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Jyske Bank A/S
Earnings Call Analysis
Q3-2024 Analysis
Jyske Bank A/S
During the earnings call, Jyske Bank’s leadership announced an upgrade in the net profit guidance for 2024, now expected to be between DKK 5 billion and DKK 5.3 billion, an increase from the previous range of DKK 4.7 billion to DKK 5.1 billion. This improvement reflects strong underlying profitability despite a challenging interest rate environment, indicating projected earnings per share (EPS) of DKK 21.7, the highest in 2024.
For Q3 2024, Jyske Bank reported a return on tangible equity of 13.2%, slightly below the prior four-quarter average of 14.2%. The cost-to-income ratio stood at an impressive 47%, showcasing efficiencies below the 50% target. Notably, the bank posted a net profit of DKK 1.4 billion, marking it as the best quarter of the year. These figures underline the bank’s solid operational performance amid decreasing loan demands and central bank rates.
The bank has faced headwinds from lower market rates, affecting net interest income (NII). A slight dip in loan demand, particularly from large corporates and public entities, was noted. Conversely, strong performance in assets under management (AUM) persisted, buoyed by market growth and inflows of new customers, which is essential for fee and commission income generation.
Jyske Bank maintains a focused strategy on the Danish market, highlighted by strategic acquisitions aimed at enhancing profitability without market expansion. The leadership emphasized a commitment to achieving a double-digit return on equity by 2028, despite anticipated lowered interest rates. The bank plans to operate with a cost-to-income ratio below 50%, indicating a disciplined control of operational costs as it grows.
The Common Equity Tier 1 (CET1) ratio stands at 17.2%, comfortably above the target range of 15% to 17%. Management expressed intentions to utilize excess capital effectively, with plans for dividends to shareholders expected to be around 30%, along with potential share buybacks depending on approval. The bank expects to maintain a conservative approach to managing share repurchases and strategic investments.
Looking forward, Jyske Bank has demonstrated cautious optimism, projecting that organic growth will offset the anticipated decline in interest rates, which could land around 1.75% by 2028. The bank expects its net interest income to recover as loan volumes increase by 1% to 3%, with deposit growth of 2% to 4% anticipated. They also foresee improvements in fee-based income as market activities normalize post-rate declines.
Jyske Bank's leadership outlined clear plans to maintain cost efficiency amid inflation, projecting negligible impacts on costs over the forecast period. Efforts to streamline operations and invest in IT solutions underpin the desire to reduce overheads and enhance customer experience while ensuring long-term profitability.
The earnings call acknowledged potential risks from market fluctuations and regulatory changes but asserted confidence in Jyske Bank’s strategic positioning within the Danish financial landscape. Leadership is open to opportunistic M&A activity where it aligns with its existing operational strengths and where sustainable growth can be achieved.
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Hi, everyone. Thank you for joining us on Jyske Bank's conference call for the financial results for the Third Quarter of 2024 as well as Strategy Update. This is Simon Hagbart from Investor Relations speaking. With me, I have Jyske Bank's CEO, Lars Morch; and CFO, Birger Nielsen.
Lars and Birger will walk you through our prepared remarks. Afterwards, we will open up for questions.
I will now hand over to Lars.
Thank you, Simon, and thank you for meeting up and taking the time to dial in to the meeting here today. We have been looking forward to share our Q3 and strategy update with you. We'll start immediately in order to use the time efficiently.
Earlier this month, we upgraded the guidance for 2024. Now the net profit is upgraded to DKK 5 billion to DKK 5.3 billion from between DKK 4.7 billion to DKK 5.1 billion. This means an earnings per share between 75% and 80%.
Further, we have updated our strategy with increasing underlying profitability to mitigate lower short-term interest rates.
Then again, for 2028, we have financial targets announced. It will be a double-digit return with the lower anticipated interest rates, and we will be a below the 50% cost/income ratio bank, and we'll accumulate more than 40% of current market capitalization in excess capital.
So Birger, will you walk us through the financials of Q3 and outlook, please?
Yes. Thank you, Lars.
We continue to do and deliver a good operating performance here in Q3 despite decreasing rates and especially driven and underpinned by higher AUM and favorable financial markets.
Looking at Q3 at a glance, you can see that we delivered return on tangible equity of 13.2% and the last 4 quarters, 14.2%. Cost/income ratio was at 47%, well below 50%, and we saw a reversal of loan losses of 2 basis points in the quarter. CET 1 ratio was at 17.2% and also above our target interval of 15% to 17%. And finally, earnings per share at DKK 21.7, the highest in 2024.
Looking at the righthand side and talking about volumes, you can see there's been [ muted ] demand for loans in the quarter, but there's been a strong development in AUM, driven primarily by stronger markets, but also net inflow of new customers.
On the bank volume side, we have seen slightly lower demand for -- from large corporates and public entities with low margins, but also a transfer of mortgage-like loans from the bank to the mortgage institution.
