Jyske Bank A/S

CSE:JYSK

Earnings Call Analysis

Jyske Bank Upgrades 2023 Outlook

Jyske Bank elevates its 2023 earnings per share projection to the upper half of DKK 70 to DKK 80, a potential increase of up to 44% over the previous year's peak. Notably, income has doubled in Q3 2023 from the same quarter last year, partly due to higher net interest income from Handelsbanken's acquisition. Cost inflation remains in check at 3%, with the cost/income ratio notably improved to 43%. Solid credit quality persists, with zero basis points in cost of risk during Q3. The bank plans to initiate capital distribution, proposing a DKK 500 million dividend. Integration of acquisitions progresses, including PFA Bank and Handelsbanken, the latter enhancing normalized pretax profit forecasts from DKK 1 billion to DKK 1.3 billion. Jyske Bank's CET1 ratio has rebounded to a healthy 16.7%.

Leadership Transition and Record Earnings

Jyske Bank's Q3 2023 earnings call marked a pivotal moment as it coincided with Anders Dam's retirement after 26 years at the helm. The new CEO, Lars Stensgaard Morch, is now steering a bank that has doubled its income from the previous year's third quarter and anticipates earnings per share in the upper half of DKK 70 to DKK 80 for 2023, significantly higher than the previous all-time high.

Robust Financial Health and Strategic Acquisitions

The bank demonstrated remarkable financial health, with a cost/income ratio that has dropped well below 50% to 43%, and still solid credit quality with no reported cost of risk for Q3. The period also saw the acquisition of PFA Bank, bolstering its asset management portfolio by DKK 16.1 billion and setting the stage for a stronger earnings capacity.

Capital Distribution Strategy

Jyske Bank has signaled the resumption of capital distribution with a proposed DKK 500 million dividend, reflecting its enhanced earnings capacity and lower share liquidity. This move marks a shift towards combining dividends with share buybacks to balance the capital distribution effectively.

Aiming for Prudent Capital Ratios

With an improving CET1 ratio now at 16.7%, Jyske Bank remains cautious, factoring in a Systemic Risk Council proposal for a new capital buffer. The bank prioritizes maintaining a robust capital position in anticipation of Basel IV requirements, signifying a careful balance between rewarding shareholders and ensuring financial resilience.

Outlook and Challenges Ahead

Management's outlook is cautiously optimistic. While a lower turnover and activity in Q4 is anticipated, which could potentially curb earnings, the bank remains confident in its underlying business strength. Additionally, with a record-breaking year for profits, the outlook for 2023 and beyond appears promising. However, the bank is not revising guidance upwards due to market uncertainties and expects some impact from the current economic conditions on its business lines.

Operational Adjustments and Cost Management

Jyske Bank is navigating a period of operational reshaping, with IT migrations, integration of recent acquisitions, and adjustments to the ongoing market shifts in interest rates. Management is finely tuning the organization for efficiency, aiming to reduce integration costs and realize synergies, which in turn, are intended to offset the headwinds of inflation and other cost pressures.

Guidance on Dividends and Buybacks

Looking forward, the bank plans to pursue a flexible approach to capital distribution, primarily focusing on annual dividends supplemented by share buybacks when feasible. This tactic acknowledges market limitations and incorporates the possibility of interim dividends if required. The emphasis on buybacks demonstrates Jyske Bank's commitment to deliver value to shareholders while navigating regulatory requirements and market liquidity constraints.

Earnings Call Transcript 2023-Q3

[Simon Hagbart Falk, executive]

Hi, everyone. I hope you are well, and thank you for joining us on Jyske Bank's Q3 2023 Post Results Conference Call. This is Simon Hagbart from IR speaking. And with me, I have our CFO, Birger Nielsen.If you have trouble hearing us during this call, please feel free to reach out to us after the call and we'll get back to you. Please make sure that your devices are muted as Birger will walk you through our prepared remarks. Afterwards, we will open up for Q&A.

