DNB Bank ASA

OSE:DNB

Earnings Call Transcript 2019-Q1

[Thomas Midteide, executive]

Okay. Good morning to all, and welcome to DNB and our U.K. headquarters here at the Walbrook, and our First Quarter Presentation. The last quarter, I mentioned that the best manager -- the best Norwegian manager in the world was in Manchester United. I think this quarter, we have the best manager due to the poor football results.

We will have a session, investor call at 12:30 U.K. time. So Riccardo and Jan Erik and all the rest of you following us on the webcast, you will be able to ask your questions at 12:30 London time.

Now first, Rune will go through the overview and Kjerstin will of course take us through the details afterwards, and we'll have a Q&A session here in London as well. Rune?

[Rune Bjerke, executive]

Thank you, Thomas, and welcome to this presentation. I was not able to participate when we presented the 4Q numbers, but I know that you at that time had a thorough full run through the macroeconomics in Norway. And the macroeconomy is and will be important for DNB, taking into account that we have 80% of all our revenues coming from Norwegian clients. And what we said after 4Q is still valid. I would rather say it's more valid after the first quarter. We see a continuation in the reduction in the unemployment rate. And we will probably reach 3.5% or 3.6% during the year. And that is about 50% of what you see elsewhere in Europe on average. So we have a very strong labor market. On top of that, we are seeing that investments are picking up again in the oil and gas sector. A 10% increase in investments offshore lead to fuel of the investments mainland as well. So all in all, the investment activities as well as the potential increase in personal consumption due to real wage increases will support a positive macro outlook for Norway in 2019.

And as you know, we have had 2 rate hikes in the key policy rates up to now and we expect additional 2 hikes either this year or 1 this year and 1 next year. After that the visibility is not so good, but the economy is very strong and the Central Bank will look at both the inflation, but maybe more important the development in the currency rates.

Having talked about the macro picture, you can easily understand that it is possible for a bank like DNB to have growth in all customer segments and that's what we have had in 1Q. We achieved a return on our equity at 14.1% if we include the gain from the restructuring of our nonlife insurance operations, but adjusting for that we ended at 10.7%, But on a trailing 12-month basis, you see the number is 12.5% and we are gradually climbing and moving towards the 12% return on equity target.

I was talking about the loan growth and we expect loan growth in the range of 3% to 4% in 2019, as guided for. In first quarter, the growth was even stronger, 1.2% and if you adjust for currency elements, we ended at 1.6% in the quarter. So its nothing negative when we look at activity overall, but the growth will fluctuate somewhat between the quarters, so you cannot just annualize the results in 1Q. So the guiding is still valid, 3% to 4% for the year.

We also had a sound increase in net commission and fees. If you look at the trailing 12 months development, we were up 6% and 4.9% up from first quarter last year. It's different elements adding to that and Kjerstin will come back to that later. You'll also see that we have a comfortable CET1 ratio at 16.4%, which opens up for continuation in our buyback activities as well as growth ambitions. I will come back to that later on.

Earnings per share ended at NOK 4.61, up from NOK 3.36. And if you look at the results from the buyback program, you can easily see that while net profit is growing by 34.1% compared to last year, the EPS is growing by 37.2%. So the buyback program actually contributes to the EPS development.

We are intending to continue our dividend policy. We aim for at least 50% cash dividend payout. And we will use and continue to use buybacks as a tool to optimize the capital structure. When we had our AGM a couple of days ago, we received our decision and proxy to apply for a program in the beginning to buy back up to 2% of the shares, and the applications is already filed and sent to the Norwegian FSA.

Taking a short look into the segments. It's important to say that when we have rate hikes, there will be negative lag effects in one segment and actually positive effects into other segments. So personal customers, they do not only face a quarter with 2 fewer interest rates, they also face a situation where it takes time to get benefits from the rate adjustments already made. So from May on, there will be an increase in NII due to decisions already taken to raise customer rates.

Going forward, we will probably face some of the same situations as we have had over the last 2 rate hikes. We are prepared and I'm pleased to say that the rate adjustments from our side has been implemented in a sound and quiet way. Actually, we have lower churn in the first quarter this year than we had in first quarter last year. And it's also comforting to state -- to say that we actually have a higher level of premortgage approvals as of now compared to the same time last year. So in the segment, the growth was 0.8%, deposits grew by 1.2% since the end of the year and we are very satisfied with the development in the segment.