Looking at the P&L, we saw a downward pressure on NII as expected, lower due to lower market rates and lower central bank rates and also the full quarter effect from an NPS issuance in June. The fee and commission income came out strong, primarily driven by the AUM, as I just mentioned.
Looking at the cost, we were up 4% over the year, driven by salary increases and the inclusion of PFA Bank. And it all sums together to a net profit of DKK 1.4 billion, the best in '24.
Looking at the guidance, as Lars alluded to, DKK 5 billion to DKK 5.3 billion, up from DKK 4.7 billion to DKK 5.1 billion here on the 11th of October. And the second change we've made relates to loan impairments where we now state a low level in '24 as we saw in '23 due to the reversal here in the third quarter.
And that ends my short remarks on the Q3 financials.
Thank you, Birger.
And moving to the strategy part here. Jyske is a focused domestic bank. We are focused on Denmark. It's a banking business and portfolio with a home market focus. The foreign activities have been divested over the years, and we have increased the strength in Denmark through focused acquisitions within areas where we are already active.
We deem the Danish market to be an attractive market with strong characteristics and with a steady growth. Within the Danish franchise, we've strengthened our setup during the last couple of years with a number of acquisitions. First and foremost, the Handelsbanken acquisition back in 2022. That was more margin on the same body. So it was volume and strong volume, quality and good employees within areas where we're already active, predominantly Personal Banking and SME banking, positive ROE effect and a scaling of approximately 20% in core areas.
The PFA Bank was a smaller but also positive acquisition. It's also ROE positive and there's a scaling on AUM. So this is further capital-light income.
We've also just closed a deal on a leasing portfolio, which is also ROE positive and scales within an area where we are a market leader.
On top of those positive activities during the last couple of years, we have also increased our strategic optionality significantly. We have new opportunities in mortgage. There's an antitrust ruling that creates a new and significant possibilities for us. This allows us for a measured approach pursuing strategically and financially sound opportunities.
Further, we expect a level playing field on capital that will benefit us also from potentially early '25 and forward.
We have a focus on cooperation where it makes sense and sourcing from whom it makes sense. We pursue strategic sourcing and partnerships in cooperation with companies in our industry and other relevant parties.
On top of that, we've had discussions with Bankdata, which is our provider on IT, which is our main provider on IT, and we've found a solution where we feel confident that the Bankdata can accommodate the usual bank needs and that will allow us also to get cost efficiencies going forward here.
The more scale that we have acquired during the last couple of years also have given us opportunities to serve some of the -- more of the very attractive larger Business clients and some of the CRB clients where relevant and where we can be profitable.
The antitrust settlement unlocks several structure opportunities, so better opportunities for market consolidation, which for us has been important, and we believe for the market, it has been important. There's also a possibility to shift the mortgage partner without losing future income and without losing the data. And finally, there's now an open door for jointly funded mortgage solutions. These are 3 opportunities that we did not have 5 weeks ago. These are strong opportunities that we would have hoped that we've had earlier than now, but these are potent opportunities that we can use for our benefit in several areas.
The fourth thing that has been discussed is a parallel distribution of mortgages. That is not part of the agreement. And we believe that it maybe should have been, but the 3 other ones are the ones that we now are looking at, and we are working hard on the different opportunities that it creates for us.
We think that the agreement overall moves the needle quite a bit for our opportunities. We are not in a hurry, but we're working hard to see which of the [ opportunities ] that we have at hand that makes most sense financially, strategically and certainly, we will also make sure that we can service our clients in the best possible way.
There are details that are not clear in the agreement, and we are trying to make sure that we get all the details relevant in order to assess our strategic possibilities here. And again, we pursue those that make sense financially and strategically.
We've got our strategy, Potential for more. It's a strategy where we believe that we can deliver an even better customer service, especially in the segments where we are most successful and likely to be most successful and where we are able to get a good risk return. We also believe that we underlying can deliver a better investment case in the bank, which is important to us. And on employees, it's an audacious strategy, and we believe that the employees are very positive towards the missions in the strategy.
And on Potential for more -- in terms of Potential for more in society, we expect to contribute to enable a growth, a sustainable growth in the Danish society.
So if we turn a little bit more to where we predominantly expect to invest, that will be within our strongholds, areas where we already have a strong franchise today, where we think we can be one of the market leaders, and where we think investments will pay back also fastest.
And in the Business and Corporate segments, it's the medium-sized businesses and selective corporate and institutional clients we are focusing at that. Yet, we believe that we're one of the strongest banks today if moved up the hierarchy and is also one of the largest banks here today, and we believe that a couple of focused investments can make us even more attractive and profitable in that area.
When it comes to personal customers, we are the strongest when it comes to affluent personal customers, private banking clients, homeowners or you could say a little bit more complex clients. We believe the investments in these pockets here will be beneficial for all customers across Jyske Bank.
We aim to build a simpler and more seamless bank. We'll stick to a conservative risk approach, and we'll deploy new technologies in order to be more efficient and to be more seamless and simpler in the way that we operate.
We'll also have a lot of focus on the execution of strategy and reaping of the benefits of the strategy.
