DNB Bank ASA

OSE:DNB

Earnings Call Transcript 2021-Q2

[Thomas Midteide, executive]

Good morning, ladies and gentlemen, and welcome to this second quarter presentation from DNB, both here in Bjørvika in Oslo and on live stream.

For many of you, I guess the highlight of this week was the Euro Cup final on Sunday. [Foreign Language], a good fight from the lines as well. Our highlight of this week is absolutely sharing the results of all our customer activities in the first half of a very exciting year, 2021.

Oslo is open again, and we are very happy to see many of you back here in DNB headquarters. Jan Erik, Vegard and Thomas, amongst others, very good to see you back here in DNB. Even if you're watching, you can absolutely send us your questions, use the form below this picture and we'll get back to you in the Q&A session.

As usual, Kjerstin and Ottar will take you through the details and the numbers. Kjerstin, the stage is yours.

[Kjerstin Braathen, executive]

Thank you very much, Thomas, and a very good morning to all of you, and welcome to this second quarter presentation.

Second quarter has indeed been a very active quarter in the Norwegian economy and in the business environment, and optimism is on the rise. We have seen an increasing number of vaccinations. We have seen the local societies that were in lockdown gradually opened, and it gives a strong sense of a movement towards normality. Activity that were high across many sectors already have continued to increase, and we've seen a pickup of activity in other areas.

However, most of our teams still works from home, and we find ourselves talking more and more about the future work without actually knowing. I don't think anybody knows how it will when we return into what's going to be the new normal. But I do have a strong sense that the majority of the team really longs to what we are able to enjoy somewhat here today, having more people in the rooms, seeing actual live people and getting that energy and motivation from interacting also physically. So in the view of that and given more now than 15 months working remotely, I must say that I'm tremendously proud and grateful to the team for their relentless efforts that they put in every day to create value for our customers as well as our owners.

The numbers tell a very representative story this quarter about the activity: a net profit of NOK 6.4 billion for the quarter and a return on equity of 11.1%, representing a strong performance and solid results across the group. This quarter, we see growth in all areas, both on the lending side and on deposits. Personal customers, large corporates and SMEs with the latter growing the most with a growth in the quarter of 3.4%. NII is up 1.9% compared to the previous quarter.

Looking at the remainder of the revenue this quarter, it's a high quality mix, and we have an all-time-high revenue in commission and fees. Here, comparing mostly with the second quarter last year, we see a growth in all areas and, in particular, most strongly driven by investment banking and asset management as the 2 areas that grows the most.

Costs are somewhat up, reflecting a higher activity in the quarter. And there are a positive development on quality of the portfolio as well as resolving restructuring situations with customers, leading to impairment reversals this quarter, furthering strengthening the results. So positively impacted from close to all of the lines in the accounts, we have an earnings per share of NOK 4.01 per share, which is up by more than 30% compared to the same quarter last year.

We continue to build capital from the business, and our capital position is robust with a core equity Tier 1 ratio of 19.1%, strengthening our ability to continue to reinvest in the business through growth, but also to deliver on our dividend policy.

The Norwegian economy is performing well. Activity continues to pick up. The Norwegian Central Bank estimates that already the next quarter, we will be back at growth levels at the same level that we saw before the pandemic. Growth for this year is expected to come in at 3.7% GDP and 3.5% next year.

No doubt, we have seen the economy benefit from the stabilizers we've talked about so often, having a separate currency, having individually set interest rates as well as a very strong fiscal position. This has enabled monetary policy initiative as well as fiscal policy initiatives that have been beneficial to the economy in recovery. So the current situation and the positive outlook leads to a scenario with likely raising key policy rates. And the Central Bank has indicated that the hikes are likely to start with the first one being done in September this year.

As you can see from one of the illustrations, the outlook has continued to improve on each [ admission ] of new scenarios, the latter being made in June this year. So in addition to the expected September hike, we expect an additional 4 rate hikes towards the end of 2022 and, overall, up to 7 rate hikes towards the end of 2024.

Unemployment is very important for the economic activity in Norway, and we are approaching already unemployment levels that are close to pre-pandemic levels, with the latest measure being done at 2.9% with a further expectation to decrease. And it's important for us to get all people back to work.

