Good morning, everyone. Welcome to the conference call for Danske Bank's financial results for the H1 of 2022. Thank you all for taking the time to listen in on our call today. My name is Claus Ingar Jensen, and I'm Head of Danske Bank's Investor Relations. With me today, I have our CEO, Carsten Egeriis, and our CFO, Stephan Engels. In today's call, we will present Danske Bank's financial result for the H1 of 2022, and we aim to keep this presentation to around 30 minutes. After the presentation, we will open up for a Q&A session as usual, and afterwards, feel free to contact our Investor Relations department if you have any more questions. I will now hand over to Carsten.
Thanks, Claus, and good morning, everybody. No doubt the first six months of 2022 was, in almost all aspects, a very turbulent period. The world has moved from one extraordinary situation caused by the pandemic to another dominated by the Russian invasion of Ukraine and the accompanying effects of energy supply, accelerated inflation, and firm tightening of monetary policies in the U.S. as well as in Europe. In these, even by historic standards, very volatile times, we focused, and we are focusing on helping our customers navigate in a very uncertain environment. At the same time, we continue to execute on our strategic agenda with strong commercial and customer focus while maintaining a strong commitment to our role in the green transition in the society.
As I also mentioned during our conference call in April, and during the H1 of the year, we've continued on a positive trajectory with improved commercial progress in our core banking activities, evidenced by strong growth for corporate lending in particular, and an overall good level of economic activity to the benefit of our core income lines. That said, our activities in the financial markets have been severely impacted by the magnitude and the pace of interest rate changes, which have had a negative impact on trading income from primarily our rates business and on net income from insurance business in the form of negative valuation adjustments. On that basis, on the 10th of July, we announced a revised net profit outlook for the full year.
We maintain our view of higher full-year income from core banking activities, however, and we now expect net profit for 2022 to be between DKK 10 billion and DKK 12 billion based on lower than expected trading and insurance business income, as well as slightly higher costs due to sustained elevated remediation costs. The Q2 marked a period during which the growth outlook for the economies in which we operate was revised down due, among other things, to expectations for a change in consumer confidence and a persistently higher level of inflation. However, consumer spending remained healthy in the H1 of the year, supported by strong household finances as well as very low unemployment, and we continue to see good corporate sector activity.
Against this favorable background, credit quality continues to be strong with our PMAs and adjusted macro models being the drivers of impairment charges for the Q2 . The good commercial progress was driven not only by strong customer activity in general, but also by our own initiatives in many areas of the business, and we're happy to see our market share within some customer segments increase during the quarter. 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 fair value effect of loans at Realkredit Danmark, lending was up 4% from the same period last year, due primarily to demand from our corporate customers. The good progress we've seen with our sustainability offerings continued.
We have improved our green offerings to personal customers, and we've maintained our position as a top-ranked arranger of sustainability-linked finance. Financially, we saw good 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. As previously mentioned, the transition into a completely different interest rate environment has been challenging and had an adverse impact on net trading income, primarily within mortgage bond markets in Denmark and Sweden, whereas our currency franchise benefited from good customer activity. The insurance business saw a positive development in the underlying business, which we'll comment on later. However, income came in significantly lower, including the gain from the sale of our Norwegian insurance business. In terms of operating expenses, we continue to make structural progress by reducing underlying costs.
However, sustained elevated costs from remediation and AML continues to strain our cost line. Stephan, he'll comment on the financial results in more details later in this call and will also comment on our revised outlook for the full year. First, let's go through how we continue to make commercial progress within our business units. Slide two, please. At our Personal Customers business unit, we generally see good activity across the Nordic region, and we see momentum towards regaining our Danish retail position. We're working diligently on improving customer flows, and we've continued to see improvement. In terms of market position, we've improved our market share for bank lending to 19% as bank lending was up 4% year-over-year.
The strong development in bank lending is partly as a result of recent remortgaging activity and our customers' preference for a Danske BoligFrit loan, where the margin is higher than on conventional fixed-rate RD loan. However, the call feature for Danish mortgage bonds also meant that some customers have been able to reduce their loans by 20%+, which naturally reduces the average LTV ratio and therefore results in lower margins for us as a bank. On the other hand, this made a good contribution to our fee income and also entails reduced credit risk, which we'll highlight later in this presentation. We continue our challenger strategy in Personal Customer Nordic with a positive trend in lending volumes, which were up 3% year-over-year in local currencies in both Sweden and Norway.
The traction we're experiencing with home finance meetings and approval of our mortgage applications further supported the trend in lending. Also in Norway, we recently extended our partnership agreement with Akademikerne, which underpins our focus to enhance profitability across the region. For business customers, we've maintained our strong relations with our customers as they navigate the current uncertainties at a time when supply chain challenges and commodity prices have a rapidly changing landscape. We've seen credit demand, and we have helped our customers with increased financing along with more ancillary offerings, particularly cash management and FX product categories, showed a strong development from the same period last year. As part of our new service model in both personal and business customers, we continue to enhance our allocation of resources through the investments we make in our digital solutions.