[Birger Krogh Nielsen, executive]

Thank you very much, Simon, and welcome, everyone, to this conference call, post Q3.If I look at the scenario we are facing, volumes are in a more stable environment now than -- and development now than we've seen for the quarters in 2022. The demand is simply lower, especially on the corporate side. And the impact from high interest rate will gradually influence our business going into '24. But so far, we have seen a very resilient performance among our customers in general.Looking at the slide and the 6 points we want to highlight from the start here. The first one is an upgrade on the outlook for '23. Now we estimate earnings per share in the upper half of DKK 70 to DKK 80 for '23. As you can see, up to 44% higher than the all-time high level in '22. And if I take the very long picture from the year 2000, we have a [indiscernible] book value per share accretion per annum on average.Then the second point to mention here is that we want to resume capital distribution. The Board has endeavored to distribute capital here in the second half of this year, and we have found it suitable to propose a dividend to an extraordinary general meeting here in -- on the 1st of December of DKK 500 million. And going forward, we expect to do a mix of dividends and buybacks.Thirdly, Anders Dam retires actually as of today, after 26 years as CEO in Jyske Bank. And the new CEO is already appointed, it will be Lars Stensgaard Morch, who will take office on the 1st of November.Fourthly, in Q3 of '23, we have actually doubled our income compared to Q3 of '22, heavily impacted, of course, by the higher NII by the acquisition of Handelsbanken as well.Fifthly, our cost inflation is manageable. We have seen, also in Q3, a 3% underlying cost inflation, and our cost/income ratio is now well below 50% at 43%, down from 55% a year ago.The credit quality is still very solid, as I started mentioning, cost of risk, 0 basis points here in Q3. Post-model adjustments, very solid and almost unchanged from Q2 as well. And if I look at the Stage 1 exposures, their share has risen over the last year and the Stage 3 exposures share has fallen over the last year.So moving on from that, I want just to give you a status on the 2 acquisitions of PFA Bank first and then secondly, Handelsbanken. We acquired PFA Bank here on the 1st of October this year. As you may well know, it's a no-lending bank. We took over 10,000 clients, 40 FTEs. And the big chunk of business is asset under management, DKK 16.1 billion, split in 2 pieces, DKK 13.5 billion through PFA Bank and a very small portion from third parties and the rest DKK 2.6 billion from the [indiscernible] platform owned by PFA.Looking at the -- well, the strategic rationality is straightforward, we want to support our wealth management strategy and grow our business with private banking customers. The financials, the total consideration here is DKK 247 million. The capital consumption is very low due to low loans and advances naturally, and the consideration of DKK 247 million is split between the net assets and then a goodwill of around DKK 120 million. We closed the deal by the 1st of October, and we expect to migrate IT in the first half of next year. And the return, still we expect to pay around DKK 50 million in integration costs next year and the full financial impact will be seen from '25 onwards.Moving to Handelsbanken. We are in the final process of preparing for IT migration on the 11th of November this year, which will finalize the full integration of Handelsbanken, both customers, employees and IT setup. Looking at financials, we have lifted our normalized pretax profit from '25 onwards from DKK 1 billion formerly to now DKK 1.3 billion, primarily due to the higher margin on our deposit base also, of course, related to Handelsbanken's customers.Looking at the integration cost and cost synergies, we still expect to reach around DKK 300 million of integration costs this year. We have reached DKK 156 million so far in the first 3 quarters. It is still a back-end loaded integration cost, simply because of the activity that we are facing here in the fourth quarter. Up until now, 2/3 of the integration costs are related to the IT migration and [ 1/8 ] is around -- or related to branch mergers and the rest are related to employees' retention costs, et cetera.Moving on to the synergies. We still expect to deliver around DKK 0.2 billion this year. We are at DKK 144 million so far after Q3, and it's also a back-end loaded story after the IT migration. In November, we can reap further synergies, 2/3 of the synergies reaped so far are related to employees. And the last third part is group administrative costs. The branch network is merged to the extent we have announced formerly. So around 1/4 of all the branches that we wanted to close and merge have taken place by end Q3.Moving on and looking into the results for this quarter. It is by far the strongest quarter in the history of Jyske Bank when it comes to underlying business, only surpassed by second quarter of 2014, where we booked an income from badwill relate to the acquisition of BRFkredit at that point in time. If you look at the upper half of the left -- sorry, upper right with the volume numbers and graphs, you can see that it's a very flattish story. Also here in Q3, there is a slight reduction in bank loans related partly to the postponing of tax and VAT payments, but also, as I said in the introduction, to lower corporate demand.If I look at the mortgage loans, you see a nominal flat development as well there. And the CRE market, which has been up for debate in the press recently, is a subdued market with low demand at present. In the left corner at the bottom, you can see the swing from Q3 last year to this year. And obviously, of course, net interest income and also value adjustment are the main triggers. We have seen a strong income from value adjustment in the third quarter, especially due to the performance of option-adjusted spreads for callable bonds. You can see a slight decrease in the return on operational lease. It is actually the income that is dropping a bit from an exceptionally high level on operational leases and driven by the very high prices for secondhand cars.The core expenses are, of course, on the rise due to the inclusion of Handelsbanken loan losses, still a slight reversal this quarter, but a much higher reversal in the third quarter of last year. And then we have had a strong performance on the investment -- in the investment portfolio this quarter related also to the performance of callable bonds.Yes. Next one, we are aiming for brand, as