DNB Bank ASA

OSE:DNB

Earnings Call Transcript 2021-Q1

[Thomas Midteide, executive]

Good morning, and welcome to DNB's presentation and the presentation of the results for the first quarter. Now this is the fourth quarter without anyone present here in Viorica in Oslo. Hopefully, you are safe and sound behind your computer screens. We miss you a lot, even the ones with FL recommendation. We will open up for questions in about 30 minutes. So please use the form below to ask your questions, and we will ask them on behalf of you here in this auditorium. As usual, we will hope and start to show with Kjerstin and Ottar taking you through the numbers.

Go ahead, Kjerstin.

[Kjerstin Braathen, executive]

Thank you, Thomas, and good morning, ladies and gentlemen, and a very warm welcome to this presentation of our first quarter results. As I stand here in a close to empty auditorium, I must start by saying that I really look forward to the next opportunity to see more of you here present while we give our presentations. While parts of the society in our way has been impacted by local lockdowns during the first quarter as well, we see less and less of an impact of this to the economy and in our numbers. We live in a world that continue to be affected by the pandemic, but 1 year into the pandemic, I make it is clear that Norway has fared well from a relative perspective, both with regards to dealing with the pandemic as well as the economic effect. Activity has been high across all of the customer segments in the quarter as such. And the team has performed very well in this environment, which results in a very solid start to the year.

Our return equity comes in at 10% for the quarter. This is a clear pickup from the level that we saw during the quarters of 2020. And this is despite the fact that we carry a lot of equity on our balance sheet. For illustration purposes, if we had added or taken out the dividend that was distributed in the month of March, the return on equity for the quarter would have been 10.5%. The earnings of the quarter continues to show the resilience that we've talked about. And it comes in line with the earnings in the fourth quarter, while the costs are down.

Picking up already from a high level of activity, we see increased activity in several areas, such as capital markets and savings and investments. And this leads to a historically high level of commission and fees for the first quarters, usually not the highest quarter from a seasonal perspective. But fees and commissions are up by more than 5% compared to the fourth quarter and close to 18% from the same quarter last year.

Earnings per share comes in at 3.65%, a 60% growth compared to the first quarter last year. All in all, this leads to a solid build-up of capital by 50 basis points in the quarter to 19.2%, solidifying our position with a record high buffer towards the required level from the authorities.

The Norwegian economy continues to recover. Recovery is slightly less than expected during the first quarter, but the outlook going forward has been further improved by analysts. And the expectations for economic growth now from DNB markets is for a growth level of 3.7% for this year and 3.5% for next year. Vaccines are progressing, more than 23% of the population have received a vaccination. And they expect to be more or less done by the month of August, which will have a further positive impact on the economy.

In light of the recovery and reduced cost and expenses due to a 0 interest rate level, we continue to see consumer confidence picking up. People feel good about their economy and optimisms continue to be on the rise. Given the economic recovery, the Norwegian Central Bank also continues to signal interest rate hikes. All in all, in aggregate, 6 interest rate hikes expected until the end of 2024, the first one expected towards the second half of this year. Registered unemployment is now at 4.3%, a low number if we compare ourselves to many around us, but a level that is higher than what before entering the pandemic. Substantially reduced from a year ago, expected to continue to reduce as the society further opens up. And the important thing now is to get even more people back to work and certainly the young ones who have been particularly impacted by the pandemic.

We continue to grow and develop our business in line with our strategy. And a few comments on the ongoing transaction that I'm sure most of you have heard about. A few weeks ago, we announced our interest in our offer to buy 100% of the shares in Sbanken. Despite being different in size, we strongly believe that there are more similarities than differences between our 2 organizations. Both digital leaders, both in the front with regards to innovation and pacing to deliver the best customer experience to our customers. There is a strong, both strategic and financial rationale for the transaction. And we are convinced that combining our 2 organizations and the competencies across these 2 organizations will lead to even improved offerings to our customers. The transaction is ongoing. The offering period is now open for shareholders to accept until the 24th of May and thereafter go through authority approval process with an estimated closing if it develops as we desire in the third quarter of this year. We increasingly see the benefit of having a leading position across digital, and the trend of digitization just continues to scale throughout the pandemic. We see this across all of our customer channels. For an example, in savings and investments. We have seen a 50% growth in customers on the savings platform spot during the first quarter. We see exponential growth in funds being sold on this platform. A total of NOK 7 billion was sold for during last year. And this year, already more than NOK 3 billion in funds and investments have been sold across the Spare platform. We now have more than 1 million active customers on our mobile banking platform and 600,000 daily visits. So customer interactions continue to be higher than ever.

Consumers have been rapid and changing behavior. And despite many shops being closed, we continue to shop. And the growth in e-commerce in the past 12 months has been 18%. We see this translates in the lot of businesses, one thing to sell products and services digitally instead of physically. And in the past 12 months, 50 new businesses have started using Vipps as a payment method in order to sell products and services.