Coupled with good traction and further innovative digital offerings targeted to our segments, I'm excited about the opportunities that lie ahead. We now also have the organization set up, fully up and running, and we welcomed Christian Bornfeld and Johanna Norberg to the ELT as the new heads of our new personal customers and business customers unit. Slide three, please. Let's then turn to LC&I. Overall, LC&I had a busy period. The high level of economic activity drove a continually positive trajectory for our activities in general banking. In the H1 of 2022, we experienced significant credit demand from our customers, and we supported customers with some DKK 40 billion in new lending. Broadly speaking, credit demand reflects both the limited appetite for capital markets but also our strategic ambition to grow in Sweden and also high activity across the piece.
In relative terms, lending volumes at LC&I increased 24% compared to the level the year before. The increase in lending volumes was especially high in Denmark and Sweden, where we've grown lending volumes by more than 30% year-over-year. The strong lending volume, as well as higher deposit margins, made a good contribution to NII, which increased 9% year-over-year. However, despite the increase in NII, total income in the H1 of 2022 was down 25% from the same period last year as a result of significantly lower net trading income and lower fee income. The decline in fee income from capital markets related activity was caused in particular by a slowdown in ECM activity. Fee income in the H1 of 2022 was down 9% from a high level the year before and 6% quarter-on-quarter.
Our strong position in everyday banking services helped to counter some of this decline as fee income from everyday banking products sustained the positive trend seen in recent quarters. Trading activities were affected by high volatility and low liquidity in the Nordic fixed income markets. This had an adverse impact and caused challenging conditions for our business, especially in the Q2 . During the period, we were pleased that as a leading Nordic fixed income house, we were able to continue to support our customers through a volatile period. In addition, while we remain committed to continue to run a leading Nordic fixed income house, we have applied a cautious approach for the rest of the year and calibrate our risk appetite to the prevailing market volatility. Stephan will talk more in detail about the financial markets and also the impact on our trading income later in the presentation.
We continue to build on our market leading position within sustainability and to apply the power of finance to drive sustainable progress. Demonstrating our leading capital markets platform, we were selected as joint lead manager for a next generation DKK six billion 20-year green bond issue and continue to be ranked number one among Nordic banks according to the Bloomberg league tables for sustainability-linked loans and sustainable bonds. Our asset management activities were affected by financial market conditions as assets under management decrease. However, fee income and asset management increased slightly compared to the H1 of 2021, driven by higher performance related fees. Let's focus on our insurance activities in Danica. At Danica, the result for the H1 of this year was significant lower than result for the same period last year, and also lower than the result for the preceding quarter.
The turbulent financial markets with rising interest rates and also rising inflation led to negative valuation adjustments and therefore 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 the health and accident business. Please note that the gain from the sale of Danica Pension Norway of DKK 0.4 billion is included in the result for the H1 of 2022. The underlying business in Danica continues to develop positively. We saw continued growth in premiums from the level in the same period last year, as well as also an improved underlying health and accident business for which we saw 25% fewer claims and improved recovery rates driven by preventive efforts. Slide four, please, and then I'll hand over to you, Stephan.
Yeah. Thank you, Carsten, and good morning from my side. As Carsten just mentioned, we saw good progress for our core banking activities in the H1 of the year, where strong commercial momentum for primarily our corporate customers led to an increase in lending volumes and resilient income streams from our diversified business model. Income from core banking activities performed well and was in line with expectations. NII was up 4% from the same period last year as deposit repricing initiatives and higher volumes more than mitigated the temporary margin pressure caused primarily by rising funding rates in Norway and Sweden. NII was up 3% from the preceding quarter as a result of yet another quarter with an increase in lending, a positive impact on deposits from recent repricing actions, and higher short-term rates.
The improvements we have seen in lending margin continued in Q2, which I will comment on in more detail later. Net fee income was in line with the levels 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 primary 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 Q2 with the preceding quarter, fee income came in lower, primarily because of high remortgaging activity and seasonally higher refinancing activity in Q1. Net trading income came in significantly lower than the same period last year due to mainly very challenging market conditions for our rates business, whereas underlying income from our customers held up well despite the turbulent financial markets.
Relative to Q1, income was lower as market conditions for our rate business worsened in the Q2 . However, the contribution from other customers and treasury had a somewhat mitigating effect. As Carsten mentioned earlier, the underlying business at Danica performed well with higher premiums and fewer claims. However, net income from insurance business came in significantly lower due to negative investment results mainly on life insurance products where Danica has the investment risk. The result for Q2 includes the gain from the sale of Danica Norway of DKK 0.4 billion. Other income amounted to DKK one billion for the H1 of the year, including the gain related to the sale of our business activities in Luxembourg in Q1.
Operating expenses came in on par with the same period last year as higher costs for AML sustained elevated remediation cost and the Swedish bank tax counterbalanced the one-off sweep book last year. Overall, we continued the good progress with reducing underlying costs compared to last year as well as the preceding quarter. Loan impairment charges amounted to DKK 2.2 billion in Q2, slightly down from Q1. Continued strong credit quality led to further reversals of impairments, however, countered by adjustments of macro models and additional PMAs. We continue to have sufficient buffers in place, which I will also comment on later. Net profit for the period thus amounted to DKK 4.5 billion, down from DKK 5.9 billion for the same period last year. Slide five, please. Now let us turn to the underlying development and now net interest income for the group.
Overall, NII saw a healthy improvement of 4% in the H1 of 2022 from the level in the same period last year, driven by deposits as well as lending. On the deposit side, this uplift was driven by higher short-term rates and the effects of our deposit repricing initiatives we took during 2021 and 2022. On the lending side, we were pleased to see a positive effect on volume from strong demand from our corporate customers in particular. This was, however, partly offset by margin pressure in our Nordic retail business, mainly stemming from timing effects that arise because of the time gap between base rate increases and the associated implementation of price adjustments.
