DNB Bank ASA

OSE:DNB

Earnings Call Transcript 2023-Q2

[Rune Helland, executive]

Good morning, and sorry about the slight delay, but very -- welcome to DNB's quarterly live presentation here from Oslo. Also, a warm welcome to all of you following us online. Kjerstin and Ida will take us through the results and the number generated by the whole DNB team through high customer activities during the quarter. In about 30 minutes, we will have a Q&A, followed by an individual interview with media. But first of all, please Kjerstin.

[Kjerstin Braathen, executive]

Thank you, Rune, and a very warm welcome to all of you and the presentation of our second quarter results this year. In a somewhat turbulent world, our numbers that we present continue to reflect a resilient and robust Norwegian economy and a very strong performance from the team. We do acknowledge that the level of uncertainty in general is higher than normal, but the second quarter that we are now closing the book on, they bear witness of high activity through the quarter, healthy and profitable growth and a robust and diversified portfolio across the group.

The profit for the quarter is NOK 9.5 billion and return on equity for the quarter, 15.6%, which is well above our targeted minimum level of 13%. And as you can see, the rolling return on equity continues to increase this quarter as well to 15.9%. These strong results are driven by quality earnings across the group. NII grew by 4.3% from the first quarter, driven by lending growth across all segments and higher rates. Net commission and fees, there is an all-time high quarter, this second quarter with a strong performance across the fee platform, also demonstrating our hard efforts to grow our fee income faster than our volumes. We take reserves as impairment provisions this quarter of NOK 871 million. 75% of this or NOK 653 million is related to a legacy portfolio in Poland, which has been in runoff since 2012.

Beyond, we continue to see a well-diversified and robust portfolio with 99.2% of our exposures in Stage 1 and 2. We continue to build capital through attractive earnings during the quarter, and our core equity is now at 18.9%, a very comfortable 180 basis points headroom towards the expected and required level by the FSA. Earnings per share, up 18.1%, NOK 5.93 per share for the quarter and close to 30% increase if we compare the first half this year compared to first half last year, which provides a very sound platform to deliver on our dividend policy. We continue to await approval from the FSA on our applications to buy back shares and intend to initiate a program once we receive this. Now taking a look at the economy in general. As mentioned, the general uncertainty is higher than normal after several years with higher inflation and increasing rates. Even so, the Norwegian economy continues to grow, however, at a somewhat slower pace this quarter compared to the previous one as expected. We do expect growth to come in around 1.2% this year with increased investments in sectors such as oil and gas and a lesser growth in pulse from other sectors such as construction and building.

Inflation continues to persist above the targeted level, and the Central Bank has raised policy rates on 2 occasions this quarter with an aggregate effect of 75 basis points. The key policy rate is now at 3.71% -- 3.75%, expected to continue to increase and top out at 4.25% before staying there for a while and thereafter reducing towards more or less the level that we see today. Inflation is expected to peak this year before stabilizing and reducing towards the second half of the year and continue next year.

If we take a closer look at the Norwegian household, they are in average robust and in good financial health. Employment and ability to service debt remain key in every country, but in particular, in a country where most people actually own their own home and we have dominantly floating rates, which enables a rapid pass-through of monetary policy. So on the illustration, we show you how much of their disposable income, people in general, used to service debt.

There is a strong tradition to amortize debt in Norway. And if we look at the interest burden only, you will see that this has doubled compared to the 0 interest environment we had during the pandemic to 8.5% of disposable income being spent on interest rate payments. However, if we look at the aggregate of installments and interest payments, the growth is much less. People in general use 15.9% of their disposable income to service debt. This is anticipated to grow to 16.5%, with the additional expected hike in rates, still a modest level in general of their revenue in total.

Again, as we've mentioned before, the most important factor for financial stability and social wealth is that people have a job, and we continue to see a very robust employment market in Norway. Unemployment is at 1.8%, which is very low. We do expect it to increase somewhat, but topping out at 2.4%, which is low both in a historical and geographical context. Development of disposable income, another key factor. We do expect a slight reduction this year after wage inflation is expected to come in at 5.5%, but as from next year, the market in general expects disposable income, again, on an average basis to continue to grow, increasing affordability for population before interest rate payments.

As usual, I would like to share a couple of highlights on the main customer segments. It is a solid quarter for the personal customer area and we continue to be motivated by the fact that customers continue to choose us as their bank. We see this demonstrated by a growth both on the lending side and on the deposit side. Lending and personal customers grew by 0.5 percentage points this quarter, past 12 months growth of 3.2%. This quarter alone, we see a growth of 3.7% in deposits, a seasonably strong quarter due to holiday payments that we have in the Norwegian market. NII, however, is down by 0.8%, impacted by increase in policy rates and money market rates, as mentioned, and lag effects. This slight decrease is more than compensated for by activity-related income in other areas.

