKK 600 million quarter-on-quarter? Or will the impact be less like just magnitude? Or is the current run rate, but also if I look at your trading income, year-on-year trading improved functions was up only DKK 200 million whereas NII was down DKK 1 billion. So is that kind of the delta?
No again -- yes, again, in a flat rate environment, you would expect the number to come down to 0, most likely, call it, over 3 years, I think, is a halfway fair way of modeling it. And then again, it depends on what kind of interest rate risk management decision we have and what kind of rate movements we have. So for now, I would for the next couple of quarters, stay around the number that we have seen in Q1.
But could you maybe then give a little bit details what products are these, is it just basic interest rate swaps, cross-currency swaps, interest rate options? Like what's the underlying product that you have hedged?
I think I would, for many reasons, try to shy away a little bit from giving you too much detail of our interest rate hedging strategy here. So forgive me, I'm going to be a bit tight lipped on this.
Okay, okay, I understand.
[Operator Instructions]. And your next question comes from the line of Jakob Brink, Nordea.
And sorry for going back to where you left on the second or the previous question. So I guess I'm a bit surprised that you're running such a mismatch that it can cost DKK 668 million in a quarter. So is it some kind of hedges that sort of expired in the beginning of Q1? Or have you changed anything materially? Maybe also what was the impact in Q3 and Q4 where rates also had started to go up, it would be nice to know. And then my second question also on NII. You sent out a restatement recently where, among others, you moved the Danica equity interest income out of NII into Danica. What has been the impact in Q1, so the negative impact on NII from doing that move, please?
Yes, Jakob, my simple answer would be if you look at the other line in basically all our peers, I think you will find very similar numbers, if not higher ones. So I think that gives you an indication that, that is probably more a reflection of the relatively quick rate environment, interest rate hedging strategies across the Nordics. So I don't think that is anything specific. Again, as I said, year-over-year, the number is completely flattish. And quarter-over-quarter, it is also very, very similar. I think there's only a smaller delta. On the NII from Danica, I need to revert to Claus a bit.
No, I think that also goes from the restatement file that we have delivered on the 16th of April that the NII impact is actually fairly small. So of course, I do not -- I'm not able to give you the precise but it's a small double-digit number in millions.
Okay. Just coming back to your answer and the first one, Stephan. So if I take the Swedish retail book, it's DKK 89 billion in Q1 and in Danish kroners. And as far as I know, roughly half of it is 3 years. So let's call it DKK 45. And you're losing DKK 889 million in 1 quarter. So that's 6%. I mean that sounds like a lot.
Yes, I'm not sure whether looking for the Danish retail book is the right place to start with.
Swedish one. I said Swedish the -- so I thought that was the problem, right? That you have 3-year Swedish...
Yes. All I'm saying, you will find in -- you said that the DKK 686 million is big. All I said is if you compare the other line in our friendly competitors, they are at similar sizes.
Okay. So -- but disregarding what competitors said, I'm just still trying to understand the DKK 670 million times 4 divided by half of your Swedish book is 6%. So why is the lag effect all of a sudden 6% in a quarter?
Jakob, I think you are trying to get to the same level of detail that I already refused friendly enough to answer to Sofie. So...
Yes. Yes, yes, I'm sorry for -- I'm not trying to be rude. I'm just trying to understand from my estimates for next quarter. It's just a big increase in the costs. So that's why. But okay. Fair enough. I'll leave it.
[Operator Instructions]. And the next question comes from the line of Jan Gjerland from ABG.
Two questions from my side as well. The first one goes back to this, of course, this change in the strategy. Why on earth do you actually want this kind of volatility into your net interest income line when it's sort of been a kept secret inside the trading line? And sort of the impact is just the banking book you're taking on risk? Or is it the liquidity portfolio you're taking on brings back to the NII line? That's my first question.
