Danske Bank A/S
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Danske Bank A/S
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Welcome to the Danske Bank Pre-Close Call Q2 (sic) [ Q3 ] 2021. [Operator Instructions] Just to remind you, this conference is being recorded. Today, I am pleased to present Claus Jensen. Please begin your meeting.
Thank you so much, operator. Welcome, everybody. And especially welcome to the Q3 2021 pre-close call. My name is Claus Ingar Jensen, and I am Head of Investor Relations in Danske Bank. 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 markets as well as one-offs that you should be aware of before the start of the silent period of the 8th of October, ahead of the publication of our Q3 report on the 29th of October. I will go through the P&L statement line by line and remark on capital at the end. 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, as usual, highlight the following. I will only answer questions related to already disclosed information and one-offs as well as publicly available data as of the 27th of September, 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 forecasters, including the Danish central bank continue to have a positive outlook for the remainder of 2021 as the global economic -- or as the global economy normalizes and the Nordic economies reach full or close to full recovery of economic activity post the COVID-19 restrictions. Data points indicate that consumers quickly return to their former spending patterns once they get the opportunity to do so and the primary concerns are now related to inflationary pressures and the risk of overheating as a number of indicators points to that the global recovery has peaked. That said, let us have a look at the net interest income.Please remember that Q3 has 1 interest day more than Q2 with an NII impact of around DKK 30 million to DKK 40 million per day. During the quarter until this week, the Swedish kroner and the pound sterling have been roughly flat against the Danish kroner, while the exchange rate of the Norwegian kroner has appreciated around 1% against the Danish kroner on basis of public data. Regarding 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 have remained flat, while business deposits have been lower and household deposits have been somewhat down post the reopening of societies. We have nothing to add to these statistics.With regard to margin developments, we also refer to publicly available sector statistics as the only externally available source of insight. In general, we observed sustained margin pressure. Since the second quarter, 3-month STIBOR has increased 1 basis point, while NIBOR has increased 10 basis points, and CIBOR has been close to flat, all on the basis of quarterly averages.With regard 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 took effect on the 1st of July and are expected to have a positive impact of around DKK 250 million, all else equal in the second half of 2021. Further to this, we reiterate our previous comment on sustained margin pressure.Additionally, Norway central bank raised its benchmark interest rates to 0.25% on the 23rd of September. Further to this, we have increased our lending rates with up to 30 basis points and deposit rates with up to 15 basis points for certain customers with effective dates 10th and 24th of November, respectively. Then on the funding side, we have issued a dual tranche senior unsecured U.S. dollar benchmark in the third quarter. Both tranches are USD 1 billion and were priced at G plus 55 equivalent to Euribor plus 36 basis points for the 4 noncore fee structure and T plus 73 basis points equivalent to Euribor plus 54 basis points for the [ 6 noncore 5], respectively.On the redemption side, we gave notice on the 7th of September of early redemption of our USD 1 billion nonpreferred senior notes with a coupon of 3%. The notes were effectively redeemed on par on the 20th of September. Please revisit Page 31 of our Q2 '21 conference call presentation to see the redemption profile for maturing funding. This concludes our messages on net interest income.Looking at net fee income, we want to highlight 4 drivers: investment fees, activity-driven fees, housing market-related fees and capital market related fees. We can see that the equity markets have been developing positively during the quarter, perhaps not the last couple of days with an increase of approximately 4% in the OMXC25 Index in Copenhagen and an increase of around 4% in the S&P 500 Index, which will likely support investment fees and activity in our Capital Markets franchise. Just to give a couple of examples. However, please note, that the third quarter could be impacted by the holiday season. Secondly, activity-driven fee income is supported by the economic recovery following the final leg of the reopening, especially in Denmark, where consumer spending remains above pre-COVID levels.In addition, remarketing activity continues to be at a low level. We also gain note that the interest rate development could affect borrower loan preferences as we saw it in the second quarter. Apart from these factors, fee income at Danske Bank is, as always, dependent on market development in relation to our asset management business and on activity levels in relation to our banking operations.Turning to net trading income. Please note that Q3 is typically affected by lower activity due to the summer holiday period. Moreover, we have seen higher interest rates, a steepening of the yield curve and the significant widening of spreads on mortgage bonds, where callables have widened 20 to 30 basis points, whereas spreads on noncallable bonds have been unchanged from the level in last quarter. The yield spread between Danish bonds and German government bonds have widened 3 to 4 basis points in the 10-year segment.On the 7th of September, Danske Bank announced the sale of its shares in Aiia to Mastercard subject to final approval, which is expected by year-end 2021. The sale does not have any operational effects and will lead to a one-off gain of approximately DKK 0.1 billion in Q4. Looking at net income from insurance business, we expect a negative one-off of approximately DKK 0.2 billion in the third quarter, while the previously announced one-off related to payroll tax in Danica Health and Insurance is expected in Q4. 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 Q2 numbers included a negative one-off of DKK 350 million related to the changes in our VAT setup. However, recognition of expenses related to remediation of legacy issues will impact the third quarter. Other than that, we do not have any specific comments regarding to our cost development.In respect to -- of credit quality, we have nothing to add from when we published our Q2 report. We do not have any specific comments on the noncore and tax lines. 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. Of this amount, approximately DKK 35 billion was implemented in the first half of '21, and we expect around DKK 17 billion in the third quarter. The risk exposure amount is, as always, subject to general market volatility and FX movements as well as growth.In respect to -- of the Norwegian systemic risk buffer, the Danish Ministry for Industry Business and Financial Affairs, will await CRD V implementation in Norway, we will comment on the impact for the group once we have further clarity from the Danish Ministry. On the 29th of September 2021, the Swedish FSA announced their decision to increase the countercyclical buffer from 0% to 1% with effect from the third quarter in 2022, which is preliminary assessed to increase the group's fully-phased in CET capital requirement by around 0.2 percentage point as of Q3 2021, all else equal. We know that the reactivation of the countercyclical buffer in Denmark to 1% from the 30th of September '22 and the increase in the countercyclical buffer in Norway from 1% to 1.5% from June 2022 was already included in the group's fully phased-in CET1 capital requirement as of the second quarter this year. 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 8th of October. Shortly, we will also start collecting consensus estimates with a contribution deadline on the 14th of October end of business. Please note that we will publish our Q3 2021 report on the 29th of October at 08:00 a.m. CET and that the conference call for investors and analysts will take place at 08:30 a.m. Operator, we are now ready for the Q&A session.
