DNB Bank ASA

OSE:DNB

Earnings Call Transcript 2023-Q1

[Thomas Midteide, executive]

Good morning to you all. Welcome to DNB and the live presentation of the Q1 results. The magnificent artist print, he used to saying sometimes it snows in April, and it certainly did this week. We've had 4 seasons in just 1 week in Oslo. But today, we'll hope you will feel the DNB warrants in the DNB auditorium. Welcome to you following us online as well. As usual, we'll go through the numbers first with Kjerstin and then Ida in detail, and we'll have a Q&A session about 30 minutes. Kjerstin? Please go ahead.

[Kjerstin Braathen, executive]

Thank you so much, Thomas. And a very good morning to all of you. First quarter 2023, a quarter that has been marked by turbulence across global capital markets at times. It has all the same in a quarter with a continued high activity in the Norwegian economy. We are both grateful and humbled that are -- that more customers continue to trust us with their business. And the solid economy in combination with high activity has led to growth across most business areas and a very strong set of results that we delivered today. I'm also very proud of the team who works relentlessly meeting thousands of customers every day. Now to a couple of highlights in the quarter. We point to return of equity, return on equity as our most important financial target. And return on equity for the quarter comes in at 17.2%. This is up from 17.1% in the fourth quarter last year when this number is restated for IFRS 17. Many of you may remember that in the fourth quarter, we had an unusually low tax rate. So the quality in the numbers that we deliver today is even higher than those of the fourth quarter last year. NII is up by 3.8% from last quarter and close to 40% from the same quarter last year. This is driven from growth in both lending and deposits across customer groups, increasing interest rates and also the acquisition of Sbanken. High activity across customers and products has led to growth in fees and commissions by 1.8% compared to a very strong first quarter last year. These are all-time high results. We have a robust and diversified fee platform, but the largest contributor in terms of growing this quarter is transactional and banking services with customers. There is a robust development in asset quality. We have a net contribution from reversals this quarter, which reflects successful restructurings as well as a stable and very solid portfolio. Rock solid capital, 18.6% with a very, very comfortable headroom to its required unexpected level from the regulatory authorities and a growth in earnings per share in the fourth quarter of -- or earnings per share of NOK 6.59 per share, a substantial growth from the first quarter last year, which enables us both to continue to grow with a sound capital as well as continue to deliver on our dividend policy. Activity level in the Norwegian economy continues to develop at a healthy level. And we are expecting a GDP growth of 1% this year. Consumption is holding up. There is a continued shift from goods towards services and investments are expected to pick up in the energy sector, offsetting a slight decrease in investments across the mainland economy in 2023. We have a demonstrated resilience in combination with the expected growth and the fact that inflation is still at a higher level than the targeted level from the Central Bank. The expectations for further rate increases are now increased and the expectations from DNB markets who issued new assumptions in the morning today is that the Central Bank will increase the key policy rate by another 4x this year with the policy rate topping out at 4% towards the end of 2023. There has been a completion of the central wage negotiations in Norway. They settled at 5.2%, and this has led to expectations for wage inflation for markets for the year at point -- this also means that a lot of Norwegians would actually experience a growth in disposable income despite the fact that inflation is still high. I continuously say that the most important thing is that people have a job. Unemployment is still low at 1.4 -- 1.8%. The very tight labor market is showing some signs of easing and unemployment is now expected to grow somewhat towards 3%. There is an increased confidence across the markets that we will have a soft landing in the Norwegian economy. All the same, I think it's very important to point out that we are in times where uncertainty is higher than normal. These are times where models have their shortcomings. And we have seen in recent weeks, the impact of us being an open and small economy, and we can and will be impacted by turmoil that happens around us in global markets. Now a few highlights from the business areas. There is a very strong performance from personal customers for the quarter. Pretax profits are up by 9.1% compared to last quarter. NII is up by 9.8%. This is impacted by a continued growth in lending as well as increasing spreads in the sector. We have continued to hold up a very high activity on savings and investments in the quarter. During the quarter, we've had numerous conferences under the brand name C Invests across Norway on every occasion with a full house. We have had a record attendance and attention on our leading investment arena DNB Invest. And the result of these activities and the economic development has led to an increased holdings in both deposits and savings where increase in saving products offset a slight decrease in deposits in the personal customer segment for the quarter. We continue to innovate to constantly offer better products and services to our customers. News from this quarter is the ability to pay in the mobile banking app with Face ID, and we have made it easier for customers to switch banks. We do see that our position as the preferred customers -- the preferred bank for young customers in Norway, that, that position has even further strengthened during the quarter. We also experienced that an increasing number of customers want to talk to us to seek economic advice, which we're often able to find. And even though there is a slight uptick in requests for installment deferrals, these are still what we would characterize as normalized levels. There are no material shifts in the portfolio, no systematic migration and the portfolio continues to be very, very robust. As for corporate customers, again, we see that the activity in corporate customers is more than twice the size of our activity with personal customers in financial terms. We're very pleased to see a healthy growth in corporate customers, 3% -- 3.7% growth in lending and 12.3% growth in deposits. NII, slightly down from previous quarter in view of 2 less interest days in the first quarter, but up by 36.7% from last year. we see a very high activity level across the customer group in the quarter and are pleased to see that we win an increasing number of mandates in the payments and transactional area, an area where we have invested substantially during the course of the past few years. Revenue from our investment banking capital markets activity continues to hold up at very high levels, but with a different mix of products. There is less income from the M&A side, a higher contribution from DCM as well as from the FICC area. The first quarter is also a very strong quarter for markets with a pretax profit of NOK 1.3 billion. We continue to work on and successfully complete restructurings in the offshore segment. And we have taken some reversals during the quarter in view of the completion of some of the restructurings. And this is also combined with a very solid development of the portfolio. The development in the markets has also led to a gain from holdings that we have in certain of the companies that we have previously restructured. So all in all, a very solid performance, I'd say, across both corporate customers and personal customers. And with those remarks, I'll leave the floor to our excellent CFO, Ida Lerner.