I said here, of the target range in record-setting '23. As you can see in the graph here, the first 3 quarters surpassed the whole of 2022, which was a record year. And now we aim for the upper half of DKK 70 to DKK 80 in total for 2023.We want -- we have been able to rebuild capital at a rather quick pace since we merged with Handelsbanken in Q4 of last year, where we stood at 15.2% on the CET1 ratio. Still in the target range of 15% to 17%, but in the low end, naturally, after the inclusion of Handelsbanken. Then we have rebuilt it now by 1.5 percentage points to 16.7%, and that is inclusive of the proposed DKK 500 million of dividends.The higher capital is also -- we need to see it -- please go back, Simon. The higher capital, we also need to see in relation to higher capital requirements. We have seen a proposal from the Systemic Risk Council of a new capital buffer, which will take place, expectedly from the 1st of July next year. And the inclusion of that capital, of course, puts further pressure on the capital requirements in Jyske Bank. And if I look at the CRE portfolio in Jyske Bank, we have a split of, in total, a bit more than DKK 100 billion between private rental properties, office and retail properties and mortgage, all consuming [Technical Difficulty] 25% of our total lending. And those more than DKK 100 billion has a relatively low risk weight, which we [Technical Difficulty] release.But nevertheless, it has a significant impact on our capital requirements. And that we need to take into consideration moving forward. We have a clear expectation that this capital buffer is of a temporary nature because it needs to be seen in relationship to the new Basel IV requirements from the 1st of Jan '25, where some of the input floor elements actually target the same as the CRE buffer requires.Yes. Let's move on. Then let's just look into the capital distribution, as we talked about the dividend proposal of DKK 500 million, and we are resuming the capital distribution now after we finalized the last buyback program in May of last year, and then we announced the acquisition of Handelsbanken and spend time rebuilding capital, as I just said. And it's been the Board's aim to endeavor to distribute capital here in the second half of '23. And that's the reason why they have found it appropriate now to announce this dividend that can be executed within the year.And it's also clear that the Board has made a decision to combine both dividends as well as buybacks going forward. The reason being twofold. One is that the earnings capacity of the group has grown significantly over the last quarters. And secondly, that the liquidity in Jyske Bank stock is -- or share is not that high that it may be able to consume all the needed distribution of capital going forward. And that's the reason why we want to make a combination of those 2, still a decision made by the Board on a quarterly basis and they, from quarter-to-quarter, will find the appropriate way of managing buybacks versus dividends. But it's obvious that our buyback policy, as you have seen in the letter last year, from [ 2018 to '21 ] is still a very valid and preferable way to proceed, but we need to take into consideration the liquidity in the Jyske Bank share.Yes. Moving on. Then if we look at our liabilities and look at the -- especially the deposit rates over the last few years, you can see a period of negative interest rates, we had also negative deposit margins in our book. with a significant negative margin actually in the [Technical Difficulty] net interest rates. Then from '22 onwards, we started rebuilding this [Technical Difficulty]. You could see that Jyske Bank's average deposit rate is slightly higher than [Technical Difficulty], which is more or less or primarily related to our large portfolio of corporate deposits, [ with ] more tighter spreads.Looking at the right-hand side, you can see that from the 27th of November this year, we will lift both lending and deposit rates by 25 to 50 basis points. And so from that point onward, we will pay 0.25% on transaction accounts and private individuals can set up savings accounts and saving deposit accounts gaining 1.5 to 2 percentage points. And for corporates, with term deposits from 6 to 15 months, they can gain between 2.5% and 3% on a yearly basis.If I just -- maybe I should also comment on the composition of those private and corporate deposits. If we take the private book, we still see some movements towards these savings accounts and a little bit more than 1/3 of our private deposits are positioned within savings accounts by -- in Q3. When it comes to corporates, they made a very quick movement toward term deposits, and now we see a more stable development there and a little bit more than -- a little bit less than 1/3 of that book is actually within time deposits.If we then look at the asset side, our bond portfolio, we have gradually lifted the hedge of the interest rate risk in the banking book with a higher interest rate in general in the market. So partly, we have offset some of the negative -- sorry, some of the negative interest rate risk in the banking book while taking on board positive interest rate risk in the bond portfolio. And as you can see in the time of negative interest rates, we had a return on the bond portfolio, which was significantly higher than the certificates of deposit rate with the Central Bank. And as you can see, as of now, this only is lifted -- is not lifted yet. So we expect to see a further improvement in the bond portfolio performance over the coming quarters.And then it's of course, fair to say that when interest rate starts to dip again, we will get -- gain some return from the bond portfolio, but gradually, we will bring the return back to a level where we are maybe close to the present level. But in the interim period over the coming 1, 2, 3 years, we don't know, there could be and there will be a better performance in the bond portfolio relative to the [ risk ] free rate at the Central Bank.Finally, my comments on the outlook. If I focus on what we have changed this quarter versus formerly, there are 2 things to mention. One is that our loan impairment charges will still be an expense, but a minor one. As you can see, we only booked DKK 96 million in Q1 to Q3, whereas last year, at the same point in time, we had actually reversed DKK 447 million. And secondly, we have lifted our expectations for the earnings per share to the upper half of DKK 70 to DKK 80, similar to an estimate of now the upper half of DKK 4.7 billion to DKK 5.3 billion net profit.I think that concludes my introduction. And please ask questions.

