Dnb ASA

OTC:DNBBY

Earnings Call Analysis

Strong Profitability Despite Challenges

DNB reported strong Q2 financial results driven by robust activity across its segments. The bank's return on equity reached 16.6%, supported by an all-time high in net commissions and fees, up 22% year-on-year. Net interest income increased by 1.9%, and loan growth was up 0.6%. Despite taking NOK 560 million in impairment provisions, the bank maintained a solid capital position with a core Tier 1 capital ratio of 19%, exceeding regulatory expectations by 210 basis points. The Norwegian economy remains resilient, and DNB expects the strong activity levels seen in the first half of 2024 to continue into the second half.

Economic Outlook and Central Bank Policy

The Norwegian economy remains robust with low unemployment at 2%, anticipated to persist in the coming years. Amidst higher inflation levels, the Norwegian Central Bank maintains a key policy rate of 4.5%, expected to taper to 3.25% by 2027. This resilient economic backdrop underpins the company's performance, reflecting strong customer activity and investment growth, particularly in the petroleum industry.

Quarterly Financial Performance

The company experienced a solid quarter with a return on equity of 16.6%. Net interest income increased by 1.9%, spurred by heightened customer activity and loan growth of 0.6%, with corporate customer activity outpacing that of personal customers. Notably, the net commissions and fees surged by 22% year-over-year, marking an all-time high driven by significant gains across all product areas, especially in investment banking services.

Impairment Provisions and Asset Quality

The company took impairment provisions amounting to NOK 560 million, primarily linked to specific events affecting small- and medium-sized enterprises and large corporates. Despite this, the portfolio remains diversified and solid, ensuring a strong capital position with a core Tier 1 capital ratio of 19%, comfortably above regulatory expectations by 210 basis points.

Guidance and Future Projections

The company projects continued robust performance in the second half of 2024, driven by increased customer optimism and high economic activity levels. They expect stable net interest margins, with customer deposits shifting less frequently between accounts. Regulatory impacts such as the Norwegian FSA's proposed adjustments in risk-weighted floors for mortgages and commercial real estate are anticipated to have an 80 to 90 basis points effect, yet strategies are in place to mitigate significant impacts.

Investment Banking and Global Growth

Investment banking services registered an exceptional quarter, with corporate finance fees up 165% compared to the previous quarter, boosted by active capital market engagements. The company's expansion outside Norway, particularly in debt capital markets and renewable energy financing, continues to contribute positively to overall growth, reinforcing the projected sustained fee growth exceeding 4% to 5% annually.

Operational Efficiency and Risk Management

Operational efficiency remains a priority, illustrated by the managed integration of Sbanken, which though incurred minor additional costs, did not significantly detract from overall performance metrics. The company's ongoing share buyback program and targeted adjustments in loan book duration underscore prudent capital management conducive to maintaining a strong financial position.

Earnings Call Transcript 2024-Q2

[Operator]

Hello. Welcome to the DNB Quarter 2 Conference Call. My name is Caroline, and I will be your coordinator for today's event. [Operator Instructions]

I will now hand over the call to your host, Rune Helland to begin today's conference. Thank you.

[Rune Helland, executive]

Thank you so much, and hello, everyone, and welcome to the Q2 Quarterly Analyst Call. Around the table here in Oslo, we have in addition to the CFO (sic) [ CEO ] and CFO, Kjerstin and Ida; Hakon Hansen, Head of Wealth. We have Alexander Opstad, Head of DNB Markets; and we have also Harald Serck-Hanssen, the Head of Corporate.

Before we open up for your questions, Ida will give you the highlights for the quarter. So please?

[Ida Lerner, executive]

Hello, everyone, and very nice to see so many of you on the call. I'll start with a bit brief update on the macro picture. The Norwegian economy continues to show strength with low unemployment, resilient activity level and increasing confidence among both individuals as well as corporate. Investment activity in the petroleum industry is expected to remain high in 2024 and mainland corporate investments are expected to pick-up from low levels in the second half and then gradually increase in the coming years. Overall household consumption has upheld well in spite of higher inflation and increased interest rates. Purchasing power is expected to further improve this year by increasing real wages already in 2024.

Unemployment remains low at 2% and expected to remain around this level in the coming years. Inflationary pressure has come down, but remains higher than the long-term target of around 2%. With wage growth around 5.2% this year, continued strong Norwegian economy and low unemployment, the Norwegian Central Bank is expected to maintain the key policy rate at 4.5% until March next year, and then gradually decrease it towards 3.25% in 2027.

Now moving over to this quarterly results, which was definitely impacted by higher activity and an all-time high net commission and fee. Profitability is solid for the quarter with a return on equity of 16.6% and this is driven by a healthy economy but also strong activity across the Group, both in terms of different customer segments as well as product areas. Net interest income is up 1.9%, driven by growth and customer activity. Loan growth comes in plus 0.6% with a stronger growth in corporate customers, but also increasing activity and growth in personal customers towards the end of the quarter, also seen in the higher activity we've seen in the property markets.

