Danske Bank A/S
CSE:DANSKE
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Danske Bank A/S
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Welcome to the Danske Bank conference call. [Operator Instructions] Today, I'm pleased to present Claus Jensen. Please begin your meeting.
Thank you, operator. And good afternoon, and welcome to the Danske Bank Q2 2020 Preclose Call. My name is Claus Ingar Jensen, and I am the Head of Investor Relations. With me, I have Heidi Nielsen and Robin Løfgren from our IR team. Please note that this call is being recorded for compliance reasons, and the script used for this call will be published on the Investor Relations website after the call. In today's call, I will highlight relevant data and one-offs that you should be aware of before the start of the silent period on the 26th of June, ahead of the publication of our interim report for the first half of 2020 on the 17th of July. I will go through the P&L statement line-by-line and remark briefly on capital at the end. Afterwards, we will open up for a Q&A session. But before we start, I would like to briefly highlight the obvious. I will be commenting only on already disclosed information and one-offs, as well as publicly available data. In this connection, I wish to stress the developments in specific indices may not always have the same effect on our performance. I will limit my response to follow-up questions so as to not include nonpublished information or qualitative remarks on performance in the second quarter. That said, let's start by having a look at the net interest income. Please remember that Q2 has the same number of interest days as Q1. In the quarter until mid-June, the Swedish krona appreciated 2% on average against the Danish krone, while both the Norwegian krone and the pound sterling depreciated around 3% on average. Please note that these effects are calculated averages and that, for instance, the Norwegian krone has appreciated since the end of the first quarter. On the funding side, we issued both covered bonds and senior preferred debt in the second quarter. Effective 12th of May, we issued EUR 1 billion in senior preferred debt at 112 basis points over the 3-month Euribor. Effective on the 14th of May, we issued SEK 5.5 billion in covered bonds through Danske Hypotek at 3-month Euribor plus 15, 1-5 basis points. Effective June 18, we issued NOK 6 billion in covered bonds at 3-month Euribor plus 29 basis points. Effective 22nd of June, we issued USD 1.25 billion in senior preferred format at 3-month Euribor plus 74 basis points. Please also revisit Page 33 of our Q1 conference call presentation to see the redemption profile for maturing funding. On the 1st of May, an MREL subordination cap was introduced, meaning we can now meet part of our MREL requirement by issuing senior preferred bonds. With regard to volume developments, we refer to publicly available sector statistics as the only externally available source of insight. We have nothing to add to this. Market rates have developed in opposite directions with 3-month Nibor, decreasing 117 basis points, while 3-month CIBOR and Stibor increased 26 basis points and 3 basis points, respectively, on the basis of quarterly averages. To reflect current market conditions as well as increased funding costs, we hiked the rate on Swedish 3-month and 3-year mortgages by 5 and 10 basis points, respectively, with effect from the 20th of April. This affects the front book immediately and the back book at the next interest reset, and it will -- and it covers regular customers as well as our partnership agreements with Saco and TCO. On the 7th of May, the Norwegian Central Bank cut their official rate by 25 basis points to 0. In response to this as well as market conditions, we have announced a cut of up to 40 basis points for both loans and deposits. For mortgages, this affects the front book from the 14th of May and the back book from the 25th of May. For deposits, the effective day is the 15th of July. As previously announced on the 1st of June, we introduced negative deposit rates for retail customers in Denmark. Deposits above DKK 1.5 million, carrying a negative interest rate of 0.60%. As a result of the extraordinary situation caused by the coronavirus pandemic, we have suspended the charging of negative interest rates for up to 90,000 small businesses with deposits of less than DKK 500,000. This concludes our messages on net interest income. Looking at fee income, please note that fee income at Danske Bank is, as always, dependent on market developments in relation to our asset management business and on activity levels in relation to our banking operations. The market has performed well in the second quarter with a 17% increase in the OMX C25 Index in Copenhagen and a 19% increase in the S&P 500 index, just to give a couple of examples. At Banking DK, remortgaging activity has almost completely halted. Sector statistics show that Realkredit Danmark has seen DKK 1 billion worth of early redemptions in Q2 against DKK 17 billion, 1-7, in Q1. As a rule of thumb, we typically earn around 50 basis points on remortgaging with the majority booked as fee income and the rest split between trading income and NII in that order. Please note that the actual effect is uncertain as some customers may have chosen to leave Danske Bank. The significant slowdown in remortgaging activity is as expected and in line with our full year guidance for fee income. Turning to trading income. Please note that we do not guide on this specific line item. Late in Q1, the global financial markets saw very high volatility, including wider credit spreads and yield spreads between Denmark and Germany, which