This time, I think it's important also to highlight on the development in assets under management in the retail market because you can see that the market share of DNB, when it comes to mutual funds, is increasing. We have actually increased the market share from 31.5% to 32.4%, and 50% of all net sales of mutual funds in Norway belongs to DNB. It's not only the repricing strategy we have implemented, it also -- it's also about the strong distribution power of the bank.

As I said, the lag effect is different -- lag effect is different from the -- for the SME segment, but you can see that the continuation of the very strong return history is going on. We had an 18.2% return on allocated equity in the quarter. Volumes are up, a 10% increase in commission fees related to our investment bank division. It's not only risk products, it's actually more about corporate finance and advisory services in the field between SME and DNB markets. So this segment is going to perform the same way as they have done over the last 3 to 4 years.

Large corporates is also delivering a decent return on the allocated capital, 12.8%. And as you can see, we have had some volume growth this quarter. So we are more or less done with the rebalancing operation in the segment. It has been extremely successful. We still have about NOK 6 billion left in the noncore portfolio, which we gradually are going to reduce in the quarters going forward. But there are profitable growth opportunities in the segment. And probably you will see some modest growth overall in 2019, but it will fluctuate from quarter-to-quarter. You cannot expect to see the same growth level going forward because we have done some great -- some pretty big underwritings and these underwritings will be syndicated, but activity level is comforting.

A few words about the cloud-based digital solutions. Because now we are really seeing the effects of what we have invested in over the years. Start with the mobile banks. Close to 800,000 downloads, 773,000 users and actually 1 million daily logins to check balance and also to do minor self-served activities. It has been extremely successful in the way that we are able to provide releases more frequently and we can upgrade the mobile bank in a totally different way that we were able to do in the past. So far we have had 8 upgrades and more will come.

Looking at the savings app called Spare, you can clearly see that the growth in sales is steady state, ticking upwards. NOK 2 billion is already done through the app. Maybe it's more important to explain what this is when it comes to the share of total sales and that is actually more than 30% of total sales to the retail segment through the app. And the number is growing.

And last but not least, the DNB Puls app, which is a tool for CEOs and CFOs in SMEs in Norway. We have actually achieved NOK 8,500 downloads and this opens up for daily communication with decision makers in the SMEs. And this is a tool to sell more and also a tool to stay in closer contact and be a more preferred partner for SMEs in Norway.

Then Kjerstin, I think you should dig a little bit deeper into the numbers.

[Kjerstin Braathen, executive]

Thank you very much, Rune, and very good morning to all of you. Rune touched quite extensively on the growth for the quarter, so I'll just quickly again repeat. 1.2% for the quarter; 1.6% underlying if we correct for the currency. And I would emphasize again that we're particularly pleased to see a stronger growth in the personal customer area this first quarter compared to last year and that is after completing 2 runs of repricing. The strongest growth this quarter comes in the large corporate area, but again here we do expect the growth to vary from quarter-to-quarter in view of the nature of the business, which is now more an originate to distribute activity. Again for the year, growth expected to be within the 3% to 4% area.

If we take a look at the margins and here we're now showing the trailing 12 months development in the net interest margin and that has a flat development compared to the fourth quarter. If we look quarter-on-quarter, there is a decrease and this is related to the fact that the resolution fund and the increase of cost there is offsetting the further positive effect that we have from the price increase.

We have completed our second repricing after the Central Bank lifted rates in February. We are saying that the effects of this is very similar to the repricing that we did during the third quarter last year. Approximately the same amount of loans being repriced, slightly more on the deposits, but not far from the effect from the previous repricing, which was in the area of NOK 300 per quarter. Expectations for margins going forward are stable to positive when it comes to the NIM and a more stable development on volume weighted, which is ticking up by 1 basis points in this quarter.

Coming to the development then in the net interest income. The net interest income is up by more than 3% if you look at the first quarter last year; however, down from the fourth quarter, which is also expected due to several reasons. But we think it's important to look at the various elements in the net interest bridge and the positive contributions comes in the areas we would like to see them. They come from a positive effect on repricing and they come from the profitable growth in all of the segments. On the resolution of fund cost of NOK 137 million, there is a NOK 50 million cost for Poland this quarter and all of the resolution fund fee for Poland is paid in the first quarter. The other elements that are offsetting is an effect from IFRS 16 and there is also a lesser contribution from interest in the nonperforming portfolio and some less from the amortization effects and fees in this quarter. The effect from the repricing I just mentioned comes gradually in the second quarter and also in the third quarter with a full effect, so we have positive expectations for this picture going forward.