And within these activities, there are 2 areas I would like to highlight: retail brokerage, which is lower than last year, but still DNB, our brokerage arm, is performing relatively better and taking market share in the quarter, and also attractive income from assets under management or what we call savings. In general, people save a lesser portion of their income, which is to be expected in a market like we have today, but we continue to see an increase in number of savings agreements and those who have entered into savings agreements continue to save, leading to very stable and increasing volumes, as you can see from the illustration on the chart. The portfolio stays very robust with next to no increase in nonperforming loans during the quarter. And overall, I would highlight a very, very solid performance by the team across Personal Banking.

The second quarter also in Corporate Banking is yet another strong quarter. We continue to see profitable growth on the lending side. On average, volumes are up by 3.3% during the quarter. There is a slight reduction in deposits. This is related to seasonal payments of dividend across listed companies and also tax payments from the oil and gas sector. It's important to highlight that these are low-margin volumes. And if we look at the deposit margins overall, for the Corporate Banking sector, they continue to grow during the quarter.

I'd also like to highlight the growth across SMEs, which remains attractive, and we see a growth of 3.7% so far this year. In all, this is reflected in net interest income that grows by 7% from the previous quarter. Performance also in Corporate Banking for other activities, other operating income is also very strong. DNB Markets is the material contributor to these revenues and Markets had a strong quarter with a pretax profit of NOK 1.4 billion. I would like to highlight the high-quality customer-related revenue in Markets with a very strong contribution from areas such as FICC and DCM bond origination. And I think these strong results, again, demonstrates the diversified and robust fee platform that has been built over many years in this area.

We remain committed towards working with our clients on the energy transition and the volumes are ranged in sustainable finance grew by 7% during the quarter, and we are on track to deliver on our target towards the NOK 1,500 billion in sustainable finance that we are targeting to a range before 2030. All in all, robust asset quality also here, predominantly reserves are related to a legacy portfolio, more than 20% return on allocated capital in Corporate Banking and a very strong quarter.

And with these remarks, I'll leave the floor to our excellent CFO, Ida.

[Ida Lerner, executive]

Thank you. Thank you, Kjerstin, and good morning to everyone. Sorry, I skipped one. We noted a profitable loan growth of 1.4% in the quarter. In the Personal Customers segment, the lending volumes grew by 0.5% across the DNB trademark as well as Sbanken. The growth in Corporate Customer segment was 2.2%, predominantly within low risk but across all subsegments in Corporate Customers. The deposits decreased by 3.4% in the quarter. Deposits in Personal Customers increased by 3.7%, while they decreased in Corporate Banking by 7.9%.

The decrease in Corporate Customers was related to seasonal effects such as dividend payments across industries as well as tax payments related to the petroleum industry, similar to as what we saw in the fourth quarter. We maintain a strong deposit-to-loan ratio in the customer segments of 74.9%, and we reiterate our long-term ambition of an annual loan growth of between 3% to 4%.

The net interest margin was up 3 basis points and now amounts for 181 basis points. This includes full effects of the repricing from end January and partial effects from the repricings mid-May and end of June. The Norwegian Central Bank has hiked the interest rates twice in the quarter, in May by 25 basis points and in June by 50 basis points. The average NOK money market rate is up 59 basis points in the quarter, a lag effect gives temporary reduction in lending spreads and increases in deposit spreads. This led to a decrease in combined spreads of 3 basis points in the quarter.

Net interest income increased by NOK 633 million, up 4.3% from last quarter. Effects from repricing, including interest on equity amounted to NOK 315 million. We note full effect of the implemented repricings end of January and partial effects from the repricing being implemented mid-May and end of June, respectively. Currency effects contributed by NOK 132 million and 1 additional interest rate increased NII by NOK 127 million. Following the Norwegian Central Bank's increase in key policy rate in May of 25 basis points and in June of 50 basis points with effect -- we announced repricings with effect from end of June, and beginning of August, respectively. We estimate an annual NII effect in line with the latest repricing of approximately NOK 1.1 billion per announced 25 basis points repricing. Please note that the indicated effects are based on the current composition of the portfolio.

