Danske Bank A/S
CSE:DANSKE
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Danske Bank A/S
Earnings Call Analysis
Q4-2023 Analysis
Danske Bank A/S
While market expectations indicate that central bank policy rates may have peaked, the macroeconomic outlook remains uncertain, with both policy and inflation developments being ambiguous. However, during this period, Nordic countries, especially Denmark with its strong pharmaceutical sector, have witnessed some GDP growth slowdown but have maintained resilient economies, marked by historically high employment rates and robust household finances.
The fourth quarter observed the Swedish krona appreciating by about 3%, with the Norwegian krone slightly up and the British pound remaining stable. Amidst this, the Norwegian Central Bank increased its policy rate by 25 basis points, diverging from the stance of the European Central Bank and the Swedish Riksbank.
Due to macroeconomic uncertainties and property price volatility, the company expects muted volume development in lending across all business segments. However, the company has reiterated its expectations of closing transition processes by end of 2024 and foresees deposit levels to remain stable and elevated for the fourth quarter. The Swedish market has faced intense deposit price competition, influencing interest margins as benchmark rates like STIBOR and LIBOR rose marginally.
The company reaffirms its net interest income (NII) sensitivity to be in the range of plus DKK 600 million to minus DKK 500 million per 25 basis points change. Looking ahead, over the next 100 basis points movement and within a 12-month period, the company anticipates additional benefits due to balance sheet effects from their hold-to-maturity portfolio and unhedged fixed-rate assets, potentially adding another DKK 300 million in year two and DKK 200 million in year three.
Investment fees are subject to asset management performance, which sees a significant portion of fees booked in the fourth quarter. The company benefits from positive developments in equity and fixed income markets. Additionally, despite negative consumer sentiment, consumer spending has shown a real-term increase of around 2% in November.
Housing market activity in Denmark has picked up but remains subdued compared to the 2021 peak. Income from Q4 2022 refinancing auctions was approximately DKK 50 million, with the overall mortgage activity remaining low. Danish capital markets have remained stable, with solid demand in debt capital markets (DCM) contrasting with muted equity capital market (ECM) and mergers and acquisitions (M&A) activities.
Benefiting from benign financial market conditions, the company has seen lower Danish mortgage rates and tightening spreads on 5-year non-callable bonds by nearly 1 percentage point. Alongside this, Danish government bonds have outperformed their EU peers in the fourth quarter.
Year-end expectations for loan impairment charges are around DKK 0.3 billion. Additionally, a reduced tax expense of DKK 0.3 billion to DKK 0.4 billion is anticipated from the year-end tax assessment related to previous years.
The company maintains a target Common Equity Tier 1 (CET1) ratio of 16%, which is significantly above the minimum regulatory requirement. Pending developments regarding the implementation of capital add-ons as proposed by the Systemic Risk Council, the company does not foresee any material shifts to its capital targets.
The board plans to continue with the semi-annual dividend policy, expected to be communicated as part of the full-year report. The financial reporting process is poised to undergo changes in accordance with new guidelines, which will reflect the company's evolution and strategic shifts.
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Good afternoon and welcome to the Danske Bank Q4 2023 Pre-Close Call. My name is Claus Ingar Jensen and I'm Head of Investor Relations. With me, I have Katrine Strobech, Olav Jorgensen, 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. Given that we conduct this call via Teams, please be aware that if you want to ask questions, you must log on via the Teams app or your browser. If you participate via telephone line, the IR team will be available for questions after the call.In today's call, I will highlight relevant public data and macroeconomic trends in our markets as well as one-offs you should be aware of before the start of the silent period on the 12th of January ahead of the publication of our 2023 Annual Report on the 2nd of February. I will go through the P&L statement line by line and comment on capital at the end, and afterwards, we will open up for a Q&A session.For the sake of good order, I would like to highlight the following: I will only answer questions related to already disclosed information as well as public available data as of the 31st of December, 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 start out with macro, where I would like to start by commenting on the current macroeconomic environment before we go through the line items. Compared to the uncertainty we faced in the beginning of 2023, the economy outlook now points increasingly to a soft landing across the major economies. Although market expectations clearly indicates that Central Bank policy rates have peaked, the long-term policies and inflation development remains uncertain. Additionally, the worrying development in the geopolitical landscape may lead to serious consequences across the global economies as supply chains and commodity prices can quickly be disrupted.In the Nordic countries, we have seen a slowdown of GDP