DNB Bank ASA

OSE:DNB

Earnings Call Transcript 2021-Q4

[Thomas Midteide, executive]

Good morning. Welcome to DNB and the live presentation of our fourth quarter results. We have hardly opened a bottle of [indiscernible] now for 2 years, hence, no partygate here at DNB headquarters. We might have a chance this weekend as Oslo have lifted all the restrictions almost.

First, we would like to share all the customer activities and results with you, and we have prepared an extended presentation for you today. CEO Kjerstin will tell you more about DNB's profitability and dividend policy. CFO Ida will take you through the financial ambitions. And Ingjerd, Head of Personal Banking, we'll give you the latest from Personal Banking, which is exciting. And Head of Wealth Management, finally, Hakon, will dive into savings and pensions. We will open up for questions in about 60 minutes. And if you are following us online, you are more than welcome to type in your questions in the form below.

So Kjerstin, please?

[Kjerstin Braathen, executive]

Thank you, Thomas, and a very good morning to all of you, and a warm welcome to this extended presentation of our fourth quarter and annual results for 2021. I must start by saying that when we were planning this event, we were really looking forward to finally being back on the road again, with every restrictions having lifted. But Omicron wanted it different. While not being fully out of the pandemic yet, we have become better at living with it, and the lockdown has been shorter this time, and the impact on the economy has also been less in this wave than in the previous ones.

The numbers we present here today is a testament of a strong resilience in the economy, very adaptable customers and relentless efforts from a strong team that has worked very hard throughout the year to deliver to our customers. In a few minutes, my CFO, Ida Lerner, will go through the detailed quarterly results. But before that, I would like to make a few remarks on the year as a whole as well as on selected themes of strategic importance to our business.

If I should summarize the year in a few remarks, it would be a very strong performance across the group. Pretax profits are almost back up to the 2019 levels and up 28% from last year, reflecting a strong contribution from all areas and very high customer activity. Net interest income is stable despite operating at a 0 key policy rate for the bulk of the year. Fees are very strong. We have a growth of more than 15% compared to the previous year with high activity across capital markets, asset management and insurance, all of which areas we have pointed to as important strategic areas of growth for us.

Costs are up. We continue to work on the initiatives outlined on our Capital Markets Day. But the impact of these does not fully compensate for the inflation and the strengthening of competence in certain areas. Net reversals for the year reflect a very robust portfolio and also a very solid macro situation in Norway.

The result of all of this is a return on equity that ticks up sharply from the previous year, ending at 10.7% for the year, not fully at the minimum targeted level of 12% but well on our way. We also see a strong uptick in earnings per share, which are up more than 30% compared to the previous year and also increasing compared to 2019.

So I'd like to make a few remarks on the main customer areas. Pretax profit in personal customers is up by 1.5%; a healthy growth in mortgages for the year, 2.7%; and an even healthier growth in deposits of more than 7%. Despite this, we see net interest income reducing by close to NOK 1 billion. This reflects the fact that we have been operating at 0 key policy rates. see net interest income reducing by close to NOK 1 billion. This reflects the fact that we have been operating at 0 key policy rates. We do, however, see a very strong pickup in fee-related income in other areas. In particular, I'd like to highlight the activity and growth in saving schemes and also in insurances.

In corporate customers, we see a doubling of the pretax operating profit compared to the previous year, both reflecting strong customer activity and all the year. I'd particularly like to highlight the activity in capital markets, all-time high, and a very strong cooperation between corporate banking and DNB Markets led to our revenue from DNB Markets on these customers to increase by more than 20% for the year. While we certainly benefit from a high activity in capital markets, I would like to underline the increased robustness in these earnings. We see an increased diversification, both across geographies, across products and not the least across industry segments. We are also motivated by the feedback from our customers, yet another year confirming our #1 position in corporate finance and on equities in Norway.

We continue to build capital in a strong year and end the year with a core equity ratio of 19.4%. We are consistent in communicating our commitment to delivering on our dividend policy. And based on our robust capital situation and a positive outlook for the business, the Board is proposing a dividend of NOK 9.75 per share. This is fully in line with our dividend policy that you know well, more than 50% dividend per year and an increasing nominal dividend per year. We continue to intend to use buybacks as a tool to optimize. In view of the temporary dividend ban and the pending Sbanken decision, we have not bought back shares during 2021. But we will ask for a proxy in the general assembly and intend to use this as an integrated part of our policy going forward.

Our financial targets stand firm. I wish, again, to highlight that our most important target is to deliver a minimum return on equity of 12%. The only change I would like to draw your attention to on this slide is the slight change in capital. That does reflect the amended requirements from the FSA with an uptick of 50 basis points in the Pillar 2 guidance. As we've previously communicated, we assume a full increase in the countercyclical buffer, which then leads to the expected level increasing to 17.6%, well below the current level.

The recovery in the Norwegian economy has been both stronger and faster than expected. And Norwegian businesses have shown a strong resilience and adaptability during the pandemic. The growth last year ended at 4%, somewhat higher than previously expected. And after a slow start to the year, given Omicron, we expect the activity to pick up, and DNB Markets' estimate for GDP growth this year is at 3.6%.

Already in the autumn last year, we saw that the unemployment was back to prepandemic level. So we've seen a slight uptick with Omicron, but we expect this to be temporary as the theme from businesses around is really that they are looking for more people to hire.