If we turn to some of the key areas of the strategy, again, it's the same segments that we're focusing on, on this slide. We will enhance advisory capabilities, and we'll be simplifying the digitization processes. We do think that across Business and Personal Banking that we need to meet our clients more often. We need to be more relevant to our clients, and we need to be better at taking a 360-degree view on the clients. We expect to be able to be much more active and have more interactions than we've had up until now.
When it comes to Business and Corporate clients, there are a very limited number of products where we believe that taking a step-up will be very beneficial for both customer perception and also the profitability of the bank.
We will invest in IT to make sure that we have a strong and resilient platform, but also to make sure that we become more efficient so that when we are in 2028, or before that, we will be a more efficient bank.
Everything that we'll do in the strategy will be underpinned by a new concept in terms of marketing and branding and more focused direct marketing.
Across the bank, we have agreed on 4 different areas where we will step up. One of them is the steering principles that we have already now integrated into the bank's operation, which is based on the customer experience, house in order and profitable growth.
On top of that, with a performance management that we believe will be strong and beneficial in terms of both implementing the strategy and reaping the benefits here, but also motivating the employees. We are working on a succession setup that we think will also increase diversity going forward.
Sustainability is a key thing for us. It's a key thing also for our clients. We have a way of working with sustainability where we want to be moving things forward, but we want to be moving things forward positively with our clients.
Branding and marketing will be reviewed, and we will have more personalized communication, more digital sales and marketing than we've had today, which is more cost efficient than the communication that we've used up until now.
Yes. And moving on to the financial targets and the assumptions for '28. We have put out a 10% return on tangible equity target. Besides that, a target for cost/income ratio below 50% and as already announced, when it comes to [indiscernible] distribution, a 30% dividend payout and on top of that, share buybacks to the extent possible.
The 2 main assumptions behind the 3 targets are a CET1 ratio at the lower end of 15% to 17%, which is assumed here after Basel IV implemented on the 1st of January, inclusive of a CRE buffer of 0.9 percentage points; and based on historic performance, an 8 basis points cost of risk through the cycle.
We expect to improve our underlying profitability in the coming years. The starting point is around 12% return on tangible equity here in '24. The lowering of interest rates from the central banks down to, as we estimate, 1.75% in '28 will, of course, be a drag on the return, but we'll counter that by organic growth, which also outpaces normalized value adjustments and normalized income of operating lease.
And when it comes to cost, very small impact over the period until '28, almost negligible in nominal terms because we will do our utmost to counteract inflation.
When it comes to cost of risk, it will gradually be higher, but very limited due to the low interest rate that supports our credit quality in the book.
And finally, higher volumes will, of course, absorb more capital.
Looking at the income, we will focus and aim to deliver a stable income development despite the much lower interest rates. The net interest income will pick up due to lending growth, 1% to 3% is our assumed development over the period; deposit growth of 2% to 4%, well below what we have seen in the last decades; and we will expect to outpace when it comes to the Corporate segment and gradually improve our momentum with personal clients.
The net fee and commission income will improve. We will expect to see a more normalized activity level gradually over the course of the next quarters. And on top of that, growth in capital-light business, especially AUM, inclusive of net inflow of customers, much comparable to what our performance has been in the last few years.
Other income will include a normalization or value adjustment operating lease, all summing together to about DKK 13 billion income in '28.
The cost/income ratio is at present well below 50% due to the very strong NII performance over the last quarters. And we aim to keep it below 50% in '28.
The expected inflation will be moderate, around 2% to 3%, probably slightly higher wage inflation. But contrary to that, we will initiate cost initiatives structurally where we can slim line the group where possible.
And point number two, we are retaking synergies where we continuously invest in improved processes and IT.
And thirdly, we will, of course, see low one-offs after the inclusion of Handelsbanken and PFA. All in all, aiming a steady course towards '28, as I said, to do the utmost to mitigate the implications from the inflation.
Looking at the capital generation, we start here in Q3 at 17.2% CET1 ratio. The profit, of course, lifts up significantly the capital generation. We have to deduct the capital cost of growth and also deduct Basel IV, as previously announced, up to 1.5 percentage points. Summing that together, we still have excess capital generation with about 40% of current market cap composed of 2 elements, one being the 30% reservation for dividends and the other part, excess capital that potentially could be bought back if approved by the authorities.
All that leads us to assume a CET 1 level in the lower end of 15% to 17%, inclusive of the CRE buffer of 0.9 percentage points. And we will shortly reassess our targets after the implementation of Basel IV here by the 1st of January and inform you when the new guidance is ready.
Thank you, Birger.
And briefly on the business units' targets. On the Business banking, we expect to be #1 on advisory satisfaction and we expect to be able to have 50% more business client meetings per adviser in 2028.
We also expect to be able to grow the share of wallet due to better usage of the internal product and competency platform that we have already today. We have one of the strongest leasing companies in the company, for instance, that we are not utilizing to the full extent today. We have strong capital-enhanced products that can penetrate to a larger extent into the Business Banking segments.