[Operator Instructions] And our first question comes from the line of Jakob Brink of Nordea.
Thanks for the presentation. I have just 2 follow-ups on what you just said, Claus. But could you just repeat what you said about the USD 1 billion senior redemption, the dates and also the impact, please?
Yes. Jakob, of course. The redemption of the senior note, it had a coupon of 3%. And we gave notice on the 7th of September and they were effectively redeemed on the 20th of September.
Okay. And on costs, also again, sorry, what did you say exactly?
I said on our costs, please be aware that the Q2 numbers included a negative one-off of DKK 350 million related to the changes in our VAT setup. However, recognition of expenses related to remediation of legacy issues will impact the third quarter. Other than that, we do not have any specific comments regarding our cost development.
I think on the last topic on cost, I think Stephan said at the Q1 or Q2 conference call, that we should assume cost to be roughly flat on a quarterly run rate in -- through 2021. Is that still the case or?
Yes. We still expect to meet what we have said around the underlying cost that it will be lower than DKK 24.5 billion. So yes, that is correct, of course, with some variations that you will always see from smaller amounts, of course.
Okay. Then on -- 2 other questions. You talked about Norway and you said that Danske have raised by up to 30 basis points on lending and 15 on deposits. As far as I can see, you have not yet given notice to the Akademikerne customers of any increase. Is that correct? And why not and?
That is correct. That is also why I said here that it is the increase is for certain customers in Norway. It's not for all customers, and it's not including the academic. So in that respect, you are right, Jakob. This is a business decision. And as always, I would say, when we have had interest rate increases in Norway, there can be different considerations. And it is not so that we always raise rates for all customer groups at one time. It has been seen a couple of times that there is some kind of delay. And whether the Norwegian business management will increase on the [ academics ] we will have to see. I have no further information on, if it will happen and when it will happen.
Okay. And then just last question from my side. On the Danish rate cut last night, I've seen now that your [ Peer Erste Group ] bank have been out just before the call started at lowering on lending rates but not on deposit rates. Now of course, I guess, they could change that as well going forward. But have you done any -- have you got any plans of whether to cut on your deposit rates by 10 basis points?
We have not communicated anything. And as you know, standard procedures is that we cannot comment on potentially future changes in our pricing. There is a small amount of deposits sitting with our LC&I division, where they follow Central bank rates, but it's a very small amount. And the effect here will be very, very small. The biggest part of our deposits in Danish kroner sits with our PB&C, and there we have not announced anything for the time being.
And our next question comes from the line of Sofie Peterzens of JPMorgan.
Sofie from JPMorgan. A little bit related to the previous question, but, Claus, could you just remind us what your rate sensitivity in Denmark, is the 10% or 10 basis point change in the Central bank rates?
Yes. It's -- the rate sensitivity on -- if interest rates are being cut by 25 basis points, that is our standard way of formulating it is DKK 700 million.
That DKK 700 million. Yes.
If we cut by 25 basis points across all the currencies where we are operating. But this is for Denmark and it's not 25 basis points, it's only 10 basis points, right.
Okay. Okay. So DKK 700 million is across all geographies?
Yes, that is correct. That is correct. And please note that we haven't made any decision, as I also explained to Jakob on the pricing side.
Okay. And the DKK 700 million doesn't incorporate any pricing changes but old pricing basically remains unchanged?
This is -- yes, that's correct. Yes.
And then the second question, there was an article out on the countercyclical buffer and also on the systemic risk buffer in Denmark. Could you just comment on your kind of views on the comments that came out from the risk record earlier this week?
