Danske Bank A/S
CSE:DANSKE
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
175.5
212.8
|
| Price Target |
|
We'll email you a reminder when the closing price reaches DKK.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Danske Bank A/S
Earnings Call Analysis
Q2-2023 Analysis
Danske Bank A/S
Danske Bank has demonstrated robust growth in lending, particularly highlighting a 3% quarterly uptick in demand for its flexible housing loan product. This growth reflects the bank's strategic drive towards augmenting digital accessibility, exemplified by their development that enables new account openings directly through their mobile app. These advancements are significant as they suggest Danske Bank's substantial investment in digital transformation to better service personal customers, an increasingly important differentiation factor in the competitive banking landscape.
A significant 70% rise in the bank's profit before impairments over the previous year is a testament to higher net interest income (NII) from increased deposit margins and diligent pricing initiatives. Moreover, a 1% year-on-year increase in lending volumes across the Nordics underscores the bank's sustained expansion and its strategic positioning to leverage opportunities for growth in these markets.
Danske Bank's Business Customer segment has seen the deployment of the self-serve platform 'District Marketplace' to over 100,000 users in Denmark, with a focus on digital product accessibility. Over 16% of products in Sweden are now ordered online, marking significant progress for the bank's digital and sustainable initiatives. They have also launched a free digital Environmental, Social, and Governance (ESG) profile tool for Business Customers, indicating a robust commitment to leading in sustainable transformation.
Reflecting a solid financial performance, shareholder equity returns soared to 12.4% from just 5.2% a year ago. This remarkable growth in returns is a key indicator of the bank's efficiency and profitability improvements, making it an attractive consideration for investors focused on earning potential.
The bank's NII trajectory remains positive with a 6% quarter-on-quarter and an impressive 45% year-on-year increase. This strong performance was driven by higher deposit margins in the prevailing high-interest rate environment and pricing measures that countered higher funding costs. However, the overall slowing trend in mortgage lending volumes due to declines in housing market activities poses a challenge that investors should monitor. Still, Danske Bank's introduction of competitive savings products, such as 'Danske Toprente', has attracted over DKK 10 billion in inflows, underscoring the bank's adaptability and strategic response to changing market conditions.
The bank faced a 13% fee income reduction year-on-year due to dampened customer investment activity and a significant decrease in the housing market. Despite these headwinds, the bank has maintained stable corporate activity levels and adapted its pricing models, which could signal resilience in the face of macroeconomic volatility.
A testament to Danske Bank's robust financial health is its consistent capital strength, with a CET1 capital ratio slightly inching upwards to 18.1%, predominantly due to increased net profits. This indicates that the bank maintains a sturdy buffer and is well-capitalized, which is crucial for investor confidence, particularly in uncertain economic times.
You don't have any saved screeners yet
Good morning, everyone. Welcome to the Conference Call for Danske Bank's Financial Results for the First Half of 2023. My name is Claus Jensen, Head of Danske Bank's Investor Relations. And 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 IR department if you have any more questions.
I will now hand over to Carsten.
Thanks, Claus. And I would also like to welcome you to our conference call for the financial report for the first half of the year. There is no doubt that the first half of the year was a very busy period for us. Overall, we saw a good commercial momentum across our core banking activities. And the finalization and progress we've made in respect of legacy cases has been pivotal for our ability to formulate our new Forward '28 strategy and our financial ambitions for '26.
Our new strategy announced on the 7th of June is a cornerstone of our ambition to strengthen our position as a focused Nordic leader with strong profitability and growth. And later in this call, I will provide a short overview of our new strategy and also the progress on execution.
The macroeconomic environment continues to be characterized by the uncertainty that has followed from the significant changes to the geopolitical landscape. No doubt, the economy is doing better than expected, characterized by high employment and improving consumer spending.
However, as core inflation continues to be at an elevated level despite differences between countries, central banks remain in tightening mode and the medium to longer-term effect on the economy of the tectonic shift in the interest rates that we've witnessed has yet to be seen. And as such, uncertainty remains. And as our economy is right in the June version of our Nordic outlook report, it is too soon to celebrate a soft landing.
On our financial results that we published this morning, I have three main observations that I'd like to highlight when we compare with the same period last year. Firstly, a strong progress for income, driven primarily by a normalization of the interest rate environment by pricing optimization and from a positive development in trading income on the back of our new fixed income strategy, along with more benign financial market conditions.
Secondly, we have kept operating expenses flat despite increased inflationary pressure and thereby improved our cost-to-income ratio. And thirdly, credit quality remained strong with no real credit deterioration in the period.
Financially, the first half of the year was strong with a net profit of DKK10.2 billion, equivalent to a return on equity of 12.4% for the period. Please be aware that currency depreciation and fair value effects on housing loans had an adverse impact on our reported numbers during the period. The result included a small positive impact from a number of one-off items, including a negative valuation related to the planned disposal of our personal customers in Norway.
On the basis of a strong improvement for income, focus on costs and a strong credit quality, I'm pleased that we have adjusted our outlook for the full year to a net profit of DKK18.5 billion to DKK20.5 billion from the previous DKK16.5 billion to DKK18.5 billion.
I'm also pleased with the commercial momentum that we saw in the first half of this year. This came particularly in the form of a high level of corporate banking activity across business customers and LC&I that supported lending volume and income, including also a good flow of corporate customers in Sweden, which has a clear strategic focus area for us.
Our capital markets franchise benefited from a more stable macroeconomic situation that allowed for a recovery in market activity, led by good DCM activity and also a pickup in our ECM pipeline from a very low level.