Lastly, we continue to strengthen our efforts as an actively accelerator into the sustainable future. And today, clearly commit to deliver a net zero emission from our activities in 2050. We do not believe that this is about exiting and more believe in impacting. We are looking to support and proactively accelerate the transition with our customers into the new economy as well as scaling our financings in renewables and also into the new solutions needed. We have set clear targets for our ambitions to continue -- to contribute to raise capital for renewables as well as green property financing by 2025, and we are on track to deliver on these targets.

A few words on the main business areas. A strong performance in the quarter from the personal customer area. We continue to see profitable growth both in lending and deposits. The growth for the past 12 months in the area on the lending side is 2.8% and 4.6% in deposits. A high activity across many areas has led also to a growth in income from other areas and lending. We see high levels of real estate brokerage. We see high levels of sales of insurance. And not the least, we see a very high activity level in savings and investments. And here, we have highlighted the trend over time, building on the picture I just drew for our savings platform in full, showing you the development of the assets under management in the retail sector for the past couple of years. A very strong growth of 57% in assets under management for the past 12 months. We continue to focus specifically in this area and believe that we are well-positioned for a trend that will continue to be attractive as we move forward. A very robust portfolio is demonstrated through very low losses in this area. And overall, a strong quarter for personal customers.

Across corporate banking, we also see a very high level of activity. Very attractive growth in the SME sector, where the 12 months' growth pace is in the area of 6%. And the growth in deposits across corporate banking, that is even higher than what we see in the personal customer area. Also for larger corporates, the activity has been high during the quarter, but a lesser part of that activity translates into growing our balance sheet lending, which is slightly reduced compared to the previous quarter. This is due to a very high activity in capital markets, combined with our desire to continue to push forward on the originate to distribute the strategy that we've talked about. This lead to an increasing pace in the turnover of capital and increasing number of deals having to be done in order to see growth. We continue to see a high pace of activity coming into the second quarter. The growth in large corporates will vary from quarter-to-quarter, but we certainly believe we have an attractive platform to profitably grow this part of the business going forward.

First quarter this year is a record income in the cooperation across markets and corporate banking. And it's interesting also due to the fact that usually the fourth quarter is the highest seasonally period for this activity. Net reversals due to a couple of customer-specific situations also contribute positively. And we see an improved return on allocated capital in this area from previous quarter, which is now above 14%. High activity in markets leads to a pretax result in this area of more than NOK 1 billion for the first quarter. And DNB Life activity comes in at NOK 460 million, also a good quarter for our business in the life insurance company.

And with that, I will leave the floor to Ottar to comment more on the results.

[Ottar Ertzeid, executive]

Thank you, Kjerstin, and good morning. The positive loan growth for personal customers continued in the first quarter with 0.6%. The high loan growth for SMEs also continued with 2.3%, FX adjusted. For large corporates, loan volume declined 1.4%, adjusted for FX, reflecting the strong debt capital markets and originate and distribute activity as see in commission and fees and as the CEO mentioned. Total loan growth was just 0.2% currency adjusted. Average loan volumes was affected by increase in the value of the NOK towards other currencies of around 5%. Adjusted for this, average loans were stable. Loan growth in large corporates is expected to pick up, as the CEO mentioned, and it does continue to effect around 3% to 4% annual total loan growth. The healthy growth in deposits continued with 2% for personal customers, 7% for corporate customers and 5% in total. The deposit to loan ratio thus strengthened to almost 70% from 65% at year-end. This strong development for deposits will be increasingly valuable with the forecasted policy rate hikes by the Norwegian Central Bank.

And now on to margin development. Net interest margin and volume-rated combined spreads in the first quarter are affected by portfolio mix effects, partly the high-growth for deposits compared to loans, and partly personal loans growing more than corporate customer loans. The mix between personal customer and corporate customer loans reduced lending spreads by approximately 1 basis point. The effect of increased deposits to loans accounts for 2 of the 4 basis point change in combined spreads. Spreads are also impacted by the 7 basis point average increase in the NOK money market rate from the previous quarter, increasing deposit spreads but reducing lending and combined spreads. The bank has closed a 0 net exposure towards NIBOR as the NIBOR effect on customer spreads is largely offset by higher interest on equity. The annual resolution fund fee in Poland was paid in the first quarter and had a small negative impact on net interest margin.

Moving on to net interest income. Lower funding costs increased net interest income by NOK 56 million, reflecting our attractive funding terms and the increased deposit to loan ratio. The annual resolution fund fee in Poland reduced net interest income by NOK 23 million, stronger average NOK currency had an impact of NOK 106 million. While the effects of higher NOK money market rates and effects of spreads reduced net interest income by NOK 73 million. Two less interest rate days had an effect of NOK 159 million.