Compared to the preceding quarter, NII was up 3%, driven by the aforementioned positive volume development for corporate customers, but also by recent rate hikes and the day effect. With respect to wholesale funding activities, we have been active during the H1 of the year in order to meet our funding need, primarily by issuing covered bonds in Nordic currencies. Given the heightened level of uncertainty in the financial markets and the continued elevated credit spreads in Q2, as well as the status of the Estonia matter, we have decided to remain somewhat sidelined. Slide six, please. Comments to our fee income development. For the H1 of the year 2022, we were pleased to note that fee income maintains the strong level from last year despite the turmoil in the financial markets.
A testimony to the strength of our diversified business model, fee income from core banking activities came in strong for the H1 of 2022, which helped mitigate the lower activity level in capital market-related activities. This was especially visible in terms of lending fees which were up 8% and activity-driven fees which were up 20% year-over-year, mitigating lower capital markets related fee income and investment fees. Moreover, when adjusting for the landmark ECM deal we did in the H1 of 2021, capital market fees in the H1 of 2022 were largely in line with the same period last year. Relative to the preceding quarter, total fee income was around 7% lower due to continued subdued activity in capital markets and seasonality effects given high refinancing activity in the Q1 .
Fees generated by investment activities were slightly lower, both year-over-year and relative to the preceding quarter, as they were impacted by lower assets under management and reduced investment appetite among our customers. Slide 7, please. Turning to trading income, let me start by providing some background for the adverse development we saw in the H1 of the year and during the Q2 in particular. The first part of 2022 was characterized by an extraordinary market situation across our main fixed income markets in DKK, EUR, and SEK. As you know, the change in inflation led central banks to tighten more and sooner than expected. The large subsequent repricing of rates and credit spreads led to extraordinarily high volatility and low liquidity in the Nordic fixed income markets. In this challenging environment, we continued to support our customers.
Against this backdrop, we today report negative trading income for the Q2 , primarily related to losses in our LC&I rates and credit fixed income operations. Group trading income for the H1 of the year came in at DKK 0.2 billion and was significantly impacted by a negative result of DKK 0.4 billion for the Q2 . The development in the Q2 was due mainly to a negative contribution from LC&I of DKK -740 million. Income from our currency businesses and from customer activity in other business units contributed positively. Slide eight, please. Now let's take a look at our operating expenses. The headline number for H1 came in in line with the same period last year.
While we had specific one-offs in 2021, this year has seen higher than initially expected remediation costs, which was the main driver to the slightly higher cost guidance for the full year. We communicated in our company announcement on July 10, 2022. Additionally, our cost base this year is also affected by the new Swedish banking tax, a partial normalization of traveling, adjustment to amortizations of projects, and a one-time IT expense related to recontracting. Overall, all of these have been absorbed by our ongoing efforts to simplify operations and improve efficiency. In that regard, we continue to see an improvement in underlying cost in the form of lower staff cost as a result of a decline in total numbers of FTEs. Adjusted for the planned FCP, financial crime plan ramp-up, we have seen a 7% decrease in FTEs since the peak in 2020.
Lower costs for our transformation, which is progressing according to plan, also contributed to the progress compared to the same period last year. With the reasoning I just outlined, we remain confident that our cost trajectory is on track as we look towards 2023. The elevated levels we experience in this year are in many cases characterized by cost items of a one-off nature and as such, the cost take out we expect to see from here on and through 2023 continue to be in line with our targets. Slide nine, please. Now let's turn to credit quality and impairments. Actual single name credit deterioration and individual impairment charges remain very modest, and we saw additional single name reversals which this quarter were primarily related to the oil and gas segment.
Given the uncertain macroeconomic outlook, we have minor changes from our model adjustments this quarter, which coupled with additional post-model adjustments to further account for potential unforeseen implication that could impact our loan book. This means that we ended the quarter with an annualized loan loss level of four basis points for the group. The model adjustments to our macro scenarios I just mentioned have been done to reflect the increasing inflationary pressures and implications with the potential for more prompt policy actions in terms of interest rates, which drove additional impairments of DKK 0.2 billion in Q2. This came in addition to the DKK 0.4 billion we had already taken in each of the two preceding quarters.
While we remain comfortable with the quality of our well-diversified loan book, some sectors will undoubtedly be impacted by the rapidly changing operating environment and as such, additional DKK 0.45 billion of post-model adjustments were implemented to cover this uncertainty, taking our total PMAs to DKK six billion. This now includes an adjustment in personal customers of DKK 250 million relating to potential lower recovery rates for customers subject to debt collection. Halfway through the year, we take comfort in our well-provisioned position and the additional PMAs we have in place to account for the current uncertainties. Given our strong credit quality, we continue to expect that impairments in 2022 will be below the around eight basis point loan loss level we consider to be our normalized level. To further address some of the higher risk sectors, let's go to slide 10, please.
Now let me provide some additional context to some of the portfolios that are typically exposed to changes in the macroeconomic picture. Firstly, our commercial real estate book is well-diversified and characterized by very modest exposure to property developers. In general, credit growth relating to commercial real estate has been balanced up until now due to our credit risk management practices, which have included overall and sub-segment caps as well as concentration limits. In addition, our underwriting standards focus on cash flow and debt service capabilities, which include interest rate sensitivity in addition to prudent LTVs at origination. Our agriculture portfolio has a high proportion of secured lending via RD and has been significantly de-risked when comparing historically.