The Norwegian Central Bank is ahead of the curve if we compare them to their peers in other countries, where most seem to be talking about hiking interest rates these days. The Norwegian Central Bank has already hiked rates on 2 occasions. And their forecast is for an additional 5 interest rate hikes to come within 2024. The market's view, however, is slightly more hawkish, with an expectation of 6 interest rate hikes. And DNB Markets' estimate is that 4 of these will come in the current year 2022.

In addition to a high level of activity, rising inflation also form a part of the backdrop for raising interest rates. It is, however, important to differentiate between core inflation and consumer price index, where the latter also includes energy and utility prices, which tend to be more volatile, and this has certainly been the case more recently. The core inflation in Norway is still well below 2% and expected to stay south of 2.5% in the coming year.

Investments in the industry sector is an important driver in the economy, and it's expected to increase in the coming year. Over time, we do expect investments in the petroleum-related sector to reduce somewhat, but expected investments in the mainland economy is expected to more than compensate for this.

2021, yet another strong year in the markets leads to a further growth in the value of the sovereign wealth fund, again, confirming the very strong fiscal position of Norway. And we would argue that, altogether, this represents a very strong backdrop for our business going forward.

Now let me turn to a few themes that are strategically important to us, with sustainability being the first one. We have committed ourselves not only to net zero in 2050 but also to being a driving force in the energy transition. We work together with our clients to help them achieve their goals, and we see more and more of them setting goals. And we've experienced a sharp pickup in activity and interest in this area during the past year.

A few highlights in this market. We've seen a doubling of volumes being raised as sustainable or green bonds, and we've taken a leading position in this market. We, as DNB, has also raised our first green bond, and we received tremendous interest from many new investors, which not only showed an interest but also to part in the EUR 1 billion issuance. And my colleague, Hakon, will talk more about our activities on the investment side related to sustainability later on.

Finally, I'd remind you that sustainability is about more than the climate and making sure we keep the planet safe for future generation. The fight against financial crime continues to be at the top of our agenda, and we work hard to improve our efforts in this area every day.

Norway is among the most advanced digital societies in the world. And we continue to leverage our already very strong position in the digital space. We hold several of the leading financial apps in Norway. 30% of the Norwegian population actually use our mobile banking app. And we have 1 million customer visits into our digital stores every month. Each customer visit is an opportunity to learn something and gain insight and an opportunity to satisfy a need through one of our products or services. We have seen a 62% growth in number of users in our Spare, which is our saving and investments app. We have seen more than 20% sales increase in sales of savings schemes, and an increasing share of these sales are happening directly in the app.

With cloud-based digital channels, we also see that we can maintain a high pace of change and innovation, continuously meeting our customers' changing expectations. And we are pleased to see that Norwegians continue to prefer to use bank-backed payment options, which we not see in every country. And my colleague, Ingjerd, will say more about this later on.

To me, it's a paradox that the more we talk about being digital, the importance of technology, the more important having the right people with the right competence becomes. And building a culture powered by engagement and motivation is something that we've worked on in DNB for over a decade. And I'm pleased to see that my colleagues in DNB are willing to recommend DNB as an employer to a much larger extent than we see to be the Scandinavian average. Over the past years, we've seen a clear shift in competence and a much broader diversity and skill set among our employees. Tech engineers, legal competence as well as security experts forms a much larger part of our group today than it did 5 years ago. And during the past 5 years, more than 50% of the graduates that we have hired actually have a technology background.

We are one of the most attractive employers in Norway, but we're certainly not resting in that picture. We continuously work hard to keep and build the attractivity further to make sure that we continue to have a very strong team. I maintain that our people is our most important competitive advantage, and facilitating further development and growth for our employees is going to be -- continue to be a top priority for us.

And on that note, what is more fitting than to give the stage on to my, indeed, very competent CFO, Ida Lerner.

[Ida Lerner, executive]

Thank you, Kjerstin. I would like to start out by showing you that we are well underway to deliver on our financial targets. As commented in the fourth quarter 2020, we saw a temporary reduction in return on equity due to COVID-related events. As you can see from this chart behind me, the trend has now shifted, and the reduction was indeed temporary, and we are now back on the right path. Solid performance across the segments and product areas prove that we are underway to deliver on the overriding target of a return on equity above 12% by the end of 2023.

There are several factors that will contribute to achieving this, where cost-income ratio below 40% is one of them. Continued growth in NII and commission and fees will be the main drivers for income growth also going forward. Various cost initiatives will partly curb wage and other cost inflation, and continued focus on asset quality will contain cost of risk. Through positive jobs, low cost of risk and efficient use of capital, we feel confident in our ability to deliver on our financial targets and, thereby, continue to deliver on our dividend policy.

Total currency-adjusted loan growth in the customer segments for the full year was 3.6%, well in line with the communicated target of between 3% to 4%. Profitable volume growth and increased NOK interest rate will lay the foundation for further growth in NII. Going forward, we still aim at an annual profitable loan growth of around 3% to 4% as well as maintaining a sound deposit-to-loan ratio.