I said initially that we're closing in on a situation that feels like normalcy, but we should be aware that we are not fully out of the pandemic yet, but it is encouraging to see the accelerating vaccinations in Norway, now with more than 55% of the population being partly or fully vaccinated. And we've talked about the trust level in the Norwegian society, and the estimate now is that more than 90% will accept and actually carry through on the vaccination against COVID, which protects against future potential waves.

I thought I'd update you on a couple of strategic initiatives that we have ongoing and that you may know about. In relation to the proposed acquisition of Sbanken, we now have, if we add up with the shares that we own, an acceptance of our offer for more than 90% of the shares, which puts us in a position where we can buy the remainder also number of shares given regulatory approval.

We have, this quarter, received an approval from the Ministry of Finance upon a positive advice from the FSA. The competition authorities have decided to move on to a so-called Phase 2 in their process. But it is important to point out that they have put mortgages on the side and are now looking at the savings and the fund part of the business and an expectation for a decision from the competition authorities is received during the third quarter.

On the payment side, a couple of weeks ago, Vipps announced their agreement to merge with MobilePay and Pivo. And we have seen an accelerating trend in both online shopping and mobile payments during the pandemic. So we are excited upon the opportunities for Vipps to combine their activity together with the players in Denmark and Finland.

The payments market is not local. It is European or even global, as we see that here, it's really the large tech companies that are challenging the established players. Scale is important, and strengthening the strategic platform is important. And with this transaction, there will be a close to tripling of number of users of the wallet service with 11 million people and 330,000 customers attached to the joint platform. This transaction is also pending regulatory approval.

We have worked on sustainability for many years, and it's important for us that we work on this as an integrated part of our business. Sustainability spreads across many themes. But the area where we have updated our strategic initiatives and our ambitions this quarter is related to the transition to a greener and more sustainable economy. We have several roles in the transition, and we are proactively targeting to impact the economy in the right direction.

We will finance the growth of new business areas as well as scaling, for example, renewable energy. And we will also help clients to finance the transition and have set targets for a reduction on the indirect impact of our client portfolio in several areas by 2030. And in aggregate, we have said that we will either finance or structure or advice on financing up to NOK 1,500 billion worth of sustainable financing until 2030.

Thirdly, we are proactively working to increase the investments across sustainable investment alternatives and have said that we will grow investments from our customers into sustainable products by NOK 100 billion up until 2030. The transition is important, and we have stated very clearly that our role -- our primary role is to impact more than exit. We actively engage with our customers on sustainability and finance both the transition as well as the growth in new areas.

It's been a very active quarter in the personal customer area with an improvement in pretax operating profit by more than 20% compared to the previous quarter. A strong growth in lending also this quarter, 1.4%, but maybe even more interesting is the 12-months growth that we've seen of 4.2% with also stable underlying margins. This is a strong performance by the team in what is, as always, a competitive market.

Deposits continue to grow also in the quarter, and we see a 10% growth in revenue compared to the previous quarter overall because, in addition to interest income, we are pleased to see that our customers are increasingly using our services in other areas. And I'd like to highlight a few: real estate brokerage, 14% increase compared to the same quarter last year, a very active housing market with many buying either their first new home or moving in to a new apartment or house.

On the insurance side, we are picking up speed. It has been an important job in integrating our activities with Fremtind, our joint venture company with the savings bank, where we are now over to one common system. We have readjusted the portfolio. And we now see that increasingly putting our efforts into sales are yielding results with on the non-life side and improvement in results of 47% compared to the same quarter last year.

Lastly, we've talked about savings, and we continue to see a strong trend on the savings side, as you can see from the illustration with a 2-year history. A compound annual growth rate of 12%, way above GDP, as we've talked about, in particular, highlighting the increased interest and activity for most people to actually also save in fund products where the volumes are up close to 50% compared to the same period last year.

Quality of the portfolio is robust. We continue to see a decrease in the nonperforming volumes even on the unsecured side. And also in personal customers, we have reversals during the quarter, supporting the results we deliver this period. All in all, a very strong performance, I'd say, by the team and across the group.

