Everyone, welcome to the conference call for Danske Bank's financial results for 2022. 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 results for 2022. We 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.
Thanks, Claus. I would like also to welcome you to our conference call for the annual report. We have now put 2022 behind us. Unfortunately it turned out to be a completely different year from what we expected at the time of this conference call a year ago. The outrageous Russian invasion of Ukraine brought war to Europe and sparked geopolitical tension to a level we have not seen for decades. In 2022, a rapid increase in inflation re-emerged as a major macroeconomic challenge. We started to see pockets of inflation already in 2021, driven mainly by supply chain issues caused by the pandemic. Energy prices soared at the outbreak of the war in Ukraine and drove inflation up more broadly, including food prices.
On the basis of this, we saw a prompt response from a number of central banks, and many years of negative interest rates were reversed back to a more normalized territory inside a very few months. The initial reactions in the economies were a decline in consumer confidence and house prices, followed by a more bleak economic outlook, which I'll come back to later in this call. Although energy prices and long-term interest rates have peaked, uncertainty remains high. In this challenging environment, we have done our utmost to support our customers, both financially and with strong advisory services. Fortunately, the starting point for most of our customers was good in 2022 against the backdrop of strong macroeconomic conditions with record high employment and strong activity for most of the year, despite increasing costs for both businesses and consumers.
2022 also marked a year in which we made further progress on our plans. In order to increase our focus on customers and execution, we adapted our new organizational setup in 2022, and we continued the progress in terms of enhancing our digital solutions and simplifying our business, which supported the strong commercial momentum we saw across our business units and within the corporate customer segment in particular. This resulted in solid growth and improved market share in many parts of our business. Another strong focus area for us has been, and still is, our work on compliance remediation. The significant amount of resources we have invested in recent years has enabled us to make good progress on our financial crime plan. A couple of examples are increased automation of processes for KYC and transaction monitoring, as well as our ability to close regulatory observations.
Progress has also been made on reaching solutions for our legacy cases, in this context, I'm of course especially pleased that late in the year we were able to reach a final resolution with the U.S. and Danish authorities in relation to the Estonia matter. We have learned from our mistakes, we have taken the steps necessary to ensure that Danske Bank has robust measures in place to do everything possible to prevent such failures from taking place again. Sustainable progress is at the core of our strategy and our purpose as a bank. We recognize that sustainability, and especially sustainable finance, is critically important for us as we can play a pivotal role by providing capital for the green transition.
Our clear ambition to lead on sustainable finance in the Nordic countries, we were delighted to see tangible progress on our sustainability ambitions in 2022. For instance, we provided project financing for the consortium behind the Hornsea Two wind farm, currently the world's largest offshore wind farm. We continue to be ranked number one among Nordic arrangers in Bloomberg's Global League Tables. In addition, just two weeks ago, we raised our ambitions when we launched our new comprehensive climate action plan, which I will discuss in more detail later in the presentation. Financially, the result for 2022 included a significant impact from the provision for the Estonia matter. We therefore posted a net loss for the year of DKK 5.1 billion, including one-offs, which is in line with our guidance.
The underlying result for the year was based, among other things, on strong customer activity following the reopening of societies after the pandemic. Against that background, we saw a solid uplift in lending and improving market share positions for retail, as well as corporate bank lending in Denmark. Towards the end of the year, however, housing market activity declined as a result of higher uncertainty and corporate lending demand retracted from a very high level. The return to a more normalized interest rate environment we saw during the second part of the year was a very important contributor to our result. In combination with stringent execution of strategic pricing initiatives, this enabled us to reestablish deposit margins. The turmoil in the financial markets impacted our results in different ways.
The significant higher uncertainty led to lower activity and thereby lower income from our capital markets business, however, partly mitigated by a shift in preference towards bank lending. Within our trading and insurance activities, the full year results saw an impact from very difficult market conditions due to significant repricing of almost all assets. As I explained in our previous conference call, this repricing happened over a relatively short period of time, during which we continued to provide liquidity to our customers and with a magnitude that we only really know from stress test scenarios. The underlying insurance business performed well, and we are pleased to note that the recovery in the financial markets in the second half of the year translated into more positive results, not only for insurance activities, but also for trading income. I'm also pleased to see that this has continued into January this year.
Our operating expenses came in at DKK 26 and a half billion, including the provisions for the accelerated solutions for the debt collections case. Net of the provision, underlying costs amounted to DKK 25.6 billion, in line with our guidance. Costs for the remediation of legacy cases, including the Estonia matter, have been elevated throughout the year, partly mitigated by good progress on underlying cost efficiency. We expect sustained elevated costs for remediation of legacy issues of approximately DKK 1.1 billion in 2023. Compared to the level at the end of 2021, salary costs are down by more than 3%, underpinned by a decline in the number of FTEs of more than 5% when also disregarding our AML ramp-up.