On top of that, we expect to be able to recoup more of the strong Medium-sized businesses and selected large corporates.
On the Corporate & Institutional Banking, we will be competing within select areas where we are competitive and where we can be profitable. We also do expect that the good development that we are having at the moment on AUM will continue, and we are investing into that.
On the Personal Banking and Private Banking part, we will aim to stay #1 on the Personal Bank -- on the Private Banking customer satisfaction in the main yearly survey. On top of that, we've been challenged a bit on Personal Banking customer satisfaction recently, but at the moment, a relatively better development and we hope that, that can bring us up to a top 3 among our peer groups of the 7 largest banks within this time frame here.
Also here, growth in assets under management is vital. And again, we have a strong value proposition, and we have good momentum. So it's key for us to keep that good momentum.
We also expect that we can increase the annual customer acquisition that we have today. We think our annual customer acquisition is a bit on the low end today. And hence, there's room for improvement here.
And again, like on the Business Banking part, by improving efficiency within the bank, we'll be able to meet more clients, and we think we'll be able to meet the doubling 100 clients. Clients that meet us are both normally more happy, stay with us longer and obviously, is also a more attractive client from our perspective.
Lastly, moving to the digital platform. Within the cost projections that Birger was commenting on, we think we'll be able to move the digital platform forward, both in terms of better customer experience and better customer journeys. We also think that the scalable platform, we'll be able to arrange in a fashion where it's possible for us to, like-for-like, have a lower cost on that.
New technologies will be boarding. And on top of that, we'll be investing in a compliant and resilient setup, which is obviously important for us to make sure that we have a strong platform in those areas also.
So finally, a slide that is basically summing up everything we have said within these 25 minutes.
So I think, Simon, we are open for questions.
Yes. Thank you, Birger, and thank you, Lars, for your remarks. [Operator Instructions] And the first one is [ Albert ] from ABG.
Just a question on your target setting. Are these targets you strive to beat, aspire to beat, are they your best guess? Or are they more to be seen as a floor of your worst performance, something you would never want to go below? So any questions about how you view these targets, please?
Thanks a lot. That's a good question, [ Albert ]. Our view is that we can and shall be a double-digit return bank by 2028. And we do the best to get above the 10%. So we are not aiming for 10%. We are aiming for 10% plus.
All right. That makes sense. And then a question on -- obviously, profitability comes down when rates go down. So a question on when you believe this will trough because me and consensus have you at about 10% return on tangible equity in 2026. Do you see it just staying flat until 2028? Or do you believe in an even worse trough? Or -- because I believe you present measures that should improve your profitability. So maybe you could improve it from 26% to 28%. So any thoughts on that? The profitability trough would be nice there.
Yes. Thank you very much for the question. It's clear that we want to improve, as we said, the underlying profitability of the group, while the cost metrics that we can work on and the cost management that is important to us that we have done in a stringent fashion for several years and, of course, that is within our control.
Not within our control is, of course, the market development. As we see it now, there is a clear expectation of a much lower interest rate in the short term. We will try to mitigate the implications to the extent possible via cost control and via other actions on the income side. For instance, AUM, that can continue as we have seen over several quarters now. So there is certainly a lot of actions to be taken in the period where interest rates are decreasing.
When interest rates start to ease off at a lower level, expectedly 1.75% close to the end of next year, we expect to see a significant uplift in our returns from there onwards because we can reap the fruits of our cost management, our new technological investments in processes and IT. And on top of that, of course, a continuous development with our customer base as Lars alluded to before.
So a final question then before I jump back into queue. I understand that through AI and IT investments, you can become more efficient. Every employee becomes more efficient. And it sounds like that will enable you to meet clients more. So my question is basically with the increased efficiency, do you think that will be entirely met by growth? Or can you have less employees? Basically, do you have any plans to like decrease employees as they become more efficient through attrition? Or are you just planning to grow into your cost base? So any thoughts on that and maybe the hiring freeze if you have seen a pickup in attrition?
Good question. So we're communicating a cost/income here. And what we've put into our model now is not aggressive growth. We will, as part of this, grow. We'll grow profitably, but we would also take out costs and the number of FTEs will be quite a bit lower in 2028 as part of this strategy here.
Next question on the line comes from Matthias from Nordea.
I hope you can hear me now. So I have three questions as well. I think you should take them one by one. So starting on your assumptions on lending growth and deposit growth. What I hear is basically that you assume to grow in line with the nominal GDP or almost in line with the market. Isn't that a bit cautious given that all the things you tell should aim for more growth than that? Or how should we think about your lending growth assumptions on deposit growth assumptions?
Thank you, Matthias. A few comments to that. It's right. It's correct that we refer to market development when we talk about lending growth potential and deposit growth potential. But during the course of the strategic period, we expect to, as I said before, outpace, especially in the Corporate segment, the market not dramatically, but we expect to outpace it. And when it comes to private clients and personal clients, we will gradually improve our momentum in that segment as well, where -- so that when we end, well, '27, '28, we will be at least at the market rate -- at the market growth line. So it is -- I think it's very much in line with what you can expect, but we have some initiatives, as Lars said before, that can trigger a slightly higher growth in some specific areas.
