Good morning, everyone. Welcome to the Conference Call for Danske Bank's financial results for the Q1 2022. Thank you all for taking the time to listen in on this call today. My name is Claus Ingar Jensen, and I am Head of Danske Bank's Investor Relations. With me today, I have our CEO, Carsten Egeriis, and our CFO, Stephan Engels. Slide one, please. In today's call, we will present Danske Bank's financial results for the Q1 2022. We will aim to keep this presentation to around 30 minutes, and after the presentation we will open up for a Q&A session as usual. Afterwards, feel free to contact the Investor Relations department if you have any more questions. I will now hand over to Carsten. Slide two, please.
Thanks, Claus. Let me start by making a comment to the company announcement we published yesterday about our decision not to distribute dividends in connection with the announcement of our interim report for the Q1 2022. This is done in order to ensure prudent capital management as we have now entered into initial discussions with US. and Danish authorities in relation to the Estonia matter. Our decision yesterday is consistent with our announcement in February 2022, and I'm not able to share any more details about the discussions with US. and Danish authorities, which are confidential. However, we're not yet able to reliably estimate the timing, the form of resolution, or the amount of a potential settlement or fines, which is likely to be material.
That said, I will now together with Stephan, comment on our financial results for the Q1 , which was published this morning. Despite the tragic events in Ukraine following the Russian invasion in February and the accompanying effects on the outlook for the global economy, we at Danske Bank have had a satisfying start to the year. As I mentioned during our Conference Call in February, we ended 2021 in a positive way as we started to benefit from several green shoots, all supporting increased business momentum in many areas of Danske Bank. I'm pleased that also in the Q1 we've continued on this positive trajectory with improved commercial progress in our core banking activities. I'll provide more detailed comments for each of the business units later in this call.
The Q1 also marked a period in which the remaining restrictions caused by the pandemic were lifted and economic activity remained at a high- level. However, we also saw a potential capacity constraints in the labor market and also rising inflation from the levels we saw already in the Q4 . Russia's invasion of Ukraine fueled an acceleration of the supply chain and energy supply issues. The situation is unlike anything we've seen for decades, and the uncertainty about how this will affect the economies and our customers remains high. The significant investments that we've made to enhance our financial crime prevention and our compliance resilience over the past years have enabled us to respond swiftly to quickly changing environment.
The sanctions implemented in response to Russia's invasion of Ukraine are complex and expansive and have impacted a number of businesses and operators in various ways across the Nordic countries. As a trusted financial partner, we've diligently focused on managing sanction risks while helping our customers navigate through this changing landscape. In this turbulent environment, we saw good commercial progress driven by strong customer activity and our initiatives in many segments of our business. Despite a slowdown in our capital markets-related business from a very high- level last year, overall transactional activity, including remortgaging, was high. Adjusted for the fair value effect of loans at Realkredit Danmark, lending was up 2% from the same period last year, due primarily to demand from our corporate customers. The good progress we've seen within our sustainability offerings continued in the Q1 .
We've improved our green offering to personal customers, and we've maintained our position as a top-ranked arranger of sustainability-linked finance. Financially, we saw progress in our net interest income due to positive effects from higher volumes and pricing initiatives, whereas fee income maintained the strong level from last year, benefiting from a diversified business mix. Turbulent and difficult financial markets had an adverse impact on net trading income, due mostly to value adjustments, whereas customer activity and trading income from our business units held up well relative to the same period in 2021. However, income from insurance business came in significantly lower despite a positive development in the underlying business. In terms of operating expenses, we continue to make structural progress by reducing underlying costs despite continually high- costs for remediation and AML.
The cost-to-income ratio came in at around the same level as in the preceding quarter and higher than the level for the same period last year, mainly because of lower income. Credit quality remained strong with loan impairment charges at a low- level as our customers' financial position remained healthy, and we saw limited impact from adjusted macro models in the Q1 and continue to have a prudent post-model adjustments in place. Stephan will comment on the financial results in more details later in this call.
Despite the somewhat higher- degree of uncertainty for the economies, we maintain our outlook for a net profit of between DKK 13-15 billion for the full- year, subject to uncertainty, and does not include any effect from a potential settlement of the Estonia matter in 2022. Stephan will, as usual, comment a little bit more on the outlook later in the call. Let's have a look at our business units in the Q1 . Slide three, please. At Personal and Business Customers, we started the year strongly with good activity and improving income across all lines. NII benefited from a growing credit demand and the additional impact of the deposit repricing initiatives that we've taken. In general, we saw a strong development for fees across segments, particularly within business customers, which also benefited from price initiatives to further encourage the use of digital channels.
In Personal Customers Denmark, we saw seasonally high- refinancing activities combined with good contribution from remortgaging and also general high- activity from healthy consumer spending. With the necessity of the green transition becoming increasingly more important for our society, we continue to implement products and solutions for all our customers, for example, through new loans that give personal customers an incentive to change their heating source, and further also investing in our advisors' ESG abilities. We continue our challenger strategy in our Personal Customers Nordics business with a positive trend in home financing meetings and also approval of mortgage applications in Sweden, which has supported the trend in lending.