Credit quality remains strong, and the loan loss ratio for 2022 came in at 8 basis points, including the effect from the accelerated solution for the debt collections case. Despite a high degree of macroeconomic uncertainty, the credit quality of individual customers was strong, and our impairment charges consist mainly of model-driven effects, including additional Post-Model Adjustments. That said, I'll now comment in more details on what we see ahead of us in 2023. Slide two, please. Given that 2022 turned out to be a very turbulent year, given the rising geopolitical tensions and changes in the macroeconomic landscape, I believe it's worthwhile to provide an insight in how we see 2023 and how we believe we are positioned to navigate in this more uncertain environment.
During primarily the second half of last year, various economic forecasts, including also our own Nordic Outlook, were adjusted towards deteriorating or even mild recession scenarios. In this context, the outlook for unemployment is of particular interest for us as it plays an essential role for credit quality. We have noted that unemployment in Denmark is expected to rise, but only modestly and of course, from historically low levels. Also in Denmark, we consider the economy to be well prepared after several years of financial consolidation for our customers and strong public finances. Against this strong backdrop, Danske Bank is well-positioned to face a scenario with lower growth as we have a robust and a well-diversified balance sheet derived from prudent credit policies and comfortable impairment buffers, including a solid capital position.
When it comes to our exposure against commercial real estate, we have maintained a prudent approach post the great financial crisis and over the past three years, reduced exposure to the non-residential segment. Our conservative approach has ensured that our exposure in Sweden has remained stable despite market growth and well-diversified with lower concentration risk over the past years. Post-Model Adjustments for the commercial real estate exposure were increased in 2022 to address increasing uncertainties, and it now stands at DKK 1.8 billion. For 2023, we may see loan impairment charges of up to DKK 3 billion, primarily driven by weaker macroeconomic outlook affecting our models. In this operating environment, we expect a net profit of DKK 15 billion-DKK 17 billion, and I will leave it to Stephan to comment in more details on that later in the call.
As we look into 2023, we will continue to focus on driving our commercial agenda and to build on the many improvements that we've seen in 2022. Slide three, please. As mentioned earlier, we have a clear ambition to be the leading bank for sustainable finance in Denmark and among the market leaders in the Nordic countries. Further to this, two weeks ago, we raised our ambitions as we launched our new climate action plan. This plan outlines how we will reduce CO2 emissions across all customer segments in order to accelerate our customers' green transition. A key element of this plan is an ambitious increase and expansion of our 2030 targets. For instance, we've increased reduction targets for power generation from 30%-50% and for shipping from 20%-30% to around 50%.
We've also expanded the scope of our targets to now also include commercial real estate, cement, steel, and also personal mortgages. Our commitment to sustainability and to net zero is not new, we are now specifying our starting point and our roadmap to reaching this goal. With around DKK 2,800 billion in invested capital and lending, we really have a unique opportunity to contribute to solving the climate crisis. The journey ahead of us will undoubtedly be challenging, but we're committed to supporting the sustainability transformation, and we will continue to play the role that we have always played, and that is helping our customers adapt to new circumstances and to benefit from those new opportunities. Slide four, please. Let's take a look at our three core business units.
At Personal Customer, we have generally seen high customer activity, particularly related to the Danes' ability to remortgage, which has supported our fee income and more than mitigated the lower AUM-related fees. The solid improvement in profit before impairments clearly benefited by the improved deposit margins, driving NII up 11% year-on-year and 26% quarter-on-quarter. Given the economic uncertainties and the slowdown in the housing market, the lending trend was more muted towards the end of the year. This also affected our ability to regain further market shares at Realkredit Danmark. We continue to focus on improving our front book market share, which is also supplemented by growth in market shares for bank lending, including the growth for our Danske Bolig Fri Loan product of almost 60% in 2022.
It is a strength of our franchise that we're able to accommodate our customers' needs by offering both traditional mortgages through Realkredit Danmark and competitive mortgage-like bank products. We also see a steady improvement in the customer flows in Denmark in high priority segments such as young customers and the mass affluent segment, and also the private banking segment. Furthermore, the recent Voxmeter survey on customer satisfaction showed significant improvement, with Danske Bank improving both in 2021 and being the most improved in 2022. At Personal Customers Nordic, we have taken steps to strengthen our advisory services further, and we have a clear ambition to continue to improve profitability, also through our renewed partnership agreements, which include improved repricing possibilities. This will support our effort across the region on both lending and deposits and our ability to expand our wallet through cross-selling and more holistic customer relationships.