Well, I think I'm not sure whether there is any real excessive volatility in the NII. If you compare our guidance and sensitivity since the end of 2021 and then multiply it what has been happening, you basically get exactly to the numbers where we are right now. So I think in guidance, we have been pretty clear and that has been following these lines pretty well, maybe with the exception of one or the other currency effect that we have seen lately. And again, I think what we have been giving here, that's why we've been making it so explicit and clear, we have just following the higher attention on managing the interest rate and the banking book. We have moved a certain position into, call it, basically treasury responsibility. We have called that out clearly. You have got the number, and I think I have given guidance in respect of what this number would look like in an unchanged interest rate environment going forward. And I think that is as much as we going to discuss that.
Yes, I mean just to add, I think this is very important to recognize, this has nothing to do with market positioning. The -- what were -- there's 2 things happening here, there's a reclassification of hedges relating to managing our interest rate risk in the banking book, which is move to NII, where it really should be. So that is, therefore, how we manage our lending and our deposits and the hedging of that. Then there is the trading book and the trading book stand-alone when we talk about our new fixed income strategy. There we talk about how we're reducing the risk, how we're reducing inventory, how we're thinking about facilitating customer flows in a lower-risk model, where we're more focused on how we facilitate and distribute risk. And there, we see a really positive momentum. So those are the pieces, and I hope that's clear. Then I understand that there was a question around the details of the NII hedges, what the impact has been quarter-on-quarter and also what the impact will be over the next 2, 3 years as some of those hedges run off. And there, I think Stephan has answered that. So I hope that's clear. Thank you.
Absolutely. Really, just want to confirm that your customer trading book, sort of the book of bonds for helping clients that is kept inside the trading, or is that not part of the NII? Just to...
That's trading, that's trading. So the -- what we've moved to NII are only the interest rate risk management, so the hedges related to assets and liabilities. And that's -- those are treasury functions that we believe should sit within NII, and that's what we've moved. So that's really important. I hope we're really clear on that. So then now you really see a clear clean trading P&L and you see sort of a clean interest rate risk in the management related to NII. Is that clear, Jan Erik?
Yes, of course, it's just that when we did look at the trading line, nobody cares about it, whether it is good or bad, so you don't get any multiple expansion on it. When it's just only your NII, feels you get the multiple expansion and paid multiples. So I'm just a little bit curious why do this sort of change in our accounting to maybe the worse, I don't know. But lay that aside, it's done, so that's fair. When it comes to the full-time employees, I see it's actually up by some 100 persons in this quarter. And you said on the expense line that it was some near-shoring transition. So what -- could you explain a little bit more why you are up on the FTEs please?
Yes. Again, on -- this is for us, this is, of course, not about multiple expansion. This is about doing it the right way and having very clear accounting and having the sort of dynamics clearer. And there, I would again say that it could be that multiple expansion are different on trading. But again, this is core customer facilitated trading income. A lot of it actually is fee income within that. That's the way the dynamics work at a lower risk. And it's important to have that separated from interest rate risk in the banking book. On FTE, we do have a slight upward FTEs. Most of these FTEs are driven by some of the remediation work that we alluded to in -- at the Q4 year-end discussions. And most of those FTEs are in low-cost jurisdictions. And therefore, we continue to feel comfortable with sort of the underlying costs and also our outlook on underlying costs and FTEs.
Just one follow-up on the lending volume and deposit volume you say that, of course, there are some kind of market changes to the housing, et cetera, in Denmark, which just sort of takes your book negatively. But underlying, could you just confirm the underlying growth level Q-on-Q in the different geographies, please?
Yes. So if you look at -- and it's probably best to look at sort of currency adjusted, right? We see a -- pardon me?
Yes, please.
Yes, so we see a slight growth in our personal customers in Denmark. We see flat in business customers in Denmark. I'm talking quarter-on-quarter. We see more or less flat in Sweden and Finland, slightly down in Norway. That's PC. And on business, I would say, more or less flat to slightly up again currency-adjusted local. And then on LC&I again, constant FX slightly up. So I think it's a story of slightly up to stable. There's a few that's slightly down, but overall stable to slightly up on lending currency-adjusted. So activity remains fairly good overall. But clearly, housing market is somewhat subdued in all the markets.