For business customers, we have strong relations with our customers, and although strong credit demand came primarily from our large corporate clients, we continue to increase ancillary business with SMEs across our other offerings, where especially cash management and also FX product categories showed a strong development from the same period last year. As part of our tiered service model, we continue to enhance our allocation of resources through the investments that we make in our digital solutions. In the Q1 , this resulted in further improvement of relationship managers' ability to fully approve credit applications for small businesses digitally, which now accounts for 60% of all approvals. Coupled with good traction and further innovative digital offerings, we're really excited about the opportunities that lie ahead.
We now also welcome Christian Bornfeld and Johanna Norberg to the executive leadership team as the new heads of our new Personal Customers and Business Customers unit, with the aim of really fine-tuning our focus with a dedicated split of P&BC, and this takes effect on Monday. Slide 4, please. If I turn to LC&I, we continue to build on our strong relationships with our customers as a leading wholesale bank and have been able to support customers through a wide range of product offerings and advisory services, which resulted in our financial performance holding up well despite the volatility that characterized the quarter. In particular, we saw strong development for lending volumes, which increased 4% from the same period last year. This was driven both by our activities in Denmark and in line with our strategic priority in Sweden as well.
Together with our leading everyday banking solutions, this volume growth mitigated the lower activity seen in capital markets, where primary markets slowed significantly during the quarter. Assets under management saw a decline in the quarter due to financial markets correction. However, AUM was supported by continued constructive net sales and our efforts to strengthen investment products, including also award-winning sustainability offerings. Even without adjusting for a landmark ECM transaction last year, our diversified business model resulted in NII and net fee income combined being stable in the quarter, despite the volatility and the negative effects of the decline in AUM. As volatility hit the financial markets, we supported our customers with risk management expertise, which underpinned trading income despite the challenging market conditions. When excluding negative value adjustments, trading income at LC&I declined 14% from the same period last year.
However, net trading income rose 29% compared to Q4. Next slide, please. Let's briefly take a look at our insurance activities in Northern Ireland. At Danica, the result of the Q1 came in significantly lower than both the year earlier level and the level in the preceding quarter. The turbulent financial markets had a negative impact on the investment results on life insurance products, where Danica holds the investment risk, as well as on the investment result in health and accident business. In addition, the result from the health and accident business included a negative valuation effect from an adverse development in hedges relating to inflation risk.
The underlying business saw a positive development in the Q1 due to a continued growth in premiums from the same period last year, as well as the Health and Accident business, where our preventive efforts have contributed to a decline in new cases. In Northern Ireland, the core banking operations performed well, with NII and fee income combined up 16% from the same period last year, supported by sound underlying activity, higher UK rates, and also diligent pricing adjustments. This positive development was, however, offset by trading income being affected by mark-to-market adjustment of interest rate hedges. Given the nature of this hold-to-maturity hedging, this adjustment is, however, expected to reverse in the future.
Before I hand over to Stephan, let me wrap up by saying that all in all, I'm confident with the increased progress we've made in the Q1 across all our business segments. Despite the fact that in many ways the Q1 was a turbulent one, we have, as we saw during the pandemic, benefited from our diverse and our resilient business model and have been able to focus on continued execution of our 2023 plan. Next slide, please, and then I'll hand over to Stephan.
Yeah. Thank you, Carsten. As Carsten just mentioned, we had a satisfying start of the year on the back of good progress from the end of 2021. Our income from core banking activities performed well and was in line with expectations. NII was up 3% from the same period last year as deposit repricing initiatives and higher volumes more than mitigated the margin pressure we saw from primarily higher funding rates in Norway. NII was up 1% from the preceding quarter, despite the negative day effect as a result of yet another quarter with an increase in lending and a positive impact on deposits from recent repricing actions and higher short-term rates. Net fee income was in line with the level in the same period last year, when fee income benefited from strong customer activity and one significant ECM transaction in particular.
The slowdown we have seen in primarily income from our capital markets business was almost fully mitigated by higher activity-related income, including an increase coming from remortgaging activity in Denmark. When comparing Q1 with the preceding quarter, fee income came in lower, primarily because of the annual booking of performance fees and asset management in Q4. Trading income came in lower compared to the same period last year, due mainly to valuation effects, whereas underlying income from customers held up well despite the turbulent financial markets. Relative to Q4, income was lower as the Q4 last year benefited from a one-off gain of DKK 0.2 billion. However, underlying trading income from the business units was up because of good customer activity at P&BC and LC&I.