[Ida Lerner, executive]

Thank you, Kjerstin. We noted a profitable loan growth of 2.1% in the quarter. In the personal customer segment, the lending volumes grew by 0.6%, and the growth in the Corporate Customer segment was 3.7% and predominantly than in low risk. The deposits increased by 6.9% in the quarter. The development was fairly stable in the personal customer segment with a slight decrease of 0.6% but an increase in corporate banking by 12.3% as stated by Kjerstin. This reflects our solid position in a turbulent market as well as inflow from customers, in particular, in shipping as well as in the oil and gas industries. We maintained a strong deposit to loan ratio of 78.6% in the quarter, up from 75.1% in the fourth quarter. We reiterate our long-term expectation of an annual loan growth of between 3% to 4%. The net interest margin was up 8 basis points to now 178 basis points. This includes the full effects of the repricings in October, November and mid-December and partial effect from the repricings implemented from end of January.Lending spreads were up 32 basis points and deposit spreads down 17 basis points, which leads to an increase in combined spreads of 10 basis points. Net interest income increased by NOK 529 million, up 3.8% from the fourth quarter. Effects from repricing, including interest on equity amounted to NOK 741 million. Increased average loans and deposit volumes contributed by NOK 117 million. Currency effect contributed NOK 67 million, and the 2 fewer interest days decreased NII by NOK 231 million. The increased contribution to the deposit and guarantee and resolution fund was driven by an increase in the resolution fund in Norway as well as the fact that we take the full yearly cost in Poland that is being recognized in the first quarter amounting to NOK 66 million. Following the Norwegian Central Bank's increasing key policy rate in March, DNB announced a further repricing with effect from mid-May. This is estimated to have an annual NII effect of NOK 1.1 billion. Please note that the indicated effects are based on the current composition of the portfolio. Customer activity has continued to be high, including continued strong contribution from FICC, which is included in other income. The net commission and fees comes in at NOK 2,634 million, reflecting strong performance across product areas and is actually an all-time high first quarter. When looking at the restated numbers in 2022 in the fourth quarter 2022, in line with IFRS 17, you can see that looking at consensus is actually deviates by approximately NOK 320 million. So this is something that needs to be taken into account when looking at the analyst consensus estimates, which didn't have this number in there. The results from real estate broking is up 4.6%, reflecting increased activity in the market. Investment Banking continues to deliver good results, mainly stemming from debt capital markets as well as equity broking. It's up from the fourth quarter, but down from the corresponding quarter in 2022. That was, however, a quarter with extraordinarily high activity, in particular related to M&A coming out from the pandemic. Asset Management and custodial services were down 3.2%. Asset under management is up 4.3% and with slightly offset by a 1 basis point reduction in commissions. We saw a continued positive inflow from retail customers in the first quarter, and we note that set in point too, that our customers remain committed to the savings schemes and actually increase their savings amount. Guarantee commissions is up 8.9%, reflecting a sound increase in demand for trade finance products in the Corporate Customer segment. Money transfer and banking services continues to increase, up 45.2% from the corresponding quarter last year. The positive development is driven by increased use of payments card but also a decrease in costs. Fees from sale of insurance product is down 2%, but a continued strong underlying performance. Operating expenses are down NOK 390 million, reflecting seasonally lower level compared to a high fourth quarter. The nominal expenses in the quarter are affected by nonrecurring items of approximately NOK 100 million related to an early termination of a lease agreement in Norway. The pension expenses are approximately NOK 70 million higher than normalized levels, reflecting higher return on the closed defined benefit scheme. The scheme is partly hedged, so you can therefore find a corresponding gain under net gains on financial instruments. Fixed salaries are overall stable and a smaller increase of NOK 8 million this quarter. Variable salaries and other personnel expenses, travel, training and marketing expenses are down by a total of GBP 363 million from a high level in the fourth quarter. The credit quality remains robust and well-diversified assessed in point to, with 99.2% of the portfolio in stage 1 and 2. We are continuously scrutinizing and stress testing the portfolio, but we have so far not seen signs of systematic risks in any segment or industry. For the personal customers, impairment provision was NOK 70 million. The personnel customer portfolio, as Kjerstin said, remains strong with no signs of deteriorated quality or increased impairments. Our customers continues to be in dialogue with us, but then mainly in relation to seeking advice on how to handle increased costs as well as increased interest rates. But we are not seeing any noticeable changes when it comes to installment holidays or increased impairment levels. For the corporate customers, we noted net reversals of NOK 149 million, mainly related to reversals and successful restructurings in offshore. We remain comfortable with our credit portfolio. But please bear in mind that losses will vary from quarter-to-quarter and the uncertainty in relation to customer-specific events has increased in light of the macroeconomic development we see around us. Now moving on to capital. Our capital position remains strong with a core Tier 1 capital ratio of 18.6%, up 30 basis points from the fourth quarter, driven by solid profit generation, partly offset by volume growth and FX effects. This gives a headroom of 160 basis points from the NFSA's long-term expectation. With the strong core Tier 1 capital ratio as well as profit generation, we remain committed to our dividend policy. The Annual General Assembly gave the Board of Directors and authorization on Tuesday to buy back shares up to 3.5% of outstanding shares. DNB has following this sent an application to the NFSA and await their approval. Summing up. Our key figures are affected by the implementation of IFRS 17, but setting this aside, we delivered a strong result in the first quarter, driven by high-quality income and good performance across product areas as well as customer segments. Cost income ratio came in at 34%, return on equity at 17.2%, and earnings per share was at 6.59%, an increase of 3.6% from the fourth quarter and 38.2% from the corresponding quarter last year. With that, I would like to thank you for your attention...