Clearly, our retail business has been impacted by the slowdown in the housing market activity across the Nordic countries, in particular when compared to last year. In respect to the Danish market, we've seen a significant decline in housing transactions in general and in the urban areas, in particular. As this is where we are strongly positioned, the adverse impact on issuance activity in likely [ph] Denmark and thereby fee generation has been significant.
However, the housing market in Denmark recovered slightly in the second quarter, where we've seen improving demand for our flexible housing loans in the market in Denmark, and we provided significantly more green loans.
In addition, we continue to see good demand for our competitive saving products that led to a further increase in retail deposits. Despite the fact that brand perception in Denmark is still impacted by the legacy cases, we're also pleased to see an improved traction for customer satisfaction and improved offerings. And we also continue to see progress on customer inflow within prioritized segments.
Credit quality remained strong with very modest impairments recognized which led to a net reversal in the second quarter and essentially no charges in the first 6 months of 2023. We've maintained a strong capital position. And at the end of Q2, our capital ratio improved to 18.1%.
Our funding and our liquidity position remains robust. As I mentioned previously, we continue to see an inflow of retail deposits, whereas our corporate deposits declined due to currency depreciation and a reduction in nonoperational deposits. Hence, our LCR came in at a more normal level of 148%, down from an elevated level at the end of Q1.
Let me briefly recap on our new strategy, in particular, also the progress that we've seen over the last 1.5 months. Slide 2, please. As you may recall, only 6 weeks ago, we presented the Forward '28 strategy at our Investor update. This strategy sets a clear direction for Danske Bank with strong ambitions for our commercial development and clearly defined financial targets for 2026. This strategy will naturally replace the Better Bank plan, and I was pleased to see the positive reception of our new strategy in the market.
In essence, this strategy will enable us to become a more focused Nordic leader with a disciplined focus on growth and profitability. We have four strategic areas for investments: the first three advisory, digital, sustainability are supported by the fourth simple, efficient and secure operations across all activities in Danske Bank. And this will set the direction for the business units, and each of them have tangible ambitions for how to position themselves against peers and in their respective markets.
Execution on what we promised at the Investor update is, of course, of paramount importance for our ability to reach our ambitions, and I'm very pleased with the following progress that we've made already.
Firstly, our decision to defocus and thereby to seize our retail and private banking business in PC Norway is a result of our focus on portfolio optimization. The announcement we made on Wednesday this week to enter into a transaction with Nordea is strong evidence of our ability to execute and in line with the decision we communicated.
The expected release of capital of approximately DKK5.5 billion will add to our strong capital position and our potential for capital distribution, in line with what we also communicated on the Investor update.
A second proof point of execution is our decision to enter into a strategic partnership with Infosys. This partnership has led to the sale of our IT operation in India to Infosys. And the point of departure for this decision is our ambition to be a leading bank in a digital age. And this entails significant investments in digitalization and technology. And we strongly believe that the partnership with Infosys given their global presence and scale is the best way forward for our ambition to further accelerate our digital and our technology transformation.
And finally, we announced an ambition to accelerate capital distribution in 2023 in the form of a dividend payment for the first 6 months. And today, I'm pleased to announce that the Board of Directors has decided to distribute a dividend of DKK7 per share, and this represents a payout ratio of slightly more than 59% based on a net profit of DKK10.2 billion for the first 6 months.
So the net profit for the first 6 months of above DKK10 billion, equivalent to a return on equity of 12.4% and a cost income ratio of 49.3% is a clear improvement of profitability and of cost efficiency. And the result is another step in the right direction for Danske Bank and no doubt, we are on the right track to meeting our targets and in doing so setting the scene for a promising start for delivering on our new financial ambition.
Let me just briefly update on the performance across our three main business units, and this is Slide 3, please. At Personal Customers, we continue to see progress and the operational performance was strengthened by improved deposit margins despite headwinds from currency depreciation.
Improved margins led to strong uplift in NII across the business. And as a result, profit before impairment has more than doubled in the first half from the level in the same period last year when adjusting for the impact of the divestment of PC Norway.
As a result of continually good activity, activity-related fees held up well. However, significantly lower housing market and investment activity had an adverse impact on fee income compared to the same period last year, which also benefited from record high remortgaging activity.
Sentiment in the Danish housing market, however, started to improve slightly in Q2, as did also investment activity. Cost reductions contributed positively to the increase in profitability as a result of our focused efforts to become a simple bank.
In respect to volumes, deposit volumes have steadily increased during the first half of the year with good traction for inflow into savings products, whereas lending volumes have declined slightly in the quarter. However, this was impacted by headwinds from FX. If you look at PC Denmark in isolation, we saw an increase in nominal lending, partially driven by increased demand for our Danske Politi [ph] home loan product for which volumes were up another 3% this quarter, adding to the positive trend in demand for more flexible housing loan products.
One of our key strategic ambitions for our Personal Customer segment is a digital front door access to Danske Bank. And this quarter, we continued our digital journey by introducing a new feature that enables customers in all countries to open transaction and saving accounts directly in Danske Mobile Banking app. And the new feature followed the possibility to set up reoccurring monthly investments that we introduced earlier this year.
In terms of customer satisfaction, we've seen our Trustpilotscore increase from 2.1 to 4.3 out of 5. This is the highest among peers. And in addition, the BoxMeter [ph] Institute of Analysis Tracking Best Banks of the Year in Denmark reported that Danske Bank as the best bank with greatest progress for consecutive years.
