Danske Bank A/S
CSE:DANSKE
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Danske Bank A/S
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Hello and welcome to the Danske Bank Conference Call. [Operator Instructions] Today, I'm pleased to present, Mr. Claus Jensen. Please go ahead with your meeting.
Thank you so much, operator. Good afternoon, everybody, and welcome to the Danske Bank Q3 2020 Pre-Close Call. My name is Claus Ingar Jensen, and I am the Head of Investor Relations. With me, I have John Bäckman 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 14th of October, ahead of the publication of our interim report for the first 9 months of 2020 on the 4th of November. 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 the Q&A session.But before we start, I would like to briefly highlight the obvious. I will be communicating only on already disclosed information and one-offs as well as publicly available data. In this connection, I wish to stress that developments in the specific indices may not always have the same effect on our performance. I will limit my response to follow-up questions so as not to include nonpublished information or qualitative remarks on performance in the third quarter.That said, let's start on having a look at net interest income. Please remember that Q3 has one more interest day than Q2. Our usual guidance is for an NII impact of around DKK 30 million to DKK 40 million per day.During the quarter, the Norwegian kroner and the Swedish kroner appreciated around 2% each on average against the Danish kroner, while the pound sterling depreciated around 1% on average. Please note that these effects are calculated averages.On the funding side, we issued both Tier 2 capital and nonpreferred senior debt in the third quarter. Effective on the 2nd of September, we issued EUR 0.5 billion in Tier 2 capital at 196, 1-9-6, basis points over 3-month Euribor.Effective 11th of September, we issued USD 1.25 billion and USD 750 million in the nonpreferred senior format at 3-month Euribor plus 81, 8-1, basis points and 3-month Euribor plus 110, 1-1-0, basis points, respectively.Please also revisit Page 35 of our Q2 conference call presentation to see the redemption profile for maturing funding.With regard to volume developments, we refer to publicly available sector statistics as the only externally available source of insight. According to these statistics, the upward trend in commercial deposits in Denmark seems to have continued in the third quarter. We have nothing to add to these statistics.However, please note our comments from Q2 that the elevated level of deposits as well as some of the short-term lending facilities provided to corporate customers should be seen in the context of the current uncertainty and are, therefore, not necessarily of a permanent nature.Market rates have declined during the third quarter, with 3-month Stibor and Nibor decreasing 20 basis points and 18, 1-8, basis points, respectively. While 3 months CIBOR decreased 7 basis points on the basis of quarterly averages.To adapt to current market conditions, we cut the rate on Swedish fixed-rate mortgages with interest reset intervals of 10 -- sorry, of 2 to 10 years, by between 11 and 47, 4-7, basis points with effect from the 1st of October. This affects the front book immediately and the back book at the next interest reset, and please note that just over half of the Swedish mortgages on our books are fixed rate.As a response to the competitive situation in the Norwegian mortgage market, we have announced a cut of 5 basis points for our partnership customers in Akademikerne on both loans and deposits. For mortgages, this affects the front book from the 17th of August and the back book from the 24th of August. For deposits, the changes takes effect on the 20th of October.On 15th of September, we announced that commercial customers in Denmark will now be charged a negative interest rates on their entire deposits. Previously, only deposits above DKK 200,000 were subject to negative interest rates. This affects the front book from the 16th of September 2020 and the back book from the 1st of January 2021. This concludes our messages on net interest income.Looking at fee income. Please remember that pension and insurance fees benefited from 2 extraordinary items in the second quarter amounting to approximately DKK 200 million in total as Q2 included a one-off tax gain and a reversal of a guarantee provision taken in Q1.Please also refer to the press release dated on the 4th of September 2020 in which we expect the compensation of between DKK 80 million and DKK 100 million for customers in the managed account solution that Board will reply. This compensation will be booked in Q3 with the majority booked on the fee line and the rest booked under costs.Apart from these items, 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 have performed well in the second quarter with an 11% increase in the OMXC25 index in Copenhagen and an 8% increase in the S&P 500 index just to give a couple of examples.At Banking DK, remortgaging activity continues to be subdued compared to the very high levels in 2019. For Q3, specifically, remortgaging amounted to DKK 19 billion, 1-9 billion, at Realkredit Danmark, which is slightly below the Q1 2020 level.