growth, but overall, the economies remain resilient. Particularly in Denmark where the economy has been supported by the pharmaceutical sector, we see historically high employment rates and household finances remain strong. For a more detailed macroeconomic outlook, please refer to our most recent economic outlook from the 5th of December. The solid macroeconomic backdrop also drove the profit upgrade we announced on the 8th of December as the quality of our credit portfolio remains strong, and we now expect only negligible loan impairment charges for the fourth quarter.As always, be mindful about currency fluctuations in the regions we operate in. SEK has appreciated by around 3%, while NOK has appreciated slightly and pound sterling has been roughly flat in Q4.With that, let us have a look at net interest income. Firstly, I would like to remind you that the Q3 NII benefited from a EUR 300 million one-off. Also note that there were no policy rate hikes in Q4 by the ECB, the Danish Central Bank or neither by the Swedish Riksbank. On the 13th of December, the Norwegian Central Bank increased policy rate by 25 basis points, and we have notified customers of various price changes, which will take effect during Q1. Specifically for Q4 and following the latest increase of 25 basis points in ECB and Danish policy rates back in September, we would like to reiterate an annual impact of around DKK 0.1 billion. This is obviously below our guided NII sensitivity as we repriced both transaction accounts as well as term deposits.As such, we announced that we would start paying 25 basis points on all transaction accounts in Denmark with deposits of up to DKK 50,000, effective from the 1st of October. We have also raised the interest rate on several saving products effective from the 18th of September. The significant pass-through should be viewed as a catching up of previous rate hikes. Looking at the sector overall, where we refer to publicly available data, the volume development is expected to be fairly muted. Across business segments, lending demand may be impacted by uncertainties related to the macroeconomic slowdown and property price uncertainty.Please be aware that in respect to the lending statistics for Denmark from November, which recently have been published, we are not able to confirm the trend in the private lending volumes. Also keep in mind that it is fair to assume a decrease in PC volumes or personal customer volumes to continue in Norway through the transition period. We continue to expect the transition to close by the end of 2024. On deposits, we expect an overall stable and elevated level to continue in Q4. The higher rates offered on our well-recognized saving products are likely to add further to the migration into these products in Q4.Additionally, the Swedish market, in particular, has been susceptible to fierce deposit price competition. Please note that Q4 has the same number of interest days as Q3. Related to our funding costs, the 3-month STIBOR and LIBOR have risen by around 8 basis points and 6 basis points, respectively, in Q4 on the basis of quarterly averages. Please be aware that when we observe increases in LIBOR and STIBOR, the immediate impact on our NII is negative as higher customer rates, in particular in Norway are subject to notice periods.During the year, we have issued funding in various formats, including senior, covered bonds and private placements, bringing the total amount of debt transactions to around DKK 95 billion year-to-date. This is in line with our public target to raise between DKK 80 billion and DKK 100 billion in 2023. Activity in Q4 included a green EUR 500 million 5 non-call4 non-preferred senior priced at 3-month Euribor plus 145, 1-4-5 basis points with settlement date on the 9th of November. On the other hand, we also redeemed a EUR 1.25 billion preferred senior on the 10th of November with a spread of 3-month Euribor plus 30, 3-0 basis points. Please see danskebank.com debt section for further details on terms and pricing for each issuance.Finally, we reiterate our NII sensitivity of approximately plus DKK 600 million and minus DKK 500 million per 25 basis points change across all currencies on average over the next 100 basis points within a 12-month period. As the balance sheet effects from our hold-to-maturity portfolio and unhedged fixed rate assets are gradually taking hold, we would all else equal, expect to see a year 2 and year 3 benefit of another DKK 300 million and DKK 200 million, respectively. Please note that by far most of our sensitivity relates to DKK and euro in that order.In respect to fee income, the development is already subject to market conditions in the financial markets, housing market activity and the general activity level among our customers. Let us start with the development in investment fees. This will be subject to the development in assets under management and the investment appetite of our customers. In respect to performance fees from asset management, please recall that we normally book the majority of these in Q4, and we refer to table 2, 3, 4 in our Q3 fact book as a recent reference regarding our fund's performance. To that end, we have noted a positive development in equity markets and performance in fixed income markets towards the end of the year.Moving to activity-driven fees, we observed that while consumer sentiment as measured by Statistics Denmark has remained negative, the latest spending monitor by Danske Bank Macro Research shows an increase in November of around 2% in consumer spending in real terms comparing to the same period last year.Turning to fees