Net income from insurance business came in lower due to a lower investment result and an adverse effect from an inflation hedge, as Carsten mentioned earlier. Other income amounted to DKK 0.7 billion for the quarter, including the previously announced gain related to the sale of our business activities in Luxembourg. Operating expenses came in 2% above the level in the same period last year, driven by an increase in regulatory cost and elevated remediation cost. Good progress with the reducing underlying cost as well as lower transformation cost mitigated part of the increase. I will comment on the cost development in more detail later in this call. Loan impairment charges amounted to DKK 0.2 billion in Q1, down from DKK 0.5 billion in the same period last year.
The level continues to be well below a normalized level, confirming overall strong quarter credit quality and our very limited direct exposure to Russia and Ukraine. We continue to have sufficient buffers in place, which I will also comment on later. Net profit for the period thus amounted to DKK 2.8 billion, down from DKK 3.1 billion for the same period last year. Next slide, please. Now let us take a closer look at the underlying development in the net interest income for the group. For NII, we saw a good improvement compared to last year with an increase of 3%. Deposits are clearly benefiting from two factors. Firstly, the repricing initiatives for deposits we launched during 2021, and secondly, the higher short-term rates.
On the lending side, we are pleased to see the positive impact from an increase in volume, whereas the negative impact of lending margins is due primarily to higher NIBOR rates as the associated pricing adjustments for customers in Norway announced this quarter awaits implementation due to the notice period. Relative to the preceding quarter, NII was up 1% despite fewer interest days in the quarter. This development can mostly be attributed to the same factors I just explained for the year-over-year development, namely higher volumes and margins. In addition, we saw two opposite effects in Q4 related to the TLTRO and a negative one related to the NII impact of taxation of business travelers. In respect to wholesale funding activities, we have, as usual, been active during the Q1 in order to meet our funding need, primarily by issuing covered bonds and non-preferred senior bonds.
The uncertainty caused by the Russian invasion of Ukraine kept the market at low activity for a period. However, in early April, we issued a sizable non-preferred senior debt issue in US. dollar, confirming that we have full access to the market and we are in a comfortable position for now. Let's have a look. Next slide, please. Let's have a look at fee income. As we have discussed on some of the previous slides, fee income maintained a strong level and came in at an almost unchanged level from the same period last year, when fee income had benefited from high activity driven by more benign financial market conditions. In the Q1 this year, we saw a more turbulent market due to rising interest rates early in the quarter and significantly higher uncertainty as a result of the Russian invasion of Ukraine.
Hence, we have seen a decline in income from activities subject to financial markets conditions. However, this has been mitigated by strong commercial momentum in our business units. Fees generated by investment activities were impacted by lower investment appetite among our customers. However, fees were relatively stable from the same period last year as we continue to benefit from the increased momentum on investment sales we have seen building throughout last year. When comparing with the preceding quarter, please note that Q4 included the annual booking of performance fees of DKK 0.3 billion in asset management. Both year-over-year and relative to the preceding quarter, activity-related fees were up, reflecting the strong underlying economic activity and now exceed the level before the pandemic.
In combination with our own customer initiatives, this translated into higher customer activity for example, through corporate daily banking services and was further supported by adjustments to our fee structure for corporate customers. For lending and guarantee related income, we also noted higher activity driven by remortgaging activity and the semi-annual refinancing of Flex Loans. The higher long-term rates resulted in strong interest for remortgaging among our personal customers in Denmark, and the good traction we have seen recently for our Flex Loan mortgage product further added to remortgaging activity. Next slide, please. Trading income came in at DKK 0.6 billion for the quarter, significantly impacted by market value adjustments of group treasury's mortgage bond portfolio, mark-to-market movements on an interest rate hedge in Northern Ireland, and XVA adjustments in total amounting to DKK 0.5 billion.
Despite the turbulent financial markets, customer activity held up well at both P&BC and LC&I. The combined income of the two units exceeded the level from the preceding quarter by 28% and was down 7% from a high- level in the same period the year before. When comparing trading income for the periods, please note that the Q1 last year, as well as the preceding quarter, included one-off gains from the sale of Visa shares and AIA. Next slide, please. Now let's take a look at our operating expenses. The headline number came in higher than the same period last year, due mainly to the planned ramp up of AML compliance we implemented last year and continually elevated costs for remediation of legacy cases. In addition, the new Swedish bank tax and insourcing of IT explains the increase.
We continue to see an improvement in underlying costs in the form of lower staff costs as a result of decline in the total number of FTEs of 3%, driven by a decrease in financial crime FTEs of 6% since the peak in 2020. Lower- costs for our transformation, which is progressing according to plan, also contributed to the decline in costs from the same period last year. If we look at the quarterly development, the continued progress on structural cost reductions more than absorbed the introduction of the Swedish bank tax and continually elevated remediation costs. The seasonal decline in performance-based compensation we normally see in Q1 was partly offset by a reversal of severance pay in the preceding quarter. Next slide, please.