The Norwegian Central Bank forecast to increase the policy rate by another 125 basis points by the end of 2024. The next rate hike is expected to come in March this year. We have seen a significant increase in commission and fees during 2021, up 15.9%. The all-time high results reflect a strong position within a wide range of product areas as well as active capital markets. We saw continued solid performance within pensions and savings, as my colleague, Hakon Hansen, will come back to later on, and a strong result from investment banking supported by active markets and the originate and distribute model in large corporates. We recognize that the results from commission and fees may be temporarily higher due to high activity in the market and a rebound of COVID-19. Our ambition of an annual through-the-cycle growth of between 4% and 5% still stands, which is substantiated by the development we've seen in recent years.

With macroeconomic development, supporting income generation, combined with a further strengthening of strategic positions as well as a strong cost focus, we remain committed to deliver a cost-income ratio below 40% by the end of 2023.

We have a robust and well-diversified credit portfolio with 98.9% of the exposure in stage 1 and 2. In 2021, we had net reversals of NOK 868 million, reflecting the quality of the portfolio and improved macro. As you can see from the middle of this slide, we have, since 2015, rebalanced our loan book, which gives a more resilient portfolio. We have, since 2015, reduced our exposure within cyclical industries, such as oil, gas and offshore, from 7% to 4%, shipping from 7% to 2% of our overall portfolio, and we have, at the same time, increased the relative share of personal customers from 49% to 53%. The line on the right-hand side here shows that the average loan to value of the mortgage portfolio has gone down to now 56%. Combined with the improved and strong Norwegian macro, we expect to contain cost of risk at lower levels than historical average. Please, however, bear in mind that variations will occur between quarters.

The Tier 1 capital ratio was strengthened by 70 basis points in 2021 and ended at a solid 19.4%, 310 basis points above the Norwegian FSA's expectation, even after taking into account the proposed dividend of NOK 9.75. The decision on the Sbanken appeal is still pending, and should the bid be approved, it would meet an initial reduction of the Tier 1 capital ratio of 120 basis points. We have received, as Kjerstin mentioned, new requirements and expectation in relation to the supervisory review and evaluation process. The Pillar 2 requirement is now at 1.9%, and the Pillar 2 guidance is at 1.5%, 50 basis points up.

In December 2021, the Norwegian Central Bank announced an increase in the Norwegian countercyclical buffer from 1% today to 1.5% from the 30th of June this year and 2% with effect from year-end 2022. In our capital planning, we assume a full Norwegian countercyclical buffer of 2.5% expected effective from the first half 2023 as well as a countercyclical buffer in other countries to be back at prepandemic levels. This gives a long-term capital expectation of 17.6%. DNB aims to operate above the long-term expectation with some headroom. We do not quantify a specific number for this headroom. It will vary with currency effect and other short-term fluctuations.

The leverage ratio at year-end increased to 7.3%, well above our Nordic peers and a regulatory requirement of 6%. The leverage ratio is affected by central bank deposits, which fluctuates during the quarter. Adjusted for central bank deposits, the leverage ratio was 8.1% and has been stable over time.

The tax rate is expected to be 23%, an increase from previously stated 22%. This is due to increasing income in Norway with a tax rate of 25%.

To summarize, the significant headroom of the regulatory requirement, together with a solid return on equity, will ensuring capacity for both growth, a potential cash offer for Sbanken and to continue deliver on our dividend policy.

I would now like to move on to the fourth quarterly results. With a profit of NOK 6.2 billion for the quarter, return on equity comes in at 10.3%. We continue to show resilient earnings and profitable growth across all business areas. Volume growth and repricing effects increases NII by 5.3%. There was a continued high activity level in the capital markets, and net commission and fees were up 22.2% from the corresponding quarter last year. Macroeconomic conditions are good. Our asset quality is robust, reflecting the low impairment provisions this quarter. And due to the consistent level of performance, earnings per share ended up at NOK 3.79, up 15.6% from the fourth quarter 2020.

Total loan growth in the customer segments currency-adjusted was up 1.1% in the quarter. There was a solid growth in corporate customer segments of 2.3% and a stable development in the personal customer segment. Moving to the right side, the light green light -- line, you can see the average deposit in the customer segments continue showing strong development. Currency-adjusted deposits increased by 1.5% during the quarter. This leads to a strong average deposit-to-loan ratio in the customer segments of 76.6%, up from 69.6% the last year.

The net interest margin increased by 6 basis points in the quarter. NII will be impacted by the 2 announced customer repricings effective from the 12th of November 2021 and the 28th of January 2022, respectively. The notice period of repricing of loan for customer gives lag effect. We will see full effect for the first announced repricing in the first quarter while the second will have a full effect in the second quarterly results.

Net interest income increased by NOK 519 million. The repricing that came into effect on the 12th of November gave an increase in NII of NOK 211 million in the fourth quarter. It is important to note that NII effects from changes in the key policy rate comes when we change customer rates. As mentioned previously, the notice period on repricing of loans gives lag effect. We communicated that the annual effect of the first rate hike would be approximately NOK 1.5 billion. We expect a similar annual effect from the second hike. We cannot give guidance on the effect of future rate hikes, but keep in mind, when looking at historical numbers, the NII effect was tapering over time.

Amortization effects and fees increased NII by NOK 135 million, supported by the high activity we saw in the quarter. Higher average loan and deposit volumes increased NII by NOK 86 million. Other NII income includes, among other things, a positive result from treasury.