Net commissions and fees up 22% from the corresponding quarter last year, with a strong performance across all product areas, an all-time high result in investment banking services, predominantly stemming from debt capital markets, but also an increase in activity in equity capital markets and M&A. In addition to that, we continue to see a solid performance in asset under management with continued increased savings from both personal customers, but also institutional.

The portfolio continues to be solid and well diversified. We take impairment provisions of NOK 560 million in the quarter, predominantly related to customer-specific events in small- and medium-sized enterprises and large corporates. The capital position remains strong with a core Tier 1 capital ratio of 19%, 210 basis points above the regulatory expectation, in spite of the fact that we've now also taken the share buyback program that was announced in June of 1% of outstanding shares into account. So the fact that we have a profitability increasing the core Tier 1 capital ratio that is outweighed by the deduction from the share buybacks.

With that, I think we will open up for questions.

[Operator]

[Operator Instructions] We will take the first question from the line Riccardo Rovere from Mediobanca.

[Riccardo Rovere, analyst]

Just for me to understand the -- exactly what you mean. When this morning during the press conference, if I understood it correctly, you stated that the robust level of activity that you have seen in the first part of 2024 is expected to continue in the second part of 2024. And if I understood it correctly, this comment refers not only to lending, but to a much broader, let's say a much broader context to any kind of activity and not just lending. Did I get it correctly?

[Kjerstin Braathen, executive]

I think what we tried to say is maybe slightly more nuanced to that, and I can try to comment. I think the broad comment that we addressed is a shift in sentiment amongst individual customers who now seem more positive and are more actively looking at transacting, for example, in the housing market again. And that has increased the activity in this area during the quarter. And the general outlook for the economy is also strengthened by what seems to be some more optimism among business leaders that were interviewed in the survey made by the Central Bank a few weeks ago. And I think overall, if we look at lending volumes, we have stated that we expected first half to be somewhere -- somewhat more muted than we expect second half to be without being sort of segment-specific.

But we also said that activity in the corporate area, more specifically in the large corporate area, has been very high and the growth we deliver must be seen also in combination with the insight that there has been a relatively high activity of prepayments and a high number of transactions being done in the second quarter. If we go to the fee side, there is no news that there is a seasonality quarterly that impacts these numbers, in addition to the level of market activity for some of the areas and several important drivers this quarter were real estate brokerage, investment banking and asset management.

Real estate brokerage, there is a seasonality where second quarter is usually a very high quarter. Investment banking is also second and fourth quarter that usually are the quarters that are the most active. In terms of the poundness and healthiness in the market, what we see, there is no reason that there will be a shift, but of course third quarter will be lower. That is natural to expect compared to what we've seen in this quarter. But there is a healthy amount of this being worked on and considered also for the [ office. ]

Assets under management is more gradual. It also depends on the profit sharing split that comes in pieces every quarter, but more so, particularly in the fourth quarter. But in the management at least, the info from the retail side comes relatively steady as we see them from savings agreements to individuals, but we see them also from down payments on pension agreements that many of our corporate customers are making on behalf of their employees. So I'm not sure it's exactly the same, but it's a healthy outlook.

[Riccardo Rovere, analyst]

Okay, yes. And then if I may a second and also a third question. Given that January 2025 is approaching, so Basel IV is approaching, would you be able to indicate what is the expected impact on first-time adoption, January '25 and fully loaded impact? And would you be able to give us an indication where most of the impact is expected to come from, it can be credit risk, op risk, FRTB?

And then I have a third question. If I remember correctly, you stated in previous occasions that term deposit in retail accounted for, roughly speaking, 80% -- maybe 85% of the total. This morning you stated that this shift is kind of tapering. So I am just -- what I infer is that the 80% to 85% should be -- should have remained more or less stable in the quarter. Is that correct to say?

[Kjerstin Braathen, executive]

I'll do -- quickly do the last one and then Ida can comment on Basel IV. The mix that we have referred to on retail customers is not specifically on term deposits, but it's on saving accounts versus transaction accounts, where 75% roughly has been on savings accounts and 25% on transaction accounts. And there has been a shift in asset mix that has impacted the couple of previous quarter with more funds being moved into the savings accounts. But that impact has tapered over the course of this quarter, so we see less of that towards the end of the quarter. I'm not sure that we have a new mix number to give you. It should be around between 75%-ish.

[Ida Lerner, executive]

Yes, yes.

[Kjerstin Braathen, executive]

Yes, still.