from lending activities. Housing market activity in Denmark has improved slightly, but remains at a subdued level relative to the peak in 2021. Also, please be aware that we had refinancing auction of adjustable rate mortgages in November. As a reference, income related to the Q4 2022 refinancing auctions amounted to approximately DKK 50 million, 5-0 million. We would also add that the mortgaging activity has remained low in the fourth quarter. Capital markets activity has been overall stable in Q4 as customer activity in DCM remains solid, while activity in ECM continued to be muted. The level of M&A activity also continues to be low, but improved towards the end of the year.Now turning our focus to trading income. While we have observed benign financial market conditions, Q4 has historically been subject to seasonality from lower customer activity. We have observed lower Danish mortgage rates and the 5% callable mortgage funds have closed due to lower yield. Spreads on 5-year non-callable bonds have tightened close to 1 percentage point. Additionally, we have seen strong sentiment on Danish government bonds in Q4 that performed versus EU peers, where the 10-year yield spread to German government bonds tightened by 5 basis points.With respect to our insurance activities, the investment result is always subject to valuation effects from developments in the financial markets. We have no comments on other income, and there are no one-off items for Q4.On cost, we have no specific comments regarding the quarterly development. And as mentioned at the beginning, and as we communicated in our company announcement on the 2nd -- I'm sorry, on the 8th of December, we expect negligible impairments in the fourth quarter of 2023. Therefore, we expect full-year loan impairment charges to be around DKK 0.3 billion.The only comment related to tax is that we expect a reduced tax expense of around DKK 0.3 billion to DKK 0.4 billion from the year-end tax assessment related to tax from previous years as we also announced on the 8th of December. We do not have any specific comments on REA or risk exposure amount, besides noting that market risk remains subject to volatility in the market.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 12th of January. Shortly after today's call, we will also start collecting consensus estimates with a contribution deadline on the 15th of January at noon. Please note that we will publish our 2023 Annual Report on the 2nd of February at 7:30 a.m. CET and that the conference call for investors and analysts will take place at 8:30 a.m.
We are now ready for the Q&A session. If you wish to ask a question, please raise the -- please use the raise your hand function. Thank you. I can see we have a question from Sofie.
Here is Sofie from JPMorgan. So in terms of your rate sensitivity, you mentioned that it's DKK 500 million for a 25 basis point hike in rates. But given that the rate expectations have moved quite a lot, how should we think about potential NII impact from a 25 basis point cut in rates? Will it also be DKK 500 million and DKK 200 million and DKK 300 million in year 2 and year 3?
Yes, I'm not sure I've heard what you mentioned first. We have said plus DKK 600 million if rates go up and minus DKK 500 million if rates go down by DKK 500 million. So we -- as you can see, Sofie, this is identical to the interest rate sensitivity we have communicated at Q3. And we have no further comments to how rate outlook for 2024 will impact our NII. It will not have any impact for Q4, I can say. And I believe we will make comments around that at our conference call on the 2nd of February as this essentially is about the 2024.
Sorry, maybe I wasn't clear. I mean the year 2 and year 3 impact, how should we think about that in a negative rate environment with falling rates? Will it also be DKK 200 million, DKK 300 million lower NII than year 2 and DKK 300 million in year 3?
Yes. That is what we see for now. And whether there will be any changes is to be communicated on the 2nd of February. But for now, we can confirm the sensitivity that I just repeated in our comments in this call.
Okay. So DKK 1 billion for 25 basis point rate cut basically.
Yes.
With a year -- okay. And then my second question, could you also -- you mentioned that you repriced the deposits in Denmark. But could you also remind us what you're doing in Finland and how the deposits are paid in Finland? Are you paying on the average balances or kind of lowest balance or how should we think about the balances that you're paying? The -- yes. The new rate.
I think we did the same in Finland at the time where we raised interest rates on transaction accounts in Denmark, i.e., on the 1st of October to 25 basis points on transaction accounts. And in Sweden, we have 50 basis points interest rates on transaction accounts. That has been raised twice during the late-summer and autumn. So -- and that is also on transaction accounts.
The 25 basis points basically on transaction accounts will hit now in the fourth quarter for Finland, additional 25 basis points in Sweden and then 25 basis points for Denmark.
Yes, that's correct.
And then my final question, on the Danish potential real estate floor, is there any additional news on that item?
You mean on the capital add-on --
Yes.
Yes.Ă‚Â No, the latest news, and now I'm quoting some of the media in Denmark from late last week is that the government agree that there should be this add-on, which has been proposed by the Systemic Risk Council, but we have no further details around implementation for now.Ă‚Â And then there is a question from Jan Erik.