Yes. I think it's very difficult to comment. The systemic risk council in Denmark is advise everybody that are making recommendations for the Minister of Business and they have done so a number of times since they were established as a result of the financial crisis. Sometimes the minister has followed the recommendation, sometimes he doesn't follow the recommendation. What they have now have done is that they have proposed the introduction of a systemic risk buffer where they are recommending a 1% risk buffer for the Danish banks. And they will, as they have said, they will probably also on their meeting in the December look into whether they should do another recommendation for activating 1% more of the countercyclical buffer. But this is very early days, and we do not know how the minister will respond to this. So I don't have any further comments on that.
And what about if the systemic risk buffer goes up by 1%? Would that mean that your safety buffer potentially could go down? Or how should we think? Is there any connection between those 2?
This is also very new for us. So we do not have any further comments on this. What is, of course, interesting is how a systemic risk buffer will be used in a stress scenario. And -- but that is something that requires communication with the relevant authorities, and we have not even started to do so. So I'm afraid that this is what we can answer to that for the time being.
That's very clear.
Our next question comes from the line of Mads Thinggaard of ABG Sundal Collier.
I'm sorry, Claus, I just have to come back to the potential systemic risk buffer in Denmark. You're saying it's new to you. Does that also mean that the plan for 9% to 10% grow in 2023, I mean, would that have to be adjusted with a systemic risk buffer in Denmark?
It's too early to comment on that, Mads.
Okay. But I mean, when you said you were going to tell us on Q3, how you will reach that, then you didn't know about this. That is ...
When -- at the Q2 call when we said we will provide an update on the 2023 plan. This was, of course, unknown for us at that time. Yes. That is correct. Yes.
And then just coming back on the legacy costs in Q3, could you tell us how much it is?
We don't have the exact amount available for us for the time being. But I can say that we maintain our full year guidance of the cost where we expect underlying expenses to be lower than DKK 24.5 billion.
Okay. Okay. So not that big in that sense. So then a last one. And I think Jakob was asking a bit about Norway and the rate changes and it is, I guess, a bit complex. I mean, could you tell us a bit? I mean, could you -- do you have a kind of a view, how much NII would go up and down in 2022 with the moving parts we know by now. I mean the rate changes you did do and the change in the market and the official rate change. Do you have a kind of help there to how much NII would go up and down?
Yes. I'm afraid, Mads, that when we have announced an increase in customer rates in Norway, we have refrained from making any comments on the isolated NII effect because there are a number of moving parts here. And as you know, we have seen that the moves in the interest rates in Norway has often been going on for many quarters where the Norwegian Central Bank has continued to implement increases or decreases. So it wouldn't make any sense to be honest, to discuss the isolated impact of one specific interest rate increase as we have done here also because there may be more to come if there will be further speculation on further Norwegian rate hikes, right?
Our next question comes from the line of Jacob Kruse at Autonomous.
Just 2 quick ones. Firstly, on the deposit repricing in Norway, you talked up to 15 basis points. How -- do you have any indication of what portion of your deposits actually reprice at all? And what portion will be the kind of 0 rate transaction accounts? And then secondly, on the cost side, the underlying DKK 24.5 billion, are the remediation expenses part of underlying? Or is that a different thing from underlying?
It's a part of -- to answer your last question first, it's part of the underlying. Yes, it is. And we don't have the exact split on the deposit side in Norway. So unfortunately, I'm not able to give you that number. We can see that in the Nordic division, we have deposits of around DKK 40 billion in total on personal customers in Norway. We do not have -- we also have deposits of DKK 67 billion. That's Q2 numbers on the business customers in Norway. But I'm afraid I'm not able to provide you with an exact number of how many of these deposits are being impacted by this increase.
But is it a meaningful amount on the retail side in Norway? Or is it just for the corporate side we're talking about?
No. As you also heard from one of the previous questions, no pricing action has been announced for the Akademikerne agreement we have in Norway. So I would not expect that to be a meaningful amount now.
On the deposit side?
Yes, yes, exactly.
Currently, we have one further question in the queue. [Operator Instructions] And that question comes from the line of Per Grønborg of SEB.
Claus, just one clarification question. On Sofie's question on your floor risk. I don't know whether I got it wrong, but to me, it sounded like you said that the DKK 700 million were assuming absolutely no repricing on neither deposits nor on lending. Is that correct?
No, that is not correct. This is assuming a pass-through. So I'm sorry if I misunderstood Sofie's question, but then we have the chance of providing some clarity here on your question.
Okay. But the fact is that this is assuming that you lower lending rates by in principle 25 basis points that you adjust most and most of deposits with nothing. [indiscernible] Thank you, Claus. That was just a clarification I need.
[Operator Instructions] Okay. There seems to be no further questions on the phone, so I'll hand back to our speaker for the closing comments.
Yes. Thank you all for participating, and thank you for your questions. You still have an opportunity to do some follow-up questions until the 8th of October where we are going into the silent period. So by that, I wish you all a pleasant weekend. Goodbye.