[Simon Hagbart Falk, executive]

Thank you, Birger. The first question in line is Sofie Peterzens from JPMorgan.

[Sofie Peterzens, analyst]

This is Sofie from JPMorgan. So I would have 3 questions. The first question would just be on kind of dividend paying now instead of share buybacks. I recognize the liquidity element. But is there any other considerations that it takes longer to kind of get the share buyback approval or anything else? So if you could just also remind us of the share buyback approval in Denmark and what negotiations you have had or discussions you have had with the FSA.And then my second question would be on the proposed CRE buffer requirement for Jyske. Back of the envelope impact seems quite high. But maybe if you could just talk about the impact that you potentially expect from this.And then my final question would be on rate sensitivity. One of your Danish peers last week guided that in year 3, there is actually quite a lot of NII tailwinds from higher interest rates and higher than kind of initially guided for. Do you have something similar that the recent rate hikes that we have had for the past 18 months also reduce your NII in kind of '25? So maybe if you could give some comments around this.

[Birger Krogh Nielsen, executive]

Yes. Point #1, dividend versus share buyback, the process time for doing share buybacks is much longer than doing a dividend. And the Board has focused on delivering a distribution of capital to the market this year, and that's the reason why we proposed this dividend. That's point #1. But it's also, as we -- as I alluded to, the start of a combination of dividend and buybacks going forward, simply because of the liquidity in the Jyske Bank share.Secondly, the CRE buffer, as I said, yes, we have a CRE portfolio of more than DKK 100 billion assets. It's a low-risk portfolio. But yes, there is a significant impact on the capital requirement. There's been some calculations in the market. I think they are not far off. We can't specifically comment on the level here.Regarding rate sensitivity, we have formally said and we still state that there is a DKK 500 million sensitivity to a 100 basis points parallel shift. The bond portfolio, as I alluded to, will in the interim period -- until rates will find a new level of long-term sustainable level will, in the interim period, of course, gain further returns. That's what I showed with the graph. But that is [Technical Difficulty] nature actually because interest rate [Technical Difficulty] eventually [Technical Difficulty]. That being said, we have raised our hedge against the negative interest rate in the banking book over the last months and quarters. And of course, that narrows the negative sensitivity when interest rate starts to dip again.

[Simon Hagbart Falk, executive]

The next question in line comes from Martin Birk from SEB.

[Martin Gregers Birk, analyst]

Perhaps continuing on NII [Technical Difficulty] performance of VAT and corporate taxes, what kind of impact do you see on your lending and deposits in the quarter?

[Simon Hagbart Falk, executive]

Yes. We can't comment specifically because it's difficult to estimate the actual impact in an all-else-equal scenario. But it's fair to say that it has had an impact. You can also see that from sector statistics. I think the overall postponement was [Technical Difficulty]. Our market share is very roughly 10%. If we had 10% of that, that would be DKK 5.7 billion. I'm not sure that's quite what we've seen an impact, but it is probably a large portion of the development we saw in bank loans in the quarter.

[Martin Gregers Birk, analyst]

Okay. And given also the comments that you guys -- that you just mentioned on NII, what is the -- is there an outlook for NII next year?

[Simon Hagbart Falk, executive]

Yes, that's a good question. So overall, I think in terms of our balance sheet, most items have adjusted pretty quickly to the higher level of interest rates. But on the other side and the liability side, those 2 parts that Birger alluded to, i.e., bonds asset side and the passes done on the liability side, that should -- yes, they still have some adjustment to realize, I think. But those are opposites, so I'm not sure we'll -- I can't comment sort of a specific level. But in general, I think consensus is for flattish to maybe slightly up or slightly down, depending on who -- what estimates you're looking at. But we have some positive tailwinds, and I also think we have some negatives. But in sense of the negatives, I think we are relatively well positioned, given our relatively large share of corporate deposits, which have, in general, migrated quicker to higher-yielding deposits and also have a higher share of the deposits with the reference rates. So that's also why you see the quite high pass-through from our side in terms of deposit rates. So I think we've taken a bit of the beating already, but there's still more to come, especially given the changes that's coming up in Q4.