Now moving on to commission and fees. Commission and fees was all-time high in the fourth quarter, up 24.6% from the third quarter, driven by solid performance across product areas. For real estate broking, the fourth quarter was somewhat weaker, but keep in mind that activity for the corresponding quarter in 2020 was exceptionally high. Investment banking fees were up 53.5% from the same quarter last year, driven by high activity within corporate finance and strong performance across investment banking products. Asset management and custodial services increased by 19.2% in 2021, in total, are lifted by both positive net inflow and an all-time high asset under management. Money transfer and banking services continue to increase, up 32% from the last quarter, still affected by the COVID-19 restrictions, but we see positive development from card transactions in addition to income from Uni Micro. Fees from the sale of insurance products increased by 5.8%, driven by increased profitability in the insurance portfolio, both nonlife and personal risk and volume development in defined contribution pension.

The costs are up by NOK 675 million from a low level in Q3, the operating expenses in the quarter are affected by high activity. Variable salaries increased by NOK 136 million, reflecting high activity and performance you saw in commission and fees. Fees increased by NOK 129 million and is predominantly related to initiatives in compliance. The increase in fixed salaries reflects the investments in technology and compliance competence. We also incorporated Uni Micro, the SME ERP provider we acquired in 2021 with 116 full-time employees. Increase in pension expenses reflects a higher return on the closed defined-benefit scheme. The scheme is hedged, and the corresponding gain is recognized in -- on financial instrument.

IT expenses increased by NOK 44 million from an exceptionally low third quarter. Costs related to travel and training increased, which is a natural consequence of the removed COVID restrictions we experienced up until December last year as well as high customer activity.

The Norwegian economy is strong, and we expect, as Kjerstin pointed out, that we go into a period with slightly higher inflation, which will impact our cost levels. Nevertheless, we remain committed to our communicated target of a cost-income ratio below 40% by the end of 2023.

We had total impairments of NOK 275 million in the quarter, reflecting the robust and well-diversified portfolio. For personal customer, net impairment was NOK 64 million, reflecting continued solid portfolio. There were net impairments for corporate customers of NOK 211 million, and the reversals in stage 2 were driven by improved macro and improved underlying credit quality. Stage 3 impairments were primarily driven by a few customer-specific situations already in stage 3 from the outset of the quarter. SME continues to show low impairment levels and strong credit quality. Offshore now only constitutes 1.1% of our total EAD compared to 1.4% just a year ago but still remains to be the most challenging part of our portfolio. 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.

Summing up, our capital position remains strong, and the strong earnings per share provides a firm foundation for delivering on our dividend policy. Return on equity improved, positively affected by increased income and low impairment provisions. Earnings per share were strong at NOK 3.79. As Kjerstin pointed out, the Board proposes a dividend of NOK 9.75 per share and will also ask the general assembly for a power of attorney to buy back shares. As shown in this presentation, we remain committed to our dividend policy and are well underway to deliver on our financial ambitions.

With that, I thank you for your attention and leave the floor to my wonderful colleague Ingjerd, Head of Personal Banking.

[Ingjerd Cecilie Hafsteen Spiten, executive]

Thank you, Ida. I'm excited to stand here to report on strong progress and a positive outlook for the Personal Banking segment. We are a market leader, well positioned for continued growth, and we are a digital leader with a strong position and ability to adapt to the future. So my focus here today will be to talk you through how we will continue to drive profitable growth within the Personal Banking segment.

I will start by underlying our strong market position in Norway as the major player in both lending and deposits. Our lending portfolio is still twice as the size as our closest peer while our portfolio of deposits is now more than 4x the size of the nearest competitor. We have held a strong market leader position for many years, constantly adapting to changing market conditions and customer demands.

This slide shows the progression for mortgages and deposits over the last 3 years: 3.2% growth for mortgages and 6.2% growth for deposits. For the mortgage portfolio to 2029 -- 2021, volume growth is 2.8%. Growth slowed in the fourth quarter, yet I'm confident that we will grow profitability over the coming year. Competition in the market remains fierce, and we have a proven track record of profitable growth through periods with increasing interest rates. And this experience is variable going into the coming months and years. Our mortgage portfolio continues to be a very high quality, and the portfolio is highly flexible with over 90% floating interest rate.

On the chart on the right side of the slide, you see the -- see our deposit portfolio over the past 3 years. For 2021, we are very pleased to see the deposit-to-loan ratio at an all-time high level at 59%. And we see a 7.1% growth of deposits for the year. This growth reflect the fact that customers consolidate both their salary and deposits with us in DNB. Deposits are the best starting point for encouraging customers to invest in long-term savings with us. And this growth is in line with our strategy of being the customer's preferred universal bank.

To succeed as market leader in 2022, we need to provide our customers with the best digital banking ecosystem and constantly adapt to customer -- to changing customer behavior. Our efforts, they are paying off with world-class customer engagement and increased efficiency. And the star of the show is our mobile banking platform, launched early 2019. Customer satisfaction and App Store ratings confirms that we are providing a state-of-the-art platform with -- which is highly valued by our customers. Nearly 1/3 of all Norwegians over the age of 16, they bank with the DNB mobile app. Our customers' banking habits are now increasingly mobile first. And this trend will continue with more than half of all transactions already taking place on the mobile platform.