Net commission and fees comes in at NOK 2.8 billion, up 10.2% from the corresponding quarter last year, reflecting strong performance across product areas and an all-time high second quarter results. The result from DNB real estate broking is down 4.3%. But as Kjerstin pointed to, there are fewer properties being sold and real estate broking is gaining market share. Investment Banking delivers a strong second quarter result, up 12.6%, mainly driven by income stemming from bond activities. IBD overall performs well in a challenging market. Asset Management and Custodial Services were up 7.4%. Asset under Management is up 13.5% from the Q2 last year driven by inflow as well as increased market values. We note continued positive development in a number of saving schemes as well as increased amount savings saved on a monthly basis.

Guarantee Commissions are up 7.8%, reflecting sound increase in trade finance products. Money transfer and Banking Services continues to increase and is up 29.2% from the corresponding quarter last year driven by continued positive development in money transfer and strong contribution from banking services. Sale of Insurance Product is down 1.8%, stable underlying performance from DNB Life and Nonlife insurance products. Please keep in mind that as a result of the transition to IFRS 17, you will now find a larger share of the income from DNB Life under Other Income.

Moving on to costs. Operating expenses are up NOK 107 million, overall stable compared to the previous quarter. IT expenses increased by NOK 79 million. Salaries and other expenses are up NOK 70 million, reflects higher activity level and conversion of consultants to FTEs. The increase in FTEs mainly relates to conversion of hired help due to a change in the Working Environment Act. The decrease in fees of NOK 63 million is mainly related to the finalization of the customer identity verification work.

As Kjerstin said, the credit portfolio remains robust and well diversified with 99.2% of the portfolio in Stage 1 and 2. The Personal Customer portfolio remains strong and solid. Our customers continues to be in dialogue with us, but mainly seeking advice on how to handle increased costs and interest rates. For the corporate customers, impairment provision totaled NOK 215 million. A few customer-specific situations were partly offset by reversals of impairment provision in the offshore sector. The portfolio remains robust, and we do not see structural changes such as extraordinary drawings or -- [ on available ] liquidity facilities or overdue payments.

NOK 653 million, i.e., 75% of the total impairment this quarter is related to a foreign currency legacy portfolio in Poland. The EU Court of Justice came with a judgment in June related to [ One Bank's ] foreign currency portfolio in Poland which led us to set aside reserves for increased legal risk associated with the legacy portfolio stemming from before 2012. We remain comfortable with our credit quality in the portfolio. But please bear in mind that the losses will vary quarter-to-quarter and that uncertainty in relation to customer-specific events has increased due to the macroeconomic developments.

Moving on to capital. Profits in the quarter contributed to a 50 basis points increase in the core Tier 1 capital ratio, offset by 20 basis points decrease, primarily related to profitable lending growth. We note a core Tier 1 capital ratio 18.9% in the quarter, 180 basis points above the regulatory expectation. We are still awaiting approval of the buyback program from the NFSA. But with a strong core Tier 1 capital ratio and strong profit generation, we remain committed to our dividend policy.

Summing up, we deliver a strong set of results across the board in the second quarter, reflected in our key figures. We see a return on equity of 15.6%. Earnings per share was NOK 5.93, a decrease of 10% from the previous quarter, reflecting the dividend payment, but up 18.1% compared to the corresponding quarter last year. We also see a cost/income ratio of 35.1%.

And with that, I would like to thank you for your attention and open up for questions.

[Rune Helland, executive]

Thank you very much, Kjerstin and Ida for that very structured and value-add presentation. We will now open up for questions, and we will start with Thomas Svendsen from SEB.

[Thomas Svendsen, analyst]

Yes. Question to the buyback and the approval there. Do you have an idea why it takes so long to get the approval, given that it's close to 3 months since AGM?

[Kjerstin Braathen, executive]

The short answer to that is no. We don't have a good understanding of why the process is taking longer than usual, but hope to get a reply as soon as possible.

[Thomas Svendsen, analyst]

And theoretically, if it takes even longer time, we will have a problem with distributing -- redistributing the capital to shareholders according to your plan this year, I guess.

[Kjerstin Braathen, executive]

Well, I think it's too early to draw broader conclusions. I think the key message from us in terms of capital planning is that we are committed to returning excess capital to shareholders over time and that we will do that through our dividend policy.

[Thomas Svendsen, analyst]

Second and final question from my side. Looking at your chart of net interest margin, I'm noting what we think today about future interest rates. Do you think it's realistic to keep this net interest margin in the coming years?

[Kjerstin Braathen, executive]

I think it's very difficult for us to comment on future margins. That depends on several factors, as you well know, both the pricing and the moves of the Central Bank as well as the market and the competitive environment. You've seen that our margins are increasing in a higher interest rate environment. We continue to see rational behavior across the market and find that we do have competitive products and prices and the customers continue to choose us, and those are the factors that we will consider also in the future when considering pricing. But the key message is really related to the nature of competition, which is fierce, but rational in the Norwegian market, and we continue to see that even in today's environment.

