Danske Bank A/S
CSE:DANSKE
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Danske Bank A/S
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Welcome to the Danske Bank Pre-Close Call Q2 2021. [Operator Instructions] Just to remind you, the call is being recorded.I'll now hand the floor to Claus Jensen. Please begin your meeting.
Thank you, operator. Good afternoon, and [indiscernible] to the Danske Bank Q2 2021 Pre-Close Call. My name is Claus Ingar Jensen, and I am Head of Investor Relations. With me, I have Olav Jørgensen, Patrick Skydsgaard, Sofie Friis and Nicolai Tvernø 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 public data and macro trends in our market as well as one-offs that you should be aware of before we start the silent on the 2nd of July ahead of the publication of our Q2 report on the 23rd of July. I will go through the P&L statement line by line and remark on capital at the end. And afterwards, we will open up for a Q&A session.But before we start and for the sake of good order, I would like to briefly highlight the following: I will answer -- only answer questions related to already disclosed information and one-offs as well as publicly available data as of this Monday, the 21st of June, unless otherwise noted. In this connection, I wish to stress that developments in specific indices may not always have the same effect on our performance. Let's quickly touch upon the macroeconomic outlook before we move through the line items. I want to highlight that a number of macro forecasts, including the Danish Central Bank, continue to have a positive outlook for the remainder of 2021 and expect a fairly rapid recovery of economy activity once the economy is no longer constrained by the COVID-19 restrictions.We have seen pent-up demand throughout May with mobile and card transactions up 5% to 10% from the same level in 2019, underpinning the robust economy and the expectation of a positive macroeconomic outlook for the remainder of 2021. In addition, we note that the Danish Central Bank has released a publication stating that banks are well equipped to counter the expiration of the government support packages.That said, let's start by having a look at net interest income. Please remember that the second quarter have 1 interest day more than Q1 with an NII impact of around DKK 30 million to DKK 40 million per day. During the quarter until this week, the Swedish krona is roughly flat against the Danish kroner while the exchange rates of the Norwegian kroner and the pound-sterning has appreciated around 2.5% and 0.5%, respectively, against the Danish kroner on the basis of public data.As stated previously, COVID-19 and the availability of government support packages are expected to be key determinants of demand for business loans and credit facilities, and thus, the future demand for credit facilities to mitigate the impact of the coronavirus pandemic is highly uncertain. Keeping this in mind, let's turn to volume developments. We refer to publicly available sector statistics as the only externally available source of insight. According to these statistics, lending volumes in Denmark remain subdued, while business deposits seem to have stabilized on an elevated level. For households, the increase in deposits continues. However, data post the broader reopening is not yet fully available. We have nothing to add to these statistics.Coming to the interest rate environment. We note that interest rates generally have risen further since the start of April and yield curves have also steepened with longer-term yields, rising more than short-term deals. However, we do not expect a significant level of remortgaging activity, but continue to note that the interest rate development could affect the loan preferences from borrowers.With regard to margin development, we also refer to public available sector statistics as the only externally available source of insight. Our overall observation regarding margin development remain consistent with the trend observed in the first quarter.Since Q1, 3-month STIBOR was almost flat while NIBOR has decreased 19 basis points, 1-9 basis points, and CIBOR has increased 2 basis points, all on the basis of quarterly averages. Then on the funding side, we issued 2 benchmark bonds in the second quarter. The first one was an AT1 issuance of USD 750 million at the spread equivalent to 321 basis points over 3-month Euribor. The second issuance was our second-ever green nonpreferred senior of EUR 500 million at a 93.7 basis points spread to 3-month Euribor. This represents an about 3 to 5 basis points net issuance premium to conventional nonpreferred senior issuance and an estimated premium of 3 basis points.On the other hand, in April, we gave notice of early redemptions of our EUR 500 million Tier 2 notes with a coupon of 2.75%. The notes were effectively redeemed on the 19th of May at par. Please also revisit Page 32 of our Q1 conference call presentation to see the redemption profile for our maturing funding. With regards to deposit repricing, we have not announced any further changes since the initiatives we took ahead of the Q1 release. The initiatives announced on the 26th of April will not take effect until the first of July, but they are expected to have a positive impact of around DKK 250 million, all else equal in the second half of 2021 and the full year effect of around DKK 500 million. In this regard, please note our previous comment on sustained margin pressure.This concludes our messages on net interest income. Looking at fee income, we want to highlight 3 proxies, namely the general consumer spending, that development [Audio Gap]consumer spending remains above pre-COVID levels. The equity markets have been developing positively during the quarter.[Audio Gap]Mortgage bonds, where callables have widened 20 to 25 basis points, whereas spread on noncallable bonds have been stable from the level in the last quarter.The yield spread between Danish bonds and German government bonds has widened by 2 basis points in the 10-year segment. And please note that Q1 included a positive one-off on the trading line of DKK 227 million related to the sale of Visa shares.Looking at net income from insurance business. Please be aware that a strong investment result in the insurance business contributed positively in Q1. And finally, Q1 included a negative one-off of DKK 200 million negative related to an ongoing provision to cover a method change for PAL tax within the health and accident portfolio. We do not have any specific comments on other income, and this concludes our comments on the income lines.On our costs, please be aware that the Q1[Audio Gap] Apologies, ladies and gentlemen, we seem to have some technical difficulties with the line. We're just going to try and reconnect out and get back to you. We're just going to put the call on hold for a moment whilst we do that.[Technical Difficulty]
Apologies for the delay, ladies and gentlemen. We are back connected now, so I'll hand you back to Claus.