Turning to credit quality and impairments, our direct exposure to Russia and Ukraine is very limited, and we therefore continue to see an improving trend in credit quality and impairment charges below normalized level. Actual single- name credit deterioration and individual impairment charges remain very modest. Despite added macro model charges and additional post-model adjustments to account for the current uncertainty, we ended the quarter with an annualized loan level of 5 basis points for the group. While some sectors will undoubtedly be impacted by the rapidly rising inflation and the economic implication from the war in Ukraine, we remain comfortable with the quality of our loan book. We have done a diligent bottom-up review of exposures that might be impacted by second order effects and will continue to prudently assess our portfolios.
With the current uncertainty, we have made prudent adjustments to our macro scenarios, which drove the additional DKK 0.4 billion impairments this quarter, which is in line with the level we saw in Q4 that was ascribed to the uncertainty at the time related to COVID-19 restrictions and the Omicron lockdown risk. This uncertainty has clearly been reduced since, and as such, parts of the post-model adjustment that was put in place to cover COVID-19 retail-related tail risks have been repurposed towards segments particularly affected by the global tension with an additional add-on of DKK 0.2 billion. With that, we ended the quarter with provisions of around DKK 1 billion for any Russia-Ukraine impact not yet measurable on single- name level or captured in our macro models.
In addition, we have kept around DKK 1 billion for any COVID-19 -related tail risks that could emerge. Overall, we remain comfortable with our well-provisioned position and the additional PMAs we have put in place to account for the current uncertainties. While we expect impairment levels to normalize going forward, we are reassured by the robust household finances and the low LTV ratios, which we see across the Nordic countries, coupled with our specialized risk officers in place to cover the more complex parts of our portfolio and the significant de-risking of our balance sheet in recent years, for example, in relation to oil and gas, support our view of a normalized loan loss level of around eight basis points. Next slide, please. Now let's take a look at our capital position.
Our total capital ratio decreased due to the recent call of AT1 capital. Our reported CET1 capital ratio decreased slightly to 17.6%, as the increase from retained earnings and lower RWA were offset by an increase in deductions related to Danica and a small increase in intangible assets. RWA came down slightly in the Q1 as the increase in market risk following higher volatility in the financial markets in Q1 was more than mitigated by lower credit risk. In our capital planning, we remain mindful of the regulatory landscape, including the announcement to raise the Danish countercyclical buffer to 2.5% by the end of Q1 2023. Danske Bank's leverage ratio was 4.7 according to transitional rules and 4.6 under fully phased-in rules. Next slide, please. Finally, a comment on the outlook for 2022.
As Carsten mentioned at the beginning of this call, we confirm our outlook for a net profit between 13 and 15 billion DKK. As it appears from the financial report we have presented today, we see a good traction on our income from core banking activities, a stable cost development, and a continuation of loan impairment charges below a normalized level. As the observed decline in income from insurance business and net trading income was predominantly caused by value adjustments, we remain confident in our ability to meet the outlook for the full- year. However, it remains clear that the ongoing geopolitical tension and the potential risk from the pandemic are both factors that could further affect economies.
Consequently, the outlook is of course subject to a high degree of uncertainty and limited visibility, and does not include any effect from a potential settlement of the Estonia matter in 2022. Next slide, please, and over to Claus.
Thank you, Stefan. Those were our initial comments and messages. We are now ready for your questions. Please limit yourself to two questions. If you are listening to the Conference Call from our website, you are welcome to ask questions by email. Finally, a transcript of this Conference Call will be added to our website and then within the next few days. Operator, we are ready for the Q&A session.
Thank you. Just as a reminder, if you do wish to ask a question, please press zero one on your telephone keypad. Our first question comes from the line of Jakob Brink from Nordea. Please go ahead.
Thank you, good morning from my side. I have two questions. The first one is on costs, please, and your guidance of around DKK 25 billion. Now costs were a little above consensus and my expectations here in the Q1 . Also looking at the cost split over the past two years, it's been a somewhat lower share in the Q1 than this year. Why is it that you think 25 is still the level? Is there any big AML- related cost in the Q1 that would fall away in the next three quarters or anything else you can help us with here? My second question is on loan losses. I see that your stage three loans are coming down in the quarter.
We've seen the same in other banks. Obviously still strong credit quality. What should we expect, do you think, for the remainder of the year regarding P&L provisions? Will you keep reducing the COVID buffer to offset potential provisions or move more to the Ukrainian buffer, or what should we expect? Thank you.
Yeah. Hi, Jacob. Thanks for your questions. Let me just briefly touch on the asset quality questions, and then I'll hand over to Stephan on the cost question. We still see in our asset quality and in our customers, both across personal and business, quite benign asset quality trends. There's no question, of course, that there's uncertainty, but we're not seeing any concerning trends in our books as we look today. I think from a Corona perspective, you know, we're right in the middle now of seeing how the, particularly in Denmark, how the Corona loans phase out. The first loans were due here in April. Again, we don't see any material concerns at this stage.