And in this context, I'm also pleased to see strong recognition from our high-yielding savings products and our green car loans by the Danish Consumer Council, which is an important testament to our strong value proposition. This public acknowledgment of our products and also the increase in customer satisfaction scores makes me confident that we are on a positive trajectory towards stabilizing our position as a leading full-service retail and private bank in Denmark.
Let's move on to Business Customers. At Business Customers, we've seen solid financial results with profit before impairments being up 70% compared to the same period last year. The uplift was driven mainly by higher NII from increased deposit margins and diligent pricing initiatives, while non-NII income remained solid over the past quarters.
We've seen a 1% increase in lending volumes across all our Nordic markets year-on-year. However, when adjusting for FX headwinds and fair value, lending volumes were up by 4%. And there was also an increase in deposit volumes in all markets, except for Norway.
In respect to fee income, we're now seeing the benefit of our subscription fee service model implemented in mid-2022, along with a positive development in service fees, a good example of our increasing share of wallet among our business customers.
Optimizing our pricing structure is a priority at Business Customers, and we are focused on aligning the pricing of our services and products to the market with a holistic customer focus in mind. We remain committed to advising our customers and how to operate in volatile markets where current conditions call for an extra focus on working capital needs and credit risk mitigation. And I'm happy to see that our financial advisory capabilities are brought into play through close collaboration and a thorough understanding of changing customer needs.
And we continue to see a solid development in our CSAT scores, where we now rank number two among peers for Business Customers in Denmark across customer segments. For small businesses, we ranked number one in Sweden and for midsize, we ranked number one in both Norway and Finland, and this underpins our position as a focused Nordic business bank. So we are thus on a positive trajectory towards our Business Customer ambition of becoming the leading business bank in the Nordics for customers with advanced needs.
A big step in our digital journey has been taken over the last half year, as our district marketplace was rolled out to more than 100,000 district users in Denmark. District Marketplace is our self-serve platform where customers can access the most popular products digitally at any time. We've observed an increase in the number of products ordered digitally through self-serve. And since the launch in Sweden last year, more than 16% of products are now ordered online, and this trend has been increasing. And I'm very excited to see the impact we can generate with District Marketplace across our Nordic markets.
Additionally, we've launched the digital ESG profile for our Business Customers. This is a digital self-service tool offered for free that enables our customers to work more systematically with sustainability. In the system, customers can get an overview of and also measure the impact from their ESG initiatives, a great step in our ambition to become the market leader for Nordic business customers with sustainable transformation ambitions.
And then finally, LC&I. LC&I has also had a very busy first half of the year, serving our customers as the market conditions stabilize somewhat, and capital markets were more constructive during the second quarter of 2023. In the first half of the year, we saw a significant uplift in profit before tax, driven by higher NII and trading income. And we're pleased to see that our new fixed income strategy in LC&I, as well as supportive market conditions has benefited trading income.
Although fee income in LC&I was down slightly compared to the last quarter, conditions improved in capital markets in the second quarter. And in particular, we've seen solid activity in DCM and we're now starting to see a promising pipeline for ECM and M&A.
Assets under management recovered in the first half of 2023, driven by an improvement in financial markets after the significant decline in the second quarter last year. And in particular, we've noted the better performance of our investment products versus benchmarks, which should be supportive for future inflows.
The positive development in both income and costs drove profit before impairments of 116% from the same period last year, however, down 20% from the preceding quarter, as trading income declined from the very strong level we saw in the first quarter.
Good customer activity led to demand for new credit facilities as well as drawdowns on existing facilities and resulted in an increase in lending volumes of 10% year-over-year when adjusting for FX. This also reflects our strategic ambition to grow in Sweden, and we're proud that we are already in the second quarter of 2023 reached the ambition set in 2021 to have welcomed for the new large corporate customers by 2023.
The increased demand for our advisory expertise and our strong balance sheet enable us to support our customers with increasingly complex solutions, facilitating some of the most significant capital market transactions in the Nordic region.
So for instance, Danske Bank helped Sobi, a Swedish-based biopharmaceutical company with our bid for the U.S. listed company, CTI BioPharma in a transaction valued at up to USD1.7 billion, involving many teams across our corporate and investment bank. Additionally, our ECM franchise was the leading ECM adviser in Denmark in the first half of 2023, and we've been part of several notable transactions, for instance, supporting NKT in raising more than DKK2.7 billion.
As mentioned at our investor update in June sustainable finance is a key part of our strategy, and we are proud to maintain our leading position in sustainable finance, arranging more green bonds from European borrowers than any other arranger in the first half of 2023 and ranked number nine in Bloomberg's Global Green Bonds League Table.
Additionally, a strategic ambition for LC&I is to continue improve our offering for corporates. And to that end, I was delighted to see us being rated Nordic number one position within DCM investment-grade issuance and interest rate swaps and Nordic top two positions within daily banking areas such as cash management, according to Prospera Research. Our transaction banking solutions are generally highly rated by customers and continue to win market share as we've been awarded new house bank mandates from large Nordic corporates.
I'll now hand over to Stephan for a detailed walk-through of the financials. Slide 4, please, and then I'll hand over to Stephan, please.
Thank you, Carsten, and good morning. 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 busy start to the year driven by normalization of interest rates, better financial market conditions and costs under control with a combined positive financial impact across our business units.
Net interest income saw a strong progress and was in line with expectations. NII was up 45% from the level a year ago, as the normalization of interest rates and our own efforts to optimize pricing structures had a strong positive impact. The improvements continued in the second quarter where NII was up 6% from the preceding quarter, as the effects again from normalized interest rates continue to materialize in our numbers. Adjusted for the adverse depreciation of currencies, NII was up around 50% and 9%, respectively.