[Operator Instructions]. And the next question comes from the line of Martin Birk from SEB.
Two questions. The first question is on market shares, especially Danish market shares. Any input to what is happening there? And then second of all, we also talked about this last quarter, Carsten, when you said that lending margins would start to trend up from this quarter. Some of the lending margins that you report on, they are indeed trending up, but probably not as much as I would like. Are you having a -- what do you see out there in the market? Is it difficult to -- was it more difficult to reprice the lending side compared to what you expected just a quarter ago?
Hi, Martin, thanks. If I look at the market shares, and we only have market shares for February. We're told market shares for Q1, you asked for Denmark, will be out on the second of May. But if I sort of look at the latest market shares from February, we see -- if I take personal customers, Denmark, we see slight increases on bank lending, driven again by Danske Porteføljepleje, and we see pretty flat on mortgage. In business, we see a slight decrease on bank lending but slight increase on mortgages. So we -- it's a little bit up and a little bit down, I would say. Overall market share is pretty stable. We continue to feel okay about Realkredit Danmark. If you look at like what you call gross lending we've maintained sort of the higher level of new loan market shares on gross lending that we saw throughout last year. But of course, on net lending, I think the total market in Danish Realkredit was like DKK 3 billion to DKK 4 billion. So it's sort of insignificant. Lending margins, as you said, we do see some upward margins on PC, still pressure on business customers. We will continue to reprice. There is a lag effect on business probably by 5, 6 weeks. So we will continue to reprice. And therefore, you should also continue to see lending margins trend upwards. But as you also alluded to, perhaps lower than expected given time lag. I hope that answers.
Yes. So when should we -- I mean when should we really expect a pickup here? Because I mean, I guess when you guys the forward curve would be worried that all of a sudden the forward curve is behind you and you still have deposit betas picking up, but you're not really repricing on the lending side as actually you should do. So I guess we should be seeing quite a material pickup in lending volumes, not lending volumes, lending margins pretty soon, right?
Yes. I mean you should expect over the coming quarters that lending margin will continue to improve. Claus, do you want to comment?
Yes, I just want to add, Martin, just to give you the full picture, there is still this lag effect from our lending in Norway that we are -- that are coming in over time. So that's part of the explanation why lending margins show a negative in the NII bridge.
And your next question comes from the line of Jacob Kruse from Autonomous. I will go to the next question there's no response. [Operator Instructions].
Operator, can we have the last question, please?
[Operator Instructions]. We will now take your last question. And your last question comes from the line of Alexander Demetriou from Crédit Suisse.
Just two from me. So firstly, on remediation expenses, they remain elevated at 1.1 billion in 2023. Could you just remind us of the trajectory and how much it is likely to reduce over the coming years? And secondly, just on lending volumes, so would you be able to kind of provide some guidance on what you expect for the remainder of the year? Are we likely to pick up, see a pickup in the personal customer segment towards the end of the year? Or do you still see that quite muted towards the end of the year?
Thanks for that. Remediation costs, we said that a very material part of that remediation cost will go out as we go into '24. There will still be some tail of remediation, but it will be substantially reduced. And really, the remediation cost is a debt collections case and then some costs still related to the Estonia case, but substantially lower. And if you then go out in '25, it should be substantially completely out. Then lending volumes, I mean, it's really difficult to say. We do see that the housing market is picking up a little bit. So I would expect more volumes on the housing side as I look into Q2, I think it's very difficult to predict lending volumes if I look across the corporate space, given the economic environment. But so far, flows, activity pipeline looks decent.
To all, really appreciate your interest in Danske Bank, and also for all your questions. And of course, as always, please reach out to Claus and his team in Investor Relations if you have any questions. Have a great day. Thanks very much.