I would expect that during the second half of the year, you would slowly see a further phasing out of the corona buffer, if you will. I think in terms of the global tensions post-model adjustment that we put forth of about DKK 1 billion, that is still highly uncertain. We'll have to wait and see how things play out. Again, I'd reiterate that we have very limited exposure as such, of course, to the war in Ukraine and to Russia, Ukraine more generally. That's also why we call it a global tensions post-model adjustment because it is there for more general concerns of which we don't really see anything come through in our book at this stage. On costs.
Hi, Jacob. I would make two, call it, pretty simple comments. One is, there is obviously further plans for cost take-out throughout the year as much as I do agree with your seasonal argument in a way. Also keep in mind that in Q1 we have seen costs that are partly due to insourcing of IT that has kind of had some, call it, one-off start-up investment that we don't think is recurring. So that's why we still believe that our cost trajectory is fully in place.
How much have those one-off costs been, please?
It's roughly DKK 80 billion. DKK 1 billion, sorry.
Sorry?
Roughly DKK 80 million. Sorry.
Okay. Yeah. DKK 80 million
Okay. Thank you. Just sorry on the losses, Carsten. You said that you would potentially phase out the COVID buffer in the second half of the year. Given the uncertainty, do you think you will continue to be adding them to the Ukraine buffer, or do you think the likelihood of reversals is larger?
Yeah, I think that's a very difficult question to answer, Jacob, so I'm gonna remain cautious and say I'd like to wait and see how the current macro tensions and uncertainties play out in Q2.
Okay. Fair enough. Thanks a lot.
Thanks, Jacob.
The next question comes from the line of Mats Lidell from SEB. Please go ahead.
Yes. Good morning, and thank you. Looking a little bit into NII sensitivity, since that's a major topic among the Nordic banks. First of all, we got the rate hike in Sweden yesterday. Do you have any estimates for your interest rate sensitivity related to the rate in Sweden? And also, how is the path in Denmark considering that the ECB would move a little bit later during this year, regarding repricing of deposits, et cetera? I know the mortgage product, but on the deposits with the pricing you charge us there, if you could allude on that. Thank you.
Yeah. Hi. Morning, Mats. Just on NII more generally, we look at a 25 basis point increase, and this is mostly really driven by ECB and DK rates. A 25 basis points increase in rates would probably give around DKK 500 million-DKK 600 million all else equal of NII, just to state that first of all. That's for the next 25 basis points. We would expect subsequent increases to be around DKK 800 million of NII sensitivity, just so you all have that as sort of a high-level view. Your question on Denmark, and then I'll come to Sweden at the end. Your question on to what extent rate expectations and rate moves would change pricing on deposits, as I understood your question.
Clearly I can't say anything about future pricing, but obviously current rates in Denmark are still negative, and short- rates are still negative. You know, we haven't charged negative rates to our customers for a long time, and roughly two-thirds of our deposits are still not covered by negative interest rates in Denmark. Clearly, you know, as rates potentially increase, and there is of course a likelihood that euro and DK rates will increase towards the end of the year and into next year, you know, then we would look at how we reflect that, you know, both in deposits as well as in lending rates. Too early to say anything about that. Then on your Sweden question, we don't disclose NII sensitivities for Sweden.
Okay. Thank you. Regarding these investigations, especially in the US., you say it likely could be material, whatever that means. We can do the calculation backwards here in terms of capital requirements and where you are, et cetera. Have you stated anything? How much could you withstand in terms of a potential fine if we really sort of paint a bearish picture here? Have you estimated that and said anything?
No. I mean, first of all, I know this is not what you're asking directly, but I might as well say it, so it's out that I can't say anything about the timing, the outcome, or the amount of any potential settlement or fine. Then to your second question, to your direct question, we haven't done any direct calculations of the nature that you mentioned there. Obviously we disclose our capital and our minimum requirements and so forth.
Yeah. Okay. We take it from there. Okay. Thank you.
Thanks.
The next question comes from the line of Maria Semikhatova from Citibank. Please go ahead.
Yes. Thank you. A couple of questions from my side. First on costs. You recently noted that the resolution of legacy issues is likely to be delayed beyond 2023, and that you are now looking into alternative approaches. Just want to check with you what it means for the outlook of remediation costs. If I'm not mistaken, you previously guided that remediation costs would amount to DKK 400 million this year, then drop to zero in 2023. That's the first question. Second, just was wondering on outlook for Danica earnings. I think previously you said that normalized is around DKK 1.5-DKK 1.7 billion. But just given the result of the Q1 , what you think would be the appropriate level for this year? Thank you.
Yep. Thanks, Maria. Yeah, on the remediation costs around the debt collections case, which I believe was your question. I had a little difficult hearing it just at the start. You know, we had guided to higher remediation costs. They're probably a little bit higher in Q1 than expected also because of the increased magnitude of the case. We are looking, as you also alluded to, at alternative solutions to basically address and get the case resolved towards our customers. Therefore you know, we don't believe there is an impact to our 2023 cost guidance, which I think was your question. Then Stephan, I pass over to you on Danica.