Furthermore, the exposure is well diversified across sub-segments which mitigate potential risks when commodity prices move rapidly or when market dynamics are changing in general. Also for this portfolio, we have a specialized unit managing the exposures and the rigorous underwriting standards have also resulted in a high degree of collateralization. Finally, property exposure related to our retail customers is supported by the strong household finances and continually very low unemployment across the Nordic region. While inflation does affect the disposable income to a certain extent, households' ability to service their debt obligations remains intact. In addition, the home equity is very high and our RD book, 85% is fixed for five years or more.
Though some customers are facing higher rates on their variable products, the original credit approval depends among other things on prudent debt to income assessment and the ability to serve a mortgage loan during stress. For all three portfolios outlined here, we have substantial PMAs in place to cover any tail risks that could emerge, and this further supports our solid balance sheet, and hence we are reassured by our strong asset quality. Slide 11, please. Now let's take a look at our capital position. Our reported CET1 capital ratio came in at 17.1%, mainly as a result of higher RWA as a consequence of the higher market volatility and deductions related to Danica.
RIA increased slightly in the Q2 as the increases in market risk following higher volatility in the financial markets in Q2 was partly mitigated by lower credit risks. In our capital planning, we remain mindful of the regulatory landscape, including the announcement in Sweden that the countercyclical buffer will be raised to its normalized level of 2% by the end of the H1 2023. Danske Bank's leverage ratio was 4.7% according to transitional rules and also under fully phased-in rules. Slide 12, please. Some comments on the revised financial outlook for 2022 that we announced on the 10th of July based on challenging financial market conditions and made despite the positive development in our core banking activities that we have presented in this call.
We therefore adjusted the net profit guidance for 2022 from DKK 13 billion-DKK 15 billion to now DKK 10 billion-DKK 12 billion, including the gains from MobilePay, Danske Bank International, and Danica Pension Norway. As it appears from the main financial report we presented today, we see good traction for our income from core banking activities, and on this basis, we continue to expect this income to be higher for the full year. Higher net interest income driven by good economic activity will more than offset lower capital markets and investment related fee income. The announcement from yesterday's central bank rate hikes will provide further tailwind to our net interest income.
Net income from insurance business and trading activities are expected to be below normalized levels based on the significantly lower income observed in the H1 of the year and expectation for a modest income recovery in the H2 of this year. This is of course subject to market conditions and with a degree of uncertainty that is higher than usual. For operating expenses, we now expect costs in 2022 to increase from around DKK 25 billion to around DKK 25.5 billion, driven by continually elevated remediation cost. We will maintain a strong focus on cost management initiatives in order to continue the structural decline in underlying cost we consistently have delivered during the last couple of quarters. Finally, we maintain our expectation for loan impairment charges to be below normalized level, given overall strong credit quality for the remainder of the year.
Slide 13, please, and back to Carsten.
Thank you, Stephan. Before we go to Q&A, I would like to wrap up by taking a step back and shortly reflect on the substantial progress we've made since we launched our 2023 Better Bank agenda. The journey that Danske Bank has been on since 2019 makes me confident that we have the platform and the advisory services to fulfill our potential as we operate with a more robust and a more efficient organization and improved commercial momentum, including our competitive edge within sustainable finance. After I took over as CEO, we decided to adjust our plan for 2023 to reflect mainly the extended scope of our compliance and financial crime prevention agenda.
While the H1 of this year has been characterized by a rapidly changing economic landscape, where we have seen significant financial market volatility impacting trading and insurance income, the strength of our diversified business model and the traction we're gaining on our core banking operations makes me confident that we will deliver on our financial ambitions going forward. Furthermore, having optimized the organization and as we build on our solid foundation, we are approaching a more normalized state of business operation, which will undoubtedly enable us to sharpen our commercial execution even further. Going forward, we will focus on continuity and sharp execution of our commercial priorities to enhance our value proposition to customers and to continue to play a key role in the society we operate in to the benefit of all our stakeholders.
All these factors enable strong underlying traction as we position ourselves to deliver on our 2023 ambitions. With that, I will hand it back to you, Claus.
Thank you, Carsten. Those were our initial comments and messages. We are now ready for your questions, and 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. A transcript of this conference call will be added to our website 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 now. Our first question comes from the line of Johan Ekblom from UBS. Please go ahead.
Thank you very much. Maybe just starting on net interest income. After the hike we saw yesterday and the pricing action you took, I guess we're getting back to zero rates quicker than we had expected. Can you talk a bit about how we should think about the rate sensitivity for the 50 basis points we had yesterday, where there is a full pass-through on deposits, and how that changes for subsequent hikes that are expected later in the year? The second question will be on the cost side. I think in the bridge that you've helpfully provided, there's a net DKK 0.1 billion savings from inflation and kind of underlying savings.
What's your thinking around inflation for next year in terms of what are you seeing on wage negotiations and kind of general expenses, just to get a sense for what your baseline is, on the kind of gross basis there? Thank you.