Net fee income came in lower than the level a year ago. The decline was driven by overall housing market activity, as well as the decline in fees from investment activities. In Q2, fee income came in lower than the previous quarter, mainly due to the refinancing related seasonality. On the positive side, activity-related fees saw an increase compared to the same period last year, as well as the preceding quarter, which I will comment more on later.
Net trading income recovered from a low level a year ago when financial markets uncertainty was higher, reflected supportive market conditions and facilitated by a new fixed income strategy. The recovery was most pronounced in the first quarter and the second quarter trading income benefited from a positive one-off of DKK0.3 billion.
Net income from insurance improved from the low level last year when financial market uncertainty led to negative valuation effects. In the second quarter, however, the result was impacted by valuation effects and an adverse development in the health and accident business due to an increasing number of claims. The increase in claims is expected for the second half of the year as well, thus impacting the full year outlook for our insurance business.
The underlying business improved due to an increase in premiums of nearly 9% compared to the year before. Other income amounted to a negative DKK0.4 billion in the second quarter, as the result included a valuation related one-off of DKK0.7 billion from the exit of our Personal Customers business in Norway.
Operating expenses came in slightly lower than the level a year ago through strict focus on cost control and lower transformation costs, we have been able to mitigate the impact from elevated remediation costs and higher inflation. Expenses were slightly higher relative to the preceding quarter, as inflation was partly countered by exchange rate effects. Against this background, our cost income ratio saw a very strong improvement and amounted to 49.3% against 67.6% a year ago.
Loan impairment charges reflect continually strong credit quality and amounted to a small net reversal for the first half of the year, driven by a reversal of DKK0.2 billion in the second quarter. I will comment on impairments in more detail later.
Finally, the tax expense in the second quarter of DKK1 billion was down by approximately DKK0.8 billion, mainly due to a reversal of a provision of DKK0.6 billion related to the exit of the International Joint Taxation scheme in 2019.
Net profit for the first half of the half of the year, thus amounted to DKK10.2 billion, more than twice the result from the same period last year and slightly down from the preceding quarter. The result represents a shareholder equity return of 12.4%, up from 5.2% a year ago.
Slide 5, please. Let's take a closer look at net interest income for the group. Overall, NII continued its positive trajectory with another 6% Q-on-Q, adding to the year-on-year uplift of 45%. The strong trend comes despite another quarter with currency headwinds and the improvement was driven by a continued solid expansion of deposit margins that benefited from the higher interest rate environment, along with our diligent pricing initiatives. This mitigated higher funding costs and various effects breaking on lending margins in a rate hike [ph] cycle.
As expected, the trend in lending volumes slowed through the first half of the year after the rapid growth in credit lines and liquidity facilities we saw in the second half of 2022, particularly to the higher-rated corporates. Lending margins have stabilized recently on the back of our ongoing efforts despite the continued lagging effect due to notice periods and the timing of repricing of loans in general.
The total deposit volume remained elevated despite a lower reported number in Q2. This was impacted by FX and additionally related to nonoperational deposits at LC&I. In fact, we saw a positive trend and inflow in Personal Customers, deposits with plus DKK6 billion in PCDK and outside a conscious choice to reprice deposits in BC Norway, we saw deposit inflow in all other Nordic markets among our Business Customers. Altogether, we supported the positive contribution to NII from deposit volumes in the quarter.
The management of interest rate risks in the banking book and treasury impacted the year-over-year development. However, this should be viewed in the light of the significant contribution from improved deposit margin and works as an implicit hedge. As such, it was allocated to the business unit deposits margins during Q2 and is partly reflected on this slide with the full impact to be evident going forward. But to be clear, it had no group effect in Q2. In fact, the second quarter impact was modest and other treasury benefited from the higher interest income on our equity base, as well as a day effect of around DKK75 million.
Finally, as Carsten highlighted, our Savings product offerings have been pressed [ph] by the Danish Consumer Council following the launch of our new term [ph] deposit products in the beginning of the year. During the second quarter, we saw further inflow into our savings products with more than DKK10 billion migrating into the Danske Toprente, rand and Danske Danske Indlan products roughly evenly split between the two.
The NII sensitivity over the next 12 months remains to be plus DKK700 million for the next 25 basis points uplift with an additional uplift of around DKK300 million over the following 24 month. The sensitivity will decrease going forward under the assumption that we see further deposit migration. But keep in mind the significant tailwinds from the previous hikes as it takes more than 12 months before we see the full benefit.
Slide 6, 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 since last year was driven primarily by lower investment fees due to lower customer activity, lower AuM and performance fees. When comparing to the previous quarter, customers in investment activities were stable, and we saw a small increase in fees generated by asset management due an increase in AuM.
Substantially lower housing market activity driven by interest rate uncertainty and lower remortgage activity was a key driver for decline in fee income from lending and guarantees compared to a year ago. As Carsten mentioned previously, there has been a sharp decline in housing and market transactions in the Danish market. This led to a decline of more than 50% in issuance of new loans for the retail segment in RD. Of the decline in fee income from lending and guarantees from last year, 70% can be explained by lower issuance of RD mortgage loans in Denmark. The decline in income from Q1 was mainly due to seasonality as the income from refinancing of variable rate mortgages loans in Q1 amounted to DKK0.1 billion.