[Ida Lerner, executive]

And in terms of your question on CRR3, there are 2 elements that we need to keep in mind here. First of all, the NFSA has come out with a proposal of increasing the risk-weighted floors on mortgages as well as commercial real estate. That in isolation, if that was approved, would have a negative impact of around -- between 80 to 90 basis points. That is a hearing process. As you know, it's similar to what the NFSA proposed in late-2022. It's a hearing process whereby the Norwegian Central Bank, as well as the other banks and other stakeholders will provide their response in terms of what the -- what they believe as a response to this proposal. And then the Norwegian Ministry of Finance will make a final decision later on this fall.

We don't know the outcome of that, but bearing in mind that the only thing that we can point to is that we can't see that there -- anything that has changed in terms of macro or underlying risk that would indicate that that would be a different view than what it was in 2022. But again, that is an outstanding question.

In addition to that, it's more the underlying effect from the implementation of CRR3 that is expected to come in the 1st of January, where we've said that they will have following mitigating actions from our side, it will have some negative effects, but not to the extent that that would impact our dividend policy or our ability to pay out dividends. We said that that would have a relatively modest negative impact. But again, that also is dependent on final documentation and there's still continuous information coming out in terms of interpretation. The absolute majority of the impact is related to risk exposure amounts coming in Corporate Banking.

In terms of FRTB, that doesn't impact, now that has been postponed. But that doesn't, in isolation, impact us as much as it does for other banks. But that's purely based on the product mixing in DNB compared to other banks.

[Riccardo Rovere, analyst]

Okay, so

[Ida Lerner, executive]

FRTB has been so strong, so.

[Riccardo Rovere, analyst]

Yes. No, no, no. It's true. So I understand that even on a fully loaded basis, imagine we are in 2030, the most of the impact would be on the corporate risk exposure amount. Nothing -- that would be mostly the impact if I understand correctly?

[Ida Lerner, executive]

Yes, that is correct. FRTB does not impact us.

[Riccardo Rovere, analyst]

Okay. In FRTB, so I imagine the op risk should be kind of residual from what you say. I mean, maybe not 0, but not that relevant?

[Ida Lerner, executive]

Op risk is a small element. I would say. I will point more to the op risk element relating to what comes as an automatic response to this or effect -- as an effect of us increasing our income base. But that's not related to CRR3. That's what you also saw at the end of last year where the op risk element...

[Riccardo Rovere, analyst]

Okay, yes. Very, very helpful.

[Ida Lerner, executive]

We also maintain the view and belief given that we have a conservative framework and onerous capital on our balance sheet. We believe that the full implementation of Basel III, where that will actually lead to a harmonization of capital rules that would benefit us over time.

[Riccardo Rovere, analyst]

Okay, and just to finish on this, let's assume for a second that the proposal by the Norwegian FSA on floors, mortgages and CRE comes into effect that only partially would impact the Basel IV effect that you've just mentioned on the corporate side maybe on this, or just on the CRE side, not on the mortgage side, right?

[Ida Lerner, executive]

It has an impact on both, but that's what I pointed to in isolation, has an immediate impact of approximately between 80 to 90 basis points.

[Operator]

We will take the next question from the line Sofie Peterzens from JP Morgan.

[Sofie Peterzens, analyst]

Here is Sofie from JP Morgan. I'm sorry to go back to the fees, but if I look in your factbook and look at the corporate finance fees, they are like up over 100% compared to the previous 8 quarter average. They are up 165% quarter-on-quarter. How should I think about the run rate when I make the modeling, going forward? Like, is it fair to assume that it will be significantly higher compared to the previous run rate that we have seen through the last 8 quarters? Or that the current level that we saw now in the second quarter is kind of sustainable? And kind of similar question, if I look at the insurance results, it's also significantly up quarter-on-quarter and compared to the previous run rate, and same goes for the equity method income, like the [ print ] that you had in the second quarter was impressive. But is it kind of here to stay or is it fair to assume that some of it was exceptionally strong equity markets, and maybe going forward it will normalize and converge somewhere closer to historic average? So that would be my kind of first question.

And then the second question would be that on the press conference earlier today, you kind of mentioned that also some of the growth that you're seeing is coming from outside of Norway. Could you elaborate a little bit, kind of which products, which markets, which currencies? And how do you think about this growth going forward? And yes, so there are a little bit more details around the growth going forward? And then just going back to the kind of margin development, we saw higher kind of lending spread in the quarter, but the deposit spread declined and the combined spread was marginally down, but how should we kind of think about the net interest margin going forward if your rate assumptions are correct for the next 2 years? Like what are the moving forwards? I know you can't guide, but how should we think about the margin development going forward?

[Kjerstin Braathen, executive]

I think I'll ask Alex to try to shed some light on the fee side, but just start by saying that over time we have communicated how we invest in a broader and more diversified activity, both from a geographic point of view as well as from a product point of view. So the average over time has been continuously growing well above the target that we've set for the total fee base, 4% to 5%. So it's important to keep that in mind. But Alex, maybe you could try to give some color.