Regarding Sofie's last question about this implementation, what have you sort of taken into account when you have your target of 16% CET1 ratio? It's sort of above the minimum requirement and stuff like that. So you previously said that [ both for ] and certain elements in the CRA floor is also sort of taken into that account. So is it any changes to your sort of your own target even though that your minimum requirement can and potentially will move up in connection with these serious additions?
So as this has not been -- this has up until now been a proposal, so it's not something we have included in our numbers. But of course, we will start to do so once we know how and if and when it will be implemented. But I do not see, of course, subject to final decision, I do not see this as being having a materiality that has the potential to change our capital targets.
Did you mention anything about dividend distribution or capital distribution this time around other than that you, of course, will have your semi-annual dividend?
Yes. It's a part of our Q4 or the communication in the full-year report will also be a recommendation from the Board on dividend payments as we normally do, of course, except for the years when we didn't pay down any dividends. But that will be communicated as part of our Q4 communication.
Just one final for me, so I am also done. You mentioned on your -- you said -- did you say DKK 0.1 billion effect from the same time around 25 basis points?
Yes.
So it means that we have very limited positive effect this quarter and some changes next quarter.
Yes. If it hasn't been for the -- if one should have followed the NII sensitivity strictly and there hasn't been this catching up on interest rates, I would say that the normal sensitivity for those 25 basis points should rather be closer to DKK 500 million. But due to the effect we have seen from passing on interest rates, then the impact is more closer to DKK 0.1 billion, as I mentioned in the call.Ă‚Â And then Jakob Brink.
On your comments on trading income, could you just repeat that? You said, so Europeans or Danish European spreads have narrowed, but what did you say on the actual spread levels or rate levels?
I said we have observed lower Danish mortgage rates and the 5-year callable mortgage bond have closed due to lower yields. Spreads on 5-year non-callable bonds have tightened close to 1 percentage point. Additionally, we have seen strong sentiment on Danish government bonds in Q4 that performed versus EU peers and the 10-year yield spread to German government bonds tightened by 5 basis points. That's the numbers we have mentioned.
But that's -- normally, I think usually you would refer to spreads rather than levels. And of course, you do that, the spread versus euro. But the absolute levels in Denmark, are you saying that they are important for trading income this quarter? And then my second follow-up question would be you upgraded your guidance on the 8th of December. And since then, I think rates were down another 40 basis points. So should we expect that you could even come out and beat if you actually have a sensitivity to rates this time?
I think in line with our revised fixed income strategy, I think the sensitivity on trading income lies more on customer activity than it does on the actual rate level because we have, as part of our new fixed income strategy, precision taking in order to facilitate customer transaction has been minimized compared to previously. So that is why I would be cautious to put an equal sign between the trading income and the lower yields. Of course, it is to the extent that, that can facilitate a higher customer activity, yes, then it would be beneficial for trading, but there are slightly different dynamics for our trading income now with a new fixed income strategy.Ă‚Â And Jan Erik has one more question. Please go ahead, Jan.
Just one more question on the insurance activity. We learned a lot about the insurance yesterday about IFRS 17. So what kind of accounting are you actually using in Danica? And how is that transported to the Danske Bank Group accounts? Is it IFRS 17 fully through you use?
Yes, that was implemented during 2023. And we are -- as you probably know, Jan Erik, we are reporting on a net basis in Danica. So it's the net income from insurance business that filters through into the financial highlights of the group.
Yes. And fully based on IFRS 17 numbers.
Yes.Ă‚Â And then a question from Namita.
Just a quick one. Are you going to move the Norwegian personal customer's business into discontinued operations or does it stay in the P&L?
Well, for the full-year report, my strong expectation is that it will stay as it is. And then we are -- once we are into the new strategy period where there will be other changes to our reporting from new reporting guidelines, there will be changes in Q1 to our reporting. And that is something we will come back to in due time in order for all analysts to prepare properly on what that would mean in practice. And Sofie with one more question.
Just a follow-up on the DKK 0.1 billion NII headwind from the higher rates on the transaction deposit --
It's tailwind, Sofie. It's tailwind.
It's a tailwind. Okay. But is it an annual tailwind? Yes?
Yes.
So otherwise, it would have been -- okay. I wasn't -- okay, it's a tailwind. Okay. Makes sense.
Okay. That seems to be the last question for today's call. So if there isn't any more questions, I will just close here and say thank you for listening and looking forward to talk to you at the Q4 result. Have a nice afternoon. Goodbye.