To be the customers' preferred choice going forward, we need to offer engaging and relevant tools. And actually, as many as 50% of our mobile bankers, they use the personal financial management tool that we have developed in the mobile bank. And international and global benchmarks, they confirms that these are impressive figures.

Digital tools and services are the core of the banking today, and we have, therefore, substantially reduced number of branch offices in the past 10 years. But customers still have access -- but our customers still have access to skilled advisers at the call center or in one of our 56 branches across the country. In 2021, we took our distribution model a step further, transitioning to appointment only for most of the branches. This frees up capacity for advisers to spend more time on complex and value-adding in-person customer interactions. And we have done this by guiding our customers to handle easier tasks on their own, supported by our specialists at the call center.

And overall, this is a much more efficient than having customers drop by a branch for everyday banking needs. In fact, we also see a 12% decrease in service inquiries to the call center since 2019. This is proof that the call center specialists, they are expertly guiding and training customers to be more self-served. And in parallel, we have prioritized the development of intuitive and easy-to-use digital self-service solutions. And when given the right tools, customers, they really prefer to solve easy tasks themselves.

This also very much applies to mortgages. 90% of all mortgage applications are submitted digitally even though it's a complex product. We are sure that our distribution model is closely following future trends: mobile at the core, supported by easily accessible skilled advisers.

Now on to Insurance. Last year, I detailed our plans for nonlife insurance through Fremtind, the merger we did between DNB insurance and SpareBank 1 insurance in 2019. This year, I'm proud to say that we are very much on track on the ambitions we have set for this merger. We have completed the transfer of all DNB customers, all the new, to Fremtind's infrastructure. By doing this, we have both increased efficiency and substantially improved the pricing models, which have made us more competitive on major product areas as car and home insurance. We now have a much more sophisticated and resilient model for pricing risk, which has increased our commission for -- from insurance by 41%. In 2021, we have driven overall sales volumes by a solid 20% for personal customers.

There is still too much churn in the portfolio, but with better analytics and more competitive pricing, I'm confident that we will be able to reduce this churn in 2022. And for corporate customers, we have seen strong growth also in 2021. We expect this growth to continue as we still have lots of untapped potential for nonlife insurance in our corporate SME portfolio. We also benefit from owning 35% of Fremtind, and our goal is to continue to develop this healthy capital-light business further, both as a distributor and as an owner.

Last but not least, another strong development in our capital-light product portfolio is sale of mutual funds. Nearly all saving agreements are sold digitally, and there is no doubt that Spare, our mobile platform for savings, has helped accelerated this trend. For 2021, the power of mobile sales has really been proven to Spare in the retail segment. Almost 1/3 of total fund net flow and 38% of all savings schemes are actually sold to this app. Since launching the Spare platform in 2017, we have seen an average growth of 40% in active users every year, but in 2021, we saw an even steeper growth of 62% in active new users for the savings platform. Spare provides its users with an intuitive interface and accessible financial information like our mobile banking platform. Like our mobile banking platform, our savings platform is highly rated and steadily expanding its user base.

So to sum up, we are proud of what we have achieved in the Personal Banking segment for the year of 2021. Through our digital leadership and ability to adapt to the future and shifting environment, we intend to maintain our strong market position and profitable growth also for 2022.

And with that, I leave the floor to my well-appreciated colleague, Hakon.

[Hakon Hansen, executive]

Thank you, Ingjerd. The saving and investment market has been booming over the last few years, as I'm sure you all know. We have also seen rapid changes in the Norwegian pension market. I've been given the honor to presenting an update from this area of DNB's business operations.

DNB has a strong and unique position as the #1 distributor and the #1 producer of savings and pension products in Norway. In a fast growing market and despite tough competition and new players entering the market, we have managed to keep and even strengthen our leading position over the last 10 years. Strong distribution facilities, state-of-the-art digital solution and competitive pricing have been important contributors for our current leading position.

As you can see from the left-hand side, one of the main drivers of growth in the Norwegian saving and pension market in recent years is the ever-changing regulatory framework. During the last decade, the authorities have introduced a number of regulatory changes to increase Norwegian savings in pension, equities and mutual funds. As a result, over the last 3 years, the number of Norwegians who own mutual funds is up by 10 percentage points from 36% in 2019 to 46% in 2021.

Now over to the right-hand side. Like all other asset managers, we have made preparations to meet the new regulations, including SFDR. All our mutual funds are screened according to DNB standard for responsible investments. Our philosophy is that integrating ESG analysis can both mitigate risk and identify investment opportunities and, thereby, improving risk-adjusted returns. ESG policies apply to 100% of our assets.

In DNB Asset Management, we have no non-ESG funds. It is a fact that this part of our industry is still immature. But in DNB, we have several decades of experience with climate-focused asset management. Our first climate-focused fund was launched back in 1989. We are currently developing our in-house ESG lab. We combine external data with in-house expertise, producing a tool for systematic ESG analysis, both on a company and a portfolio level. This enable us to produce high-quality mutual funds with a guaranteed ESG stamp from DNB, and most important, we will use this information to improve our insight and get a better basis for our investment decisions.