Sure, sure. Then the second one on cost slide, when you mentioned the talk you have had with the Bankdata and you see sizable cost efficiencies gains. So the obvious question is when and how much should we expect?
So this is calculated into our figures here. What we have is a good cooperation with the other banks on Bankdata, and we have a data platform that we believe in genuine is in good shape. We also believe that we have more efficient usage of that platform so that, that platform can, to a larger extent than today, deliver what a digital bank needs by -- from Bankdata, making sure that they deliver what is relevant for us, but also for us to reduce complexity so that our complexity comes down. And that will mean that the running cost over time would come down.
So we've had very beneficial conversations with the other parties on Bankdata and we believe that this is a win-win across Bankdata and Jyske Bank.
We'll still have IT development as well, because we have areas in Jyske that the other banks do not have and because there is some competitiveness that we want to keep to ourselves. But we are moving in the direction that we share the platform to a larger extent, to make sure that we get cost reductions over time. Some of those might be even more significant in the years following '28.
Okay. So it sounds like a gradual cost-efficiency gains that we should see over the period. Is that correctly understood?
So there will be -- on the Bankdata part, there will be investments in making sure that we have a strong and resilient platform, a compliant platform. And I believe that all banks are investing in this, and we'll make sure that there's room for those investments.
On top of that, we think, by sharing to a larger extent, we can get more for the money and altogether, we can get cost savings from this. So we believe we can get more and at the same time, get cost savings.
Yes. Okay. So the last question is on buyback and maybe a bit of clarification. So you have a target of 15% to 17%. And I know the quarter has also turned up pretty decent, but 17.2% is basically above the target. So what is triggering buybacks from [ the due end ]? Is that -- should we expect just to be 1 annual buyback program over the coming years? Or how should we think about it?
We expect to be less frequent in the market as opposed to what you see from '18 to '21, '22, that's correct. And as I said here before, our excess capital generation will be probably well above 40%. And a large chunk of that will be excess capital that is potential for buybacks.
Next question in line comes from [ Jan Slursel ]. I think we move on to the next question on the line and that comes from Martin Birk from SEB.
Perhaps just starting at another place, I guess, Lars, over the past many quarters now, we've been talking about this upcoming strategy update. Stock is now down by 10%. In your view, where did we get this wrong?
That's difficult for me to say. I think there's a combination of our Q3 results out today and the strategy, underlying the strategy comes out with better performance like-for-like. If you compare what we do on the same interest rate level, the results from the strategy here is quite a bit higher than today. So we are underlying improving profitability quite a bit.
I'm not saying that it's misunderstood, but it's important to bear in mind that we are probably a little bit pessimistic in terms of the interest rate level in 2028. So maybe that's a part of it. But underlying, there's quite a bit of extra performance in the strategy, quite a bit of extra efficiency in the strategy also.
Then potentially -- and I don't know, but then potentially, there's also expectations on the mortgage part here. And I just want to bear in mind here that this is 5 weeks, probably less than 5 weeks ago, the agreement on the trajectory. There are still things that we need to understand better in the agreement, definitions and so on, that is not 100% clear. So that, we are working on, but we're also working on finding the right solutions for the bank financially and strategically. So Martin, we don't know exactly, and maybe you're better to answer that.
But I guess my point is that when you see peer banks delivering well, similar targets, and they sort of start with a 12 and above and maybe you're only sort of 25 to 50 bps of what the market is currently pricing in terms of forward rates at the moment, is that -- I guess there was sort of an expectation of you sitting on unleased potential. And to me, this doesn't really show -- suggest unleashed potential. Do you think about that?
Well, what I can say is that we will be improving profitability underlying quite a bit from this. We will improve our cost efficiency underlying quite a bit from this. That would be within these 3 years because basically what we have is '25, '26, '27 to deliver. Within those 3 years, we will underlying be better in terms of return on equity and cost/income efficiency. And we believe that we have a better platform then also to improve from there.
And maybe, Martin, if I may add. So at the moment, we are looking into a decreasing rate environment. And what we have seen in recent years is a significant spike in our -- particularly our deposit margin, also more than what we would normally assume for our interest rate sensitivity. And I think that's the general case for banks that in Denmark, when you increase the transaction accounts by 0.25 percentage points and the policy rate goes up by 3.6 percentage points, that pass-through is lower than what you normally would assume. And when that is the case, you have increased the deposit margin significantly on the way up, and what we also factor in, in these numbers is a decrease of that deposit margin when the rates go down.
So I think it's more a general feature that we will see deposit margins increasing more than interest rate sensitivity, and that's what we've factored in. And that means our baseline is maybe a bit lower than what you had assumed, but we still are factoring in a significant underlying improvement and that momentum will continue for some years.
Okay. So if we just look at the sort of the unanswered questions regarding the potential or your mortgage book, what's the time line on that review?
It's not entirely in our hands, Martin, because we need to understand some of the definitions in the agreement which is not 100% clear to us. Then, to the extent that different decisions here also is based on third parties, that is also not 100% within our hands.