On to the corporate customer, where you also can see a strong pickup in pretax profits, both from the period last year as well as from previous quarter, where there's an improvement of close to 17% in pretax profit. Also here, we see a solid growth in the quarter, 2.7% on the lending side and, again, the SME growing the fastest. Deposits continue to grow, and it's important to point out that the majority of the growth volumes this quarter comes in towards the end of the quarter, giving a tailwind of volumes into the third quarter.

A very high level of customer activity and, in particular, in capital markets has led to an all-time-high quarter in relation to revenue from our investment banking activity. But I'd like to highlight that we, in addition to having an active market, see that our strategy of originate to distribute to work together across corporate banking and our investment banking activity gives better and better results. And there is a diversified mix of the revenue across geographies and across sectors, and we are pleased to see the development in this area.

Quality of the portfolio is robust, and we also continue to work on a few restructuring situations that we have ongoing since the pandemic, with several of them being resolved this quarter, leading to a material reversal of impairments, further supporting the results in large corporates this quarter. So after a tougher couple of quarters during the pandemic, we are now very pleased to see a total area of corporate banking returning more than 17% on the allocated capital.

And with that, I will leave the floor to our CFO, Ottar, for further details.

[Ottar Ertzeid, executive]

Thank you, Kjerstin. I will start by the balance sheet development. Loan growth for personal customers in the quarter increased by 1.4% and with 4.2% the last 12 months. As expected, loan growth for corporate customers picked up with an increase of 2.7% in the quarter. The high loan growth for SMEs continued with 3.4%, while large corporate loan growth increased to 2.1%. Total loan growth for the quarter was thus 2% or 1.7% adjusted for FX.

The growth was particularly high towards the end of the quarter, as the CEO mentioned, and the quarter-end loan volume was thus 1.2% higher than the average volume for the quarter, giving positive momentum into the third quarter. We continue to expect around 3% to 4% annual total loan growth going forward.

The healthy growth in deposits continued in the second quarter with more than 5% for personal customers, more than 3% for corporate customers and more than 4% in total. The deposit-to-loan ratio does strengthen further to 72.6%, 5 percentage points more than at year-end. The strong development for deposits from personal customers and SMEs will be increasingly valuable with the forecasted policy rate hikes by the Norwegian Central Bank from September of this year.

And now on to margin development. Underlying margin development was stable in the quarter. Higher growth for deposits than loans had a negative mix effect of 2 basis points on net interest margin and volume-weighted combined spreads. Spreads on lending and deposits are also impacted by the 19 basis points average reduction in LIBOR money market rate compared to the first quarter, increasing lending spreads and reducing deposit spreads. The bank has close to 0 net exposure towards NIBOR as the NIBOR effect on customer spreads is largely offset by the effect on interest on equity.

Moving on to net interest income. Net interest income increased NOK 179 million in the quarter or 1.9%. 1 additional interest rate day contributed NOK 88 million. The effects of lower money market rates and spreads were close to 0. The higher average loan and deposit volumes increased NII by NOK 63 million, while lower funding costs increased NII by NOK 32 million, reflecting our attractive funding terms and increased deposit-to-loan ratio.

Next, take a look at commission and fees. Commission and fees show seasonal fluctuations. Commission and fees were all-time high in the second quarter, increasing 10% from the previous quarter and 20% from the same quarter last year. Real estate broking fees increased 14% from the same quarter last year, reflecting the strong real estate market. Investment banking fees were up 56% from the same quarter last year. The positive development reflects solid performance across industries, geographies and products with particularly strong performance within equity capital markets this quarter.

Asset management and custody fees increased 25%, lifted by both positive net inflow and all-time-high assets under management. Money transfer and banking services are still impacted by COVID restrictions on international traveling, particularly the profitable international use of cards and currency ATM withdrawals. Nevertheless, fees were up 6% year-over-year. Fees from the sale of insurance products increased 8%, approximately evenly split between pension and nonlife insurance.