Now let's have a look at defined contributions. In Norway, having a defined-contribution pension scheme is legally required in the private sector with a few exceptions. This market is of high importance to us. As of today, we have NOK 126 billion in asset under management in defined contribution. What's important to note is that this portfolio is growing by approximately NOK 1 billion every month. This is recurring income, and this is recurring savings.

It is a fact that within defined contribution, the capital is sticky, and for many years to come, the inflow from active employees will be substantially higher than the pension outflow. With a normal market development and given that we keep our current market share, we will double the volume yet again over the next 5 years.

On the right-hand side, you can see how we, through our digital solutions, have targeted our communication towards employees seeking to actively engage them and advise them how to choose the right mix of shares and bonds depending on the risk profile and remaining saving period. As a result, we have seen higher -- significantly higher percentage of shares in their pension profiles over the last years, which is good for our customers and good for us.

Let's have a look at asset management. We have had several years with strong inflow and strong saving markets. At the same time, we have succeeded with an improved mix of assets and customers. As you can see from the graph on the left, the asset and management from retail segment has grown substantially from NOK 68 billion to NOK 189 billion from 2017 (sic) [ 2016 ] until today. Within this asset mix, I would like to highlight that the share of equities in the portfolio for retail customers has increased from 68% to 79% over the last 10 years. When it comes to volumes, our growth is 50% above the market growth over the last 10 years. The market has grown by 3.7x, while we have grown by 5.5x.

On the right-hand side, you can see that the commission and fee from retail customers in DNB Asset Management have risen from 35% to 55% over the last decade. Last, I would like to mention, for the first time ever, DNB Asset Management delivered a profit above NOK 1 billion in 2021.

Going forward, we are well positioned for future growth. As you can see to the left, we have a strong growth in savings schemes, with 600,000 monthly savers, giving a total of NOK 600 million in monthly savings from the retail segment. In addition, as I mentioned earlier, we have NOK 1 billion every month in defined contribution and savings schemes. Savings schemes represent recurring volume and sticky money, which is less affected by the market volatility.

Furthermore, we have a strong embedded growth in our customer base. Through Norway's most popular saving platform, Spare, we have been able to bring in new and younger clients, as you can see from the peak in the green line. And last, but certainly not least, we have a unique, scalable platform. We have strong in-house production facilities and a leading position both within digital and physical distribution in all our 3 customer segments: retail, private banking and corporate clients.

To sum it all up from me, I would like to point out 3 key takeaways. We have state-of-the-art digital solutions. We have a unique position within savings schemes, both within private savings and within defined contribution. But mostly, we are DNB with a scalable platform for both production and distribution. Thank you.

[Thomas Midteide, executive]

Thank you, Hakon, and the rest of you as well. There we are. We'll open up for questions now. We have sympathy with all the financial analysts today. We know there's a landslide of bank results and are even more happy than usual to see you today.

[Thomas Midteide, executive]

So we'll start with Joakim in the middle here and then Jan Erik.

[Joakim Svingen, analyst]

Yes. Joakim from Arctic. I have 3 questions at least. I'll try to limit myself. I'll start with dividends, which was a bit disappointing in my view. I don't understand why you need a buffer of 180 bps, even given Sbanken pending. Could you perhaps elaborate a bit on your preference towards more buybacks? Or is it that you need a buffer above the 17.6% in the range of 60 to 80 bps or so?

[Kjerstin Braathen, executive]

You're quite right. We have currently a buffer of 180 basis points, and if Sbanken should go through, that would consume 120 basis points, which leaves then a buffer of 60 basis points. We are committed to delivering on our dividend policy, which is composed of both cash dividend and share buybacks. And in the cash dividend, it's not only a minimum 50% payout, but it's also an increasing nominal payout per year. And it's important for us to keep the long term predictable and consistent. And we do repeat our intention to ask the general assembly for a proxy and the use of share buybacks as a more flexible tool to optimize around the desired capital level over time. But again, I would like to highlight the important for us to pay out excess capital in order to meet our most important target, which is return on equity.

[Joakim Svingen, analyst]

Okay. And then I was just wondering. Since you're the first Norwegian bank to get an official Pillar 2 guidance requirement, have the FSA given any guidance whether this will be adjusted from year-to-year? Or do you see it as a fixed buffer of 1.5% for you?

[Kjerstin Braathen, executive]

That is in line with Pillar 2 overall. I mean the Pillar 2 requirement is exposed to a qualitative assessment every year. It can go up, and it can go down. There's always been a Pillar 2 guidance, which we used to call a management buffer. So it is -- it's not a hard requirement. It's an expectation, but it's expressed in the wording as an expected minimum level of 150 basis points. And as our CFO pointed out, we do need to hold a certain buffer above that, but we do not specify it as we also currently have an additional headroom in view of the lower countercyclical buffer.

[Joakim Svingen, analyst]

Okay. And then just on the tax rate guidance because that was increased 1%, I believe. Could you tell me why?

[Ida Lerner, executive]

Well, the main reason for that, if you look going forward, is due to the fact that we have a -- the higher percentage of our income generated in Norway with tax rate that is larger than what we've had before.

[Joakim Svingen, analyst]

Okay. That's fair. And then the final one for me is just regarding Fremtind because I guess part of the potential for you as well was increased sales towards SMEs. And as I understand, that's still lagging a bit to the personal customers. So what is going to drive the increased market share there? And also related to that, given the strong results from Fremtind lately, are you still considering to increase your ownership share?