had a negative impact on trading income in the quarter. In the second quarter, we have seen a shift recovery in the markets, although spreads are still slightly elevated. For reference, the option adjusted spread on Danish 30-year callable bonds and 5-year noncallable bonds have narrowed by a further 7 basis points and 14 basis points, respectively, since the end of Q1. As a further reference, the spread between Danish and German 10-year government bonds has narrowed by around 8 basis points since the end of the first quarter. Please note that trading income in Q1 was impacted by income from auctions of Danish variable rate mortgage bonds for refinancing purposes. These auctions typically affect only Q4 and Q1. And for Q1 2020, income from the auction amounted to DKK 120 million. Please also note that trading income includes the investment result from the health and accident business at Danica Pension. Please also note that the sale of shares in VP Securities was carried out in Q2, resulting in a gain of below DKK 100 million. This gain is booked on the trading income in other activities. We do not have any specific comments on other income. This concludes our comments on the income lines. If we look at the cost line, we have not communicated any one-off items, and we have no specific comments to add on cost developments during the quarter. With regard to loan impairment charges, we reiterate that we still expect further impairments related to the effect of the coronavirus pandemic; however, with a large part recognized in Q1. The extensive change to the forward-looking estimates in Q1 are believed to capture the substantial downside from a macroeconomic downturn. At noncore, we have sold our Estonian commercial loan portfolio during the second quarter, causing a negative value adjustment of around DKK 125 million. We do not have any specific comments on the tax line. So this concludes our comments on the P&L. As a final point, I would like to touch on capital. As always, our capital position will be impacted by earnings, less a 60% dividend accrual. The risk exposure amount is, as always, subject to general market volatility and FX movements as well as growth, including any potential materialization of COVID-19-related lending during the second quarter. Please note that in Q1, we guided that risk exposure amount is expected to increase by a low double-digit billion amount in Q2 due mainly to increasing market risk and assuming unchanged positions and market volatility. Further, we now expect the SME discount factor to be implemented in the second quarter, and this is expected to cause a decrease in the risk exposure amount of a low double-digit billion amount and, thus, to mitigate the increase in market risk. This concludes our initial comments in this preclose call. Before we move to the Q&A session, I would like to highlight that we enter our silent period on 26th of June. And shortly, we will start -- we will also start collecting consensus estimates with a contribution deadline on the 2nd of July. Finally, we will publish our interim report for the first half of 2020 on the 17th of July.Operator, we are now ready for Q&A.
[Operator Instructions] Our first question comes from the line of Mads Thinggaard from ABG.
This is Mads from ABG. I have the first one, Claus, is on I think one of the last items you mentioned, the CRR quick fix. You mentioned the SME discount. Do you see any other effects on, I mean, on the capital ratios in Q2?
No. I mean this is -- as I tried to get through with the message that the already announced increases in REA due to higher market risk, as we announced, will be mitigated more or less by the increase -- from the decrease that's coming from the introduction of the SME discount factor. And then on top of that, it will be up to lending-driven increases in the risk exposure amount. So these are the 3 elements that I see in front of me here.
Okay. There's no IFRS 9 phase-in effect or...
Not to my knowledge. No.
Okay. Yes. And then just a second question, 2 weeks ago, you -- there -- we had some inspection reports coming out. I think it was relating to, I mean, to corporate clients and real estate and I just saw -- I mean, there was some loan losses that were taken in Q4. And then it was a bit like there were a possibility that there could be more, but also some media comments from a risk officer, I think that you had kind of taken -- had a -- that you took all provisions already. I don't know if you can kind of elaborate a bit on that and what is up and down here.
Yes, that's a good question, Mads. Thank you. No, I can confirm what my colleague in risk management apparently have told the media. And that is that the provisions we took in Q4 is able to capture the inspection. So I would not see any additional effect from this in Q2.
And the next question comes from the line of Per Grønborg from SEB.
Just a single question from my side. You addressed on noncore that there would be a loss of DKK 120 million (sic) [ DKK 125 million ] was credited, you said today, to Estonian exit?
Yes, that's correct. That's correct.
There have been 2 announcements of exits this quarter. There has been one Estonian, and now there has been one sale of a Lithuanian lending portfolio. What's -- the loss on the sale of the Estonian lending portfolio, which according to the buyer, they got a rebate of EUR 17 million. Was that taken early? Or should we expect that in this quarter?
I -- well, it was immaterial. So the only thing that we find relevant to inform about is the effect coming from the Estonian commercial loan portfolio.
So this must imply that you have taken additional write-downs on this one earlier or...