We are particularly pleased with the healthy growth in nonlife insurance. In the third and the fourth quarter of this year, we expect an approximate NOK 25 million, a quarterly negative fee effect from the new own pension account scheme. Going forward, we expect this to be compensated by volume growth and improved pricing for risk products. Overall, commission and fees have developed more positively than expected with strong development within all the 4 largest product areas.

Let's move on to costs. Operating expenses in the second quarter reflect increased activity resulting in higher personnel and IT expenses. Pension expenses increased NOK 79 million, mainly due to positive return on the compensation scheme related to the closed defined benefit plan. This effect has been hedged, and the corresponding gain of NOK 67 million is recognized in gains on financial instruments. The all-time-high commission and fee-based activity in investment banking, asset management and real estate broking contributed to a NOK 70 million increase in variable pay.

Operating expenses include a restructuring expense of NOK 37 million relating to our withdrawal from Poland, NOK 45 million less than in the first quarter. The only remaining COVID effect on costs is approximately NOK 25 million lower quarterly expenses than normal from traveling expenses. Both wage and headline inflation in Norway is running at around 3%. This is the flip side of operating in an economy doing well. However, we remain firmly committed to achieve a cost/income ratio below 40%.

And now asset quality. In the second quarter, there were NOK 833 million in net reversals of impairment provisions, NOK 304 million from Stage 2 and NOK 520 million in Stage 3, reflecting improved credit quality. For personal customers, net reversals totaled NOK 39 million due to Stage 1 and 2, reflecting a slightly better macro and a high-quality portfolio. The decrease in nonperforming consumer finance loans continued, as the CEO mentioned. For corporate customers, we saw net reversals of NOK 794 million. The reversals in Stage 1 and 2 mainly reflect improved credit quality in Stage 2. The Stage 3 reversals are driven by some customer-specific situations.

Offshore now constitutes only 1.2% of our exposure, down from 1.7% a year ago, but remains the most challenging segment. Provisions in oil, gas and offshore increased NOK 26 million in the quarter due to increased provisions in Stage 3 in the offshore segment. In total, there was a reduction in exposures in both Stage 2 and Stage 3. We reiterate that the overall portfolio is robust and well diversified. But as mentioned before, please bear in mind that losses will vary from quarter to quarter.

Moving on to capital. The healthy capital generation continued this quarter, and 50% of profits added 31 basis points to capital. The higher lending growth, particularly for corporate customers, increased the risk exposure amount by 40 basis points. The capital ratio thus came in at 19.1%, 10 basis points less than in the previous quarter. However, the capital requirement and expectation also declined by 10 basis points due to less effect from the Pillar 2 requirement, nominal floor of NOK 19.4 billion, and also 2 basis points from lower systemic risk buffer requirement. The capital headroom above the supervisory expectation is thus at the same all-time-high 320 basis points as in the previous quarter.

The Ministry of Finance has increased the countercyclical buffer requirement with 50 basis points from June next year. And the Norwegian Central Bank has stated that it expects to give advice to increase this buffer requirement again to the maximum 2.5% level seen before the pandemic. In our capital planning, we have assumed full Norwegian countercyclical buffer requirement and thus a capital expectation of 17.1%. The current 200 basis point headroom above this 17.1% provides ample headroom for our cash offer for Sbanken, which initially is expected to reduce the capital ratio by approximately 120 basis points.

In June, the Norwegian FSA published a circular regarding internal rating-based models. We do not expect this to impact the capital ratio currently. Our loan-to-value for [ modules ] is below the threshold for higher risk weighting. The Pillar 2 requirement and guidance from 2019 were kept unchanged last year due to the pandemic. In the second half of this year, we expect an ordinary supervisory review and evaluation process with effect from year-end.

The leverage ratio decreased by 20 basis points to 6.7% due to increased deposits with Central Banks and remains well above Nordic peers and the supervisory expectation of more than 6%. Excluding exposures to Central Banks, the leverage ratio is 8.2%, as it would have been reported by U.S. and European Union banks. We are confident that our solid capital position will make it possible to fully deliver on our dividend policy.