[Kjerstin Braathen, executive]

We -- first of all, we're very confident in our ability to increase sales both in personal customers and corporate customers. I believe the sales and corporate customers doubled actually compared to the year before, but we're still operating in very low levels. So that potential is very interesting. The year, as a whole, was very strong, both on fee side and net results in Fremtind. It is important that you keep in mind that there was a raise in profitability on a large part of the portfolio, which is a onetime event and, of course, a very particular year, given a low degree of damages in the results overall. We're happy with our 35% ownership. We're happy with the cooperation, and we do not have any sort of specific message on the further ownership increase at the moment.

[Thomas Midteide, executive]

Okay. We'll continue with Jan Erik Gjerland, ABG.

[Jan Gjerland, analyst]

Yes. First, on the guiding on NOK 1.5 billion more on net interest income, it looks like the -- it was [ NOK 211 million ], if I remember the number correctly. Multiplied before, that's not, of course, NOK 1.5 billion, but since we have a little bit of lag effect, as you pointed to. So how much is the real lag effect here? Is it so that we should expect an even higher catch-up in the first quarter and then it will a little bit slow off? Or how do you see the competition on this NOK 1.5 billion? What is driving the NOK 1.5 billion guiding once more?

[Kjerstin Braathen, executive]

The communication on that is based on the actual price adjustments we have implemented. The lag effect is only related to the notice period towards customers. So third quarter was affected by approximately 2/3 of the quarter and then the second rate hike tax effect from the 28th of January, if I remember correctly. So the estimate of NOK 1.5 billion for both of those stands. In our view, they were well executed, and we continue to remain competitive and profitable also in the market. But again, you should bear in mind the reference to any potential future movements compared to what we have seen historically.

[Jan Gjerland, analyst]

Perfect. Perfect. On the cost side, how is -- how should we read the current cost level, so to speak? Is this the new normal? Or is it even more catch-up effect on activity and more interaction with customers going forward so we should expect both wage inflation, maybe around 3% to 3.5% and then even more on the cost side? How should you read this cost line versus where you are coming from, so to speak? Is this the new normal? Or is it -- is this the baseline?

[Ida Lerner, executive]

Well, I think, first of all, what's important is to distinguish between what's activity based in terms of the cost that we're producing on the fourth quarter where, of course, the variable salaries are purely related to the activity levels. And we've said also that during the pandemic, we had a low activity in terms of traveling and customer-related events. And therefore, that should increase going forward. We have assessed -- as also pointed out earlier, the wage inflation is expected to be around 3% in Norway, and that's what we're kind of taking into account here as well, bearing in mind that the constitution of our employee base is that it might be a bit higher than the average wage inflation that we're seeing.

[Jan Gjerland, analyst]

Okay. Can I then have 2 questions for each for Hakon and Ingjerd? The first one to Hakon. The fees you see in moving from fixed income to equities, how larger is the portion of fees on those funds versus the fixed income funds? Is this sort of the same base platform fee? Or is it much higher for the other -- or could you just share some views on the income stream in that production? That would be great.

[Hakon Hansen, executive]

The income stream on equity funds are significantly higher than on bond funds. As you can see from the fact book, I think on the bond side, we have probably around 15 basis points, and equities, we have around 60 basis points.

[Jan Gjerland, analyst]

Very good. On the mortgage side, you had a very impressive 90% application. I did a mortgage myself in [indiscernible] once, and it was never turned out to be a smooth process sadly. But how much of the mortgage is now actually done digital when you start at 90%. How many end out now? Is it 50%? Or is it 20%?

[Ingjerd Cecilie Hafsteen Spiten, executive]

That's [indiscernible] the whole process.

[Jan Gjerland, analyst]

Yes. And how much more can you save on that process when it's fully digital?

[Ingjerd Cecilie Hafsteen Spiten, executive]

I think it's between 15% and 20% of mortgages, but I think you need to also separate between existing customers and new customers because for existing customers, it's very easy just to increase their mortgage. So that's a bigger share of the total volume for existing customers, while for new customers, I think we have between -- or, in total, is between 15% and 20%, which have a straight-through process.

And then your second question was...

[Jan Gjerland, analyst]

[indiscernible] your savings.

[Ingjerd Cecilie Hafsteen Spiten, executive]

Plenty of savings. What you see is that we are getting more and more efficient for every year, also during the mortgage process. So we are -- I will not say that it's plenty to say, but we will be more efficient going forward as well.

[Thomas Midteide, executive]

Next time, you can give us a call Jan Erik, and we'll help you through the mortgage process. So we have Johan from Carnegie and then Thomas from SEB.

[Johan Ström, analyst]

So 2 questions, first on the Sbanken deal. If it is unsuccessful, should we expect that the capital targeted for this deal will be returned to shareholders fairly fast? If so, are you able to do with your buybacks?

[Kjerstin Braathen, executive]

I guess what we can comment is that our dividend policy is consistent. And through the dividend policy, our target is to distribute excess capital to shareholders. This stands, whether the Sbanken deal happens or whether it doesn't happen.

[Johan Ström, analyst]

And then coming back to mortgage growth, I think I heard a comment on slow growth in Q4. Just curious on why was that. Was it weak growth in Q4? In fact, I think I see negative growth from quarter end Q3 to year-end. What was the reason for that? And are you growing closer to the market growth rate now?