What we can say is that we are working with this. We believe that there are better solutions for our mortgage company and better possibilities based on this agreement here, and we will obviously communicate as soon as we can. We are focusing on getting the right solution here in terms of strategic and financially delivering the best result.
Also, Martin, maybe to the assumptions, if we put this strategy forward back in Q1, Q2 with the assumptions that we had at that point in time, I think some of the figures that you're alluding to that you think is a bit disappointing, they would have looked better in that point of view. So please bear in mind that we are putting something forward here that is based on a more negative outlook on interest rates. And also bear in mind that we're putting something forward that we want to deliver. And also not just to look...
And also, please bear in mind that when it comes to consolidation in the market, this brings us to a point where we are closer to a level playing field, which is crucial as we can demonstrate by historic development.
Okay. Then last question from my side. Why wasn't Q3 a good quarter to launch a new share buyback on or potentially an extraordinary or just a dividend, given that you do not have any share buyback in the market right now, and you have a CET1 ratio, which is above your target range?
Thank you for the question. I think we have said formally that our capital plan is unaffected by how we actually manage the buyback programs in the market, and it's obvious to everyone who has followed this that it has been managed at a quicker pace than what we expected. Initially, we announced that it will potentially end by end of January next year. So we closed -- well, closed it 4 months earlier. And since our capital plan is not triggered by the momentum of the buybacks, we will follow suit on the initial plan on the Board looking into this on a quarterly basis.
But isn't it just a matter as soon as you get above 17%, then you should have something in the market? Is it as simple as that?
Well, it's -- well, first and foremost, we can't say for sure when the 17% is realized. We saw now, after the turn of the quarter, that we delivered about 17%. And please bear in mind that it was driven by also slightly lower risk exposure and also slightly lower risk development than we had expected. And of course, there is, on top of that, a time lag from initiating a good starting point for a buyback and then the approval with the authority.
So you need to send in an application 4 months before the share buyback. And you need to be in that position at that point in time where you can do the buyback. We have the position that buyback is hugely beneficial to our owners. So we want to do buybacks going forward also. So we have the 30% and on top of that, a buyback, to the extent that that is reasonable within our [ cap turn].
Okay. And it was never considered just using your dividend policy in Q3 to get around the application process?
That would then impact the application for the share buybacks.
Thank you, Martin. Next question in line comes from Jacob Kruse. And I think he jumped out of the line. So next question in line comes from Namita Samtani from Barclays.
The first question is, if it is a 10% ROTE by 2028, like why didn't you consider M&A instead of returning capital to shareholders? Like why didn't you put a slide on M&A today in the presentation?
Because what we put in here is not that we expect to do M&As, but it is that there's a strategic option that's open for us that was not open for us up until 5 weeks ago. So we are not seeking M&A at the moment. We are seeking to deliver an underlying better performance of the bank.
We do now have the strategic option if there's something that is relevant for us and will improve the financial performance of the bank to look into M&A, but we are not seeking M&A solutions at the moment.
Okay. And then just on the net interest income. So consensus has it down 5% in 2025 year-on-year. Are you happy with that? Or can you at least talk about some of the moving parts on net interest income year-on-year.
Yes. So just -- I didn't quite get the question, Namita, was it on the Q3 numbers on a year-over-year basis?
No, I'm just asking about. Yes. Just on 2025. Like consensus has it down 5%. Like are you happy with that? Like what are the moving parts?
Yes. Well, we can't comment whether we are happy on it. I think that will probably be a bit too direct. But what we can say is that if you annualize the current level of the NII, I think you will arrive close to that level, maybe slightly below -- slightly above. And then the question is, will we be able to maintain that if rate goes to 1.6% at the end of 2025 as our macroeconomics assume on the short rate. And that could be difficult, I think. And I think that's also -- I mean, today, we're a bit below consensus on the figures for Q3. And then going forward, we'll have to see whether we'll be able to maintain flat net interest income in a decreasing rate environment.
But what we get instead, Simon, is if we get even lower interest rates, we'll be able to get higher fee income probably for remortgaging and other activities that will increase in that situation. So it might be a question of a change between the lines also.
Okay. And just finally, why are you guiding to 8 basis points of loan loss charges? Like you haven't even hit that when rates have been close to 4%. And it's basically what Danske guides to in 2026. So either you're being too conservative or Danske's being too ambitious. Maybe it's a bit of both. But I just want to understand where is 8 basis points coming from?
Well, 8 basis points is coming from the last decade of performance in Jyske Bank, inclusive of a COVID-19 buffer in 2020. And so all the movements in the last decade has been included in the 8 basis points.
Yes. So basically, since we acquired our mortgage subsidiary in 2014, we had a high level of impairment charges, then we were IFRS 9 implementation in 2018. That was also a little [ low level ] of impairment charges. And then that was COVID-19, and we've built a post-model adjustment buffer equivalent to more than 4 years of normalized loan losses.