[Martin Gregers Birk, analyst]

Okay. All right. If we then jump on to capital distributions. I mean, the quarterly run rate is a CET1 generation of north of 50 basis points. You choose to pay out 23 basis points this quarter. I'm a bit puzzled to see the number coming out this low. I understand that you want to be in the 16 to 17 percentage points, given the commercial real estate buffer, but still any color [Technical Difficulty] DKK 500 million? And also along those lines, I guess we should expect something more in Q4. Could you please guide us on those expectations, please?

[Birger Krogh Nielsen, executive]

Yes, you're quite right, the DKK 500 million is maybe subnormal levels where we usually bought back DKK 1 billion approximately. So you're quite right, but that was what the Board found suitable here in the third quarter, and they found fully responsible financially also due to the fact that the CRE buffer has been proposed. And as I said, we need to take that into consideration. Going into -- and sorry, also the 16 to 17 interval, well, we stated 15 to 17, but it's clear that the CRE introduction has -- may lead us to be a little bit more cautious on the development of the CET1 ratio in the coming few quarters.Going into Q4, well, it much depends upon the ability to retain earnings naturally. But apart from that, yes, we want to be responsible for what we are stating now that the combination of buybacks and dividends will be the way forward. I can't specifically state any numbers for Q4, but it's clear that we have ambitions to deliver in '24 on a back of a very strong '23 and also expectedly a very decent '24 development.

[Martin Gregers Birk, analyst]

So Birger, if you were in my seat, what would you pencil in? Would you pencil in a 100% payout ratio for the years to come?

[Birger Krogh Nielsen, executive]

Well, I can't guide you that specifically. But if you go back and look at the charts we showed, I showed that we have seen, in the years where we did both buybacks and dividends, we were in around 70%. And then we had some years where the COVID had influenced us, but we've also delivered, I believe, decent payout ratio. So our ambition is certainly to deliver a very decent payout ratio. But as I said, there is the inclusion of the CRE buffer, needs to be assessed in relation with what's happening on the Basel side from the 1st of Jan '25. I also believe that the authorities need to take that into consideration when they make the next move on this buffer.

[Martin Gregers Birk, analyst]

But I guess my point is when I left your Copenhagen roadshow at Q2, it sounded like a share buyback and a share buyback of a significant magnitude was just around the corner. And then we waited and now all of a sudden, you come up with a DKK 500 million dividend. And in my numbers, there's nothing that hinders you from paying out -- from coming out with a 100% payout ratio from next year and onwards. Is there something that I'm missing or something that you are not telling us here?

[Birger Krogh Nielsen, executive]

Well, we are not -- we have not put out any specific payout ratio. We have said that the Board will look at this on a quarterly basis. And of course, if there is ample capital, we will pay it out preferably via buybacks and also via dividends due to the liquidity in the share. I think it's difficult for me to get much closer to an answer to that question.

[Simon Hagbart Falk, executive]

Next question in line comes from Asbjorn Mork from Danske Bank.

[Asbjørn Mørk, analyst]

Yes. Thanks for taking my questions. If I may just start where Martin left. So basically on the fact that you switched to a dividend and looking at sort of your maximum buyback capacity in terms of liquidity in your stock, I guess, we're talking something like DKK 2.5 billion. So should we expect going forward, DKK 2.5 billion of buybacks and then dividend is sort of the difference between whatever that number is in payout and then a long-term target on 80%, 90% or whatever? Or how do you see the mix between dividends and buybacks going forward?

[Birger Krogh Nielsen, executive]

Well, we expect to deliver at the outset a yearly dividend and then, of course, top up with the preferable buybacks, as I said. And if during the course of the year, liquidity narrows to an extent not being sufficient for us, we can, of course, propose interim dividends, but our preferred solution is to do a yearly buyback and then top it up with -- sorry, yearly dividend and then top it up with buybacks to the extent possible.

[Asbjørn Mørk, analyst]

Okay. Fair enough. If I may, then on capital gains, and the OAS spread benefit that you have this quarter, but maybe more looking ahead, I guess you took quite a lot of losses last year on your low-yielding portfolio. So what kind of drift to par effects do you see coming through in your book, both Q4 but also in the next couple of years? What would be sort of your natural tailwind on the capital gains line if rates stay unchanged?