[Morten Opstad, executive]

So I heard, Sofie, the question being on the fee side of the Investment Banking business, if that was correct? And of course it will fluctuate with market activity and seasonality. As Kjerstin mentioned, we have -- we are continuously investing in this platform. I'd say we invest across geographies, of which Sweden is the most important one to us. We invest across products and then it's typically on the technology side, on the capital markets side, and we invest in sector competence, on the advisory side. And those investments are recently [ studied ] and we expect the sort of structural growth to continue along the same levels, which as Kjerstin mentioned is above the sort of guided growth in fees. And historically this has fluctuated around 10% growth over time. So the sort of long-term cumulative average around 10%. And for the short term fluctuations, of course, very difficult to say. But a pickup in market activity we should see reflected in our numbers, as with our peers and competitors.

[Ida Lerner, executive]

And when it comes to growth outside of Norway, I think what we pointed to there is also the activity in not the least in debt capital markets, where we've seen an uptick in activity and as a little to point to in terms of the platform, both geographically, as well as on an industrial perspective. We're seeing a growth in income stemming from industries that still have a strong activity, and that's primarily related to renewables and renewable financing, where we have a very high turnover of capital, and therefore also an increasing income stemming from originate and distribute and then, of course, also related to debt capital markets. As well as, I would say, in terms of the bond origination side, of course.

When you had a question in relation to the margins, I think -- you know it's difficult for us to give any kind of guidance on future outlook. But what we can point to, first of all, it's important to say that the combined spreads were stable this quarter compared to the first quarter. The only thing that changed this quarter was that we made a change in internal principles related to internal margins. Calculation of margins on short-term deposits in corporate customers. That does not have an impact on Group level in terms of NII or net interest margins, as you can see from the net interest margins, actually an uptick of 2 basis points. And that's also what we say that's the most accurate number to look at in terms of looking at the development of margins.

When looking ahead, there are a number of different items that impact margins and spreads, of course. And you know that, that related to customer activity and what the customers -- customer behavior. What we talked about in the fourth quarter and to some extent in the first quarter, that our customers were actively moving deposits from transactional accounts to savings accounts, as well as in between different savings accounts, that trend seems to have been tapering off this quarter, and we see less of that in -- within the deposit portfolio. And therefore, that also doesn't impact the margins to the same degree that we have seen before.

The other element that is, of course, important when looking at the margins is the competitive behavior among our competitors or how the competitive environment is developing. Competition continues to be strong in Norway, with very capital -- or very well capitalized banks operating in Norway that wants to see that capital being moved around. On the other hand, I wouldn't say that we've seen any change in competitive behavior among the largest competitors, but it remains fierce and strong, as it did in the first quarter.

And then the last element is, of course, relating to when we -- how and when we reprice, and also the behavior from the Norwegian Central Bank. And there, I think they've been quite clear in their communication around higher for longer. And our macroeconomists have pushed out the expectation of a decrease in key policy rates from December to now being March in 2025. And I believe it's clear signs that the Norwegian Central Bank will remain higher for longer. Also, relatively speaking, bearing in mind the strength of the economy in Norway, and also their focus on the Norwegian front.

[Operator]

We will take the next question from the line Namita Samtani from Barclays.

[Namita Samtani, analyst]

I've got 3, please. Firstly, you've got a 30% market share in Retail and Corporate deposits. And deposits are actually quite profitable in this rate environment. But we can see Nordea, for example, pricing very aggressively in Norway on the Retail side. So my question is, how are you going to protect your deposit franchise? Do you need to use price as a tool or is there something else you can do?

Secondly, you've kept your stance of loan growth to pick-up in the second half of this year, yet base rate cut expectations have been shifted out. I just want to ask, what makes you so confident you can achieve loan growth in the second half of this year? And why are you more positive on retail customers transacting now? If rates are elevated, won't people just wait till next year?

And lastly, is this proposal by the Norwegian FSA related to the increased risk weights? Like, is this something that is going to pop-up every 2 years, i.e. there's going to be an overhang on DNB every 2 years to deal with this? And I want to ask, related to this proposal, why do you say not much has changed since the proposal was rejected in November 2022, because the base rate of 4.5% is quite different to what it was in the 2022?

[Kjerstin Braathen, executive]

Thank you. The first question related to market share in deposit. We certainly feel that we also have attractive pricing points. So the main movements that we have seen is not so much funds moving elsewhere, but moving from transaction and current accounts towards savings accounts and placement accounts with businesses that yield some better return. And I think we've experienced that depending on whether it's Retail or Corporate, the deposit market is somewhat different to the lending market. It's also less elastic on pricing.

One example that we can share on the Corporate side is that we have a lot of the public sector in Norway as customers, and we have won a lot of customers that have a high transactional activity and attractive deposits after having invested in our position on solutions on the payment side for many years now. And this is an area that we do not -- we note some increased interest from competitors, but it hasn't been an area where we have been particularly challenged over the past few years. And this is an area where it's not price that is our biggest competitor advantage, the services that we offer.