To sum up the quarter, operating performance was strong with healthy growth in loans, deposits and net interest income. The quarter was particularly strong for commission and fees and impairments. Return on equity came in at 11.1%. The Annual General Meeting in April authorized the Board of Directors to pay out 2020 dividends of up to NOK 9 per share in the fourth quarter. If the 2020 dividend had been paid in the second quarter as normal, return on equity would have been 35 basis points higher.

The cost/income ratio was 44.4%. Excluding the negative NOK 153 million mark-to-market effects from basis swaps and additional Tier 1 capital, the cost/income ratio was 43.9%. And if one excludes also the hedged pension cost and the restructuring cost in Poland, we are down to 43.3%. Earnings per share came in at NOK 4.01, an increase of 31% from the same quarter last year. The forecasted rate hikes by the Central Bank and the cash offer from -- for Sbanken are both expected to be accretive for return on equity, cost/income and earnings per share.

Thank you for the attention.

[Thomas Midteide, executive]

Okay. So we'll open up for questions, both from the audience live here in Oslo and the ones following us on live stream.

[Thomas Midteide, executive]

We'll start with Jan Erik Gjerland. We have a runner. So if you could wait for the microphone, we are very much happy to get your question. And second up is Vegard.

[Jan Gjerland, analyst]

Jan Erik Gjerland from ABG. Congratulations with Sbanken. A fantastic acquisition if you can get it done. So how can you mitigate the fund market savings issues with the competitive authorities? That's my first question.

[Kjerstin Braathen, executive]

I think now we are -- I think what the competition authorities have said is that they focus on the traditional banking activity and mortgages in the first phase. Now the second phase is to go into fund and savings and distribution. So our aim is still to work with them to give clarity on that situation in order to get approval, and that's what we are targeting now. So we're not currently discussing other alternatives.

[Jan Gjerland, analyst]

But what can you then do to get that actually done? How could you -- are you just sharing the market share issues? Or how could you actually make them happy, so to speak, at the end of the day? Could you shed some light to that?

[Kjerstin Braathen, executive]

I think you would have to ask them about it. I think they are asking a lot of players in the market, gathering a lot of information on this, which is a different market topic, a market with a high level of dynamism and tremendous growth recently and expected going forward. But for further questions, I'd have to refer you to them.

[Jan Gjerland, analyst]

Okay. Is this a deal-breaker, in your view, if this should not be good enough for DNB?

[Kjerstin Braathen, executive]

I think what we are commenting now is that we're aiming to shed light on this part of the transaction and aim to carry it through, as previously communicated.

[Jan Gjerland, analyst]

Okay. Then back to the quarter then. Your margin in the personal business looks to be up 15 basis points, but NIBOR is up 19. So could you shed some light into those 5 basis points change in margins on the personal side, probably mortgages?

[Kjerstin Braathen, executive]

The main driver for the development is, as the CFO clearly stated, the movement in the money market rate that impacts both the lending and the deposit rates. Overall, we are saying that margins are roughly stable, and you also see that on the volume-weighted margins. We are not specifically commenting beyond that, but underlying margins are roughly stable.

[Jan Gjerland, analyst]

And on the corporate side, it looks like you have a improved margin as well. Is corporate borrowing at better rates these days? Or is it sort of flat?

[Kjerstin Braathen, executive]

I wouldn't say that there are big shifts in trends other than that there is a high activity in the corporate market, driven by the Q2 key trends of digitization, investments in technology and investments across sustainability. And beyond that, it's more a factor of the transaction mix and the development of the various sectors in the portfolio. But the margins have shown a solid development. It is competitive. But we are also, as I previously mentioned, working hard to increase the pace of turnover and working on the duration of the portfolio, and we're managing to then uphold the margins in the portfolio. But there are no bigger shifts. It's a competitive market, but we're managing to keep margins up.

[Jan Gjerland, analyst]

Can I have one more, Thomas?

[Thomas Midteide, executive]

That's the final one, yes?

[Jan Gjerland, analyst]

Yes. The loan loss provision on the write-back side, how much more of pandemic loan losses do you have in your portfolio? So what should we expect in the year to come?