Yes. Hello, everybody. Sorry for the inconvenience here, but I was completely disconnected. But as far as I can understand from the operator, I left you when I concluded our comments on the income lines. So I will now make comments on costs.On our costs, please be aware that the Q1 numbers included negative one-offs of DKK 272 million related to provisions for home office allowance to employees and upcoming changes to our VAT setup.Now let's turn to the second quarter. On the 24th of June, meaning yesterday, we received the Swedish authority's ruling on the Swedish VAT case related to the VAT setup in Sweden. As a consequence of the ruling, we will make a provision to cover the upcoming changes of approximately DKK 350 million on our cost line in our Q2 numbers. Other than that, we do not have any specific comments regarding our cost development.In respect to credit quality, we have nothing to add from when we published our Q1 report. We do not have any specific comments on the noncore and tax lines. And this concludes our comments on the P&L.As a final point, I would like to touch on capital. As always, our capital will be impacted by earnings less the dividend payout. We reiterate our guidance on implementation of EBA guidelines where we expect REA to increase by DKK 50 billion to DKK 70 billion for 2021. We do expect to front load some of the remaining increases in the second quarter with an increase of around DKK 26 billion. In Q1, the effect of the EBA guidelines implementation was DKK 12 billion. The risk exposure amount is, as always, subject to general market volatility and FX movements as well as growth.Finally, on the 22nd of June, the Danish Systemic Risk Council advised the Minister for Business and Financial Affairs to fully reciprocate the Norwegian 4.5% systemic risk buffer and risk weight floors for residential real estate and commercial real estate. The Danish risk -- the Danish Systemic Risk Council, however, notes the 18-month transition period for the Norwegian systemic risk buffer. We will comment on the impact for the group once we have further clarity from the ministry.Further, the council also recommended an increase in the countercyclical buffer in Denmark from the current 0% to 1% effective from the end of September 2022 as per the normal 1-year transition period. This is in line with our expectation and planning. The Ministry for Business and Financial Affairs have announced that the recommendation will be followed.Preliminary calculations indicate an increase of around 0.5% of the fully phased-in in the CET1 capital requirements. The exact number will be disclosed as part of our half year results. The council expects to recommend a further increase to 2% before the end of 2021, with effect from the start of 2023.This concludes our initial comments in this pre-close call. And before we move on to the Q&A session, I would like to highlight that we enter our silent period on the 2nd of July. Shortly, we will also start collecting consensus estimates with a contribution deadline on the 8th of July end of business. We will publish our Q2 '21 report on the 23rd of July at 7:30 CET. Please note that the conference call for investors and analysts will take place at 8:30 CET.Operator, we are now ready for the Q&A session.
Our first question comes from the line of Sofie Peterzens of JPMorgan.
Sofie from JPMorgan. I actually missed a little bit on the comments that you made on fees and the trading because for me the line cut off, but maybe it was just me. So if you could just very briefly comment there. And then my second question, there were some news earlier today about Danske getting basically charged for reaching market loss. Anything -- any additional color you can give here, what does it mean? Any potential fine? That would be much appreciated.
Yes. Sofie, to start with your second question, no, we have issued a press release in respect to the case on the market abuse and the preliminary charges where our Chief Compliance Officer, Philippe Vollot is stating that this is a case that actually goes back to 2019. And it is a case that has been mentioned in June of the last year. So we have already made significant investments to strengthen our trade surveillance. And we will, of course, fully cooperate with the authorities. Other than that, we do not have any comments. And it is -- we have now been what we call preliminary charged. And based from the Danish authorities, we will see what that would lead to.The only thing I think we can be pretty sure of is that this would probably take quite a long time before we will have a result. And when it comes to a potential fine, that's too early to speculate. And we do not really have any history that we [indiscernible] the case when it comes to fine for these type of cases.And then the -- sorry to hear that you were caught off on the comments of fee income. But what we basically highlighted here is that we have seen a slightly positive development in some of the equity market indices that we are following. We are also seeing good level of activity within our ECM and DCM business, although you should be aware that Q1 was affected by a call of extraordinary transactions. And on the trading line, we highlighted some spread widening on Danish mortgages, and we also highlighted curve steepening and a small widening of the yield spread between Danish and German bonds on the government side. And then we also highlighted that we saw a one-off of DKK 220 million related to the sale of Visa shares back in the first quarter.Otherwise, this script that we have used today will be uploaded on the website, and you can see our full comments later today.