Why confidence for loan growth? I think what we are sharing is the read that we have through this quarter and the outlook for the economy in general. And then of course it always remains to be seen, how will that actually translate into the market.

But why now when rates are topping out? Keep in mind that wage growth for the second year in a row has also been north of 5% in Norway. And for the past couple of years, we've been used to no growth in disposable income and purchasing power for people. Whereas now, this year we expect the majority of households to actually get an increased purchasing power from the wage inflation. And this is combined with a very, very low level of unemployment, meaning that now that rates have stabilized, it seems like people are -- have been able to make the necessary adjustments and are more positive and optimistic. This also supports the broader market view and expectations that consumption, who we saw rise in the month of May and June, will continue to rise also in the second half of the year compared to what we've seen first half.

The proposition from the FSA, I think the comment that we're making in terms of changes is more related to the overall risk in the Norwegian economy. And despite rates having moved from 0 to 4.5%, the general view and observation is that the economy has been very resilient, surprisingly resilient I would say, in the view of many, towards this increase. And the reason why we're seeing a higher for longer scenario on rates is because the economy has developed better than expected this year. So it's hard to read through that now where we are in the cycle, that there should be indications demonstrating or underpinning that the risk in the Norwegian economy overall is higher than what we have seen and expected so far.

[Operator]

We will take the next question from the line Hugh Moorhead from Berenberg.

[Hugh Moorhead, analyst]

3 from me as well, please. The first one on asset management, strong retail net flows, but you are saying your retail commission margins declining. Please could you give us a bit of commentary on what's causing this? Whether it's competition, customer behavior? And also do you have a sense of what a stable longer term commission margin here might look like?

The second one is on Luminor. There's obviously been a bit of press speculation about whether Blackstone might divest of its stake. Would DNB consider doing the same if the price was right? Or do you see it more as a long-term strategic stake?

And then a third one, please on tax. I know that you've guided for your effective tax rate to reduce to 20% this year from 23% normally. Is that a one-off for 2024 or should we see that as a sustained rate into future years?

[Hakon Hansen, executive]

Okay. Thank you for the questions. When it comes to the retail margins, they are actually flat quarter-over -- or since the last quarter, or the first quarter of the year. But you were right, it's down 3 basis points since this similar quarter last year. That's mainly due to the index trend that we have seen over the last few years. This quarter we see it flattening out and we have a higher increase or inflow in the active fund than in the index fund that we have seen over the last few quarters. So it's impossible to say exactly, but we feel to see that -- or we see that the trend is flattening out when it comes to the index trend at least. So I think the margins is close to what we could expect in the future.

[Kjerstin Braathen, executive]

When it comes to Luminor, I think we also read the rumors that are out there, but we can't comment on that for more than that. And I think we'll just leave it, leave it at that comment. It has been, we have maintained a [ safety in ] Luminor, but of course we will take part in any discussions relating to that. But more than that, I don't think we can comment on it.

When it comes to the tax, we've said that that's the guidance for this year, and then we expect it to move up towards 23% again. And that's of course related to the debt distribution, what I call this debt distribution?

[Ida Lerner, executive]

Interest allocation.

[Kjerstin Braathen, executive]

Debt -- interest allocation. And it's driven also by the level of the interest rates and more important, the difference between interest rates in Norway and the U.S.

[Hugh Moorhead, analyst]

Okay. Sorry, just to clarify on the asset management one, that was probably looking on a multi-year view, so I think it's down from about 60 basis points in 2021 to 46 basis points now. Is that just a continuation of that shift into passive products?

[Hakon Hansen, executive]

Yes. It's been that over the last few years, but when it comes to Retail segment, you also have to add the platform fee that the Retail transact is paying to the distributor. And in DNB, that's between 15 and 30 basis points, depending on whether it's a money market fund or a equity fund.

[Kjerstin Braathen, executive]

So there are 2 shifts to be aware when you're looking at the development in a longer term trend that Hakon is pointing out. One is the trend of funds [ in piece ] increasingly being allocated into index funds, which has a lower margin that seems to be tapering from what we see in the second quarter.

And secondly, it's a change in business models where the payment from the customer is split towards the project separately that you can see in the asset management margin, and a platform fee that will be accounted for at a fee in the personal customer account as such. So this is not really a reduced margin, but it is a reduced margin if you look in isolation at the asset management company.

[Hugh Moorhead, analyst]

Understood.

[Kjerstin Braathen, executive]

And we should also highlight that despite both of these trends, the growth and volume increase has more than weighed up for the margin pressure that we've -- the limited margin pressure, I would say, that we've seen over the past few years.

[Operator]

We will take the next question from line Jacob Kruse from Autonomous.

