Danske Bank A/S
CSE:DANSKE
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Danske Bank A/S
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Good afternoon everybody and welcome to the Danske Bank Q4 2022 Pre-Close Call. My name is Claus Ingar Jensen, and I'm Head of Investor Relations. With me, I have Olav Jørgensen, Katrine Strøbech, and Nicolai Tvernø from our IR team. And 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. [Operator Instructions]
In today's call, I would like to highlight relevant public data and macroeconomic trends in our markets, as well as one-offs that you should be aware of before the start of the signing period on the 12th of January, ahead of the publication of our annual report on February 2. I will go through the P&L statement line-by-line and remark on capital at the end, afterwards, we will open up for Q&A session. But before we start and for the sake of good order, I would like to 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 31st of December, unless otherwise noted. In this connection, I wish to stress the developments in specific indices may not always have the same effect on our performance.
I would like to start by commenting on the current macroeconomic outlook before we go through the line items. The environment overall continues to be characterized by uncertainty. Central Bank remains committed to bringing down the rapid rise in inflation, highlighted by the recent ECB rate hike of 50 basis points on the 15th of December with the Danish Central Bank following suit.
Our most recent economic outlook indicates some additional uplift in Central Bank rates and although unemployment is expected to rise, we still see it being at a relatively low level. While the housing market has slowed down and property prices are down from the peak earlier in 2022, economic activity has remained good and household finances remain healthy, a good starting point for entering an uncertain year. That's it. Let's have a look on NII.
As always, please note that the impact of currency fluctuations in the regions in which we operate and further note that Q4 has the same number of interest days as Q3. Regarding volume developments, we refer to publicly available sector statistics as the only externally available source of insight.
We do note that the housing market has slowed down further, while up until the end of November, we saw more resilient business lending. For large corporates, we would expect the lending volume should normalize following the demand for liquidity facilities related to the energy price volatility that we saw in the third quarter. As we have seen throughout the year, please be mindful of the potential fair value effects on the reported lending volume at Realkredit Danmark Denmark when rates move up.
For Q4, we have seen a slight reversal. As for example, with rate [under 30 fixed] [ph], the mortgage bond in Denmark has moved down during the quarter. Since the third quarter, 3-month STIBOR, NIBOR, and CIBOR have increased around 83, 91, and 129 basis points respectively. All on the basis of quarterly averages. Please be aware that such increases in STIBOR and NIBOR in particular will lead to higher funding costs, all else being equal.
We have seen several Central Bank hikes during the second half of 2022 across the markets in which we operate. Please note that the two rate hikes in July and September of 50 basis points and 75 basis points respectively from the ECB and the Danish Central Bank will have full effect in Q4. We confirm current NII sensitivity of DKK 800 million to DKK 900 million per 25 basis points uplift across all currencies on average over the next 100 basis points.
Further to the increases in policy rates, we have adjusted our deposit and lending rates for certain customers. However, as always, these adjustments will be implemented with a slight delay due to notice periods for certain products. For the vast majority of retail deposits, namely transaction accounts, the rate given to customers is currently up to 0%.
Turning to wholesale funding, we remain comfortable with our overall funding position and market access, which was underpinned by the strong demand for the euro and dollar benchmark issuance we have executed this week. In Q4, and due to the Estonia matter, we have refrained from issuing any senior preferred and non-preferred senior, as well as capital instruments. The only benchmark issuance in Q4 was the [NOK6 billion] [ph] covered bonds we issued at the 23rd of November priced at [NIBOR] [ph] plus 58 basis points.
In respect of our fee income in the fourth quarter, we have noted that activity has started to slow towards the end of the quarter. Our recent spending monitor highlighted that based on card data for Denmark, spending was down another 0.6% in November from the same period last year after falling 3.4% in October year-over-year.
Additionally, we reiterate that the development in interest rates in Denmark has enabled some of our customers to benefit from re-mortgaging although this is leveling off relative to the activity we witnessed earlier in the year of 2022, and for Q4, it will likely be countered by a general slowdown on the housing market.
Finally, in respect of activity driven fees, business activity generally remained at a good level as indicated by public volume statistics. Activity remained subdued in the capital markets during Q4 with low issuance activity in primary ECM markets in particular. The development in investment fees will as always be subject to asset under management in particular. An important part of fee income in Q4 is typically performance used in asset management where a primary source of income is generated by fixed income products and this have been challenged throughout the year. We refer to Danske Invest website regarding benchmark performance for further details.