Activity-driven fee income related to customer activity maintained a stable level on the basis of good corporate activity and benefited from repricing initiatives, as well from customers moving to the new service-based fee model implemented in '22. In the second quarter, fee income started to benefit from a small improvement in activity from our retail customers.
Fee income from capital markets activities saw a small declining trend year-over-year as well as quarter-over-quarter. Income from debt capital market activities increased. However, ECM and M&A activity remained subdued.
Slide 7, please. The last income line for me to comment on this net trading. Trading income in the first half of the year amounted to DKK2.8 billion. This was a significant improvement from the unusually low level the year before when the Russian invasion of Ukraine became a game changer for financial market conditions and led to a significant uncertainty, especially for our rates business at LC&I.
The subsequent implementation of the new fixed income strategy and more constructive market conditions in combination with higher customer activity had a positive impact on income in the first half of this year. In the second quarter, however, net trading income at LC&I declined somewhat mainly due to the less supportive market conditions, followed by lower customer activity compared to Q1.
At personal customers and business customer, the combined net trading income was almost unchanged as an increased hedging activity among business customers were able to almost offset the decline in income from retail customers. The interest rate hedge in Northern Ireland led to a positive impact year-over-year, reflecting of combination of 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 and group functions was positively impacted by a gain of DKK0.3 billion as a result from a sale of shares from the previous debt-to-equity restructuring.
Slide 8, please. Now let's take a look at our operating expenses. Overall, our cost development continues to progress in line with our full year outlook, while our cost base remains impacted by elevated remediation costs and pressure from higher inflation on salaries and in general, these have largely been mitigated. Compared to the same period last year, we saw a positive contribution from lower staff costs because of initiatives launched during 2022. Lower planned transformation costs also had a positive impact on cost, both year-over-year as well as quarter-over-quarter.
We remain highly focused on the completion of our Financial Crime Prevention plan by the end of this year, which, together with smaller items such as marketing spend and higher software depreciation added to the higher costs in the quarter.
Finally, the cost of our continued work on legacy remediation remained at an elevated level, but came down slightly Q-over-Q. We continue to expect remediation costs of approximately DKK1.1 billion for 2023 as reflected in our outlook for the full year.
Slide 9, please. Let us take a closer look at our strong credit portfolio and the drivers behind the net reversals we have seen this quarter. Overall, our credit quality remains very solid, and we continue to see modest downward migration of exposures in our portfolio. For H1 as a whole, we ended the period with net reversals of DKK28 million, driven by reversals of DKK175 million in Q2. The positive development was attributed to recoveries from workout cases and generally lower expected credit loss in our portfolio, which also benefited from the better-than-anticipated macro environment. The latter also supported our macro model scenarios.
However, we remain mindful about the uncertainties ahead, including within specific sectors at this stage of the cycle. And as such, we have continued our prudent approach for post model adjustments, which now stand at DKK6.8 billion and remain a significant share of our total allowance account.
So while we remain comfortable with our asset quality and the well diversified and low credit risk portfolio, our post-model adjustments provide an additional comfort to mitigate tail risks in our portfolios that are not yet evident on the single name basis or captured through our macro scenarios.
With a positive development in the first half of the year, we have lowered our guidance on impairments to up to DKK1.5 billion for the full year as part of our 2023 net profit guidance. I will touch more on the outlook for '23 in a moment, but let us first have a look at our robust capital position.
Slide 10, please. Our capital position remained at a strong level at the end of Q2 as our reported CET1 capital ratio increased slightly to 18.1%. The increase in the CET1 ratio was primarily a result of an increase in net profit after dividend and lower REA. Our CET1 capital requirement increased to 13.7% as the countercyclical buffer was raised from 1% to 2% in Sweden. The fully phased-in CET1 requirement is at 14.3%, reflecting the authority's decision to reciprocate the systemic risk buffer in Norway of 4.5, effective from August 23. Our CET1 ratio includes to retain net profit in the quarter after accrued dividend of 60%, in line with the high end of the range of our dividend policy as usual.
Based on our solid performance and capital position at half year 2023, the Board of Directors has approved an interim dividend of DKK7 per share, corresponding to slightly more than 59% of reported net profit for the first half of this year. We remain comfortable with Danske Bank's healthy buffers to current and future regulatory requirements.
Slide 11, please. And then I would like to comment on our outlook for '23, which now has been revised upwards to a net profit in the range of DKK18.5 billion to DKK20.5 billion from our previous guidance between 16.5 and 18. Overall, we expect additional one-off related items in the second half of the year, mainly impacting income lines and tax. However, the combined effect from these items expected to only have a modest impact on the net profit outlook for the full year.
We continue to expect net interest income to grow driven by further normalization of rates from announced [ph] central bank rates and our continued efforts to drive commercial momentum, whereas fee income is expected to below the level in 2022.
We expect trading income to be impacted by the release of a loss of DKK0.8 billion from the OCI, reflecting for core Tier 1 FX hedge related to the sale of our Personal Customer businesses Norway - in Norway, as already announced earlier this week. Please be aware this is subject to regulatory approval and currency fluctuations between DKK and NOK.
Income from insurance activities is expected to be lower than normalized due to the negative valuation effects, higher claims in the health and accident business and a small negative of a one-off nature in the second half of the year.
We maintain our outlook for operating expenses to be in the range of DKK25 billion to DKK25.5 billion, including continued elevated remediation costs of approximately DKK1.1 billion. The outlook reflects our continued focus on cost management despite inflationary pressure.