Yeah. Thanks, Johan. I'll just make a couple of comments, and then I'll also pass on to Stephan on some of the inflation thinking and assumptions. On NII, our expectation is that for the rest of 2022, the 50 bps rate change yesterday by ECB and also by the Danish Central Bank is between DKK 330-340 million in 2022, and then around a full-year impact of around DKK 800 million. If we look at the group level, our expectation is that a 25 BP hike from here on is around DKK 800-900 million on average for the next 1%.
There will be some convexity, if you will, a little bit lower for the first 25, and then it'll be slightly increasing from there, and that's why I give the range around DKK 800-900 million per 25 BPs over the next 100. Again, for the rates hike yesterday, 3.30-3.40 in 2022, and DKK 800 million full year. On cost, just a couple of points. I mean, we have this 0.1% as you state. You'll have seen that in the H1 and also quarter-on-quarter, we've slowly been able to, in line with automation and digitization and improvements we're making underlying to take down underlying costs.
The assumption is that that will continue. If you sort of look at the H1 of underlying cost savings, which I think you can see in one of the bridges, you can sort of assume that that will be at a then slightly higher rate going into 2023, and then of course inflation will offset that. It's too early to say exactly how much pressure there is from wage negotiations. There will be some. Stephan, perhaps you can just talk about, you know, the inflation assumptions and how we think about it.
Yeah. Johan, we have obviously taken, call it, split inflation assumptions both by, call it, cost line. There are assumptions around mainly wage inflation, which is basically 65% of our total cost line. We expect somewhat lower wage inflation numbers in Denmark. I don't wanna give a number here because I don't wanna disturb ongoing negotiations. Clearly higher numbers in Lithuania and also in India, given that we do see quite some attrition typically for these, call it, nearshoring or outsourcing places. We already see some inflation this year, because whenever you replace an existing position by somebody new, you are seeing more kind of two-digit inflations on loans and wages already.
If I would give you a summary assumption on what is the underlying number, I would say somewhere between 4% and 5% already in. It remains to be seen how things pan out going forward. In that sense, some of the, call it, net NII inflow will probably be partly countered over specifically 2023 by somewhat higher inflation, for example.
The DKK 23.5 billion stands, right?
Yeah. So far 23.
Yeah. Thank you.
So far, just to be explicit on that as well, so far 23.5 clearly is the holding point. Again, that entails some inflation assumptions. If inflation comes in higher, we need to revisit our possibilities. But 23.5 is clearly the goal, and then let's see how inflation pans out.
Thank you.
The next question comes from the line of Sofie Peterzéns from JP Morgan. Please go ahead.
Hi, here is Sofie Peterzéns from JP Morgan. On the capital slide, you have a 200 million deduction. Sorry, 200 basis point deduction from Danica. Can you just clarify what this Danica deduction is and how it actually works? Then my second question would be on your capital return policy. You canceled the Q2 interim dividend as well. How should we think about the potential fine from the U.S.? How close are we and kind of once the fine is behind us, will the capital return policy normalize? Thank you.
Thanks, Sofie. I'll let Stephan talk to the Danica deduction. Just on the question on the ongoing discussions with U.S. and Danish authorities. I mean, we can't say anything at this stage. There's nothing new to say, and therefore we can't say anything at this stage around timing or outcome. And clearly, when we do finalize, then we will come out and talk to our updated capital situation. But I mean the dividend policy of 42%-60% has not been changed Stephan on Dan.
On Danica. Danica's deduction is calculated as the difference between Danica's capital base and Danske Bank's holdings. Danica holding of Danske Bank shares and so on. The main drivers at the Danica level is primarily due to an increase in market risk and to changes in interest rate scenarios, and also to a certain extent by the decrease in Danica's own funds, which is basically driven by the present value of future profits. It's an extremely technical matter and that are the main drivers.
Okay. Thank you. Maybe just to clarify on Danica. If I want to forecast this going forward, like what ratios in Danica should I look at? Is it the solvency ratio for Danica that fell from 202 to 184? What's kind of a good proxy for this? Is it the allocated capital that increased or how should I think about?
I would in general say, again, it depends on how markets will develop going forward. If we are in a somewhat more, call it, stable to more within expectation type of environment, I would think these deductions should be pretty stable. The movements which we saw mainly in Q2 are obviously driven by what has impacted also the trading line mainly. Again, it's a very technical matter, and has a number of assumptions, but in general, I would think stable is the best I can offer for now.
If I may add just a little technicality, Sofie. This has nothing to do with the allocated capital that we have for Danica, because there has been an increase during the quarter, but that is for other reasons. You should not look at allocated capital when you are looking at the deduction in our capital ratio.
Okay. Yeah, maybe we can have a call offline but I'm still not 100% sure about this. Thank you.
The next question comes from the line of Namita Samtani from Barclays. Please go ahead.
Hi, thanks for the questions. My first one, thanks for the chart explaining how Danske is gonna reach the DKK 23.5 billion cost target. But I don't see a similar slide for revenues. Does that revenue guidance of DKK 43.5 billion for 2023 still stand? Secondly, just on the costs, why should we believe 2023 is the year remediation and legal costs will go down for Danske Bank? I think you were previously guiding to DKK 0.4 billion decline in 2023 versus 2022, and now it's an even bigger decline expected at DKK 1.2 billion, if we include both remediation and legal. Also what type of gross cost savings are you assuming to get to the 2023 cost target? I think you previously said around DKK 1 billion. Is it still the same? Thanks.