So in that period, we've had an average of 8 basis points, but that is with substantially substantial impairment charges that's not part of recurring business.
And please be aware that in a normal cycle, you have several years with very low impairments and then a few years probably, as we saw during the financial crisis where impairments are high. But through the cycle, we find the 8 basis points a good and fair level if we look at the composition of the book and the credit quality that we have at hand.
There's a slide on the cost of risk assumption in the full strategy deck, but that's not included here.
And the next question in line comes from Asbjørn Mørk from Danske Bank.
If I may start with your profitability target, the return on tangible equity. Why do you want to be measured on tangible equity? I understand the capital build that maybe that illustrates it better, but you've also been quite vocal about the M&A opportunities arising from the to take credit agreement. So just wondering why you want to be measured on tangible equity. If you do M&A going forward, shouldn't your investors also get a return on the goodwill that you will create in or build in, in such a transaction?
Well, of course, we can't say at what price a potential M&A acquisition will take place or will lead to. But using the intangible equity is a matter of getting as close to the regulatory capital as possible. Deducting from the capital base, the goodwill and the customer relations, which was included when we merged with the Handelsbanken and customer relations are written off over 10 years, and then we have -- we are left with the DKK 3 billion of goodwill.
Yes. So the drag we're looking into in 2028 would be approximately 0.6 percentage points versus the -- on the ROE versus the ROTE.
Yes. And I agree with you on that one, but the point was more that if you do M&A going forward, now that you will have better opportunities to do M&A and you buy above book value, you will generate quite a lot of goodwill and your return on tangible equity will be boosted in such a scenario. So I guess return on tangible equity is probably -- at least could be a little bit of a misleading profitability target going forward. I guess you can meet your return on tangible equity target just by doing a lot of M&A at above book value.
If we end up finding it misleading, of course, then we'll adjust. But I think it's pretty common in -- among European banks, in general, to use ROTE as a measure to get closer to the regulatory capital. But I get your point that if we do a lot of M&A going forward, then that's something to keep in mind.
And, Asbjørn, maybe to take away that misunderstanding, we do not look for M&As for the sake of M&As. We have an opportunity now, and it might arise during a financial crisis, or we don't know when. We are not actively seeking M&As now. There are possibilities this will be very strong in terms of value potentially in the market. But apart from that, we will not be running around trying to do acquisitions for the sake of acquisitions or for the sake of size.
All right. That's fair. And then if I sort of may ask a little bit more of a high-level question on your new strategy. Looking at the slides, and they all look very nice, some of the most profitable banks out there, they're quite clear in sort of where they want to play and where they don't want to play, what they want to do, and what they don't want to do. So could you just help me a little bit here? What is it that you're doing with this strategy that is very different from what your peers are doing? Because it's seems to be quite a lot of the same things, at least from where I'm sitting. And then what is it that you don't want to do in this strategy period? Because it seems a little like you want to do a little bit of everything. So maybe I just misunderstood. But if you can clarify a little bit.
Yes. I don't think that's a totally fair way of explaining it, Asbjørn. We've been focusing on Denmark for the last couple of years. That's what we'll be doing going forward. We are in a limited business areas. And within each of those business areas, we will focus on the most profitable parts of those business areas, and that's where we will invest.
So we have probably one of the best leasing companies in the market and one of the largest. We'll make sure that they can be competitive going forward also. Here, it is a little bit a size game also, and looking at that, it's a profitable and also very much a plus 10% business unit. It's a smaller business unit.
If you then look at the Business and Corporate segments, our sweet spot is the larger SMEs and some of the corporate, predominantly smaller corporate clients. That's a space where there's limited competition. So I don't think every bank has this as a sweet spot. There's only a limited number of banks that can service these clients. These [indiscernible] deciding normally the most profitable also because losses are less there and normally, you get ancillary business to a larger extent than you do on the smaller and on the very largest of the clients.
So if you're looking at where we predominantly is investing and making sure that we have resources to complete, that is within the SME and other SME segment.
Then on the Personal Banking part, I think there's not a lot of banks in the Nordic countries that have been successful in saying that they would only do certain personal clients based on their income or other things. But what we do here is we predominantly again, put our resources where we are strongest and where we can get the most income. So we will directionally move more towards the customers that have also money to invest and also have a need for more products. So again, a little bit of the segments here. And here, we also think that we are relatively stronger than we are on the other Personal Banking segments.
We've been best in Private Banking for a number of years. We've not been good at acquiring new clients. That, we can hopefully do a bit better. So I think we are doing something that is for the benefit of the customers in [indiscernible], probably predominantly focusing where it makes most sense and where we also get the best returns from our investments.
Okay. Fair enough.
And honestly, it can be a little bit difficult probably to see those kind of details in the presentation.
Yes. But I hear what you're saying. If I may then ask on your mortgage business. Obviously, no news today, but you sort of keep the door open again. So just a bit curious here. I fully understand why you're not doing anything today that will be premature on the back of the [ BCCA ] dealing. But just what kind of KPIs should we look for? I heard what you said when it comes to the interpretation of the agreement, and there's still some uncertainties here. What kind of KPIs should we sort of be looking for? What would be sort of your means for justifying whether you should keep it or whether you should sell it? Anything there we should be looking for?