Next, let's take a look at commissions and fees. The strong performance in commission and fees continued in the quarter. Commission and fees show seasonal fluctuations, with the first quarter usually being slower than the fourth. Commission and fees, nevertheless, increased 5.5% from the fourth quarter and almost 18% compared to the first quarter last year. Real estate broking fees increased 14% from the first quarter of the previous years, reflecting the strong housing market. Investment banking fees were up 94% from the first quarter last year with very high activity in both debt and equity capital markets as well as equities brokerage. Asset management and custody fees increased 20% from the first quarter of 2020, reflecting both positive net inflow and all-time high assets under management. Money transfer and banking services are still significantly impacted by the COVID situation, particularly the profitable international use of cards and currency ATM withdrawals. Fees were down 97 million or 23% compared to the first quarter of last year. Fees from the sale of insurance products increased 7% or NOK 42 million, evenly split between Life and Non-life insurance. From late this year, we expect a similar one-off negative effect from the new own pension account scheme. We expect this to be compensated by volume growth and improved pricing for risk products going forward.

Overall, commission and fees have developed more positively than expected with the exception of money transfer and banking services, which were still materially impacted by COVID restrictions.

Let's go on to costs. Operating expenses in the first quarter -- in the fourth quarter included full provisions for the possible administrative fine announced in December of NOK 400 million. Operating expenses in the first quarter include nonrecurring restructuring expenses relating to our withdrawal from Poland. These restructuring expenses are offset by temporary positive cost effects due to COVID, within traveling, training and marketing events. Personnel expenses in the first quarter are positively impacted by a NOK 58 million one-off reversal owed to high accruals for variable pay in the fourth quarter last year. Pension expenses in the quarter were approximately at a normal level.

And now on to my asset quality. In the first quarter, there were NOK 110 million in net reversals of impairment provisions, reflecting the robust portfolio quality and gradually improved macro forecasts since the first quarter of last year. For personal customers, impairment provisions totaled only NOK 24 million, reflecting the high-quality portfolio. The decrease in nonperforming consumer loans continued. For corporate customers, we saw net reversals of NOK 135 million. Offshore remains the most challenging segment and impairment provisions increased NOK 187 million. This was more than offset by reversals within oil and gas and the shipping segment, particularly within container shipping.

In other corporate customer segments, impairment provisions totaled NOK 147 million. Exposures in stage 2 are reduced from January 1st, the new definition of default from European Banking authority was implemented with a probation period in Stage 3 after the default situation has ended. Adjusted for NOK 4 billion of exposure in probation, there was a reduction also in stage 3 exposures. We reiterate that the overall portfolio quality is best and well diversified, but please bear it in mind that losses will vary from quarter-to-quarter.

Moving on to capital. The healthy capital generation continued in the first quarter. 50% of profits added 30 basis points to capital. Reduced counterparty exposure for derivatives added another 10 basis points, while a stronger Norwegian kroner and lower market risk also contributed a bit positively. The capital ratio thus increased 50 basis points to an all-time high level of 19.2%, the capital requirement is 15%, the supervisory expectations 16%, including Pillar 2 guidance of 100 basis points. The capital headroom above the supervisory expectation is thus at an all-time high of 320 basis points. The Norwegian Central Bank has stated that it expects to give advice to increase the countercyclical buffer requirement, again, with effect next year from today's 1% and expects the countercyclical buffer to return to the maximum level of 2.5% at some point in time.

In our capital planning, we assume full countercyclical buffer requirement and a capital expectation of 17.1%. The current 210 basis point headroom above this 17.1% provides ample headroom for the cash offer for Sbanken, which will reduce the capital ratio by approximately 100 basis points. The leverage ratio decreased 20 basis points to 6.9% due to increased deposits with central banks and remains well above Nordic peers and also well above the supervisory expectation of 6%.

To sum up the quarter. Operating performance was strong, particularly for commission and fees and impairments. Return on equity was 10% despite the Norwegian bank policy rate still being at 0 and despite negative effects of the pandemic on fees from money transfers and banking services. The 2019 dividend was paid out in March this year. Without this extra equity during the quarter, return on equity would have been 10.5%, as the CEO mentioned. The Annual General Meeting this week gave the Board of Directors authorization to pay out 2020 dividends of up to NOK 9 per share in the fourth quarter this year. The cost/income ratio improved to 43.6% in the quarter. Earnings per share was NOK 3.65, an increase of 60% from the first quarter last year as the CEO mentioned. The strong capital build with an all-time capital headroom is facilitating the cash offer for Sbanken, which is expected to be accretive for return on equity, cost/income and earnings per share. Thank you for your attention.

[Thomas Midteide, executive]

Thank you, Kjerstin and Ottar, for diving into the numbers. And now we will open enough for questions. And with us, we have Head of Investor Relations, Rune Helland, who will ask the questions on your half.

