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 pre-close call for Q4 2021. [Operator Instructions] Today I'm pleased present Claus Jensen. Please go ahead.
Thank you very much, operator. And we are very sorry that we have been delayed. It's due to a technical issue with the supplier. We have not been able to get in contact with the call. But I hope that many of you still have the patience, because now we will start the call. So good afternoon, and welcome to the Danske Bank Q4 2021 Preclose Call. My name is Claus Ingar Jensen, and I'm Head of Investor Relations. With me, I have Olav Jorgensen, Patrick Skydsgaard, Sofie Friis and Nicolai Tverno 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 you should be aware of before the start of the silent period on the 13th of January ahead of the publication of our annual report on the third of February. I will go through the P&L statement line by line and remark on capital at the end of the call. Afterwards, we will open up for a Q&A session. But before we start, for sake of good order, I would like to highlight the following. I will answer only questions related to already disclosed information and one-offs as well as publicly available data as of the 3rd of January, 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. Despite the development of the Omicron variant of coronavirus, recent restrictions do not lead to significant changes in our economic outlook for 2022. Overall, the Nordic economies are doing well with strong labor markets, among other things. That said, let us start by having a look at the net interest income. Please remember that Q4 has the same number of interest days as Q3. During the quarter, the Swedish kroner depreciated around 1% against the Danish kroner, while the exchange rate of the pound sterling and the Norwegian kroner have appreciated around 3% and 2% against the Danish kroner on the basis of publicly available data. Regarding volume development, we refer to publicly available sector statistics as the only externally available source of insight.According to these statistics, covering the first 2 months of the quarter, lending volumes in Denmark have remained relatively flat for households while they were slightly up for corporates. Looking at deposits, they have come down somewhat but remain at elevated level. We have nothing to add to these statistics. With regard to margin development, 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 third quarter, three-month STIBOR has decreased 7 basis points, while LIBOR has increased 39 basis points, while CIBOR has decreased 6 basis points, all on the basis of quarterly averages. With regards to our retail deposits, we have not announced any further initiatives since the one that took effect on the first of July. On the first of October, the Danish Central Bank announced a lowering of its rates by 10 basis points to minus 0.6%. And subsequently, we lowered our deposit rates in Denmark to minus 0.7 basis -- 0.7%. For the Danish business customers, we have changed the interest rate to minus 1.1%. At the same time, we have eliminated the yield spread of between minus 0.75% and minus 1%, which -- within which the standard interest rate was previously set. The change for business customers took effect on the first of December 2021 and the estimated impact from this initiative alone is approximately DKK 0.1 billion all else equal on a full year basis. Additionally, Norway Central Bank raised its benchmark interest rates to 50 basis points on the 16th of December. In relation to this, we increased our lending and deposit rates by up to 25-basis points for almost all customers effective from the first of February, ended 23rd of February respectively. Furthermore, the Bank of England also raised its benchmark interest rates to 0.25% on the 16th of December. Please note that none of these changes will impact Q4 numbers. As a reminder, our group level interest rate sensitivity following a 25 basis point parallel shift of the interest rate curve up down is around plus DKK 1 billion, minus DKK 600 million. Further to this, we reiterate our previous comment on sustained margin pressure.Then in Q4, on the funding side, it is worth highlighting that we issued EUR 1.25 billion, [indiscernible] senior unsecured at a price equal to 3-month LIBOR plus 30, 3-0 basis points. Danske Mortgage Bank in Sweden, we also issued EUR 500 million covered bonds at a spread of 1 basis point over a 3-month LIBOR. On the redemption side, we gave notice on the 15th of October of early redemption of our DKK 3 billion additional Tier 1 notes equal to a price of 3 monthly LIBOR plus 495, 4-9-5 basis points issued in November 2016. The loads were effectively redeemed at par on the 23rd of November 2021. This concludes our messages on the net interest income. Looking at net fee income, we want to highlight for drivers, investment fees, activity-driven fees, housing