So -- and I don't know if you call it KPIs, but we need to find a good long-term viable solution. That's more important than finding a solution tomorrow or next week. It needs to be a good and it needs to be a viable solution.
We will make sure that we can service our clients and have a good offer for our clients. We will make sure that it is financially attractive, and we'll make sure that it strategically makes sense also.
Okay. Fair enough.
And then, Asbjørn, I know that then you can think of a number of different models here. And we can also think of different models, and we're considering those models that can be pursued.
If we then look at the models that can be pursued, and we look at the slides that you present today, how much -- how big a share of these slides would be -- would it be sort of a prerequisite for you to actually have your own mortgage institute, and how much would be doable without your own mortgage institute?
Some of those slides here will be doable both in a model where we have our own or where we have a margin that is constructed in a fashion where we can support it. So we don't necessarily need to talk about models that are in the market today. It is an imperative for us that we can service our clients in a good fashion here. And I think there are different models here that can do that.
All right. That's clear. Final question from my side, if I may. You talk about growth in capital-light income, and you have some AUM growth targets. But could you put a little bit more flavor on what you can do besides growing AUM? What you can actually do to grow your sort of capital-light income and, I guess, your underlying profitability?
Yes, good question. If we look at the history, I think we have developed the business with AUM rather significantly over the last years, also due to the approvals we got in the market and in the surveys. And we have a clear ambition to outpace the market growth over the next coming years.
And we have seen a very strong development within Private Banking clients. What we have focused on going forward is twofold. One is, of course, to continue that trend, but also to reap the benefits of the unused potential within private individuals on the investment side.
There is certainly more to be reached there, and we will try to mirror what we have of concepts and set up with Private Banking clients to enhance our profitability within Private Clients and the segment of Private Clients.
Then I think that there are a number of maybe not fully tapped possibilities in terms of our product setup and so on that we'll be looking into also.
Thank you, Asbjørn. And last question in line comes from Jacob Kruse.
Can you hear me?
Yes, we can hear you.
Okay. Great. So I had a couple of questions. First, on the NII, if I look at your bridge, you have the decline due to rates and the increase, I guess, due to volumes. If I just look at your volume guidance, it kind of translates to about DKK 1 billion of positive volume effects in terms of NII between now and 2028, which by -- if I just compare these boxes in the chart would mean that the sort of impact from falling rates will be about DKK 3 billion. So is that broadly the ballpark you're looking at? And I had a couple of questions after that.
Well, I can't -- I'm not able to reconcile those figures. And I think that's a very, very high number you mentioned in terms of the impact from lower rates. But probably is something about the mix. I mean we provided some intervals on lending. And lending could be bank lending, that could be mortgage lending, could be leasing. And on the deposit side, it's very different, whether it's time deposits or private client transaction accounts. So maybe we could have a word after the call, if that's relevant to you, Jacob.
Sure. Yes. No, it's a very crude calculation, obviously. Second was just on the cost side. Could you give any details on the sort of size of investments you're looking at and the size of savings you're looking at? In particular, as the cost expectations for next year of about DKK 6.4 billion are very similar to what you are sort of implying in 2028 at a 50% cost/income and DKK 13 billion of income. So would you be able to fill in that kind of gap a little bit?
Yes. Well, if you look at '24, we've had a cost base, which includes a significant amount of one-offs and we expect...
Sorry, 2025.
We'll start off with '24. We've had in '24 a decent amount of one-offs due to the inclusion of Handelsbanken, PFA and other parts as well, but that will gradually ease off. And on top of that, of course, there is an uplift from inflation in all cost areas. But as Lars said before, we will do our utmost to gradually bring down the number of FTEs, but parallel to that, also invest strategically in what supports what we just announced here of growth in certain segments and product lines, processes, et cetera.
So look into a moderate investment program, very moderate, but parallel to that, a stringent cost management on top of it.
We think our market for development will become more efficient with what we are doing here. And we think we'll get more development for the money. But what we do is we do actually step up on investments that makes the bank simpler and that makes it possible for us also to take cost out. And there's also in the calculations quite a bit lower cost base also when it comes to FTEs in 2028 and those reductions will not come last year. Those will come gradually in the couple of years before.
And just given that this is the day you set out your plans, why don't you pin down the cost-cutting ambitions a bit more clearly?
We could have done. We could have done that. I think having more or less flat costs, as we have in here, having the assumptions that we have in, in terms of interest rate makes a below 50% cost/income actually more -- at least more to get there than [ we see high ] initially. So we do quite a bit of cost reductions during these years and maybe we should have communicated that more clearly.
Thank you, Jacob. Are there any further questions? It seems as if that's not the case.
Thank you for participating in today's conference call. A recording of the call will be made available on our IR website in the coming days. Please do not hesitate to reach out if you have any further questions. We appreciate your interest in Jyske Bank and wish you a nice day.