[Simon Hagbart Falk, executive]

That's a very good question. I think it's difficult for us to sort of pinpoint the exact tailwind, but it is fair to say that, given that our bond portfolio is yielding in terms of net interest income below what rates are currently at, we should see a tailwind of -- I mean, over the last year, we've had value adjustments to the tune of DKK 1.4 billion. That's close to -- not all, but close to 3x a normal year. So it could be substantial, but yes, value adjustments is very dependent on the development in financial markets. So I'll leave it at -- usually, we point to the historical average of DKK 0.5 billion. Since then, we have grown in size. We've acquired Handelsbanken Denmark, and we have probably also some poles-apart tailwind. So I would expect that above normal, i.e., above DKK 0.5 billion per annum. Can't be any more specific, sorry.

[Asbjørn Mørk, analyst]

Okay. Fair enough. Then if I may, on your leasing portfolio, leasing income comes down a bit here in Q3, secondhand car prices have come down quite a lot as well. What kind of inventory price level do you have versus the current market on the leasing cars?

[Birger Krogh Nielsen, executive]

We have normally had a very conservative attitude towards our value assessment of leased cars. We see the market is in a different position now where some of the competitors actually are more aggressive in their pricing. We find that untimely and not correct at present. So we have been -- had a cautious and very conservative attitude. And that's also the reason why you've seen the significant income levels over the last several quarters because we've been positively surprised by the actual pricing in the market. What we have seen in the latter quarters and especially also here in Q3 is not a normalized level, but a significantly lower level than what we have seen formerly, and we expect over the coming few quarters to bring these values down to normalized levels.And that will entail, of course, a significant drop in returns in our book because we've had an extraordinary high return. But that being said, when I do a long-term comparison on the return on selling secondhand cars -- leased cars, we still have a decent profit of a significant double-digit million on a yearly basis. And that we expect to come into place here by '24 onwards.

[Asbjørn Mørk, analyst]

Okay. Final question from my side on your guidance for this year, considering that you made DKK 4.1 billion year-to-date, why keep the lower end of the range? And maybe you could help me a bit on the Q4 because if I had to look at the NII trajectory, if I look at your fee income benefiting from the acquisition, I take a normalized trading and include one-off costs or integration costs in Q4 and you're guiding for an expense on the loan loss provision line, but a lower expense, then I get to something that at least this is a bit higher than your range. So maybe you can help me what is it you're seeing for Q4 that will be so bad that you're not giving us a guidance upgrade?

[Birger Krogh Nielsen, executive]

Well, I think as of now, we are comfortable with setting the upper limit at DKK 80 or DKK 5.3 billion net profit. The uncertainty in the market is higher now than what we have seen formally. We don't expect to see impairments significantly up, but we might expect to see a low turnover, low activity in Q4, which could hit some of the lines, of course, in our business. We already see it now in the mortgage loan applications and bank application fees that are significantly lower than they were a year ago. And if that trend continues into Q4, of course, there will be some underlying business that we will not be able to obtain in the fourth quarter.Going into '24, uncertainty is also there. As I said, the impact from higher interest rate will gradually hit both private individuals as well as corporate during the course of '24. But that being said, we are still not worried about the quality because it's a very decent book we have and very strong book we have, it's been very resilient over the last several quarters, and we expect that to continue. But the uncertainty is greater and the turnover and the demand in the market is expectedly lower in the quarter that we are facing now.

[Simon Hagbart Falk, executive]

Next question in line comes from Jakob Brink from Nordea.

[Jakob Brink, analyst]

Going back to the capital question, so you have a 15% to 17% CET1 target. The minimum requirement as far as I can calculate in Q2 for CET1 is 12.8%. So roughly 2 to 4 percentage points above the minimum. Now if the minimum goes up, let's say, 1% due to the systemic risk buffer, you have only 2% left to the midpoint. Is that enough? Or how do you see this?

[Birger Krogh Nielsen, executive]

When we look at the level of requirements, yes, they are lifted by the CRE proposal or expectedly. When we do the stress test, and that's what is the trigger point, looking at our capital, the ample capital and the capital to distribute. The stress test effects will be varying, given what requirements the FSA puts up and how the performance has been. And I think it's clear to everyone that there's been some discussions with the SIFI banks in Denmark about the level of NII income over the last quarters and what they accept as a long-term stressed level, that could put pressure, of course, on the capital buffer long-term. And that's what actually is the important point when facing this.That being said, we are very reassured about the level we have, Q3. We have done the stress test properly and we can demonstrate a very solid capital base. And looking into Q4 and '24, where we will build up the retained earnings to a significant degree, we are very reassured about the capital level and also the ability to pay out a very decent proportion of our retained earnings.