Looking at trading income, please be mindful that Q4 is normally a quarter with low activity and also subject to fair value adjustments of specific portfolios, including Treasury and Northern Ireland. Spread un-callable, as well as non-callable bonds have reversed in Q4 from the levels we saw in the previous quarter and we have seen the same directional development for the yield spread between Danish and German government bonds.
Regarding our insurance activities, please note that we have seen slightly better performing financial markets. And please note that when comparing income from insurance to the level in the preceding quarter, we took a one-off product-related cost of approximately [DKK 150 million] [ph] in the third quarter.
Finally, regarding the merger of MobilePay, which affects other income, the transaction was approved by the relevant authorities as announced on the 21st of October in a company announcement number 14. The tax exempted one-off gain on the transaction is expected to be approximately DKK 400 million, which will be booked in Q4 and on the basis of the merger and the distribution of shares in the new parent company Danske Bank will have an ownership share of 27.8%. And that concludes our comments on the income lines.
If we look at the cost line, we would like to reiterate our guidance for elevated remediation costs for the full-year. And in Q4, we started to see additional inflationary pressure, particularly in the region of our main operational hub, as well as for utility and energy related costs for data centers, for example.
Other than that, we do not have any specific comments regarding our cost development, and we have no changes to our underlying cost guidance for the full-year when you disregard the impact of the Estonia settlement, the [Danish goodwill] [ph] write-down and the solution for our legacy debt collection case in the third quarter.
If you should note, the slightly lower settlement amount then the 15.5 billion provision we had made in total by the end of the third quarter, which led to a small adjustment of the net profit outlook for the full-year. Specifically for impairments, we are mindful of the impact of the deteriorating macroeconomic environment and how that affects our macro model charges, as well as post model adjustments in Q4.
Please note that our economists published their updated Nordic Outlook yesterday with lower growth forecast and a further revision of house prices and spending. In general, we remain comfortable with the quality of our lending book. We therefore do not have any immediate concerns with regards to the credit quality in Q4.
Finally, please note that the Q3 number was affected by 650 million one-off impairment charge we took in relation to the accelerated solution for our debt collection legacy case. We have no comments on non-core. And then as announced on December 13, we reached the final resolution of the Estonia matter with the U.S. and Danish authorities with the financial impact in-line with provisions previously made. As part of the announcement, we adjusted the net profit outlook for 2022 to a net loss better than minus DKK 5.3 billion. And this concludes our comments on the P&L.
Finally, our capital position will in Q4 be impacted by the entire net profit as a result of the Board's proposal not to pay out any dividends for 2022. We do not have any specific comments on the risk exposure amount besides noting that market risks remains subject to volatility in the market.
And 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 12 of January. Shortly after today's call, we will also start collecting consensus estimates with a contribution deadline on Friday the 13 of January end of day. Please note that we will publish our annual report on the second of February at 7.30 a.m. CET and that the conference call for investors and analysts will take place at 8.3 a.m.
We are now ready for the Q&A session. If you want to ask a question, please use the ratio hand function.
I can see that Jacob has the question. Please go ahead, Jacob.
Thank you, Claus. Just two questions please. On your comment about your macroeconomists have lowered growth outlook and house price assumptions, how should we see this in – I mean, how do you expect the 6 billion PMAs to be used? I mean, can you keep building buffers and buffers or is that sort of a requirement from the FSA that you keep building or should you actually start utilizing some of those buffers?
Well, I think first of all, this is a comment meant for, you know due to the fact that we adjust our models according to, of course the outlook for future macroeconomic indicators and that's a normal part of the practice. And if we adjust our outlook downwards, that would mean that the – that will be model adjustments impacting the impairment line. On top of that, management have this question to add to post model adjustments if they from a prudency point of view believe that certain risks are not fully covered.
But regarding the PMAs, so those were primarily booked due to COVID two years ago, now we know that wasn't used, and they were I guess, re-booked as recession provisions. So, if your lower GDP forecast leads to higher provisions, couldn't you say you're double counting or is there something else that you've become more worried about? I guess you said you didn't or you hadn’t?
No, I would say that we are not guiding specifically on any of the items, but when we change our assumptions in the model, we have to – eventually to adjust our impairments accordingly. And that is what we have done over the last couple of quarters. And that can, of course, go both ways. That depends, of course, of the direction. And as I said, if there is a need for the management to address some risk that hasn't been covered, they can do post-model adjustments.