[Jacob Kruse, analyst]

So just 2 questions. Firstly, on the NII, could you just set out how much did delayed pricing benefits on mortgages contributed to Q2? And offsetting that, how much price changes in Sbanken and other areas in Q1 kind of had a spillover effect in Q2? Just to understand what the kind of those changes did to the quarter.

And then on the capital side, this 80 to 90 basis points potential hit from floors, does that mean given where you are on capital today? And I guess I'll start, there's a positive for that -- buybacks are of unlikely until you get full clarity on capital, in addition to obviously the one you just announced.

[Kjerstin Braathen, executive]

Should I start with the capital side? I think first of all, we are now at the 210 basis points headroom to the NFSA's expectation. And that is a significant headroom, I would say to the expectation as the expectation also includes a pillar 2 guidance of 125 basis points, which is important to take into account. We have an ongoing share buyback program of up to 1%, which we are continuing to deliver on -- or implement or -- that is continuing. Sorry. In addition to that, we will of course, we have said that we will look at utilizing share buybacks to optimize the capital -- optimize the capital position. And we have also said, as we saw last year, we're splitting it to smaller pieces. And that's what I expect that we will do this year as well, going forward, if we continue to be overcapitalized, which we are today.

We'll try to help you a little bit on the first one. In the second quarter, we are getting the impact roughly from half a quarter of the last repricing that was done, that would be a positive contribution. And then there's a negative contribution from our change of rate that we did in the Sbanken [ concept. ] And we also did some smaller changes to our pricing towards the youngest segment that we're particularly focused on.

The first one being slightly higher than the second one. So I can't give you exact numbers, but that would be the general idea. And then you have some asset mix effects also impacting the second quarter. But we have said that they're tapering towards the end. But these are some of the moving bits and pieces that would impact the bucket of roughly minus 50, that you see impacting the NII quarter-over-quarter.

[Operator]

We will take the next question from the line Martin Ekstedt from Handelsbanken.

[Martin Ekstedt, analyst]

2, if I may. So, looking first at loan loss provisions, commercial real estate swings from net reversals of NOK 64 million in Q1 to NOK 141 million on net losses in Q2. I just wanted to check if this is just reactive to situation-specific data? If there are other dynamics at play? And how do you see the CRE sector handling higher for longer rates overall? And then perhaps a side question along the same lines. So what areas of the loan portfolio do you see have particularly exposed in a higher for longer rate scenario in Norway?

And then my second question, then you mentioned capital, and that you have a 2.1% buffer to regulatory expectations. If you look at your Swedish peers, they have management buffers, express management buffer ranges on top of the P2P Pillar 2 guidance is right? But I don't think you have one. But do you have a working assumption internally range or buffer above which you consider yourself to be overcapitalized?

[Kjerstin Braathen, executive]

I'll start with the last question, which is important to highlight. The Swedish banks have a Pillar 2 guidance, if I'm not mistaken, of 50 basis points. Our Pillar 2 guidance is 125 basis points. So even in that there is a significant buffer, we've said that we don't want to operate with too much of a buffer on top of the already existing buffer, but we of course, don't want to move into the Pillar 2 guidance buffer that is there, because that means that we will need to go into dialogue with the NFSA and lose room to maneuver.

We haven't quantified what that buffer on top of the buffer is, but that's more to manage continued opportunities to be able to deliver profitable loan growth as well as handle potential FX effects. But again, I just want to say that there is not a significant buffer on top of the buffer, even though we haven't quantified it.

When looking at the Commercial Real Estate portfolio, I think we are continuing to see, and actually even more so this quarter, where we see that there's more, if anything, a positive outlook in the commercial real estate market in Norway. There seems to be more of a level where both buyers and sellers are finding themselves, and we're also seeing more transactions being done than what we have seen before. And so there's no negative development in the Commercial Real Estate portfolio. And the numbers you point to, I would say, are still -- in looking at the broader perspective, and also bearing in mind that this accounts for more -- approximately 10% of our total exposure before, are still fairly modest numbers on our things that I would expect to see changing quarter-on-quarter.

94% of our exposure in Commercial Real Estate is in Norway. 75% of the portfolio is still in low risk. And this is a portfolio that we scrutinize on a quarterly basis, purely because we know that it historically has caused issues for banks in periods where interest rates have increased quickly, because that's really the most important thing to point to. The commercial -- largest Commercial Real Estate corporates in Norway have hedged a large part of their interest rates, or their interest rates costs. And that has also what you saw in the fourth quarter, we had a significant uptick in FICC income relating to hedging of interest rates in the Commercial Real Estate portfolio, which of course, kind of takes down the downside risk related to also impairments.

I would say that what we're seeing in terms of Commercial Real Estate is, as I said more positive, if anything, even though we haven't seen such a negative development that one could have expected. But we're also seeing that vacancy rates remains very low. We're seeing that rental or lease prices are increasing in line with CPI. And we're also seeing that our fairly conservative credit policy of lending to corporates, and focusing on corporate risk with strong owners, residual value and stable cash flow, has been a -- so far a very, very strong commitment also, and delivery in terms of Commercial Real Estate.