Thanks for that. I think on revenue, yes, we continue to feel comfortable about the revenue plans for 2023, and again, feel that we see good momentum across all the business lines. On cost, the question around why we should believe that the remediation and legal costs go out. Obviously, this is an assumption that we are making as management. That's because we have made a strong commitment to our customers to get a solution for the debt collections case, which, of course, is a big part of the cost out here, DKK 800 million. The legal costs are largely related to the ongoing Estonia matter.
Again, it is an assumption that can be done this year. Again, that's an assumption because we cannot say, of course, with conviction anything on timing at this stage. As you know, we announced that the discussions had started end of April, and therefore we thought it was a fair assumption to think that could be done this year. Then there was a question around the cost-saving assumption of DKK one billion. Stephan, did you pick that up? Or do you need that clarified, the question? Do you wanna just repeat the last question around the DKK one billion?
Yeah, sure. Yeah, I think, you know, in the last quarter or maybe the quarter before that, you guys were talking about DKK one billion cost savings in 2023 compared to 2022. I just wanna know if that still stands.
No, I think what we said before, and that's what we still have as part of the net underlying savings, including inflation part, that we expect underlying costs to meet our target, which means process optimization, digitalization, workforce, footprint, non-personal costs, and all the other stuff of roughly DKK 0.6 billion as a takeout in 2023, if you only look at that. Yeah.
Perfect. Thanks very much.
Just to be complete, you need to add MobilePay and Lux, which will not be on the cost line anymore in 2023, assuming that all that gets finished. Lux is already finished. We expect MobilePay to finish in the H2 of the year. These two together add another DKK 0.2 billion. That is if you want so underlying cost takeout of DKK 0.8 billion already between these two lines. There are some other moving parts, including transformation cost of DKK 0.4 billion, which you can also see on the slide on page eight.
Thanks very much.
The next question comes from the line of Jakob Brink from Nordea. Please go ahead.
Thanks a lot, and good morning. The first question is regarding market shares and your wording in the initial part of your presentation about you now having 15%-20% or so lower outflow than last year in personal customers. Looking at your own market share graphs, it actually looks like the market share deterioration in Denmark has accelerated in the Q2 . Maybe that's due to business customers, but here you guys derive the same that you're taking market share. Can you explain that? Secondly, on the ROE target next year, just trying to take your assumption implicit or residual in assumptions for the H2 of 2022, given your full year guidance.
It looks like you have a run rate ROE assumption of around 7% for the H2 , then obviously cost will be lower next year according to your plan. Also the gains from MobilePay will not be there next year, and I guess losses could be higher. Could you maybe just again fill in the gaps how to get from, let's say, maybe 7.5 to 8.5 next year, please?
Yeah. Hi, Jakob. Let me just answer on the market share piece. These are obviously numbers that are also available from the Danish Central Bank. If you break down the market share into bank lending versus mortgage lending, then if you take end of the year last year to year to date this year, Danske Bank has gained market share in private bank lending and has gained market share in corporate bank lending. We're proud of that, and that shows, I think, you know, the ongoing focus on regaining share and momentum. We've also lost significantly lower amount of customers in Denmark.
In fact, if you look at sort of our focus segments, which are the advisory heavy segments of our customer base, we have not seen customers leave us year-over-year, for the first time in a long time. The overall market share is heavily impacted by ongoing stock loss in market share and mortgages. If you look at Q2, and again, these numbers are available. If you look at Q2 net new loan market share for Realkredit Danmark, we're at 15.2% in Q2 versus, for example, 9.6% last year. We've actually seen now five, six quarters straight of relative improvement in net new loan market share in RD.
It is clear, of course, that given that the net flows are so much lower than the stock flows, the overall market share is impacted by that mortgage piece. Therefore, we of course focus on progression, progress, and seeing that new net loan market shares are improving. Again, we're happy to see that trend. That is what we relate those comments back to, Jacob. On the ROE run rate, I wasn't entirely sure on the different pieces, but Stefan, maybe you can just. I think the key question is how do we get from the H2 run rate ROE to the 8.5%-9%?
Jakob, I think if you bridge from 2022 to 2023 on the ROE level, I think it's fair to assume that we cannot sell MobilePay as well as Lux and Danica Norway next year. We also, in all honesty, do not expect to see the same kind of valuation losses and trading results that have impacted Q1 so heavily. I think that is part of the starting point discussion on where do you think you end up in 2022 in a kind of run rate model. The second part of the equation is obviously 2023. As Carsten just said, we remain comfortable with our DKK 43.5 billion assumption.
In that sense, the latest rate hikes provide some tailwind to that obviously. We have just reconfirmed our 23.5 on the cost side. The third part of the equation that you need to keep in mind that we have guided for, I call it normalized capital ratio in 2023 around 16%, then that obviously will help the equation in a way also.
Okay. Just thanks for that. Just on the first question, Carsten, you said that the stock impact is the key negative. Do you have any overview of how much of that sort of potential continued negative you will see, i.e. the clients, I guess, that has moved their bank loans already or banking from Danske but still have the mortgage loans. Do you have any sort of picture of how much more to come?
No, I mean, I think the key thing here again is that, during 2019 and 2020 the net new loan market shares, you know, have been significantly below the stock market share, right? Those are the improvements that we're making now. But even with 15.2% net new market share in Q2, and you may know this changes slightly through the year because of the different refinancing amounts. I always compare quarter-over-quarter, so you compare apples to apples, and that's where I'm saying for five, six quarters straight now, we have improved our net new market share comparing like for like. Clearly even with those market shares of again 15% this quarter, you still reduce stock market share.