I think that's how it works. And as I said, we have adjusted our outlook for 2023 when it comes to house prices, but also suspending. And that could of course be reflected in the impairment number for Q4.
Okay. Thank you. And then the first thing you said about normalized lending related to energy collaterals. I'm not quite sure I got the whole thing. Could you repeat that, please?
Yes. What I said specifically is that we would expect the lending volume should normalize following the demand for liquidity facilities related to the energy price volatility that we saw in Q3. And I think when we discussed the development on corporate lending in the third quarter, we pointed to a number of factors. One of them were that we saw also an impact or increased lending due to the situation around a number of utilities, companies, and liquidity situation, margin calls, etcetera in the third quarter. And that is what we expect would be more of – we don't expect to see the same effect here, i.e. that lending volume should be more normalized.
So, when you say that, do you mean that you actually have negative growth that these loans are running off or are you just saying that the growth rates will be more normal?
Yes. The growth rates will be more normal. So that element that was a part of the explanation for the third quarter, will not impact the numbers in Q4. That is essentially what we are saying. But whether it's going to be a positive or a negative number, I can't say Jacob. Because there were also other elements in the third quarter explanation.
Okay. Thanks a lot.
You're welcome. Jan Erik, what can we do for you.
Yes. Thank you. Jan Erik from ABG. Two questions on the NII. The first one on the transaction accounts, have you said how much transaction account you have in the different kinds of contracts since you said [indiscernible] for most of them? And have you seen any more competition during Q4 or probably to that on the transaction accounts levels?
I think what we said at Q3 were that the migration between from transaction accounts into saving accounts were at a relatively low level at that time. And I think that was echoed by a number of other Danish banks. I would expect that we have seen some more migration into saving accounts over Q4. And we will in the full-year report publish the distribution between time deposits and transaction accounts. That's something we do once a year. Yeah. But we will not do that on a [country basis], I have to say.
Okay. When it comes to your equity and what way you have, sort of invested that, should we assume that you have most in the Danish kroner part or should it be allocated due to the different kind of areas that you already hold your bank accounts or bank lending?
Yes. I think due to a change we made recently, it's more reflecting our exposure in the counties where we are operating in.
Okay. Then finally on the cost side, just to understand the related cost levels. You talked about the inflation pressure on utilities, etcetera. Is that on top of the sort of the 25.5 billion underlying guidance before the [indiscernible] or is it included in that elevated levels so to speak?
I think we said that we stick to the underlying cost guidance for the full-year, but it's – the development is definitely notable. And of course, also a kind of indication that inflation is starting to have an impact on our cost, but we stick to the underlying cost guidance that we have provided at the third quarter.
Thank you for your answers. Very helpful.
And then we have Martin. Martin, yes.
Yes. You certainly do just a – actually two questions. The first one is on your guidance for next year and I saw that the Danish FSA was out specifying that as soon as you know your guidance for the coming year, you should release it to the market. So, my question is, are we going to see – will you guys come out sometime during January with your 2023 guidance release or can you keep it to the second of February? How do you interpret these new rules?
Well, the way we see it is that just before Christmas and in connection with the settlement announcement, we adjusted our return on equity target for 2023 from to the upper end of the range in 8.5 to 9. So, we see that as our guidance for 2023 so far. And of course, we can always detail that and that is what we expect to do on the second of February, but we do have a guidance for 2023. I think that's the key message from my side.
Okay. Very clear. Thank you for that. And then second question, when I talk to your peers, they say that you are out offering positive deposit rates to on-demand deposit – on-demand corporate deposits, can you – what's the – first of all, of course, what's the number we should look at? And then also how many deposits are covered by these supposedly positive rates?
Very difficult to comment on corporate deposits because they are by far, I would say, most of them are negotiated on an individual basis. So, it's always from a relationship perspective when we do re-pricing of significant corporate deposits. Smaller deposits from, what you can say, from SMEs, they are there, we haven't seen – there, we haven't seen any changes. But the other deposits, as well as rates for credit facilities and so on are always set on an individual basis.
Okay. So, there's no way just sort of in ballpark terms, so we can get a little bit closer to the magnitude of it.
No. And I think that's as it has been for a very long time that we are not able to put more color on the pricing on our corporate deposits and loans.
Okay. Thank you so much.
Okay. Thank you so much for your questions and thank you for listening in. It looks like there is no more further questions So, I would just thank you for being here and wish you a pleasant weekend. Goodbye.