[Operator Instructions] The next question comes from the line of Jakob Brink of Nordea.
Claus, just coming back to the cost seasonality. So I think we asked -- Stephen answered a question at the Q1 conference call where he said that we should expect roughly flat cost for the first 3 quarters and then the normal Q4 seasonality. Now with the 2 one-offs, the one in Q1 and Q2, could you just try and bake that into his answer from the Q1? Should we expect the underlying levels be flat? Or what trend are we looking at?
Yes. I think that is what he was thinking that -- when he made that comment. And then you can add the one-offs that we have talked about in this call.
And how does those one-offs impact your full year guidance of the costs? Are they...
We have -- we don't see any reasons to change the full year guidance on costs on -- as a consequence of what we have announced today.
Okay. So you knew that already? Or is...
So the full year guidance still stands. No, but we haven't concluded on the month so far. We know that there is a one-off coming related to the Swedish VAT issue, as we described before. But there are -- in a bank like Danske Bank, we have a number of one-offs every quarter. And as we haven't come to the end of June yet, it's too early to make any comments on whether there should be other one-offs. But this one, which came yesterday, is a material, one of a kind. And that's why we find it prudent to inform you on this call in order to form the Q2 consensus numbers as correct as possible.
And we have one further question on the queue that's from the line of Adrian Cighi of Credit Suisse.
Sorry, I couldn't hear this, though, maybe you discussed it, but I had technical issues myself. But I'm trying to see if you've discussed sort of the interest rate sensitivity you have to Norwegian rate increase. We've seen Norges Bank become quite a bit more hawkish there. Have you disclosed any sort of sensitivities in the past that you might be able to refer to [indiscernible]?
No. I'm sorry, but we haven't. We have only disclosed the sensitivity on the group level from a 25 basis points parallel shift in the yield curves, but not specifically for the Norwegian market.
The next is for the line of Per Grønborg of Citi.
One single question, Claus. The Swedish VAT, these DKK 350 million, what does that cover 3, 4 years, 5 years? And how much should we expect the running cost to be up due to this going forward? Anything you can do to offset it, structuring your business differently?
We have -- as you would have seen, we took a provision in Q1 of DKK 150 million to change the overall VAT setup in the bank. So the DKK 350 million is a provision that are aimed at repaying VAT to the Swedish authorities for a period back in time. I don't have the exact number or figure this year, but we feel that this should be fully covering what we see of potential claims from the Swedish authorities. We have not disclosed how much the change will affect our numbers going forward as we are now entering into a kind of a new regime. But to my knowledge, it's not a material number, but maybe we can comment more on that at the Q2 call.
We have one further question come through that's from the line of Mads Thinggaard of ABG.
Yes. Claus, just one question here on the -- I mean, on the capital requirements that are going up. Now you point to this systemic risk buffer in Norway and the countercyclical buffers. Could you put some light on how much do you expect to add to your total capital requirement in 2023 compared to today for your -- I mean when you do your capital planning?
No. As I also said, we will not comment on the exact effect of the systemic risk buffer in Norway before we have the final decision from the Minister in Denmark. So that is not something we can make any comments on. I think we have made comments as far as we can go, the systemic -- the countercyclical buffer effect will be approximately 50 bps here at Q2. And that is what we can see so far. And once we have more clarity around what the minister is going to say around the Norwegian issue, then we will disclose that, of course. Further implementation of countercyclical buffers will await the decision by the minister, and he has only approved the 1%, taking effect from the end of September of next year.
Yes. I mean the reason I asked is that you have pointed to sometimes that as the EBA technical guidelines drives up, then you could lower your CET1 target at some point. Is that something that could be at risk with these -- with all these buffers and other requirements going on?
I think we have said that we will probably move into a buffer target instead of having this fixed above 16% target that we have from now. But we are awaiting clarity on a number of issues, including also this fine issue. And then when implementing more and more EBA guidelines, we are also having discussions with the Danish FSA on whether some of the existing Pillar II requirements can be reduced. That could be the use of internal models for which we are taking quite a decent chunk in our Pillar II today. That would be an area where I would expect the Pillar II requirement should be lower as we are moving into a less internal model-driven way of doing things going forward. But there is essentially nothing new here compared to what we have stated already, and we are not able to put any numbers on it.
[Operator Instructions] As there are no further questions at this time, I'll hand back to Claus for the closing comments.
Yes. Thank you very much for your interest. Again, apologize for the technical breakup, but I'm sure we made it. And also thank you so much for the questions you have today. So just to say have a nice weekend, everybody. Goodbye.