We now expect lower loan impairment charges of up to DKK1.5 billion, down by DKK1 billion compared to our previous guidance. This is due to continually strong credit quality recovers in the first half of the year and lower-than-expected model-driven charges related to weaker economic outlook. The outlook is as usual, subject to financial market conditions.
Slide 12, please, and back to Claus.
Thank you, Stephan. Those were our initial comments and messages, and we are now ready for your questions. If you are listening to the conference call from our website, you are welcome to ask questions by e-mail. And finally, 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] The first question from Sofie Peterzens from JPMorgan. Please go ahead. Your line is open.
Thank you. So this is Sofie from JPMorgan. So my first question would be just on the interest rate hedging. I think you've mentioned that - or you mentioned that you initially have this DKK700 million positive impact from 25 basis points. But could you just kind of remind us how it then works for the next kind of 3-year impact and how you have made these hedges and kind of what instruments, what maturities and what rates these hedges are invested in?
And then my second question would be just on the transaction accounts, we see that, you now [ph] pay up to 50 basis points in Sweden for a salary account, indeed more one of your competitors face up to 1.5% on salary accounts. How should we kind of think about Danske starting to pay up on transaction accounts in Denmark? And kind of any thoughts here?
And then just a very quick clarification. So the DKK800 million OCI impact, that's going to be booked in the second half of 2023. And that's included in kind of the net income guidance for the full year. And are there any offsets in terms of tax or anything else that we should be aware of for this? That would be all for me. Thank you.
Thank you, Sofie. I'll try to pick at least two of the three from your rich menu. So I confirm interest rate sensitivity DKK700 million for the next 25 Bps across all currencies. There will be an additional effect the following 24 months of DKK300 million. So that's unchanged to what we said on the Investor Day.
You asked a little bit like how does it work? It's mainly, as we alluded to, the hold-to-maturity book, as well as assets with fixed rate pricing in Sweden and Finland that we will - will reflect this development.
The 800 related to dissolution, again subject to DFSA approval, the dissolution of the FX core Tier 1 equity hedge. That is, first of all, a non-cash, non-capital event since it just moves the OCI once to the P&L. We expect it to show up in the trading line rather than in the NII line. And then the third question, I think, was on pricing of transaction accounts in Denmark and how we see the market, right?
Yes, correct. Like we do consider paying up for salary accounts in Denmark?
Yes. So I mean, Sofie, we can't comment on future - on future pricing, as you'll probably understand in general, the Danish market has obviously moved on pricing for saving accounts and then there is somewhat differentiated approach to transactional accounts, but we can't comment on future pricing from our perspective, of course.
And what about - can you comment on the historic side thing, like in the past, did you pay on transaction accounts in Denmark when you had similar rates? And if so, at what levels, please.
I think in principle, Sofie, if you go back to the times before we had negative interest rates, that's quite many years now, there was a small positive interest rate on transaction accounts. But as I said, that was a small one. I don't have the correct number, but the market has changed in a way that transaction accounts for the major banks is kept at zero.
Yes. And I think I would point a little bit to what has been said earlier. So far, the market, and again, it's only so far. But the market has developed - has behaved very disciplined. And in comparison to the, call it, old times that Claus referred to, you need to keep in mind that the deposit base in Denmark is almost twice as big nowadays. So there is - let me phrase it this way, I can see little reason to compete for these accounts aggressively.
That's clear. Thank you very much.
Thank you for your question. We are now taking the next question, please stand by. And the next question from Martin Leitgebi from Goldman Sachs. Please go ahead. Your line is open.
Yes, good morning. I just have two follow-up questions, please, with regards to your rate sensitivity and how to think about net interest income progression. And the first one, I was just wondering if you could comment what you have seen in the meantime in terms of deposit attrition or deposit migration? You flagged in your earlier comments that this could impact an high progression going forward. And I was just wondering if you could comment on the absolute level of deposits you have now - the mix in terms of deposits, in terms of split between transaction account and savings account and how this could evolve going forward?
And secondly, I was just wondering if you could comment on the phasing of some of the headwinds in terms of NII from lower lending margins in the ply deck, you show that part of the better deposit or a small part of the better deposit margins are being offset by lower lending margin. And I was just wondering, in particular, with regards to personal customers, Denmark, how much of a headwind this could be over the coming quarters or year? Thank you.
So some general comments on, if I got it right, deposit development volumes and migration. So again, there has been non-operational deposits that we have call it, reprice that has led to a smaller decline, which also Carsten reflected on - in the comments to the LCR. On the non- on the sticky deposits and the real retail deposit base, we have both in PCDK, as well as in BC across the four counties. We have seen an inflow. So contrary to what a little bit our fear was at the end of Q1, so far, deposit volumes are developing nicely.
We will - given that we have been a bit busy in Q2, we will give a more elevated split between operational, non-operational deposit and the detail we asked for, Martin, with the Q3 release. But I can say that much right now, it's looking good.
Then you asked a little bit about the lagging effect, if I got your question right on the lending margin. This is mainly notice periods in some of the markets between rate hikes and your own legal ability to reprice for the customer. Then it's a bit a reflection of what we have been talking about, the Swedish and the Finnish books, where there is a 12 months basically repricing cycle for the Swedish books and the 3-year duration for the - sorry, on the Finnish book and a 3-year duration on the Swedish book.
And then in general, on all the other loan books, you try to kind of not to reprice on a consistent level unless you have an opportunity with the new loans. So existing customers typically also follow a kind of 2, 3 months repricing cycle.
We have been active on all of those across the segments. And you can see in the lending margin development that it's stabilizing and slightly ticking up. But as usual, there is more to be done. But again, we also need to keep the customer a little bit happy.