Throughout the year, we continued to expand and improve our digital offerings to our customers. This includes the ability to open transaction and saving accounts directly in the mobile banking app, and 53% of all new accounts were opened digitally. Another proof point was our customers' preference for online bank meetings, with 70% of meetings in 2022 conducted online. No doubt that these initiatives both enhance customer satisfaction and they contribute to further improving efficiency and thereby lowering our cost to serve. For our business customers, we continue to see positive lending volume across regions, which is a testament to our ability to help clients navigate the current uncertainties. Furthermore, our tiered service model gained further recognition among customers with associated activity within FX and within cash management.
Our fee initiatives and our cross-selling of products through our District platform, together with improved deposit margins, bolstered our core income throughout 2022 and created sustainable profitability enhancement. We continue to expand our digital ecosystem through third-party integrations and new in-house solutions that will allow us to further tap into new revenue streams and improve our value proposition towards customers. It will also allow us to further harvest efficiency gains going forward. This also contributed to the significant uplift in profitability through lower FTEs and from core banking income that benefited from improved deposit margins that drove NII 13% higher in the quarter alone, as well as high ancillary income supporting a fee uplift of 5% in Q4.
With an uncertain year for the SME segment ahead, we're really pleased to see improved customer satisfaction, which is a testament to our commitment. This includes a number one on customer satisfaction in Sweden and Finland as we continue to invest in our digital channels and expert advisory services. Let's turn our focus to LC&I. 2022 saw high customer activity and was a very busy year for LC&I and for our customers. We experienced strong demand for credit, advisory services, and risk management solutions as we supported our customers in managing an uncertain environment. Our balance sheet and our advisory expertise, coupled also with the significant demand for credit, enable us to support customers with more than DKK 40 billion in additional lending during 2022. Measured in relative terms, lending volumes at LC&I increased 21% from the level the year before.
Overall, our customers have utilized new and existing facilities against the backdrop of a challenging operating environment with, for instance, the rapid increase in energy prices and challenging access to capital markets. The growth also reflects our strategic ambition to grow, especially also in Sweden. The strong growth in lending volume as well as higher deposit margins were key drivers of NII, which increased 18% year-over-year. Total income in our general banking activities have now grown with a CAGR of approximately 5% over the past three years. I'm very pleased to see that Q4 was the highest ever income quarter in general banking.
Notwithstanding the increase in NII, total income in LC&I was down 12% from the level in 2021 as a result of lower fee income and significantly lower net trading income. The decline in fee income of 15% from last year stemmed from lower capital markets related activity, primarily deal volumes and equity capital markets, and lower income from asset management following a decline in assets under management and lower performance fees. However, strong traction for our M&A offering and continually strong activity within everyday banking services, such as cash management, partly mitigated the decline. The turmoil in the financial markets had a significant impact on our trading income in 2022, especially in Q2 within our fixed income business. As a leading Nordic fixed income house, we continued to support our customers through this very volatile period.
In the second half of the year, net trading income recovered as market conditions also became more supportive. With that, I will hand it over to Stephan.
Yeah. Slide five, please. Thank you, Carsten, and good morning. I will now briefly go through the reporting lines in the income statement and reserve comments that are more detailed for the following slides. As Carsten just mentioned, we saw good progress for our core banking activities in 2022 as the strong commercial momentum led to an increase in lending volumes, primarily with our corporate customers, followed by implementation of pricing initiatives. Income from core banking activities performed well and was in line with expectations. NII was up 14% from the level in 2021 as the normalization of interest rate had a positive impact on deposit margins, as well as from an increase in lending volumes. The positive development in volumes more than mitigated margin pressure from lending activities.
The improvements accelerated in the Q4 , where NII was up 18% from the preceding quarter as the effects from normalized interest rate materialized in our numbers. Net fee income came in lower than the level in 2021. Fee income benefited from higher customer activity throughout most of the year. However, the turbulence and uncertainty in the financial markets had an adverse impact on fee income from capital markets activities, as well as on investment fees. In Q4, fee income was up 2%, driven by an increase in fees from capital market activities and from remortgage activity in Denmark. The decline in net trading income from the level in 2021 reflects the impact of volatile and difficult financial markets on our rates business, primarily in the first half of the year. In the second half, income recovered as market conditions became more supportive.