Yeah. Let me maybe shed some light on what impacted the quarter. Simply speaking, with in total like call it DKK 600 million. There was probably a third related to inflation hedges that we have put in place to meet future liabilities, mainly for the loss of ability to work insurance in our Health & Accident segment. These inflation hedges are not completely available in DKK, so they are also taken out in euro. Since inflation expectations at the end of Q3 between several countries in Europe have been quite widely apart, that has led to this valuation effect. We would expect that to come back or at least normalize to a certain level over the coming quarters. A third was basically related to widening of credit spreads in our interest rate hedges.
As these hedges approach maturity, they also would by definition start to come back over time. Around a third is from financial market correction, which is our asset allocation. This is where Danica has the investment risk and where we need to see how the market develops throughout the rest of the year. To sum it up, our underlying performance assumption for Danica still is around DKK 1.5 billion. It now remains to be seen how much of the mentioned effects will come back through the year and how much possible further deterioration might come from our asset allocation risk.
Thank you. Just to quickly follow- up on the mitigation cost. I understand your outlook for 2023, but is it fair to assume that this year these costs are likely to increase above your expectations given your efforts to speed up the cases?
As I said, the costs were slightly higher in Q1. I think it's too early to say what the impact is. As I said, we're looking at alternative approaches and we'll come back as soon as possible on that.
Okay. Thank you.
Next question comes from the line of Sofie Peterzens from J.P. Morgan. Please go ahead.
Yeah. Hi. Here is Sofie Peterzens from J.P. Morgan. Just a quick follow-up. In terms of the NII that you make on the negative deposits, I understand one third of your deposits are only have negative rates. Could you remind us how much of your annual net interest income comes from the negative deposit base that you currently have? My second question would be around your dividend outlook. Yesterday you said you're not going to pay the Q1 dividend, interim dividend. How should we think about the further interim dividends? Should we expect them to be canceled as well, or is Q1 kind of a one-off? How should we kind of think about the yeah interim dividends? That would be for me.
Hi, Sophia. Thanks. On the further interim dividends, again, can't say anything about the timing, the outcome, or the amount of the potential settlement fines and any potential dividends are subject to a decision by the board on a quarterly basis. I can't say anything other than that. I think your question on NII was specifically whether we disclose or can say anything about the income that we receive on the roughly a third of DKK deposits that are impacted by negative rates. I'm not sure we disclose that. Can I just.
I think we just.
Ask Stephan, do you want to comment?
Yeah. I think in sum total of our deposit repricing initiatives across P&BC and LC&I, we have also quite done something. We have disclosed DKK 400 million-DKK 500 million last year on several occasions. You need to keep in mind that that has been factored in and only covers for P&BC the third, as Carsten just mentioned. On a more general note, I think you need to keep in mind that the rate hikes will obviously have different effects on different currencies. As Carsten said, our main sensitivity is probably around the euro and the DKK part. You need to keep in mind that you will see different levels of impacts on segments. LC&I probably who still kind of benefits from the floored loan agreements will see a lesser to neutral effect.
Whereas, P&BC from deposit repricing might or might not see a positive effect. Also obviously being a reflection of how the market will react to any changes in pricing.
Sorry, just a quick follow-up on the negative deposit rates, because I think last year you at least guided for 2 times DKK 500 million more in NII from the negative deposit rates. I'm just wondering where the DKK 500 million then disappeared from one of those kind of initiatives.
No, no. The DKK 500 million will not disappear. You will see that in a year-over-year effect. But it will also affect Sophie, the sensitivity going forward. Because last year we were more looking at a DKK 800 million sensitivity for a 25 pip shift. This year, we will, as Carsten mentioned earlier, we will more go to DKK 500 million-DKK 600 million because some of that has obviously been captured by quite some measures and also some smaller rate hikes in Norway and Sweden as per yesterday.
Didn't you introduce that negative rates first time in January 2021, and that NII by DKK 500 million? Then you had a further negative rate introduction in kind of mid-2021, which was another DKK 500 million. I'm just kind of struggling a little bit how to kind of add that DKK 1 billion versus your DKK 500-DKK 600 million NII improvement from a 25 basis point hike.
No, I think the confusion might be that when we gave the effects of these repricing measures, we clearly said there is a full- year impact, which we will only see in 2022, and that is what we are also seeing in Q1. There was obviously a smaller effect than last year because measures only kicked in throughout the year and only come to full effect this year. On top of that, we are seeing rate hikes, for example, in Norway and as of yesterday, also in Sweden.
Part of the measures that we have taken throughout the 21 decisions, plus the rate hikes that you have seen over the last couple of weeks, including, for example, UK, obviously eat a bit into the sensitivity for the 25 basis parallel shift concept, where we expect DKK 500 million-DKK 600 million rather than DKK 800 million. There's quite some upside still from rate hikes. As Carsten mentioned, there is a different, call it sensitivity between the first 25 basis points, among other things, reflecting floors, for example, that we have in loan agreements than with the next 25 basis points, which will then go up again to DKK 800 million.