That does not mean that we're losing. As I said before, we're losing significantly less customers. Again, in our advisory heavy segments, we actually are not losing customers year on year. When you see the trajectory in terms of customers coming in and customers going out, as well as the improvements that we're seeing in bank loans and RD, we feel it's going in the right direction. The overall stock market share will continue to fall for a bit, right? Because the net new market shares on mortgages are just lower than the stock.
We are working on it, as you can see.
Yeah. Okay. I get it. Thanks a lot.
Thanks.
The next question comes from the line of Omar Keenan from Credit Suisse. Please go ahead.
Good morning, everybody. Thank you for taking the questions. I understand you're targeting the 16% common equity tier one. I just wanted to ask a follow on from Sofie's question. Can you discuss your views on the look-through CET1 hurdle and what you see further on the regulatory front from RWAs, maybe in Basel IV? The reason I'm asking the question is I want to understand the available capital resources to meet the fine net of any Pillar two add-ons that might be there already for a fine as well. Thank you.
Let me try to offer at least some answers to your question. With respect to Basel IV, I think we have said already over the last quarters that the implementation of the EBA guidelines that we have been doing and that have led to quite some RWA inflation over the last couple of quarters, from our point of view, covers at least the first stage of the Basel IV implementation. In that sense, we do not expect, at least as of now, any further effect on our capital base from that matter. Secondly, if we look at 2023 and similar to what we have said earlier on legal cost, assuming that the Estonia matter has put to rest, that also is reflecting in a way the 16% assumption.
Which means that whatever the fine may look like, and again, we can't say anything, we don't know anything, we don't have anything to offer on that matter right now, that will obviously be driving partly or totally or whatever, and I don't again wanna give any indication, the excess capital. Then once that matter has been hopefully solved at some stage, I think then we can talk to more detailed action. For now, I would think it's far too early.
The 16% hurdle is a look-through number, whatever happens with the fine.
That, that's after the fine, yeah?
Yeah. Okay. Understood. Thank you.
The next question comes from the line of Robin Rane from Kepler Cheuvreux. Please go ahead.
Yes. Good morning, and thank you for taking the question. With the increase from the Danish Central Bank yesterday, you increased the deposit rates for customers now paying negative deposit rates. Given that banks in Denmark have implemented this when negative rates have been negative, how do you think the banking system's ability to keep rates closer to zero when rates go beyond zero and turn positive? I mean, how do you see deposit rates basically developing when rates are positive? Then, secondly, on corporate margins, I mean, we have seen corporate bond yield spreads widen during spring. Do you think this will eventually help corporate margins in your new lending, or how do you see the dynamic there? Thank you.
Thanks for that. I'll start, and then Stephan, you can add. Yeah. Yesterday we passed on the 50 bps. For personal customers in Denmark, if you have more than DKK 100,000 in deposits, you still pay a -20 bps rate. Then the question is, you know, how will pricing on deposits, I took that first question, develop as we see rates go above zero? Look, obviously we're obviously very careful around not price signaling, but I think there is historical kind of views on how pass-through rates develop.
Those are obviously the various different assumptions that we use in our NII sensitivities and we gave those NII sensitivities earlier in the call. Corporate margins, you know, clearly, a higher risk macro scenario will typically drive lending towards probably more shorter term, more higher loan-to-value on the mortgage and real estate side. Probably also some rating migrations and all of those things I would expect to have some upward pressure on margins. Stephan, I don't know if you wanted to add on any of those too.
No, I'm fine.
Perfect. Hopefully that answers.
Okay. Yes. Working. Thank you very much.
The next question comes from the line of Martin Gregers Birk from SEB. Please go ahead.
Thank you. A couple of questions from my side. The first one being on your thinking around deposit margins yesterday and why you chose to follow one-to-one rather than maybe keeping some of your deposit margin. I guess the deposit margins has been sort of a sector issue many years, and you still earn far less on deposits than compared to what you should. That'd be my first question. Second question goes on the trading and net insurance loss. When I look at the volatility in your earnings compared to peers, it seems to be quite a lot higher. Are there any thoughts going into this? Then my last question on funding and specifically AT1 and T2 funding. What are the plans here?
Hi, Martin. Thank you for those questions. Look, on the deposit margin, we set a margin to the actual rate, right? Now we're charging 20 bps on above DKK 100,000, which of course is a margin to the 10 bps that the Danish Central Bank has. We've maintained the margin and just passed on the rate straight, and we believe that is appropriate. On the trading and insurance loss, I think on the insurance investment loss, actually, when you look at and it's always hard to make comparables, but from the peers that have been out on the insurance side, we don't believe that we've seen, you know, higher insurance investment losses at Danica. On trading, clearly we saw higher losses than peers on trading.
You know, when you look back and you look at the positioning of our trading business, we have about a 50% market share in Denmark, on Realkredit and on state bonds as well. In Sweden it's probably 30%-40% market share. We are significantly larger than our peers in fixed income. When we look ahead, you know, wider spreads, higher rates and also steeper curves should be very supportive for our fixed income franchise. Despite the significant de-risking that we did towards H2 of June and into July, we feel very comfortable with the H2 assumptions and also the 2023 assumptions on income. Also based on what we've seen month to date in July, but obviously it's early days still. Stephan, perhaps you could comment on the funding question.