[Rune Helland, executive]

Okay, Jan Erik.

[Jan Gjerland, analyst]

What is the rational -- what do you think is the rationale? Or what did you discuss when you met the FSA this week, probably. Why do you not get this kind of buybacks as you would like to? What is the main argument for not allowing it? Is it just because you wanted to be more cautious, as you said in the semiannual statement this May, June? Or how -- why are they holding back really? What is the main argument from them?

[Kjerstin Braathen, executive]

Thank you for the question. But I think these are questions that you need to address to the FSA and very difficult for us to comment upon. I can say there's been nothing unusual in our -- in the process, but this is a process where that the FSA obviously runs and leads, so any questions related to their considerations and thoughts needs to be addressed to the FSA.

[Jan Gjerland, analyst]

Okay. Thank you. When it comes to your own book then, what kind of sensitivity is the most important thing when it comes to loan losses going forward in your book? Is it GDP growth? Is it unemployment? Is it oil price? What is the most important sensitivity you have acknowledged in your book?

[Ida Lerner, executive]

Well, the most important factor is, first of all, the underlying credit risk in the portfolio. So it's really the risk migration or the negative development in customer-specific situations or overall across the broad -- that is the main driver, I would say. If you look at more model-based the impairments we have in Stage 1 and 2, where it's in addition to individual movement, I would say that unemployment is probably one of the most important in addition to the underlying growth, of course, in terms of GDP. But I would say that, that would be one of the most important factors in combination with a lot of others.

[Jan Gjerland, analyst]

Thank you. Just a final from my side then. Any sign of slowing growth -- lending growth during the quarter as kicked up? Or is it just stable throughout the quarter? Or it's just refinancing that is important? Is it refinancing that is most important for your book and growth these days? Or is it so that actually new mortgage growth is coming as well?

[Kjerstin Braathen, executive]

We do see new mortgage growth. If we separate Personal Customers and Corporate Customers. Taking the Personal Customers first, it's a combination of new growth, refinancing an increase of lending and what could potentially be a change in pace of amortization. Those are the 3 elements we're looking at. We do not see any increased pace of extraordinary amortization. We see some smaller volume in terms of refinancing and increasing lending as is to be expected, but we continue to see healthy volumes in terms of new mortgages and customers choosing us.

We would not be surprised if the growth across Personal Customers is lower this year compared to last year, in line with the reduced credit growth in the market. But I think the 12 -- last 12 months growth of 3.2% is representative as to our relative competitiveness in the market. Corporate Customers, SME is the most steady one to look at. They continue to show attractive growth. Some regional differences now with a stronger sentiment in the export-related industries and some of the more consumer-related ones. As for large corps, it is a more volatile number when you look at the quarterly growth. Overall, it remains attractive, as you've seen, on average, 3.3% end of date, 2.2% for the quarter. Of course, lesser activity in anything that is private equity transactional related, but very attractive and high activity in areas such as power and renewable across the platform, we might end higher than 4% this year, also in view of the somewhat weakened currency. But longer term, 3% to 4% is still what we believe should be a growth level that we could be able to maintain even in this market.

[Rune Helland, executive]

We have a question here from Vegard, Pareto.

[Vegard Toverud, analyst]

Regarding the buyback program, how will you communicate when you get the approval? Will you wait until the next quarterly presentation or will you communicate the day after you get approval in the same time?

[Ida Lerner, executive]

We will communicate it when we get the response from the NFSA, so we won't wait until the next quarterly result.

[Vegard Toverud, analyst]

And just to put the chart you showed on Slide 4 in perspective, what's the share of your mortgage book that's interest only?

[Kjerstin Braathen, executive]

I'm not sure we have shared the number, that is interest only.

[Ida Lerner, executive]

But we also -- we don't see any shift in behavior in terms of that customers are seeking to avoid paying amortization, actually not. So I wouldn't say that we're seeing any trend there. We -- and a very, very limited part of our portfolio is interest-only.

[Vegard Toverud, analyst]

It's just interesting to put those numbers in that slide in perspective for the economy as a whole to understand the impact of the increased interest rates as you discussed yourself. So if you're able to provide that number at later stage, that would be interesting.

[Kjerstin Braathen, executive]

We will take note of it. But bear in mind, in general, compared to other markets, Norwegians have a strong culture for amortizing loans, that is shown in new growth being a stronger impulse than in markets where you typically see predominantly interest-only payments. And there hasn't been a shift, but we agree. I mean, it's interesting to follow these numbers, where we're now looking at people spending sort of close to 16% of their disposable income for servicing debt. And then the belief is for disposable income to continue to grow, which underlines why even in a continued market with increasing rates, the average health should continue to be robust.