[Thomas Midteide, executive]

Thank you, Justin, and Ida. And as usual, we will open up for questions. If you have any questions online, you might type them in the form below this screen. We'll start with Jan Erik Gjerland on the side.

[Jan Gjerland, analyst]

Two questions from my side. The first one is on the buybacks application. How do you intend to implement your buybacks if and when you have been granted that 2.5% allowance. So why is it 50 basis points basis points a quarter? Or how do you think you should do it when and if you get that kind of approval? Secondly, on the growth side, do you expect the 3% to 4% growth to be mainly driven by corporates rather than households? Thank you.

[Kjerstin Braathen, executive]

I can answer the growth question. And again, reiterate that when we guide the 3% to 4%, it's on the group level, and we do focus on profitability over growth. And in view of our position, we are likely to grow in line with the market in Norway or slightly less. So then the question is how much will the Norwegian market grow? And the expectation for credit growth from DNB Markets, it's 3.7% for the year. So this is coming down somewhat, which is not unnatural in view of the market environment we are in. But we are very comfortable with the performance across the brands of DNB and Sbanken where we see that we are on a relative perspective, performing better. What we have said is that we are comfortable to flex more with the corporate banking portfolio, where we are also actively syndicating and distributing loans, and it may be that corporate will be a higher part of the growth equation for the year, but it will depend on the development as it moves forward. When it comes to share buybacks, this is, of course, also a question in terms of when we receive the approval from the NFSA. But we will continue using share buybacks, that's the flexibility tool that we've always done and will therefore expect it to be done in a conceptual way throughout the year.

[Thomas Midteide, executive]

Okay. Next up is [Indiscernible] on this side.

[Unknown Analyst]

Thank you, Thomas. Two questions. On the buybacks, again, we've seen these applications before. Normally, how long does it take to get the approval from the NFSA. Start with that.

[Kjerstin Braathen, executive]

It usually takes a few weeks, but we -- so we hope in line with historical time to be able to start towards the end of Q2.