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, and 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. Q2 was affected by unusually high activity after a very difficult Q1 which is why Q2 cannot be extrapolated to Q3, which is typically affected by lower activity due to the summer holiday period.Also, please note that Q2 included positive xVA amounting to around DKK 200 million. For reference, the option-adjusted spread on Danish 30-year callable bonds and swap spreads on 5-year noncallable bonds have narrowed by a further 6 to 8 basis points since the end of the second quarter, while the spread between Danish and German 10-year government bonds has been rather stable in the same period.Please note that income from the auctions of Danish variable rate mortgage bonds for refinancing purposes is typically booked in Q4 and Q1, and therefore, no material income is expected in Q3 2020. Please also note that trading income includes the investment result from the health and accident business at Danica Pension. We do not have any specific comments on other income. So 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 our message from Q2 that we expect most of the impairment charges needed for 2020 to have been recognized in the first half of the year. We do not have any specific comments on the noncore and tax lines. 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.Please note that in the second quarter, we guided that the risk exposure amount is expected to increase by around 3% during the second half of 2020 and to continue to increase into 2021, due mainly to the implementation of revised EBA guidelines and technical standards. We expect this to partly impact Q3.This concludes our initial comments in this pre-close call. Before we move to the Q&A session, I would like to highlight that we enter our silent period on the 14th of October. Shortly, we will also start collecting consensus estimates with a contribution deadline on the 20th of October. Finally, we will publish our interim report for the first 9 months of 2020 on the 4th of November.Operator, we are now ready for the Q&A session. Thank you.
[Operator Instructions] Our first question comes from Mads Thinggaard from ABG.
Mads from ABG here. I have, I think, 2 here. And the first one is on capital and the REA uptick, Claus, you were talking about before. Could you -- is it possible to give a bit more whether the 3% up on REA is, yes, front- or back-end loaded in the second half of 2020?
I have no specific numbers. But to our understanding, it will be distributed over both quarters, and that is why we are highlighting that there will be an effect for the third quarter.
Okay. Okay. And then referring to your press release from October 8 on, I mean, the execution on the better bank plan. And I think -- I mean, the FTE plan -- FTE reductions, I can see you have a deadline was that October 25 or something for the voluntary part of the plan? Can you give us a bit more on the, I mean, time aspect of when the FTEs are actually reduced? Will most of the cuts be executed before the end of 2020? Or what kind of profile do you see here?
I think what we can say here is that, that is actually a repetition of what we also said at Q2 that there will be staff cost cuts in 2020, and there will be staff cuts into 2021. This is -- the number up to 1,600 is for the next 6 to 12 months. So -- but I cannot give you an exact number of what will happen. I can only say that this is the standard way to do it, that we will offer these packages. And then based on what kind of reception they will get, then we -- unfortunately, we'll also have to take action when we know the result. But I can't give you any more insight in how much will be acute 2020 thing and how much will be a 2021 thing.
Okay. And what about the transformation cost? Is that kind of the same pattern that you -- or expectation you put out before between 2020 and '21?
Yes. We expect that we will have, as we stated in the Q2, DKK 1.5 billion of transformation costs, and there will be -- and the previously announced up to DKK 2 billion of that, approximately DKK 500 million will fall in 2021. So there is no changes to that. And there is no changes to our cost outlook as the announced staff reductions is us executing on what we previously have stated.
Okay. So severance settlements for this year's cuts, that would be a Q4 item. Is that correct?
That is correct, yes.
Our next question comes from Jakob Brink from Nordea.
Just coming back to the cost question. The sort of the split in the second half of the year between Q3 and Q4, is it possible just be a little more specific? I mean normally, -- or at least last year, if we take that, that was a pretty -- or it was a DKK 300 million decline quarter-on-quarter in Q3, and I guess, historically, it has been a somewhat lower cost quarter. Should we expect that, too, this year and then a very back-end loaded? Or is there any other cost that will then be booked in Q3? Just to give us some help here.
No, I think we will -- there will always be some kind of seasonality for the rest of the year. And as this is also a year where we are booking quite substantially -- quite substantial transformation costs, there could be a more seasonality effect than what you usually see in a year without any transformation costs. But I'm not able to provide any specific numbers, Jakob.
Okay. Fair enough. On your health and accident, you mentioned just before, you didn't say anything specifically, but you have obviously raised prices. Is that what you meant? And what kind of magnitude should we be looking for here in Q3?
I would not look for any material impact from that, that is my understanding.
Our next question comes from Per Grønborg from SEB.
Two questions from my side. The first one on the staff reductions you announced, it was yesterday, is that primarily on the banking side? Is there any share of compliance costs in that as well or is that way too early? Can you say anything about that?