We have, over time, been taking some value adjustments in our noncore division to capture these portfolios. Whether there has been any specific one for the one we sold earlier in the quarter, that is difficult for me to comment. But in any way, it would have been immaterial.
Okay. What's remaining in the Baltics now? Are there anything remaining over there?
It's a very, very, very small amount. We are talking about a 3-digit amount, million in euros, that we have left now. So it's a very, very small exposure left.
And the next question comes from the line of Sofie Peterzens from JPMorgan.
Here is Sofie from JPMorgan. I was wondering on the cost. Could you just update kind of how comprehensive your cost update will be with the second quarter results?
No, it's difficult for me to preannounce the magnitude of announcements in connection with Q2. As you all probably know, management has been quite clear in stating that there will be an update. But the magnitude of the update, that's difficult for me to preannounce, as you probably can understand. I can only confirm that there will be an update, okay?
Okay. And it's only on cost? Or it will also be another -- any other line?
No, I think we have stated quite clearly that the transformation in Danske Bank towards the 2023 better bank agenda, that is something that we will report on. So I would also expect that there will be comments around the progress we are making in changing the bank. Like, I don't know, Sofie, if you follow the Danish media, but there were some comments, not long time ago, from the Head of Banking Nordic, Glenn Söderholm, in respect to this better ways of working. So we are -- so it's updating like that, that you should expect.
Okay. And in terms of the AML and the euro, the investigations, is there any update that you can give on that front?
No, I have no further comments beyond what...
And should we expect any update with the second quarter results?
No. I have no further updates on the Estonian case outside what we said at Q1. So I'm not going -- I'm not able to comment what we will say in 3 to 4 weeks from now.
Okay. And then lastly, on your macro forecast, are you going to update the macro forecast with the second quarter results?
I think we will. If you are talking about the macro assumption that is part of the IFRS 9 models, we will update that when relevant. Whether there would be any specific update here at Q2, that is not something I can confirm nor deny. But it will be updated when relevant.
But there is a chance that it'll be updated for the second quarter then?
Yes. I cannot -- as I said, I cannot confirm that there will be changes. But on the other hand, I cannot deny so...
Okay. So wait and see. All good, that's fine.
[Operator Instructions] Our next question comes from the line of Jakob Brink from Nordea.
Claus, just coming back to loan loss provisions. It seems like looking at all the bank results in Q1 across the Nordics, you and the other Danish banks had much higher provisions than at least the Swedish banks in Nordea. Could you -- has there been any update from the FSA during Q2? Or how are you looking at the fact that Danske Bank had -- and Danish banks, I guess, had so much higher provisions than your Nordic peers? Is that something you will be addressing? Or what can you say?
No. I think it's difficult to comment outside what we said in Q1. I think we also addressed that in the preclose call for Q1, that the Danish FSA is having a different approach than many other supervisory authorities in other European countries and in the Nordic. And I think the Danish FSA has, in different connections in different media interviews, made it quite clear how they see their role in this and also how they differ from the way that other FSA are doing their supervision. So I think it's a Danish issue we are we are talking about here more than it should be any material difference in the underlying credit quality of the bank's portfolio.
Do you think that the Danish approach has then ended with Q1? Or are you still being forced by the FSA, like you said, ahead of the Q1 call? Are you feeling the same pressure? Or are you feeling that they are okay with the current levels of provisions?
No. I wouldn't use the word, and I do not stick to the word that there is a pressure. I think this is the way the Danish FSA is supervising the banks. And I don't think that is something specific related to Q1. I think that's the way it has been for a while, and I would not expect the Danish FSA to change their practice going forward.
Some of your competitor banks in Denmark or one of them have been out saying that losses in Q2 will be immaterial. So basically, you're not able to say that yet. So I guess, how should we read that? As such, can you call things weaker or...
No. I think that -- no, Jakob, I think my comments here on the supervisory practice from the Danish FSA is not to be linked with any forecast for our impairment charges in the second quarter. As you know, I cannot comment on that. I can only stick to our outlook, where we have said that a large part has been recognized in the first quarter. That is part of our impairment outlook for the full year.
As there are no further questions, I'll hand it back to you, Claus.
Okay. Thank you so much for calling in. We are available for follow-up questions in the team. And as I stated previously, we are moving into the silent period on Friday on the 26th of June, and we will start collecting the consensus estimate with the deadline in the 2nd of July, and we would highly appreciate to get your input for this process. So I think that's it for the day. Thank you so much for calling in. Goodbye.
That concludes our conference call. Thank you all for attending. You may now disconnect your lines.