[Unknown Analyst]

And then on funding, 2 quick questions on that side. First of all, on deposit to loans, there's a big difference between personal and corporate customers on the deposit to loan ratio. I think it's around 60% covered on the personal customer side. Do you have any parts on the specific segments or perhaps for the group as a whole? You have a very high level at the moment, but it's a huge, of course, focus area. And then secondly, on cover bonds, what is the current over -- over collateralization on that side? How much cover bonds do you have today compared to the mortgage book?

[Kjerstin Braathen, executive]

Ample room, but Ida can cover that in more detail. On the deposit side, we have a target for the group, which is a minimum of 60% deposit to loan ratio. And as you've seen, we are now surpassing that by a vast amount and are above 78% for the group. It's quite usual to have a higher coverage in corporate versus personal customers, but both of these have moved in a direction of a higher coverage than we had prior to the pandemic. We are not targeting a specific coverage per segment. personal customer deposits as well as SME deposits tend to have a more sticky nature. And of course, they very closely follow the customer relationships. The other corporate deposits, I think we can safely say that we do see a flight to quality. We are a AAA-rated bank. We are viewed as a very safe destination to be trusted with some of our customers' deposits and we have certain industries that have very high earnings at the moment, and this is also reflected in the numbers. On the large corporate side, we're very focused on accepting deposits only when they are beneficial to us also from a financial point of view. But they can vary somewhat more, but there has been a stable and consistent solidity in higher deposit or loan rates so far post-pandemic.

[Unknown Analyst]

Squeeze one in. Sorry, Thomas. But no, it's a difficult read, but Norwegian deposits at the moment, if you adjust for FX in the weak krona, is it growing?

[Kjerstin Braathen, executive]

2/3 of our deposit base is in Norwegian kroner. So I haven't got the split in terms of the -- what the FX effects. But still, it is increasing, yes. And on the funding side, we have approximately funding needs of NOK 65 million to NOK 75 billion in the year. We've done approximately 30 million already up until today. It's predominantly in senior nonpreferred. We are uncertain if we need to do any covered bonds. But if we were to, there are ample room, significant room in terms of that. So I don't have the number on top of my head, but it's ample, not something that we're concerned about. FX-adjusted deposits grew by 4.9% compared to last quarter and 10% compared to last year. So there's a solid growth also FX adjusted and very, very little foreign currency deposits in the personal customer part as well as the SME part where the most valuable deposits are placed.

[Thomas Midteide, executive]

Okay. Next question from Thomas Hansen, SEB and then Alex.

[Thomas Svendsen, analyst]

Yes, another question on share buybacks. So when trying to assess your sort of total buybacks -- buyback potential, how much weight should we put on the leverage ratio versus the CET1 ratio to sort of estimate what is the other cut capital level?

[Kjerstin Braathen, executive]

Well, if I start with the leverage ratio, we're at the leverage ratio of 6.5x today, and the requirement is 3. So there is ample headroom on the leverage ratio just there. On the CET ratio, we're at 18.6%, the long-term or expectation not a requirement. The expectation is 17%. If we look at that combined, there is ample room to buy back shares, and there is also availability in the funding market in terms of adding up in terms of AT1s or tiers, particularly in Tier 2, if that's something that we were interested in doing. So I don't see any constraints in that area, bearing in mind the strong solidity of the bank.

[Ida Lerner, executive]

And just to be very clear, we are aware that the FSA focus on the leverage ratio and what is called real solidity, but it is the core equity Tier 1, which is the restricting element that we are measured again and what should be focused on in order to assess the cushion towards the expected unrequired level.

[Thomas Svendsen, analyst]

Second question, just on number of employees. So it declined somewhat Q-over-Q. So should we expect this to continue throughout the year?

[Kjerstin Braathen, executive]

We -- as stated last quarter, we expect number of employees now to turn. It has been growing for a while. We now expect it to turn somewhat. We will not give a detailed estimate. So it's hard to be specific on a quarter-to-quarter adjustments. But as you have noted, there has been a shift towards a lower number. And I think we can say that end year it will be lower, but without being more specific than that

[Thomas Midteide, executive]

Thank you. Thomas, if you could send the microphone to Rose forward to Alexander Lager from Arctic

[Alexander Larstedt Lager, analyst]

Yes. Alexander Lager from Artic Asset Management. So you have an impressive deposit growth this quarter. But how do you expect this to develop going forward, both for personal customers and for corporates? And secondly, how many percent of your deposits now, both on the corporate side and the personal customer side are on sale interest rates on their deposits.