When looking at other sectors, I would say that what we are, we're of course, following the development in the portfolio very closely. We previously pointed to Construction as being an area that has been more vulnerable, that accounts for around 1.1% of our total exposure as default. So a relatively modest part of our overall portfolio, but it's an area that we've been following closer, and we've also seen some impairments over the past few quarters. Also there, I would say, if anything, there is a positive outlook where we're seeing that more corporates are looking at new build projects and looking at actually investing rather than the negative side of the story. So if anything, I would say that there is less focus on that.

Also, looking at the Retail industry, which is an area that we have looked very deeply into, purely because consumption or decreased consumption could potentially affect the Retail industry. Also there, we haven't seen a negative development to speak of, apart from customer-specific situation that is expected in a situation where we are today. But looking at our overall portfolio in Retail, which accounts for approximately 3%, I think it's 2.8% of our overall exposure at defaults. There the largest part of the portfolio is fast-moving consumer goods, and that has been impacted, of course, by decreased consumption. And consumption has also upheld fairly well in Norway, in spite of increased inflation and interest rates.

[Operator]

We will take the next question from the line Riccardo Rovere from Mediobanca.

[Riccardo Rovere, analyst]

A couple of 2, 3 follow-ups, if I may. The first one is on the maturity of your loan booking. In your Annual Report, you showed that you got -- at the end of 2023, you had roughly NOK 379 billion of loans with the maturity between 1 and 5 years. And you had another roughly NOK 1 trillion, a little bit more than NOK 1 trillion with a maturity over 5 years, would you be in the position to give us a ballpark of what part of this amount, roughly NOK 1.4 trillion, will actually reprice more or less in accordance with the -- with their maturity? So say maybe the fixed rate instead of being variable.

The other question I have is on, is again on the floors. When these discussions about floors in Commercial Real Estate mortgages arise, does the Norwegian FSA consider the leverage ratio? Do they care about the fact that your leverage ratio keeps over in over 6.5% to 7% depending on the quarters? Or do they realize, do they care about the fact that this number is well ahead of the European average? Or it's something, they just don't care, they only look at risk-weighted asset and they want to push up your capital requirements at any cost.

And the very final question is just a curiosity. This morning, if I got it correctly, you mentioned the fact that costs were somehow affected by some integration related to Sbanken. If I got it correctly, did I get it right? And if I got it right, would you be in the position to say how much of that was?

[Kjerstin Braathen, executive]

So if we start with the first question, what I can say is that you know that more than 90% of our mortgage book is fully floating. So that is, of course, the largest part of the portfolio. And then 30% of the small- and medium-sized enterprises portfolio is also on fully floating rates. So that's kind of -- if that's what you mean in terms of repricing and how that should be effective, that is really the only thing I can point to.

[Ida Lerner, executive]

I wonder, Ricardo, were you referring to our funding or was it the customer book?

[Riccardo Rovere, analyst]

No, I was referring on -- referring to adjusted side, not the funding, the adjusted side. You got a table -- is not a G16 in the annual report, Page 173, if I remember well. Yes.

[Ida Lerner, executive]

Okay. I thought, it was liability side. Perfect. Well, then.

[Kjerstin Braathen, executive]

So then, in terms of. That's really where you see the repricing mechanism and how that impacted. It's more than 90% of our mortgage lending book, and that is the absolute majority of what you see in personal customers is mortgage lending, as you know. And 30% of our small- and medium-sized enterprises is also fully floating, the rest is related to one. Yes.

In terms of how the NFSA thinks, I think that's very difficult for me to comment on. We have a very strong leverage ratio, [ at around 6.2% or ] 6.5%. I don't think there's anything else that I can comment than that.

When it comes to the integration of Sbanken, that is actually smaller numbers, that's more relating to overtime paid and also some IT expenses, that was extraordinary in relation to the technical integration of Sbanken. But again, not major in any way, but more smaller -- but was more related to the actual technical migration.

[Operator]

We will take the next question from line Shrey Srivastava from Citigroup.

[Shrey Srivastava, analyst]

It's sort of a follow-up on one early on market shares. So if I look at your loan and deposit market shares going back to the second quarter of '22, you've actually been losing market share at a fairly consistent clip. The same is true for corporate deposits. My question is, how do you look at your business in terms of market share versus profitability? Would you be content to sacrifice market share further if it meant maintaining your margins? Or is there a steady state and level of market share that you'd like to maintain, or if you could provide a bit more color of that?

The second one is to do with Sbanken. I know in the first quarter you mentioned that you saw an impact in terms of customers from the integration of Sbanken and onto your platform. I'd just like to ask how that's progressed in the second quarter and if you're seeing further outflows or not?