market related fees and capital market-related fees. We observed that the equity markets have been more volatile during the quarter, with the OMX C25 Index in Copenhagen closing the quarter up around 4.5% and 17%, 1-7, for the year, whereas the S&P 500 Index was up around 10% in the quarter and almost for the full year. This will likely support investment fees and activity in our capital markets franchise, which are booked in Q4, just to give a couple of examples.Activity-driven fee income is expected to benefit from high customer -- sorry, high economic activity in general, as we have seen in previous quarters, especially in Denmark, where consumer spending remains above pre-COVID levels. However, remortgaging activity continues to be at a relatively low level. We also, again, note that the interest rate development could affect overall loans preferences as we saw in the third quarter, where preference towards variable rate loans increased. Apart from these factors, 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.Please also note the usual seasonality of performance fees, which are typically booked in Q4. It is worth mentioning that during 2021, we have booked higher performance fees in asset management on a quarterly basis than previous years, amounting to DKK 80 million for the first 9 months of '21. Please also note that we had exceptionally high performance fees in 2020 of DKK 640 million. For comparison, we booked on average DKK 401 million for each of the years between 2015 and '19.Turning to trading income. In Q4, we saw that the volatility in spreads on callable bonds was much higher than usual. Overall callable spreads tightened some 5 to 10 basis points during the quarter, whereas spreads on noncallable bonds have been very stable during the same period and has been unchanged to 2 basis points wider in spreads. The yield spread between Danish and German government bonds are unchanged in the 10-year segment.Looking at net income from insurance business, the previously expected pension yield tax provision for the quarter is no longer deemed necessary. As previously mentioned, Danske Bank announced on seventh of September, the sale of its shares in Aiia to Mastercard. The sale does not have any operational effects and will lead to a one-off gain of around DKK 0.1 billion in Q4. This gain is exempt from tax. Please also note that closing of the transaction from the sale of our business activities in Luxembourg and mobile PACE merger is expected in 2022. We have no -- we have -- we do not have any specific comments on other income. This concludes our comments on the income lines.If we look at the cost line, please note that Q4 includes various cost items always booked at year-end. Activity-driven expenses, including adjustments for performance-related compensation due to strong financial markets could potentially be higher. As in the third quarter, expenses related to remediation of legacy issues are expected to continue in Q4. And finally, the costs in Q4 will include a one-off item in the form of a tax-related expense of approximately DKK 0.2 billion as previously announced. In respect of credit portfolio, we expect a continued strong credit quality in line with the third quarter. We do not have any comments on the noncore or the tax line. And this concludes our comments on the P&L.As a final point, I would like to touch on capital. As always, our capital will be impacted by earnings less the dividend payout. In Q4 '21, we implemented the remaining REA increases driven by the implementation of EBA guidelines, which amounted to a -- which amounted to approximately DKK 45 billion. The implementation has allowed us to get a Pillar Two release of DKK 4.1 billion in Q4 2021. The risk exposure amount is, as always, subject to general market volatility and FX movements as well as growth.On the 15th of December, the Danish Ministry for business announced their decision to increase the countercyclical buffer in Denmark to 2% with effect from the end of 2022, which is preliminarily assessed to increase the group's fully phased NCC capital requirements by around 0.5%. This concludes our initial comments in this pre-close call. Before we move on to the Q&A session. I would like to highlight that we enter our silent period on the 13th of January. Shortly, we will also start collecting consensus estimates with a contribution deadline on the 19th of January end of business. Please note that we will publish our Q4 '21 report on the 3rd of February at half past 7 CET, and the conference call for investors and analysts will take place at half past 8 in the morning. Operator, we are now ready for the Q&A session.
[Operator Instructions] Our first question comes from Jack Brink with Nordea.
Claus, just to make sure I understood you correctly on the deposit repricing in Denmark. Was the DKK 100 million impact, was that for retail and corporate in total?