Commission and fees up close to 5%, as Rune also mentioned. The mix is somewhat different than we may have seen in the previous quarter. Real estate comes in very strong with a more than 8% growth compared to first quarter last year. I need to remind you that we had Easter in the first quarter last year whereas this year, it will be second quarter. But even so, we're very pleased with the performance in the real estate brokerage business. And even more the increasingly strong and good cooperation between the real estate brokerage business and the bank contributes to the growth that we are seeing in the personal customer area.

Investment Banking Services, strong contributor both in the SME and the large corporate sector this quarter. Also here a different mix. And as you're well aware of, there was a much lower activity in the debt capital markets and few companies, if none, being IPOed in Norway in the first quarter so the contribution this quarter is the strongest from equity capital markets and advisory-type M&A business, but also here a 22% growth compared to the same quarter last year.

Asset Management, positive contributions from inflows, but mostly from the very positive development of evaluations this quarter. Sale of insurance products, the uptick, NOK 25 million of the uptick you see is from the sale of insurance products in our new Fremtind company, so a decent uptick for this quarter, but we do expect this to improve in the quarters to come, as this company is offsetting some costs related to the merger and it takes some time to ramp up the activity, but increasing expectations as we go along for the -- from the sale of nonlife insurance.

And lastly money transfer, looks like it's a bit soft compared to the first quarter last year. The underlying development is more stable as there were a one-off effect that led to the result you see in the first quarter last year.

Over to costs. The costs are down by close to NOK 700 million if we compare to the fourth quarter. We have, however, decided to show you the bridge compared to the first quarter as we had very large nonrecurring cost elements in the fourth quarter. There is a couple of elements in the bridge that I think it's particularly important to emphasize and those are the development in IT expenses and the pension cost. And I'd like to start with the pension cost. The increase related to pension cost if we compare to last quarter is NOK 174 million.

If we compare to first quarter last year, it's NOK 67 million. This cost is related to the transition for our employees from the defined benefit to the defined contribution scheme and there is an element in those agreements that varies with the development in the equity markets. So given the very volatile equity markets and the very strong equity markets in the first quarter this year, there is a particular high more reservation against future commitments in this area than an actual cash cost in the quarter. If we look at the historical costs over the previous quarters, you can also see that the pension element for this quarter is between NOK 50 million to NOK 75 million higher than we've typically seen in the previous quarters.

Second one, IT costs up by a rough NOK 100 million. Historically, we've had low development activity in the first quarter and we've actually worked to try to even out the level of activity to improve the productivity in our investment activity. And the results we are seeing is a factor of that work. We do not expect -- we are not planning to increase our investments activity overall for the year, but we do expect the activity to be somewhat more evened out over the quarters.

The remainder elements to talk through on costs are the elements primarily related to IFRS 16 related to the increased depreciation and a lower cost on properties. And beyond that, you can see a slight uptick on the salary side, but I would say we are neutralizing the majority of increased work related to compliance and also the wage inflation pressure more on the technology side. So we're, all in all, pleased with that.

We maintain our ambition of less than 40% cost compared to revenue, and underlying goal for us in order to reach more than 12% return on equity. And we do expect to see more effects of the initiatives related to digitization and automation towards the second half of '19.

Very stable credit quality in the portfolio. No movement to talk about between the stages, some losses in each of the segments, but -- and also some reversals in the large corporate area. But in general, really a picture that underlines what Rune talked to, a very strong macroeconomic situation in Norway.

The offshore portfolio remains the area where we're working on restructurings, but we feel comfortable with the reserves we have against that portfolio. And there are no new industry developments that we feel particularly concerned about or that is natural to talk to.

Because every time I need to remind you that the losses will vary from quarter-to-quarter, but then again a very strong macro. This results in a strong development of key figures. Profits for the quarter up by 34%, close to 3.5% growth if we adjust for Fremtind, but we do gradually see that we have more and more of the structural result elements from what we do together with our partners. The cost income ratio is improved. We had a 10% tick up in costs compared to -- no 10% pickup in revenue compared to 6% on costs and return on equity is at 14.1% for the quarter.

Capital is strong, 16.4%, along -- Basel III, it's 17.2. The Minister of Finance has confirmed that the floor will be removed during the course of the year. However, we do not know specifically about the timing and when this will be implemented. We do believe this will enable us to absorb the increase in the countercyclical buffer without making adjustments. And we are also cautious when it comes to leading you to expect that this would mean substantial capital relief in any way, but we have a strong capital position that will enable us both to grow and deliver on our dividend policy.