[Kjerstin Braathen, executive]

The -- you're quite right. The volumes in personal customers were stable from third to fourth quarter. Again, I'd like to highlight that the growth for the year, as such, were healthy at 2.7%. And it's not unusual that we see a shift in pace when we shift from a stable market environment into an increasing or even decreasing. It's part of being a market leader, but it's fair to say that it came out a bit slower than we had expected. There were some temporary effects with some interest rate guarantees from certain players impacting the situation. And we had some technical issues in our customer journeys, but we're confident in our ability to grow profitably in the personal customer segment also in '22. I think that's the main message.

[Johan Ström, analyst]

But on the technical side, was that a big factor for the numbers that we're seeing?

[Kjerstin Braathen, executive]

It's a material factor.

[Thomas Midteide, executive]

Okay. Thomas Svendsen, SEB.

[Thomas Svendsen, analyst]

Two questions from my side. First, on the costs, you talked about wage inflation costs. They're going up. But in terms of number of employees, we can see in the supplementary that number of employees is on the rise. What should we expect in the next couple of years within the frame of you reaching 12% ROE?

[Ida Lerner, executive]

Well, first of all, I think the -- as we mentioned also, there is -- of the increase in full-time employees, 116 of them are related to Uni Micro. So that's kind of related to that. We've also said that we will continue to invest in competence in areas that are strategically important for us or areas where we see that we want to invest in order to position ourselves in the best possible way for the times ahead. But we are very comfortable in terms of both the cost initiatives that we launched during the Capital Markets Day 2019 that are delivering very well in addition to the fact that we've worked on cost efficiency on an everyday basis to ensure that we reduce our costs where possible and automate processes where possible but, at the same time, invest where we see important.

[Thomas Svendsen, analyst]

Okay. And in terms of loan losses, you said you expect lower than the normalized -- historical normalized level. So could you specify that? Is it much below, I guess, it's 18 bps?

[Kjerstin Braathen, executive]

No, we don't specify that.

[Thomas Svendsen, analyst]

The reason I'm asking is just the big gap we see between today's ROE and the 12% and the quite short time frame to reach it.

[Kjerstin Braathen, executive]

I think we just need to reiterate that we need to work on all elements in order to deliver on the 12%, and cost of risk is an important part of that. Of course, we've had net reversals for the year '22. You shouldn't expect that to continue over time. But the most important comment we can give is to the macro outlook and how we view our portfolio, again, very robust, well-diversified. We do not see any signs of concern nor in the unsecured portfolio. We haven't seen any impact from rising electricity prices. And the SME portfolio also, which is a very good temperature measure for the Norwegian economy, remains very robust. And hence, this backs up our expectations in the cost of risk level.

[Thomas Midteide, executive]

Okay. And then we might have a few questions from our online viewers. Asked on behalf of you by Rune Helland, the fittest IR in the Northern Hemisphere, and we celebrated his birthday yesterday.

[Rune Helland, executive]

Thank you, Thomas. Okay. Most of the questions from the net has already been answered, but we still have 2, 3 questions. So we have a question from Vegard related to cost -- Vegard from Pareto. He is asking, how much of the NOK 129 million fee increases related to compliance is sticky costs?

[Ida Lerner, executive]

Well, we don't specify exactly how much is sticky and how much is not. But as mentioned, it's predominantly related to specific initiatives and projects as some of them will not be sticky and be more of a one-term -- onetime off situation, but we don't specify that in kind of -- in sheer numbers.

[Rune Helland, executive]

A question from Nils Christian Øyen from SpareBank 1 Markets. Growth in RWA has been very low recent years. Could you elaborate on that and on the future potential for classification effects?

[Ida Lerner, executive]

Well, REA has been going down, but that's also related to the fact that we have moved or we have -- there has been a transfer between standard portfolio and IRB portfolio, which, of course, has a positive impact there.

[Kjerstin Braathen, executive]

In addition to that, we could mention the reduction of the restructuring portfolio and lowered risk through solving a lot of the customers and the exposures that are high risk, and they consume a lot of capital in terms of risk-weighted assets.

[Rune Helland, executive]

Thank you. And a question from Riccardo from Mediobanca. This question is investment banking, corporate finance fees. What could be sort of a normalized level?

[Kjerstin Braathen, executive]

Again, it's very hard to advise or guide, and we don't desire to do that on corporate finance fees. I think my best reference would be to look at the historical development over time, where we see clearly, I believe, a growth that is higher than the market overall, which indicates that we do take market share in this area. Again, we are a niche player, and we are not impacted by the similar trend as we look to see for the more medium European players, I'd say, towards the U.S. players. We see that we are competitive. And for us, it's a sign of strength that we continue to build a broader brand across industries, geographies and products. One key example I could also give is that our revenue from our international operations and markets outgrow the growth we see in Norway for this year. And the industries that are likely to grow in view of the energy transition and the sustainability trend are areas where we have competence and a strong position.

[Rune Helland, executive]

Thank you. That's it.

[Thomas Midteide, executive]

Okay. I think that was the end of the Q&A session. Let us remind you that we, as usual, have the investor call at 1:30 Oslo time. Thank you so much for spending this morning with us. Have a great day.