[Kjerstin Braathen, executive]

Thank you for your good questions, and it's difficult to be specific as to the future developments. As stated, we have a much higher deposit coverage now than we had prior to the pandemic. And of course, we're having discussions whether the stickiness of a longer-term higher deposit to loan level and at point expected it to normalize at a sooner point in time than it actually has done. So deposits have hold up also growing inflation and increasing prices in the market, there is a stabilization with a slight decrease this quarter, but we also see a positive flow from retail customers into savings products. So those combined actually continue to show growth. But the development more reflects the economy and the market development rather than a different competitive environment. I think that is important to point out. The mix of deposits on the personal customer side is that 75% is sitting in -- across the various savings accounts products that we have. We see that customers are more focused on what kind of accounts they have their deposits in leading to some shifts, but not that either in a material manner. Consumption is expected to hold up, but wage growth is expected to be quite decent as well. So we haven't changed our guidance or expectations in a way, and we don't foresee any material shift, but it will again depend on the economic development.

[Ida Lerner, executive]

In terms of how it's split on transaction account versus savings accounts. What we have said historically is that in personal customers, approximately 75% is on transactional accounts -- no savings account, sorry, 25% on transaction accounts.

[Thomas Midteide, executive]

Okay. Yes, we also have one question from Daniel Lererix by [Indiscernible], please.

[Unknown Analyst]

It seems like your loan loss provisions reflect a soft lending. And you assume a GDP growth of around 3% to 4% in 2024, 2025. But as you say, Kjerstin, the uncertainty is higher. Would you say that the uncertainty is reflected in our loan loss provision this quarter?

[Kjerstin Braathen, executive]

Yes. The full picture that we see currently is reflected in our fourth quarter number. This both takes in the expected macro outlook for the coming 3 years and the current state of the portfolio across the customer segments. Successful restructurings have led to reversals, as we've talked about, no material movements in terms of migration, no systematic patterns in terms of industries, even though we see that sales are developing slower in certain sectors compared to others. We've talked about retail and fast consumer goods as examples, but nothing that is impacting our portfolio as such. So I think our comments should be read for exactly what it is. We are in a higher inflationary environment. This is impacting people and companies in different ways. And just from a general perspective, this increases the risk of more company-specific situations arising, but there are none that we see that is not factored into the current view that is reflected in the accounts.

[Thomas Midteide, executive]

Okay. [Indiscernible], you have been following the question from our online views. So if you have any more questions on buybacks or anything, please go ahead.

[Unknown Executive]

Yes, we do. Many of these questions have been answered. So I'll ask the one that has not been. We have a question from Diego [Indiscernible]. In addition to reversals of offshore provisions, it appears that you have reversed in total of NOK 68 million on provisions for commercial real estate. Could you please give us some details on what's driving this and which improvements you see in this market?

[Kjerstin Braathen, executive]

Yes. On commercial real estate, first of all, it needs to be just repeated that in the fourth quarter, we took some additional reversals of reserves related to commercial real estate, retail industries as well as service industries. So that needs to be taken into account when you see what's happening this quarter. The main driver for the reversal small modest reversals I would like to add in commercial real estate is macro driven. And also the fact that we aren't seeing any negative signs in the portfolio because it's really that specific element if there are specific customers migrating negatively, that will have an impact. In addition to that, I just want to reiterate that our credit policy has been very clear in terms of focusing on cash flow strong owners and residual values. And so far, in the Norwegian market, we aren't seeing any negative trends there to speak of. And therefore, looking at the cash flow, as 40% of our commercial real estate portfolio relates to office and office premises, vacancy rates and rental prices are important. Rental prices are going up. Vacancy rates are going down still. So this is, of course, a positive element when looking at commercial real estate. And I also just want to remind you that 94% of our portfolio is in Norway.

[Unknown Executive]

Very good. Also a question from Christoffer Adams, Kepler Cheuvreux full corporate lending. How is lending growth split by liquidity lending and investment-driven lending.

[Kjerstin Braathen, executive]

Yes. Well, first of all, it's a very good question. The growth is not related to drawings on available credit facilities or liquidity facilities. These are new and also healthy lending, as I pointed to in terms of low-risk customers. That's the main driver for this. So -- and it's also across segments as well as geographies, and we see growth both in what we call future in tech, and we also see growth in the small- and medium-sized enterprises.

[Thomas Midteide, executive]

Okay. I think that concludes the Q&A session. But finally, a long career has come to an end, not in DNB, but in Dagens Naeringsliv. Press for photographer Elin Helen, you have had a fantastic area in DN, next time maybe in DNB. I think I've heard that we started in the first photos in DN was [Indiscernible] and the last will be [Indiscernible], so to step up. We have got a small talk in appreciation for your great job and all the photos we have taken of all the DNB managers. So good luck in your endeavors. Okay. We'll open up for individual interviews outside as usual. For the rest of you, have a fantastic day. Thank you for coming.