It will be across all business units, including also head office functions and also all countries. So across the board.
Okay. Then going back to the floor on corporate deposit that you have lowered from DKK 200,000 to 0, is it fair to assume that this will yield somewhere between DKK 60 million and DKK 120 million, then that amount will be at least double due to the temporary floor at DKK 500,000. You...
Yes, yes. That's not -- we have not disclosed specifically the effect of the floor of DKK 500,000 that we have introduced previously. We have only disclosed the number of customers it has affected. So I'm not able to confirm any specific NII impact from the pricing action we have taken here, unfortunately.
Does the range seems reasonable to you? That was more the question.
I have no further comments, Per.
Our next question comes from Martin Gregers Birk from Carnegie.
Just 2 questions from my side. The first one is on your guidance and just sort of -- from sort of the top down, what would it take for you guys to put a bracket around your net profit guidance for this year, say, DKK 3 billion to DKK 6 billion in net profit this year?And second of all, on the dividend, have you guys heard any rumors, any speculations from the European Systemic Risk Board in this regard?
Yes. Well, thank you for your questions, Martin. And starting with your second question, no, to my knowledge, the latest we have when it comes to the European Systemic Risk Board is the recommendation they have issued for local regulators, and the Danish regulator has decided they will agree with this recommendation. And that is from -- over the summer, where they said that they would recommend banks not to pay out dividends, doing share buyback programs or excessive bonuses for the remainder of this year. So that is the latest we have heard.And then could you elaborate a little bit on your...
Okay. No. Yes, yes. I'm just curious, so when do we come to a -- I mean, usually, you guys guide in brackets, so you guys usually guide in net profit intervals of DKK 2 billion, and I'm just curious to know sort of from a communication point of view, when do we get far into the -- far enough into the year where you guys would resume your normal communication around your net profit guidance?
Yes. Of course, we have reinstated the guidance at the time where we felt that there was a little less uncertainty compared to the beginning of the corona crisis. And we are, of course, constantly monitoring the situation. So I would say, we fully understand that net profit guidance we have now, which is at least DKK 3 billion is maybe not as usual as a normal guidance, so we are constantly looking into when we can change that.But of course, let's see what is going to happen here at the third quarter whether we have more clarity on the situation. As you also know, we are moving into maybe a little bit more uncertainty due to the so-called second wave. But on the other hand, we are also approaching year-end. So of course, for the remainder of the year, there shouldn't be that much of uncertainty as we have seen before.
[Operator Instructions] Our next question comes from Sofie Peterzens from JPMorgan.
Here is Sofie from JPMorgan. I was wondering, are you going to book any ID intangible capital benefits in the third quarter or has that now been pushed to the fourth quarter?
Yes. No, not to my knowledge. So let's see what will happen in the fourth quarter.
Okay. And what about the -- my second question, there were some press reads about your CEO having been to the U.S., was it last week? Is there anything further that you can comment on this press article? And is -- do we have any more clarity on when we potentially could get the potential fine from the U.S.?
Yes. We also saw this article. You know, Sofie, we have been quite clear in saying that we have an ongoing dialogue with the authorities that are involved in the Estonia case. And whether this dialogue takes place over the phone in Denmark or in the U.S., that is not something we would like to comment on.We would like to stick to what we have said, and that is that we have a communication and a dialogue with the respective authorities.
Okay. So there is nothing you can add in terms of the potential when we potentially could get clarity on a potential U.S. fine?
No. Unfortunately not. Besides that, we expect that we will conclude our internal investigation in Q4 and some of the work streams already in the third quarter. And we are aiming for -- or our ambition is to get a joint resolution on the case. But that is essentially also what we stated at Q2, and I don't have anything more to add to that.
Okay. And then just a very final, a quick follow-up. What was the rationale for cutting the mortgage rates in Sweden?
Sorry, I didn't get that...
Sorry, what was the rationale for changing the mortgage rates in Sweden?
Yes. That was simply to adapt to the market conditions that we see in the Swedish retail market for the time being.
Thank you. There appears to be no further questions. So I'll hand back to the speakers for any other remarks.
Okay. Thank you so much for calling in and for your questions. I think we have made it very clear that we are moving into our silent on the 14th of October. So we are available until then, if there should be any follow-up questions. And then we would be very happy to receive contributions for consensus with the deadline on Tuesday, the 20th of October. Thank you so much, everybody, and have a nice weekend.
This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.