There's some changes I need to highlight in relation to the previous and the coming effects on the equity that we also talked to the last quarter. We have completed and paid out the dividend from the life insurance business to the parent during the first quarter, so that contributed with 13 basis points in the first quarter. When it comes to Luminor, that transaction -- the closing of that transaction may be postponed to the second half of the year, which was also announced by Nordea during their earnings release earlier this week. And the reason for postponing is due to the fact that the regulatory approval process is taking somewhat longer. The phase 2 of the merger with Fremtind is also pushed towards later to the year, again here also due to regulatory process related to a license. But all in all, a strong picture. We did receive the proxy from the General Assembly to continue to buy back shares and have sent the application to the FSA for approving another 2% buyback.

So with that I think I'll end my comments. And we can open for questions.

[Thomas Midteide, executive]

Okay. So feel free to ask any question you like. If you could wait for the microphone that would be fantastic. Yes. Jacob, first?

[Jacob Kruse, analyst]

So I just -- I guess I have 2 questions. The first was on capital and the Basel transition by the end of the year. I think previously, you kind of hinted that regulators would adjust [ inventories ] so that the net effect of this will [ not ] be very meaningful. Is that still the case or do you think you really get [ the 90 basis points? ] And the second question was just on Luminor. The -- this delay -- the regulatory delay, is that just process or is there anything specific that regulators need to look at?

[Rune Bjerke, executive]

We have said and we continue to say that the regulator, most probably, will act in a way so when implementing Basel III, there should be very limited positive effects for DNB and DNB's shareholders. He's saying that do not expect any regulatory arbitrage when we phase out Basel I regime. On the other hand, Basel III is Basel III and we of course will do what we can to optimize the capital structure under new regulatory regime. When it comes to the timeline for the Luminor transactions, it is only related to the fact that it takes time to get the permits from different regulators in all 3 countries for the buyer. So we expect the transactions to be completed in the second half. We do not know exactly when in the second half, but it should definitely be executed and done in second half.

[Thomas Midteide, executive]

Any more questions this morning. Yeah, in the back, please?

[Adrian Cighi, analyst]

Adrian Cighi from RBC. Just one question on NII and one on cost base. On NII, very helpful discussion on the bridge. Can you give us maybe some insight into the sort of other net interest income, is that sort of the NPL or lower interest from NPLs that you're referring to? And then on costs, are part of the increase in IT costs essentially related to improving or upgrading AML subsystems.

[Kjerstin Braathen, executive]

You are quite right when it comes to the NII and as I alluded to, the main element in the other NII is related to lesser interest this quarter on the nonperforming portfolio. And there will be some volatility in the other net interest line. I think we've seen that also previously. And here in particular with the nonperforming portfolio, it also varies with when we're doing larger reversals. So that is the main element in addition to an interest element on the leasing activity that we have in DNB Finance.

On the cost, we are investing both in strategic positioning and in compliance in AML-related procedures, but I wouldn't say that there's anything in particular related to the NOK 100 million increase you see this quarter that is related to AML. Again, that is us trying to improve the productivity and even out the activity level over the quarters.

[Thomas Midteide, executive]

Yes. Paulina Sokolova, Barclays?

[Paulina Sokolova, analyst]

Just another follow-up on the costs. The increase in pension costs you mentioned this quarter, should we infer that if equity markets kind of stay the same, unchanged, this will not recur? So it's really a one-off this quarter?

[Kjerstin Braathen, executive]

This is related to the volatility in the equity market. So there -- if there is no -- if there is a deviation, it goes in the other direction and if it stays stable, you will not see this element.

[Rune Bjerke, executive]

And bear in mind, when we decided to move from defined benefit to defined contribution for the employees, we did it in 2 phases. First, all employees with wages below a limit called 12G in Norway and the second phase for those who actually earn more than the limit called 12G, about NOK 600,000 or so. And when we made the business case for the bank, we saw that there should be or was expected to be somewhat higher pension costs overall the first 3 years but after the first 3 years, the case for the bank should be lower pension costs in general. So the fluctuations will continue, but the cost level as such will be more in line with history and also gradually lower and lower, the more employees we actually phase off the scheme. So this quarter was specific, so was the fourth quarter by the way.

[Thomas Midteide, executive]

Okay. Any final questions this morning? No? If not, I will just say thank you for sharing this morning with us and following us on the webcast and again, we'll have the Investor call at 12:30 London time. Thank you all.

[Kjerstin Braathen, executive]

Thank you.

[Rune Bjerke, executive]

Thanks.