Yeah, as I stated earlier, we have been active in the funding markets during the last quarter. We have been very active in the preceding quarters also, expecting or preparing for probably a period where we wanna be a bit sidelined also due to the Estonia matter. On AT1 and Tier two specifically, there is nothing as of now that I think we are announcing or having on our plans at all, given that the total capital position as well as the Core Tier one position are both comfortable.
But as far as I can see on the funding side, you do have some space in both the AT1 and Tier two bucket. Basically what also I'm referring to Stephan is that in, I guess in, previous conversations with you, I mean, I guess there's been a clear hint that whatever excess capital there may be in Danske Bank would be looked at post a settlement. My thinking is, do you think that the Danish FSA is gonna demand you to fill up those two buckets before you're able to pay out any excess capital?
Um.
Would that be a fair assumption?
I do get your question, Jakob. Don't get me wrong, but I think we are now somewhere on the borderline between guessing and crystal ball. I think we are all well advised to see what the future holds, and then let's see how we can deal with that.
All right. Appreciate it. Thank you.
The next question comes from the line of Johannes Thormann from HSBC. Please go ahead.
Morning, everybody. Johannes Thormann, HSBC. One follow-up question, first of all, on the trading losses. You just talked about that you have de-risked the portfolio massively. How much have you reduced your inventory? That's my first question. Secondly, on the costs, you gave the bridge in terms of where you think the cost savings will come from legacy cases, legacy legal cases. Can you probably help us understand how it will impact the different cost line, like personnel, IT costs and so on? Because IT costs, for example, we only see rising over the last quarters. Will these falling or going away legacy legal costs mainly affect other costs? Thank you.
Yeah. Thanks for that. No, I mean, we don't report on, you know, the inventories in our trading books, but again, I can confirm that we have substantially de-risked our positions on the back of this volatile environment and being cautious. Again, what I can say is that July month to date looks in line with sort of income expectations, taking all that into account and despite the de-risking of the book. I didn't catch the whole question, but let me give it a stab, and then Stephan, you can also come in. The remediation costs, the large parts of the remediation costs are really associated with two cases, the debt collections case and then the AML case.
The cost around the AML case is legal costs and predominantly external legal costs, and that's the DKK 400 million that we allude to. The cost around the debt collections cost, the DKK 800 million that you see here, is mostly related to external support to clean data, to help do calculations, to help look at how we compensate and so on and so forth. There is sort of limited, if you will, additional IT costs as such related to that. I think you had a cost on sort of IT costs more generally, and I believe you said increasing IT costs. I don't know if, Stephan, if you wanna just comment on that.
No. That I happily comment on that. There is two issues to mention here. One is we did a recontracting of call it a main component of our IT, which had a one-off cost in Q1, which is DKK 50 million roughly. We expect that to come back in a way by benefits from lower costs of that part of the outsourcing or the recontracting going forward. IT costs were also slightly affected by a different dynamics in capitalization and amortization of some of the IT costs. You know that we have a relatively strict approach to capitalization, which then is also visible in the very small amount of intangible assets which get deducted from capital anyway.
Okay, thank you. One question on the legal costs or external legal costs. Is it fair to assume that they will mostly go out of other operating expenditures or anywhere else?
No, they are allocated on the respective, call it responsible, ELT member. So in that sense, they are part of legal cost and those are also allocated largely to the segments.
Okay.
Operator, can we have the last question, please?
The last question comes from the line of Jannick Gellen from ABG. Please go ahead.
Yes, good morning. Thank you for taking my questions as well. Just a follow-up on Omar's question regarding the CET1. If you look at your page 11, it says that 14.4% this year fully loaded requirement look-through. What's the difference between the 14.4% and the 16%, is my first question. And secondly, the DKK 10 billion you sort of say you have implemented into your, as a floor level, into your 17.1. Is it taken as added RWA or is it a deduction in the capital level? Thank you.
Well, I think to answer your first question, the 16% is our capital target. The 14.4 you can see in the presentation is the regulatory fully phased-in CET1 requirement. I didn't got your last question. Could you repeat it?
You say in your report that you have some DKK 10 billion provision inside your 17.1% capital target or capital level. Could you elaborate where it is and how it is calculated?
If you look at slide 11 again. In the regulatory fully phased in, the DKK 2.4 billion, or the 2.4%, as you can see on top of the 12%, that's the Pillar two add-on for Danske Bank. In that add-on, the DKK 10 billion that you are referring to is included.
Okay. Thank you. Just one follow-up on the 16%. Is that included and fully phasing countercyclical buffers in the Nordics and also Denmark? What kind of level are you then expected to have, including in those levels?
Yeah, it's taking the buffers as we know them today. They are included in that number.
Okay. Not any hikes from here.
No. I'm not sure what you mean about hikes, because we know where the countercyclical buffer is and we know that they are almost fully utilized by the authorities. There is no further buffers coming in our calculations here.
Okay. The 16% is taking care of the fully phased in in Norway and Sweden to 2.5 and two percentage points each.
Correct.
Okay. Thank you.
Okay. Thank you very much, everybody, for listening in today and for your questions. As always, you're welcome, of course, to contact Claus and I, our Investor Relations department. Thanks very much.
Ciao.