[Kjerstin Braathen, executive]

Thank you for your questions. Our most important principle for the way we look at our business is by combining the importance of having a market lead position and growing the business profitably. And both of these are true on the lending and deposit side, that we have a comfortable market lead position in the market, and beyond that, we look for our growth to be profitable.

It is true to say that we have lost some market share and relatively not have had as good a performance the last year as compared to the 2 previous years, for example. And typically this is the case when banks are being more scrutinized and criticized. As the largest player, we tend to get more than our share of that attention in the Norwegian market, which does have an impact. But over time I think we have proven our ability to deliver on the annual growth guidance of 3% to 4%, and be very disciplined and focused on profitability, which is important for the sustainability of our business over time.

It is true that it's been -- it was negative reactions and some customers who chose to leave us once we integrated Sbanken and there has been discussions in the press that the solution wasn't as good as customers expected. And there's been sort of a startup challenges for some on the new solutions that we issued in the market. That has also tapered over time, I would say, and it belongs to the [ total ] picture that we presented today, where volumes are flat through the quarter. Deposits are up, pays new savings customers under the shared savings program this year, net for DNB so far has been more than 14,000 new customers. So the new activities now more than outweighs the negative development that we see. And we have a very high priority and activity in improving and further developing the solution that we have offered to the Sbanken customers and are very focused on spending the next years to prove our most important ambition with this acquisition, that this should be a win-win, and that we definitely believe that this will lead to much better services and products for our customers over time.

[Shrey Srivastava, analyst]

That's very helpful. If I may just have one very quick follow-up within your 3% to 4% loan deposit growth ambition, I mean. How do you think about this? How do you differentiate it between system volume growth and your volume growth? So if you were to make a split within the 3% to 4% between where you think the system will grow at and where you will grow at relative to peers. What would that be? And how would you think about that?

[Kjerstin Braathen, executive]

We don't share that specifically, but keep in mind that we have 80% -- roughly 80% of our revenue from the Norwegian market, 20% from outside, which means that we will prioritize to grow as close to market growth in Norway as we can and even above where we can. I think SME -- SMEs in Norway is the sector where we have taken market share for quite some years now. And seeing that sustainably developing a very healthy matter. When we get into the large corporate area, it is an area where we can mobilize much more in the originate to distribute fare. So to reduce the average duration of our portfolio, we've been working systematically on that for the latter few years. This has a very positive impact also on profitability. That means we're turning the portfolio very quickly around.

But the dynamic in that is also such that when -- if and when we are in periods where the Norwegian economy is growing slower, we can leverage that part of the business to deliver some more profitable growth. And I would say that's typically where we are today, where we have mobilized that business. We are seeing an increasing pipeline and increasing activity in that business. That is also demonstrated by the 1.1% growth this quarter, despite also quite active prepayments from customers.

And the reason it takes a while is because some of these are larger transactions and they can take anything from 6 to 18 months before from the start until they actually materialize. But it's that Norwegian activity combined with that international growth platform that underpins our guiding of 3% to 4% over time, yearly.

[Operator]

We will take the last question from the line [ Jan Gjerland ] from ABG.

[Jan Gjerland, analyst]

It's Jan Erik Gjerland from ABG. I have a question on the money transfer and Vipps, which is sort of your [ tapping ] bank. Last year it was a big loss in Vipps, should that sort of be continued this year? Or is that -- was that a one-off character when it comes to the big loss which you showed in the annual report? Just so we understand where the associate line could have.

And secondly, on the money transfers, which was very strong. It seems like it's a jump there. Is it anything there that is related to or relates back to Vipps when it comes to more income given from Vipps to the banks in any way, so we can understand how that money transfer plan could move on going forward?

[Kjerstin Braathen, executive]

Thank you, Jan Erik. There is no elements of revenue inflow from Vipps in the money transfer. It's a more active market, particularly on the payment side in corporate banking. That relates back to what we talked about earlier with having a strong competitive position towards corporate clients with a high payments activity.

With regards to the guiding and the expectations for Vipps, we do own this company together with several other owners and prefer for them to comment directly, but I believe they have been out in the market saying that they are working to materially reduce the negative results in the capital company with the ambition of having [ black ] numbers within a few years.

As an owner, I would also like to point out the strategic importance of Vipps and the ownerships and the positions that we have in payments infrastructure in Norway that differentiates Norwegian banks from many European banks to now see, I would call painful losses of market share and valuable customer information to other third-party providers.

[Jan Gjerland, analyst]

Perfect.

[Operator]

Thank you. There's no further question at this time. I'll hand it back over to your host for closing remarks.

[Rune Helland, executive]

Thank you very much, and thank you all for your participation and we will take this opportunity to wish you all an excellent. Good night. Sunny Summer. Thank you.

[Kjerstin Braathen, executive]

Thanks, [ Sara ].

[Operator]

Thank you for joining today's call. You may now disconnect.