No, it wasn't. It was the change of the pricing towards business customers, where we have changed the interest rates to minus 1.1% going away from the previous spread of between 75 to 100 basis points minus. So that is only an exercise we did for business customers. And the effect is estimated to be around DKK 0.1 billion, all else equal on a full year basis.
Okay. And on the retail side, there is no impact?
No, there is no changes to retail pricing.
But you said...
Yes. But that is more an automatic event or a consequence of the fact that the Danish Central Bank has lowered -- it has changed its rates.
Okay. And then on the lower deposit, you said on the sector statistics. Can you see in your books if this is deposits being reduced on deposits you're actually making money on? Or is it deposits that are below the certain thresholds where basically you are losing money?
Yes. No, that is not something where we have any insight. We will have to wait for the final numbers before we will have any comments on that, unfortunately.
Okay. And last question, on the pension yield tax, did you say that it was no longer necessary. And why is that?
Yes. That is because we have deemed the reservations we did earlier this year has been sufficient to cover the pension yield tax.
Our next question comes from Sofie Peterzens from JPMorgan.
Here is Sofie from JPMorgan. Just a quick one. The reorganization that you announced today, are you going to change any of your reporting with the fourth quarter results?
Yes. No, that's a good question, Sofie. Thank you. That's also what we wrote in the company announcement that there will be pro forma high-level numbers available in the half year report, and then we will have a full reporting, including restated numbers for 8 quarters in the third quarter report at the latest. However, we will be doing our best to see if we can take that forward, so that there potentially could be high-level pro forma numbers for the Q1 report and a full reporting plus restated numbers at the half year report. It's not something I will promise, and that's why we wrote at the latest, but we will do our best to see if that is possible.
Basically, there will be a quite big restatement coming again later in 2022?
Yes, that would be -- I'm not sure I got your last comment correct, but there will be restated numbers available later this year, yes.
Okay. And you sold Danica in Norway or it was announced a couple of weeks ago. But is it fair to assume that nothing is going to change with Danica in Denmark?
Yes, that's correct. There are no changes planned for Danica in Denmark.
[Operator Instructions] Our next question comes from Mads Thinggaard from ABG.
Claus, just a quick follow-up from my part. You said on [indiscernible] Q4, was that DKK 45 billion?
Yes, that's correct, Mads. It's DKK [indiscernible] of course.
Is that the final impact from EBA guidelines?
Yes. As far as we can see right now, as we also stated at the Q3 communication, there could be bits and pieces coming, but this is by far the impact from the EBA guidelines, yes.
So where did 2021 end on total EBA effect?
Yes, that would mean that 2021 ends up at DKK 98 billion impact from the EBA guidelines, where we -- the Q3 communicated that it would be approximately DKK 90 billion. So slightly higher.
Okay. And then you talked something about the Pillar Two release related to this in Q4. How much was that?
As far as we can see, that's 50 bps. So that would mean that if you take the Pillar Two add-on from the Q3 report of 3%, that would mean that it should be going down to 2.5%.
Okay. So it's the same 50 basis points, as you highlighted on Q3?
Yes, it is. It is.
Our next question comes from Per Gronborg from SEB.
Just a clarification question. You addressed your interest rate [indiscernible] 25 basis point rate cut. Now we have got a 10 basis point rate cut. You have -- what impact should we expect on that? I assume that lending rates are unchanged. You have lowered deposit rates. Is it fair to assume that this rate cut will end up being probably neutral, maybe even being slightly positive? What are the building blocks?
Yes, I would say that it -- there has been a change of the interest rates for those customers, who already pay negative on deposits. There is also a pass-through on some of the loans, but on the other hand, it is also a -- we have a chunk of deposits, which is not price negative on the retail side, which is quite sizable. So yes -- so I don't have the exact building blocks there, but I would say -- I would not put any significant number into this change.
There are no further questions. I hand back to our speaker.
Okay. Thank you, operator, and thank you all for calling in. And once again, sorry for the delay in the beginning. We are still here available until the silent period starts on the 13th of January. So please call us if you have any questions. And then I would just wish you a very nice weekend. Goodbye.