[Kjerstin Braathen, executive]

I think we will start again by saying that losses will vary from quarter-to-quarter. The majority of the reversals this quarter are related to a resolvement of company-specific situations in Stage 3 across sectors. There are some reversals also in Stage 2 relating to an improved credit quality as well as certain macro development. The majority of our reserves on the book is still related to offshore, which is the most challenging sector. Again, we reiterate that even though there are some more investor appetite from capital markets, that market is -- still has a way to go before it's in balance. Beyond that, I think we will see, as long as the economy continues to develop positively, that is positive.

[Thomas Midteide, executive]

Thank you, Jan Erik. Next up, Vegard Toverud, Pareto Securities, with a maximum of 10 questions in this round.

[Vegard Toverud, analyst]

I actually have only 5, but you have to stop me. On the corporate growth side, it seems like all the growth is coming on the standard model and that the IRB volumes are flattish. Is it possible to give some details into that, if that's the correct observation or if there are different moving parts? That's the first question.

[Kjerstin Braathen, executive]

It is correct that the growth this quarter is capital intensive. That doesn't mean necessarily that, that is representative for the growth across the year. It depend -- it will depend on which area the growth comes in. There could also be certain volumes that will be booked on standard and converted over to IRB with time. But we continue to state an expected growth of 3% to 4% for the group, highest growth expected in SME and personal customers and then large corporates to sort of sum up to the expected level.

[Vegard Toverud, analyst]

But is there any special developments during the quarter that drives this distribution of corporate loan growth?

[Kjerstin Braathen, executive]

Not particular that we would highlight. Again, we have parts of our volume on standard models. So it's really the mix of the growth this quarter, but no trends or expectations of future development that we would like to highlight in relation to that development, no.

[Vegard Toverud, analyst]

Okay. And just continuing a little on Jan Erik's question there. Are there any current processes that you expect to get resolved for companies in Stage 3 during the remainder of the year?

[Kjerstin Braathen, executive]

I think we'll reiterate what we have said previously, the majority of the reserves that we have in Stage 3 are related to offshore, and we are being cautious about the outlook in offshore. It is positive that the economy continues to develop well. Beyond that, losses will vary from quarter-to-quarter. I think that's what we can say.

[Vegard Toverud, analyst]

Okay. And if I understood you correctly, you expect no impact from the circular on the IRB models. Why is that?

[Ottar Ertzeid, executive]

The loan-to-value in the mortgage portfolio is below -- is slightly below 56%. And at that level, the new reference model for -- in that circle has no impact on increasing the risk weights above what we already have. So that's one big difference compared to what we have seen, at least one competitor report so far, the loan-to-value in the portfolio.

[Vegard Toverud, analyst]

And on the corporate side?

[Ottar Ertzeid, executive]

On the corporate side, the FSA has stated that this is something they might take into account in the supervisory review and evaluation process with regard to Pillar 2 requirements.

[Vegard Toverud, analyst]

So just to check if I understand you correctly, the circular could give then higher risk weights on the corporate side. Would you expect that to be compensated with the lower Pillar 2 requirements?

[Ottar Ertzeid, executive]

We just say that there is an annual supervisory review and evaluation process every year, and the outcome of that is yet to be seen with regard to our Pillar 2 requirement. With regard to the M factor, we believe that we are operating in line with European Union guidelines.

[Thomas Midteide, executive]

Thomas Svendsen, SEB, got a question as well.

[Thomas Svendsen, analyst]

First, a question on costs. I think you said at the Capital Markets Day, you had this target of gross reduction of costs of, I think, it was midpoint, 7.5% for the 2 years, '21 and '22. Could you just give an update how this work has progressed during the pandemic and if there are any delays or if everything is according to plans?

[Ottar Ertzeid, executive]

With regard to the 2020 delivery, we delivered in line or slightly above the expectations as we reported in February at our extended fourth quarter presentation. And then we have further ambitions for '21 and '22. These ambitions are unchanged. And at the same time, we report higher activity this quarter, particularly related to the fee-based activity, for example, in real estate broking, investment banking and asset, management, which come on top of that.