[Jakob Brink, analyst]

Yes. So just to understand, so basically, you're saying that the 1% higher requirement will be offset by lower stress scenario? Or will you -- or is it fair to assume that you have to aim maybe for the higher end of your range or maybe even above?

[Birger Krogh Nielsen, executive]

Well, I think 15% to 17% is a fair interval now. The CRE proposal leaves us probably not closer to 15%, but closer to 16% going forward. And that's an important point to mention. When we do the stress, the requirement will be deferred because the countercyclical buffer will be taken off, but the CRE proposed buffer will stay intact in a stress scenario. So there are moving parts when we do the stress. And as I said, we also vary in severity due to what the FSA puts up as a requirement in a stressed scenario. So there are lots of moving parts here. The point being that, as I started saying that our CET1 level is very well and very strong at present, but the development of the CET1 level in the coming quarters will not be dramatically down, but maybe more stable than what we expected pre the announcement of the CRE buffer.

[Jakob Brink, analyst]

Okay. Fair enough. And pertaining back to the question that was raised previously on the mix between buybacks and dividends, you had DKK 17 billion roughly of turnover in your share the last year on average or given daily average volumes. So I think DKK 2.5 billion was mentioned as a potential buyback, which would be around 15%. Is that how you're looking at it? Or could you even go a bit higher?

[Birger Krogh Nielsen, executive]

When we do the -- we have an arm's length principle in buybacks. And so we find a third party that once -- that can manage and execute this program for us. And they have some targets where they find themselves reassured about the quality of the buyback and also the profitability of the buyback. And of course, the ultimate limit is 25%, but most third parties actually propose a significant lower level. And that's what we have seen, if you go back in history and look at what we have -- how we have performed with the buybacks that we are talking, well, sub-15% -- 10% to 15%, probably also periods with only 10% of the average daily turnover.

[Jakob Brink, analyst]

Okay. That would be then only, let's say, DKK 1.72 billion, so it'd be a rather significant annual dividend you'd have to propose?

[Birger Krogh Nielsen, executive]

As I said, there were periods where we were down to the 10%, but it's manageable up to 15%, sure is.

[Simon Hagbart Falk, executive]

And maybe just one quick comment, Jakob. Birger alluded to the fact that it's likely that you will see more than [Technical Difficulty] per year, i.e., not one large annual dividend as the Board will continue to assess the potential capital distribution on a quarterly basis.

[Jakob Brink, analyst]

Okay. Fair enough. And then just last thing on capital. But in order to utilize the full liquidity in the Jyske share, I guess, you have to start basically on the 1st of January. So how are you -- should we expect it to basically announce the buyback late December? Or how would that work?

[Birger Krogh Nielsen, executive]

Well, we can't comment on the specifics with the -- an internal dialogue with the FSA. So we can't put anything forward there at present.

[Jakob Brink, analyst]

Okay. Okay. Then moving on to costs. [indiscernible] help me understand exactly, now that the PFA, I guess it will be a relatively small cost next year, but still something and the Handelsbanken, the integration. So disregarding the integration cost for this year, but just the underlying cost and synergies, how would you think about the cost spreads going into next year?

[Simon Hagbart Falk, executive]

Yes. So I'll try to go through the sort of the moving parts, and I hope you will stay with me. But basically, for 2024, we should see a lower level of integrating cost overall. We have guided for DKK 0.3 billion this year and DKK 0.1 billion next year in terms of integration costs related to Handelsbanken Denmark. And then of course, we have the DKK 50 million related to the acquisition of PFA Bank. However, we could see a lower level in 2023 of integration costs as some of the one-off could be prolonged to 2024, thereby reducing the tailwind from integration cost to maybe in the region of DKK 0.1 billion, but there is some tailwind in terms of integration costs on a year-over-year basis.Another tailwind would be synergies, which should increase a bit on our guidance by DKK 0.2 billion year-over-year. The negative part being that we see the full year impact from PFA Bank, of course, 40 employees and other costs related to PFA Bank that should also be a headwind sort of partly reducing the impact from synergies. So on a net basis, we could be looking at a tailwind of DKK 0.2 billion or so, which should then combat part of the high inflation that we are seeing organically, given salary inflation of 4.5%.So that's sort of the moving parts. I think summing that up, consensus seems to be for a stable-ish cost base. And I think looking at integration cost, synergies, PFA Bank and ordinary inflation, that's probably not way off.