[Rune Garborg, executive]

We have a few questions from the audience, and we'll start with Joakim Svingen from Arctic. He has 3 questions, 2 on the NII.

The retail growth was soft in Q1. Do you see it as necessary to adjust your prices to gain more traction?

And number two, having no any changed behavior amongst your customers after the announced offer to Sbanken?

And his third question, what are the key drivers for the reversals within shipping offshore and CRE?

[Kjerstin Braathen, executive]

I'll answer the first 2, and then Ottar maybe can comment on the last one. We do not -- I mean the growth in first quarter was fully in accordance with expected and worked for, I think, on the personal customer and SME. There, we continue to see all 12-month growth pace, around 3% for personal customers and around 6% for SME. And then as I explained in the large corporate, the activity level is high. But the growth on a quarterly basis is impacted by the activity level in capital markets. We have rapidly turned transaction around syndicated volume into the market and refinanced in the bond market. And the activity in capital markets as well as the growth in large corporates will vary from quarter-to-quarter. But over time, we certainly believe we have the platform to grow this profitably and maintain our growth expectations of 3% to 4% for the year. Sort of pricing, we can't comment specifically, but there's nothing in the operating model as such that, that indicates need to change. On the contrary, I'd say, on the personal customer part, we've probably been closer to growing at our market share in the past 6 to 9 months than we've been in a long time.

Second question, no, we have not seen any changed behavior from our customers after the offering of Sbanken, and there hasn't been any sort of impact to traffic into the call centers or our digital channel as a result of this, but more an excited organization that looks forward to the opportunity of, hopefully, combining our entities and cooperating with the competent team of Sbanken.

[Rune Garborg, executive]

With regard to impairment provisions, it's important to emphasize that in offshore, we took increased provisions in the quarter. The reversals are in the oil segment and company specific and also, of course, reflect a better oil price this year than we saw at the same time last year. With regard to shipping, the improvement is particularly in container shipping reflecting global -- macro global trend and also the healthy conditions in that shipping segment.

Ottar, we got 2 more questions regarding the impairment. So from Ulrik Zürcher from Nordea. How do you think about your provisioning level in relation to the potential from increase in, for example, bankruptcies, when physical and monetary conditions are tightened?

And then also a question from Yala. Have you taken all your COVID-19 provision back now? Or how should we read your guidance of offshore being the toughest area? And that business could vary from quarter-to-quarter.

[Kjerstin Braathen, executive]

I'd say in relation to bankruptcies, there is nothing that we see across the SME portfolio. We follow closely the delayed payments over a short period of time. And actually, the losses across the SME portfolio continues to be below normalized levels, and the portfolio is robust and diversified. Some pressure is natural to be expected once the fees from the public sector tax, VAT and so on starts to be claimed again. But bear in mind that we have seen historically low bankruptcies. And even in normal conditions, this hasn't been very visible across our portfolio. Part of the sectors that struggled the most in a lockdown society, restaurants, pubs, cultural activities and so on, is an extremely limited part of our portfolio. So there's no concern, but we should, of course, bear in mind that we haven't seen all of the effects of the pandemic, but we feel still very confident about our portfolio in the SME sector.

Have we taken all the provisions back? I mean, you're familiar with IFRS 9, we have exchanged one of the more challenging quarters in 2020 with a better quarter at the end of the 3-year period. We have taken some write-backs in previous quarters, as you've seen on personal customers, but we haven't fully taken back all of the reversals that was set aside during 2020 in view of slight uncertainties. But it's very hard and not desirable, I think, to try to paint the picture as it goes forward. I think the important thing to say for this quarter is that it is impacted by company-specific situations where we see write-backs. Beyond that, our message on impairments is, as before, a very solid portfolio with offshore remaining the challenging area, but we have conservative reserves across that portfolio.

[Rune Garborg, executive]

Very good. We have a question regarding the capital from [ Nils Øyens ] from SpareBank 1 Markets. Have you made any initial calculations on the impact on the CET1, if the Norwegian FSAs suggested revision of IRB framework is implemented?

[Ottar Ertzeid, executive]

It's still too early to quantify the effects of that draft and it's also important to point out, it's still a draft out for comment from the Finance Norway Banking Authorization. So it's too early to give any numbers on potential effects. But of course, if implemented, it will be a negative effect.

[Kjerstin Braathen, executive]

But it's also important to highlight, as Ottar is saying, the process is ongoing. We don't know the final outcome, but we remain very committed and confident about our dividend policy going forward.

[Rune Helland, executive]

Okay. I think that's actually concludes the Q&A session. Thank you so much for joining us this morning. We are happy to invite you to the investor call at 1:30 CET. Stay healthy. Summer is coming. Have a great day.