[Thomas Svendsen, analyst]

Okay. And a question on capital. I know that you take Sbanken on board. Is it fair to think that the purchase price or the proceeds sort of eat up some of the share -- potential share buyback potential for 2021 and '22? Or should we think that you could get both the capital charge on Sbanken and the share buyback we thought you should do before we knew about Sbanken?

[Kjerstin Braathen, executive]

We aren't specifically targeting share buybacks. Again, I would like to refer to our dividend policy that we stay very firmly committed to where we will pay out a minimum 50% cash payment as dividend and then we optimize using share buyback without targeting a specific amount. But again, I would like to refer back to the description of the capital situation that our CFO gave with a record-high headroom towards the required level. So we're very confident with our capital situation.

[Thomas Svendsen, analyst]

Okay. And final question to your new or green growth prospects. So should we think margins will go down on the new green initiatives since there will be a lot of people wanting to do the same as you, but volumes may go up and there may be more loan losses on the brown part of the portfolio? Or how should we think -- should we think it's net positive, negative or neutral? And what is your profitability target?

[Kjerstin Braathen, executive]

I think overall, the trend towards a more sustainable economy offers a lot of opportunities to the Norwegian business community and to the sectors that we are involved in internationally and triggers a lot of investment need into both mature and less mature sectors. It's important to say that our principle of growing profitably remains regardless whether it sort of falls under the renewable category or not. And we are targeting a combination of lending and arranging, thus indicating and also raising capital in the capital markets.

So we are not changing our growth guiding for the coming years. We're still looking at 3% to 4% on our own book, and we are not sort of specifically guiding margin-wise either. But we will do this business as long as it's profitable and accretive to our earnings and profits.

[Thomas Midteide, executive]

Okay. For the sake of logistics, the final question from Jan Erik.

[Jan Gjerland, analyst]

What is your CET target, so to speak, long term? If you should think about on -- back to Thomas' question about buybacks and your level of capital, is it close to 17.1%? Is it 100 basis points above? Or is it current level?

[Ottar Ertzeid, executive]

As stated, we take into account expected the full countercyclical buffer requirement in Norway, which we believe we will have in 2023, perhaps early 2023. And currently, that implies a supervisory expectation of 17.1%. In ordinary circumstances, we would like to operate with some headroom above that to take into account FX fluctuations, mark-to-market situations, but also look to any future expected changes in regulatory requirements. For example, the banking package coming up now, that is -- aspects like that, we will take into account. But we need, under normal circumstances, some headroom above 17.1%, but we have not stated a specific number.

[Jan Gjerland, analyst]

Okay. So that's the sort of the management buffer of 100 basis points you're sort of pointing to them?

[Ottar Ertzeid, executive]

No, we have not stated 100 basis points. We have stated that we are operating presently with that too high level but, at the same time, stating that we plan to some -- spend some of that, for example, on the Sbanken acquisition.

[Jan Gjerland, analyst]

Then back to the cost and the CMD. The full-time employee seems to tick up again, not that much, but up rather than down. How could you reduce cost with increasing FTEs and 3% wage growth in Norway?

[Ottar Ertzeid, executive]

We have a consistent policy of trying to change the IT consultants to full-time employees instead as we believe that technology is becoming a more important part of our business, and we'd like to have technology staff integrated with the business areas. That strategy we have followed now for 1.5 years, and this is something we're also striving for going forward.

[Kjerstin Braathen, executive]

I would like to add that it is important to reemphasize that return on equity is our most important target, and the cost/income is supporting our ability to deliver on that very important support. We need to run an efficient operation, and we think that we do in all relative and nominal terms. But we are also investing in the areas that generate an above 12% return and other areas for the future. So we do invest into capital-light areas with the result that you see a very high revenue in commission and fees.

And we also make investments on the technology side. IT is a little bit up this quarter as well as compliance. But we do remain committed to our targeted ambition on cost with cost being below 40% of the revenue, and we do believe that's achievable towards the end of 2023.

[Jan Gjerland, analyst]

Okay. Just 2 final then this time around. The pipeline in the Investment Banking Division, how does that look? And what is the valuation of Vipps from your end into the merger?