[Birger Krogh Nielsen, executive]

We have a clear ambition to bring down the cost base. These synergies that we have reaped so far and we'll reap from Handelsbanken after the IT merger and the synergies from the PFA Bank will be reaped during the course of '24. So yes, we see a clear expectation that we will be able to bring down the cost base. But as Simon alluded to, there are several moving parts and the one-offs, of course, is a tricky one because they could timely split between several years.

[Jakob Brink, analyst]

Okay. The last question from my side on migration of the deposits to savings accounts. It seems like there's been very little, as I think you also said, Simon, your corporate exposure on deposits, DKK 1 billion or so in Q3 versus DKK 10 billion in H1. Is that sort of what we should expect basically that the transition has happened in Jyske Bank already?

[Simon Hagbart Falk, executive]

Well, yes, in terms of the corporate exposure, I think for some quarters by now, at least the last couple of quarters, we have seen a very stable trend. So they reacted very swiftly. And yes, we saw last year short-term impact in terms of the corporate deposits. And then what's left, I think we'll still see some migration on the corporate side, although it will be very slow, I think, what's left there and minor. So I think the majority of the impact will be from the continued moderate pace of private clients migrating to savings accounts. That seems pretty stable from what we've seen in recent quarters, and I think that's likely to continue for some time. But as I said, our market share in that segment is relatively small compared to our normal market share. So we should have seen sort of the majority of the impact in terms of the deposit rates that we should be passing on to clients.And I think Asbjorn has a follow-up question from Danske Bank.

[Asbjørn Mørk, analyst]

Yes. Two brief questions. One, sorry to go back to the buyback versus dividend discussion. But just to avoid having estimates all over the place, could you just maybe be a little bit more specific on -- because it seems like the dividend is sort of the primary capital distribution going forward and buyback is going to be the flexible part. Is that correctly understood? And we should expect sort of a growing nominal dividend but maybe paid over a couple of interim dividends? So just a little bit more clarity would be very helpful.

[Birger Krogh Nielsen, executive]

Yes. We haven't put out any specific percentages of recent earnings or income. But it's clear, as I said before, that we want to pay a yearly dividend. And we want to use our -- the flexibility on top of that in the market to buy back shares to the extent that it's possible. There are some limitations as we talked about. And if those limitations are too harsh to us, we need to then look at an interim dividend as well. Hopefully, we can manage smoothly because we -- given the situation in the market, we still find the preferable solution to buy back shares.

[Asbjørn Mørk, analyst]

Okay. And then a final question from my side on the risk buffer on commercial real estate. So basically, it ties up, let's call it, DKK 2 billion-ish of equity, all else equal. And then [Technical Difficulty]. Can you hear me now?

[Simon Hagbart Falk, executive]

Yes, we can hear now.

[Asbjørn Mørk, analyst]

Okay. I don't know. Sorry, I dropped out. I don't know how much you got of the question. But basically, the point is that, let's say, it costs you DKK 2 billion of equity and quite a lot more in [ emerald capital ] and given the cost of equity and cost of capital, I guess, we're looking into something like 40, 50 basis points of margin expansion in this book. Is that what we should expect going forward that this cost will be passed on to the book -- to the lending book? Or how do you see this?

[Birger Krogh Nielsen, executive]

It depends on the market conditions, point #1. Point #2, it's temporary buffer. So we need to be careful with the long-term relationship with our clients. So it's on a case-by-case basis that we decide whether this is suitable to pass on to clients and some we will pass on to and some we won't. So there is certainly a flexibility when it comes to the advisors' management of this buffer. But please be aware, and I believe that it goes with others you have spoken to, that this temporary capital buffer overlaps the Basel IV implementation by the 1st of Jan '25. So I think the authorities need to look into this in order to clarify it to the banks in general, in public.

[Simon Hagbart Falk, executive]

Are there any further -- yes, I think Jakob Brink.

[Jakob Brink, analyst]

Yes. Sorry, just one detailed one. But just help me, in Q4 -- we talked about the Q4 numbers just before. But on fees, has anything changed with regards to securities trading and asset management fees in Q4 due to your acquisition of Handelsbanken? So do you still expect a rather significant level in Q4, or has something changed to the seasonality here?

[Simon Hagbart Falk, executive]

No, I think it would be fair to assume that we have sort of the same seasonality with a quite strong Q4 in terms of securities trading and safe custody. And on top of that, of course, you should add some effect from PFA Bank acquisition.Are there any further questions? Seems that that's not the case. So thank you for participating in today's conference call. A recording will be made available on our IR website in the coming days. And please do not hesitate to contact us if you have further questions. We appreciate your interest in Jyske Bank and wish you a nice day. Thank you. You may now disconnect.