Sorry, just a quick follow-up. In your annual report, I think you have the rate sensitivity is negative DKK 1.5 billion for a 100 basis point increase in rates. How does that then square to the guidance of DKK 500 million-DKK 600 million for the first 25 basis points and then DKK 800 million for the subsequent rate hikes?
Yeah. I think this is Carsten Egeriis here, Sophie. I think you should be careful because the rate sensitivity you are referring to is under the risk management part and where we apply completely different assumptions. So the negative DKK 1.5 billion is essentially based on a going concern view. So that is, you know, as I said, this is from a risk management point of view, whereas the DKK 500-DKK 600 million replacing the previously DKK 800 million guidance is, you know, in a
Constant balance sheet.
Yeah.
model, basically.
Exactly. Yes.
I mean, what assumptions do you then have for the DKK 500-600 million? That you repriced all the loans and nothing on the deposit side?
No, I think. Let's reflect back, Sophie. These 25 basis point rate shift sensitivities were originally kind of driven by regulatory prudential questionnaires. That assumes simply no change in customer behavior, constant balance sheet, and a number of other things, and obviously some pass-through assumptions that you make. In that sense, I think it is a bit of a theoretical concept to begin with. I think if you look across the market, there is very different views on what this will do, and these very different views in many cases reflect also the different business models, which obviously have different sensitivities.
Again, if you look at Danske Bank, there is obviously a higher sensitivity in, call it, our Danish business because we are structurally overfunded by deposits, given the way the Danish market is set up, and that makes for quite some sensitivity in this market. Part of that is kind of covered by our thresholds and the negative pricing, but as Carsten said, two-thirds of the deposits are, in that sense, unpriced.
You are welcome, Sofie, to give us a call afterward.
Okay. Thank you.
Yeah.
Yeah. Sounds good. Thank you.
The next question comes from the line of Jan Erik Gjerland from ABG. Please go ahead.
Thank you. It's regarding Northern Ireland and the hedges you have in trading. Should we think about those to anywhere towards the net interest income and see that is in a comparison versus the trading. The NII could sort of overstate it versus your trading loss. That's my first question. Just to clarify on the NII sensitivity, is it two-thirds in the personal customer and SME division rather than in the large corporate division that is sensitive to your Danish interest rate changes? Thank you.
Yeah. Hi, Jan-Erik. No, on Northern Ireland, I mean, these are interest rate hedges that normally would be hedge accounted, but are not due to the systems that we have in Northern Ireland. They're mark-to-market, and you should look at it in the sense that this income will come back over 2022.
Yes.
into early 2023, I guess. On your NII sensitivity question, the two-thirds is really focused on the personal customer book in Denmark. It doesn't impact the business banking book, and it doesn't impact the large corporate institutions book.
Okay. Very clear. Thank you.
To put it in another way, all deposits in Denmark, except for the two-thirds of the retail deposits, are priced negative.
Yeah.
Yeah.
Again, those are the ones where customers have under DKK 100,000 of deposits with the bank.
Thank you.
The next question comes from the line of Martin Gregers Birk from Carnegie. Please go ahead.
Thank you. Just following the lines of the announcement yesterday. Assuming you guys reach a settlement this year, what would that mean for costs going forward?
I mean, the way I would look at it, Martin, is that clearly there are costs associated with you know this case, not least lawyers, et cetera. I mean, in terms of operating expenses, there will be some a cost benefit, but you should not see that as a material cost benefit.
Okay. Now, you only wrote Danish and US. authorities in the company announcement yesterday. Should we still interpret that as other authorities that are involved in this, you guys are still waiting for them?
Yeah. I mean, again, I can't comment on discussions with authorities. They are confidential by nature. I can't say anything more on that, Martin.
If you go into the contingent liability section, Martin, you will find what kind of authorities we have a dialogue with. That's disclosed in that section.
Okay. All right. Appreciate it. Maybe just a very final question. After a potential settlement, it's also fair to assume that the DKK 10 billion of Pillar 2 relief is gonna be removed, and then potentially also the CET1 ratio short-term above 16% should also be maybe a percentage point lower?
That is a question I think we can only really answer once we know what the world looks like at the end of the day. Again, it's not for us to decide on any Pillar 2 buffer requirements. I don't wanna give any guidance what are my expectations are. I think that in this part, there's many moving parts, and I wouldn't start speculating on that right now, to be honest.
All right. Okay. Thank you.
The next question comes from the line of Johannes Thormann from HSBC. Please go ahead.
Yeah, morning. Johannes Thormann, HSBC. Two questions from me. First of all, on Danica. You basically put all the negative performance towards the valuation and market effects. Can you comment a bit more on the underlying or the technical result of the unit and try to put this in a quarterly and year-on-year context? Secondly, as you canceled your dividend due to the talks regarding the potential fines, will you do any acquisition before this is settled, or you will only do acquisitions after the talks are finished? Thank you.