[Kjerstin Braathen, executive]

We have not given specific details on valuation of the parts in the merger. I'd state, however, that we -- one of the reasons why we think this is particularly interesting or one of the signs that the payment market has a lot of potential and is interesting is looking at how valuation are developing for other comparable companies.

But what we can say is that the Norwegian owners currently owning Vipps will own 65% of the new company. And again, I should highlight that it's only the mobile wallet part of the company that will be merged together with the Finnish and Danish activities, and the ID and national payment scheme will be separated out in an individual company. But 65% is what will be owned by the current Vipps owners, and DNB will be the largest single shareholder in the company.

I didn't catch the question on IBD. Maybe you can...

[Jan Gjerland, analyst]

The pipeline.

[Ottar Ertzeid, executive]

Pipeline going forward.

[Kjerstin Braathen, executive]

I think to start, it's important to say that the IBD activity is impacted by the activity in the market, and that can vary from quarter-to-quarter. But we still see a healthy pipeline ahead, and activity seems to hold up for now.

[Thomas Midteide, executive]

So the sanitized microphone is back to Vegard, and then we have a few online questions from Rune Helland.

[Vegard Toverud, analyst]

The impact from the Sbanken transaction is now adjusted to 120 basis points from kind of before. I have not done the numbers, but it seems that the change is rather high compared to the change in the offer. Is there anything else going on there?

[Ottar Ertzeid, executive]

We have previously stated around 1 percentage point and implying in that somewhat more initially and then you have the next -- the positive effects of converting that portfolio to internal rating-based model, which will reduce it slightly below 1 percentage point. Now we'll try to be more precise, that there is a time line here with initially the full effect and only later the positive effects from that. The final number will depend on the balance sheet at the time the transaction is concluded and also the year-to-date profits for Sbanken. So this is our first quarter estimate at closing.

[Vegard Toverud, analyst]

And then just lastly, Kjerstin, you mentioned that the nonlife sales were picking up. What does that mean in terms of sales or market shares? Or is it possible to give some more details into what this actually mean?

[Kjerstin Braathen, executive]

I think what we can say, I mean, this is a company that we own 35% of that will eventually also report their results as long as our -- along with our joint venture partners. But what we see on our end is a strong pickup in sales. We have spent a lot of focus and energy on integrating, working on dual systems. Now all of the customer portfolio is onto a single system, freeing up a lot of time for sales. And we have also repositioned part of the portfolio with adjusting pricing and profitability levels.

So if you look at the pure sales and the commissions related to those sales in second quarter this year compared to second quarter last year, we're talking close to a 50% increase, 47% increase. So that is a part of the increase, approximately half of the increase that you see in the insurance category as such in the fee and commission.

I think it's too soon to say anything on the development of the market share to Fremtind as such. But we are optimistic towards the opportunities in this market going forward, still have a low penetration on our customers and see a very attractive conversion rate on the number of offers we're sending out, and we are sending out an increasing number of offers.

[Vegard Toverud, analyst]

Do you get traction also on the corporate side?

[Kjerstin Braathen, executive]

We are getting traction on the corporate side. We have high ambitions, but it's important to point out that we are coming from very low levels in this area.

[Thomas Midteide, executive]

Rune Helland?

[Rune Helland, executive]

Yes, I think you have answered most of the questions that we have here. There is maybe one more question from Joakim Svingen from Arctic and that is, when do you expect to say more about synergies and nonrecurring costs from the acquisition of Sbanken?

[Ottar Ertzeid, executive]

I think we will work together with the Sbanken organization on how to merge the 2 banks into the best possible solutions for the customers of the 2 banks. And only thereafter, we'll work with more information on the financial implications of that.

[Kjerstin Braathen, executive]

But I'd like to add that we remain very excited about the opportunity and increasingly see this as interesting as we saw initially.

[Thomas Midteide, executive]

Okay. There will be more possibilities to ask questions during the investor call later this afternoon.

We have been very happy to see you today, both online and here in the audience, and we wish you a spread-free sheet holiday later on, and have a fantastic summer. Thank you from the entire DNB team.

[Kjerstin Braathen, executive]

Thank you.

[Ottar Ertzeid, executive]

Thank you.