Thank you. Could I just follow up with regards to mortgages in Denmark? Do you see any impact there from the rollover of mortgages in terms of margin progression?
No. I mean I think in general, Martin, as we say, housing activity has been weak in the first half and activity has been just under 50% However, if you look at sort of Q2 versus Q2 last year, market share-wise, we've actually increased our market share slightly by a couple of percent on net new loans. But net new loans, of course, has been at a quite low level in the market in general.
As we alluded to in the speech, we do see some pickup in activity. We also see some pickup in customers viewing houses, et cetera, through our home real estate brokers. So there are some green shoots, if you will.
I think margin-wise, I would expect that - I would expect that a move towards shorter-term lending, probably more interest-only and potentially also with house prices falling a little bit over the next 12 months, all those aspects would be supportive to margins.
Yes. In general, I think keep in mind that we have kind of two product classes here. One is the pass-through mortgages, where the margin is more determined and also has been typically stable over the last years, but it's more sensitive to LTVs and customer rating rather than interest rates or market conditions, and it's on the bank lending part where then the pricing is a bit more flexible. But in general, I'd say lending markets on the mortgage market in Denmark are typically relatively stable through the cycles.
Great. Thank you.
Thank you for your question. We are now taking the next question, please stand by. And the next question is from Jan Erik Gjerland from ABGSC. Please go ahead. Your line is open.
Thank you for taking my questions. First one on the full-time employees. I see that you're just up to 17.7 in for the non-Financial Crime Prevention people. How should we think about this full-time employees running over into the second half of this year and into 2024 or for constant [ph] Financial Crime Prevention as well as full-time employees given your Infosys sale as well as, of course, the Norwegian business going off. But how are you thinking about this on an underlying trend when it comes to the full-time employees? That's my first question.
The second one is on this DKK300 million add-ons from the hedge and the interest rate hedge, which you have talked about. How should we think about this going into the next 24 months as a gradual impact? Or is it just the DKK300 million for each year for 2023 and 2024? Thank you.
Thanks. Let me start out with the FTEs, and then Stephan, you can comment on the DKK300 million and how that works over the next 24 months. On the FTE trends, if I take Financial Crime first, our expectation is that FTEs in Financial Crime would reduce over the coming couple of years. We gave a directional trajectory on Financial Crime costs moving from 2.3 back in '21 down to between 1.5 to 1.7 by 2025, so a reduction of roughly 30%. Most of that will be in the FTE space. So you should see that - you'll see FTEs reduce over the coming couple of years by between 20% and 30%.
And then on general FTEs, you're correct that, we will have the FTEs that sit in Danske IT and have been part of the Infosys transaction. You'll see that reduction in the FTEs as they move over to Infosys in the third quarter because that transaction is likely to close in September, but certainly in the second half of the year. And then the Norwegian FTEs, you will see come out when we close the transaction and currently the plan is to close that transaction and '24.
The slight increase that you've seen in FTEs in the non-financial crime piece is mostly related to the remediation that we have with the debt collections. And so those FTEs you should see coming out again in 2024. And then on the DKK300 million?
Yes. So that - without dwelling into too much detail given time, the simple version is there's 300 expect one third in the first 12 and the other two thirds in the second 12 month.
Thank you for your question. We are now taking the next question, please stand by. And the next question from Johannes Thormann from HSBC. Please go ahead. Your in is open.
Good morning, everybody. I am Johannes Thormann, HSBC. Three questions from my side. First of all, a follow-up on the Danish housing market. When do you expect prices and volumes to trough? And then you commented on your increase in market share, have you taken in lower margins to achieve this? Or how have the margins developed?
And secondly, if you look at your post-model adjustments, which part of your loan book is the biggest area of concern and where could you see need to increase the post-model adjustments? And last but not least, one the tax rate for '23 and '24, what should we put into our model? Thank you.
Thanks a lot. I'll comment on the first three, and then I'll hand over to Stephan on the tax rate. So the Danish housing market, as I mentioned, I mean, we do see some improvement and stabilization and it's clearly difficult to say how second of the half year will look like. But given that there is increased consumer confidence that rates are likely to peak and that we do see increased sort of early indicators of more activity, we would expect volumes to improve in the second half of the year. We don't expect anything material on pricing and margins.
The market share improvements are net new loans. And again, consider clearly that the volumes, I think they were roughly DKK7 billion in total in the second quarter for the whole market of net new loans. So yes, market shares did improve slightly, but it's on low volumes, but not any differences on pricing. So this is no changes in sort of our pricing strategy to achieve that additional market share. That is driven by continued good activity and also continued inflows of customers in Denmark in our prioritized segments.
On post-model adjustments, the - as you know, we increased the post-model adjustment slightly now at DKK6.8 billion in total. We feel we have a prudent approach to our post-model adjustments. We've increased mainly in construction, in the construction area, and that's clearly because construction activity is very weak across all the Nordic countries. So it is a prudent action to recognize that there will likely be some difficulties as we look ahead in the - in that part of the value chain.
But again, as you can also see in the stage migration and the overall asset quality, it continues to be very benign, and we don't see anything sort of very concerning materialize as of yet. But we also have a sense that at some point, some of these rate increases will hit some of the more vulnerable segments, including construction. And then on tax rate for next year, Stephan?
Tax rate for this year and most likely also for next year, I would just simply apply the Danish corporate tax rate, which is 25.2%. And then there might still be slight deviations but we'll update you on that as it happens.