I think on your last question, again, I would see it as if you're talking about sort of larger acquisitions or larger activity on that front, I would see it as unlikely that we would enter into that until we have more clarity on the current process. Stephan, do you wanna comment on the underlying technical results and run rate, which I think you alluded to before, but maybe give a bit more detail.
Yeah. Yeah. The underlying performance of Danica is doing fine. We are seeing increase in premiums, and your question about what we are seeing in risk trends. We have seen far better risk trends in our Health and Accident part. The underlying part is really strong. It is indeed the DKK 600 million of valuations which drive the result, which I alluded to earlier.
Okay. Understood. Thank you.
Next question comes from the line of Jacob Kruse from Autonomous. Please go ahead.
Hi, thank you. Just two questions from me. Firstly, just on your capital, you have 17.6% CET1 versus a 16% target, which I think you say is inflated a bit due to the uncertainties. That's about DKK 13 billion of excess capital. Then you have, I guess, some of the Pillar 2 buffer of DKK 10 billion. Just given those capital resources, the decision to cut the dividend to save, I guess about DKK 1.5 billion, can we at all think about this as the sort of scope of outcome that you see in these regulatory discussions? Or is there anything you can just say about how you think about that, you know, the capital resources that you have? Then my second question was just on cost.
I think for 2023, you're targeting DKK 23.5 billion. Does that mean that the compliance ramp-up that you've done needs to be reversed? You noted that the impact on cost of a settlement may not be that material in an earlier question. Or how do we, you know, especially given inflation that we see now, how do we go from the 6.3 billion quarterly- run rate this quarter down to a full- year of DKK 23.5? Thank you.
On your capital question, you know, again, given that we can't say anything about the timing, outcome or size of a potential fine, I don't wanna comment more on the question other than the fact that we also clearly, you know, say in the company announcement that we do this to ensure prudent capital management, given the fact that we've entered into these initial discussions. We mentioned clearly that we cannot reliably look at any timing, the form of resolution or the amount, but also that the fine is likely to be material. On the cost piece, I'm not sure that the 23.5 I mean, the outlook on the costs is around DKK 25 billion, right? That's the 23 number. Were you asking on the 23 number?
Yes. Sorry, 2023. You know, the next step from here.
Okay. I guess there are several moving parts in terms of the cost out. As you said, there are some reductions in compliance as part of that cost reduction. There are reductions planned from a remediation perspective. Then there are underlying costs, so a continuation of the reductions in salary costs, driven also by the automation and digitization efforts that we continue to see quarter- on- quarter. For example, now that we can open up automated account opening in the mobile bank here in Q1 is a good example of how we're freeing up frontline resources. Then there are also cost savings on non-salary costs, so premises and other costs. That would sort of be the main components driving the cost from around 25% to 23.5%.
I understand you can't comment on the size of the fine, but would you agree that at least the available capital resources are, you know, starting point DKK 13 billion and then some potential uplift from the Pillar 2 buffer becoming smaller once the settlement is done?
I'm not sure I understand. Again, given that I can't comment on the outcome, the likelihood, the size of the fine, I don't wanna comment on the question. I mean, I can say more generally, when we look at our capital position, as we've said previously, we have a strong capital position. If that was your question, then yes.
Okay. Okay. Great.
I think.
Thank you very much.
Jacob, I think we have to refer you to the interim report where we have put a number of what we see as being the excess capital and limited by that for now.
Yeah. Yeah. Okay. Thank you.
Can we have the last question, please?
The last question comes from the line of Robin Rane from Kepler Cheuvreux. Please go ahead.
Yes. Good morning. Thank you for taking my question. Two questions on NII, I guess. We saw some Nordic peers reporting benefits from the rate hikes in Norway and U.K. already. Is there anything of those visible in your numbers this quarter? If not, when do you expect there to be some visible benefit from this? Secondly, you mentioned that you've called the AT1 capital. Should we expect the AT1 payments that are currently deducted from the net profits to go to zero in the course ahead? Thank you.
Yeah. I mean, on the NII question, there, you know, on Norway, there'll be a lagged effect. We will expect NII to increase in Norway as we reprice there. The impacts in the Northern Ireland business, we are already seeing, and you'll see an annualized benefit of that. Overall, we remain very comfortable with our NII trajectory. We've seen increases five quarters in a row now. We also note, which we'll also show you in the bridge, that there's less days in Q1 versus Q4. We see good trajectory and we will see that further flowing through in subsequent quarters. Then, Stephan, do you wanna take the AT1 question?
The answer to your AT1 question is yes.
Okay, great. Thank you very much.
Okay. Unfortunately, we're just out of time, but thanks again all for your interest in Danske Bank. As always, you can contact Klaus and our IR department if you have any questions, and look forward to speaking with some of you over the coming day and into next week. Thanks very much.