[Vegard Toverud, analyst]

And then just finally on the deposit side. You have quarterly growth, of course, in retail deposits. But on a yearly basis, it's quite flat. Are there any -- do you experience any changes to the competitive environment for retail deposits in Norway?

[Kjerstin Braathen, executive]

We do not experience shifts in the competitive environment. We do not experience larger shift within different product mixes either, even though we're very focused on having good products for the needs of the customers in this area. So I think you need to see the development of the volumes overall as a factor that we are coming out of a couple of years with extraordinarily high savings in bank accounts.

It was noted in an interview earlier this week that Norwegians have saved an additional NOK 100 billion during the pandemic and that most of these volumes are still sitting in bank accounts. And we are now in a more normal territory, but also in an economy where it's natural to be expected that people save somewhat less. Again, those who have entered into savings agreements, continue to put down the monthly amounts, whether it's on a bank account product or from mutual funds. And I think this is also a sign of strength to the underlying economic situation but also to the advisory that has been put into selling these savings agreements that should have a longer-term nature.

[Rune Helland, executive]

Thank you. We have a few questions on the net. We have [ Sofie ] from JPMorgan. Why was the share buyback approval request downsized from 2.5% to 1.5%?

[Ida Lerner, executive]

That's purely a mechanic of the fact that there is a new guideline coming out that once we receive the approval from the NFSA, we need to deduct it from the core Tier 1 capital ratio immediately. And therefore, we changed the -- from 2.5% to 1.5% and plus 0.25% for hedging purposes or trading purposes. But there is nothing apart from that, more than that they've changed the guidelines to mean that we can't then split it up as we've done historically.

[Rune Helland, executive]

Very good. Another question from [ Sofie ]. Should we expect more losses to come through from the Polish legacy portfolio? How large is the book? And what is the coverage, please?

[Ida Lerner, executive]

Well, the loan book currently in Poland is the legacy portfolio is NOK 5.8 billion. Of that, NOK 4.8 billion is currency-related and predominantly euro loans. It's important to highlight that what we've taken as reversals this quarter is in addition to what we've taken previously in terms of impairment provisions related to this, and this is the best estimate that we have to date in terms of what we believe will be the potential outcome when we -- when customers come and approach us.

[Rune Helland, executive]

And 1 last question from [ Sofie ]. What is your view on Danske's Norwegian business that is up for sale? Are you looking at it?

[Kjerstin Braathen, executive]

We can't comment specifically on potential M&A opportunities. We note that Danske has put their business up for sale. We do see it as a sign of the strong competitive environment that is in Norway that one of the larger players is deciding to exit in view of low profitability. We think strong competition is good. It's good for the customers, and it's -- it keeps us on our toes performing. We will just follow the development with interest, but still believe that the competition in the Norwegian market will continue to remain fierce.

[Rune Helland, executive]

Very good. Jan Erik from ABG.

[Jan Gjerland, analyst]

Just 1 follow-up. I forgot that you downsized the program to 1.5%. Is that the reason so that you sort of started a new deadline from your re-request? So it's not of the 80 days, business days that they have to approve it. Is that the reason why it's still not there?

[Ida Lerner, executive]

They have up until 4 months to approve it from a regulatory standpoint, so what we based it on was more historically that they've taken 6 to 8 weeks to approve it. There shouldn't be any additional in terms of new information that has been submitted. And we haven't heard that they have a kind of a firm deadline in terms of how long it will take.

[Kjerstin Braathen, executive]

But it is true that we remitted a new application, so you can't really count the full 11 weeks since the general assembly.

[Rune Helland, executive]

Very well. We have 1 question from Johan Strom, Carnegie. Let me see. Have you seen any negative development in your commercial real estate portfolio?

[Ida Lerner, executive]

No. Well, no customer-specific situations or larger movement and underlying change in terms of what we've communicated before. This remains to be shown to be as strong as it was before. But of course, we keep a very close eye on this portfolio and scrutinize it on a quarterly basis to also see movements and what will happen in that portfolio, bearing in mind increased interest rate that are prolonged over a longer period of time. But we aren't seeing any negative developments within the portfolio as today.

[Rune Helland, executive]

All right. If there's no more questions, we would like to thank you for your interest. And we and DNB would like to wish you a very, very nice summer holiday. Thank you.

[Kjerstin Braathen, executive]

Thank you.

[Ida Lerner, executive]

Thank you.