Okay. Thank you.
Thank you for your question. We are now taking the next question. Please stand by. The next question from Jacob Kruse from Autonomous. Please go ahead. Your line is open.
Hi. Thank you for taking the question. So could I start on capital? You kind of resumed capital distributions with the dividend this quarter. How do you think about buybacks and the kind of, I guess, for 2024, the sort of trigger points? Or if you are at this level of capital plus the DKK5.5 billion sale gain or capital release from the sale, does that gap to your capital target kind of trigger you to rightsize the capital base? Or just how do you think about that whole complex of things?
Secondly, just on the guidance, it looks like you're hiking the guidance by roughly DKK2 billion versus the old guidance in terms of how the range is moving. I can see how DKK1 billion of that is the sort of combined trading, loan losses and tax roughly, if I'm trying to add up the numbers. Is that right? And if so, where is the other part, is that a better outlook for NII?
And then maybe finally, just on the deposit split, would you be able to talk about how your operational deposits are split between transaction accounts and savings accounts? I think you said you had DKK10 billion of savings accounting - close this quarter? Thank you.
Thanks, Jacob. I think on the capital side, as we also alluded to at our Investor update, we will have a very focused and disciplined approach to discussing capital targets with our regulator. Those are ongoing. And I think, Stephan, you mentioned and I think that still holds that we would come out probably summer next year with more clarity on kind of what our CET1 target and buffer is.
But there is a clear intention and ambition to distribute excess capital as we also said in June 7. That includes the DKK5.5 billion, of course, that will be - that would be released over time, post the Norwegian transaction. And again, buybacks will certainly be part of the potential approach to capital distribution as part of that.
On the guidance, you should think about several components here. You mentioned clearly impairment and trading impairment. We were guiding up towards 2.5. Now we're guiding towards 1.5. And then on NII, clearly, we are guiding towards a higher NII versus the original guidance. And then higher trading, but then keep in mind the offset to trading is then the DKK800 million of OCI reclassification that we mentioned earlier as part of the FX hedge that sort of is triggered with the Norwegian sale. Then on deposit split, Claus, let me look to give those numbers.
Yes. If you look at the Slide 3 in the presentation, Jacob, you can see that deposits in personal customers and operational deposits in the PC and LC&I accounts to DKK740 billion in total. So - and that should be measured up against a total deposit base of DKK1,087 billion in total. So the remaining part of the difference here is essentially the non-operational deposits.
Okay. And in the operational, could you split out the part of the savings account versus transaction?
Yes. You can say that we have - it's a little bit difficult because we don't give that specific split. We have transaction accounts of DKK938 billion in total, and we have time deposits of DKK135 billion. So I think what you are looking for here is essentially the split on the transaction amount in operational, as well as non-operational.
And that's not a number that we do disclose. But maybe we can talk about that bilaterally and see if we can agree on some number based on the information we have in the conference call presentation afterwards.
Thank you for your question.
Next question, please.
We are now taking the next question. And the next question from Martin Gregers Birk from SEB. Please go ahead. Your line is open.
Thank you so much. First question, coming back on - back to lending margins. I guess we have discussed those for a couple of quarters now. But if we assume that there wasn't any lag effects, how would these lending margins look like? That's going to be my first question.
And then my second question is that it seems like at least [indiscernible] moving fast from the distortion you told us on the 7th of June with the divestment of retail Norway and also your divestment to Infosys. But it seems like there's still an unaddressed question in terms of what you're planning to do with your non-premium Swedish retail customers? Those are going to be my two questions.
Thanks, Martin. Just on the latter, we talked about this, of course, in June, we believe that there is a really interesting opportunity to grow our Swedish retail business with a more focused, model focused on the affluent market focused on business owners. We have run a pilot on that over the last year or so where we've seen interesting traction. We believe that there is key differences between the Swedish and the Norwegian market, both in terms of the macro EG, a much larger market, more interesting margins, but also in terms of our own business, in terms of having more distribution, more flexibility, both in terms of partnerships and our own distribution channel.
But I also said very clearly that we have a disciplined approach to how we allocate capital and how we look at returns. And so we need to deliver on the Sweden retail strategy. And I think Christian Bornfeld mentioned on the day that we're going to give this a lot of focus over the next 1 to 2 years. At the same time, we'll also be very disciplined on following up if we cannot deliver on those plans. And then Stephan the lag effects and if there was no lag, would the impact be...
So that was a bit of theoretical questions. Let me try to give a quick answer. One is there is the lending, I call it pricing, but then there's also funding, both have a slightly different lagging effects. And in that sense, it's a bit of theoretical answer. I would think it would look better than it looks right now. But again, it's a bit of a theoretical concept, but it's both the pricing as well as the funding, keep that in mind.
Okay. Thank you. And maybe just coming back on my first question. I guess when you choose to focus on an affluent segment, you also choose to focus less on a non-premium segment and across that [ph]. I don't really think you answered my question. I mean, in a matter of a month, you were able to sell your Norwegian business at book value. And I'm sure this non-premium part of your retail bank is also an attractive asset for many of the Swedish incumbent banks. Isn't that a part of your consideration?
No. I mean the focus right now, Martin, is to grow our Swedish retail business profitably as part of the strategy that we announced in June. Having said that, we have no doubt that it's an attractive asset, but our focus right now is to growing that part of the business.
Okay, all right. Thanks.
All right. Thank you very much all for your interest in Danske Bank. And as always, please reach out to Claus and our Investor Relations department. If you have any questions, really appreciate your time this morning.