Trading income was also impacted by various valuation effects, which I will comment on later. The difficult conditions in the financial markets had a significant impact on our insurance business. As Carsten Egeriis mentioned earlier, the underlying business at Danica Pension performed well with high premiums and a modest level of claims. However, net income from insurance business came in significantly lower due to negative investment results on life insurance products where Danica has the investment risk. Other income amounted to DKK 1.9 billion in 2022, including the gain of DKK 0.8 billion from the sale of our business activities in Luxembourg and MobilePay. Operating expenses came in 3% higher than the same period last year due to a one-off provision related to the accelerated solution for the debt collection case of DKK 0.9 billion in total.
Excluding the one-off expenses were in line with our guidance for underlying costs for the full year of around DKK 25.5 billion. Of the total provision, DKK 0.3 billion was recognized in Q4, which explains the increase from Q3. Remediation and litigation costs remained elevated during 2022, however, we continue to improve our underlying costs quarter by quarter. Loan impairment charges reflect continually strong credit quality and amounted to DKK 1.6 billion for the full year. The charges include the one-off effect of DKK 0.7 billion relating to the debt collection case recognized in Q3. In Q4, loan impairment charges were driven by updated macroeconomic scenarios and post-model adjustments. Overall credit quality continued to be strong, resulting in reversals in Q4 related to individual customers.
Finally, the taxes expense of DKK 2.8 billion reflected mainly non-deductible items, including the provision for the Estonia matter and the goodwill impairment charge in Danica. Net pre-profit for the year thus amounted to a loss of DKK 5.1 million, including one-offs and in line with our guidance. For Q4 in isolation, the net profit was DKK 4.2 billion. Slide six, please. Now, let us take a closer look at the development in the net interest income for the group. Overall, NII saw a healthy improvement of 14% for the full year and 18% quarter-on-quarter, driven by deposit margins as well as robust growth in lending volumes, primarily driven by our corporate customers. The positive effect was partly countered by various lending margin effects.
On the deposit side, the uplift was driven by a normalization of interest rate as a result of the rapid change in central bank rates in the second half of the year. Also from the optimization of deposit pricing we started implementing in the first half of the year. Deposit margins at the end of the year clearly reflect that we have moved away from the negative interest rate territory and margins have to a high degree been reestablished. Total deposit volume were stable throughout the year with a slightly varying development between the segments. On the contribution from lending, the increase in volumes added positively to net interest income. As I just mentioned, that was primarily driven by unusually strong demand from our corporate customers. As expected, the trend slowed towards the end of the year.
This effect was offset by various margin effects, including delay effects, lower margins on mortgages in Denmark, and an impact from credit facilities that had been floored at zero. The credit demand we saw throughout the year includes liquidity facilities to some of our larger and better-rated corporate customers, which is contributing positively, but at the same time lowered our average lending margin. Our interest rate sensitivity for rate hikes has been changed to DKK 700 million-DKK 800 million, reflecting that we are now in a positive rate environment and we expect higher migration to savings accounts and potential effects from quantitative tightening. Finally, given the resolved status of the Estonia Matter, we resumed our wholesale funding activities in the beginning of this year.
Confirming our good access to the capital market, we issued both preferred senior and non-preferred senior bonds in different maturities and currencies equivalent to DKK 23.5 billion. Against this background, we expect the remaining funding need in 2023 to be approximately DKK 60 billion-DKK 80 billion. Slide seven, please. I will comment on our fee income development. We report lower fee income down 7% year-on-year. The underlying development differed between segments, underlining the benefits of our diversified business model. In general, activity driven fees saw a strong development, whereas the volatile conditions in the financial markets had an offsetting impact in the form of lower fee income from our capital markets related activities.
The increase in activity related fees was to a large extent driven by our everyday banking services at all business units and reflects, among other things, that the economy gained momentum after the pandemic related lockdown periods. In addition, there was a positive contribution from good remortgaging activity as a result of the changes in interest rate. Repricing of service fees during the year also had a positive impact on fee income. During Q4, we continued to benefit from remortgaging activity, whereas other activity related fees were more in line with the previous quarter. As mentioned previously, fee income from our capital market related activities was impacted by the very volatile and unpredictable conditions in the financial markets. Capital markets income came in lower than the year before, which benefited from our participation in the landmark transaction.
Income in Q4, however, came in higher than the preceding quarter due to good activity within M&A advisory services. The difficult financial markets conditions also led to a decline in investment fees. The decline in investment fees was due to lower assets under management and lower investment appetite among our customers. The annual performance fees and asset management came in significantly lower than in previous years as this item relates mainly to the performance of certain fixed income funds that were operating under difficult market conditions in 2022. Slide eight, please. Now let us turn to the development in trading income. As mentioned previously, the high volatility in the financial markets and the general repricing of almost all assets we saw for most of the year had an adverse impact on the trading income.
The negative impact came primarily from our rates business during the first half of the year, when lower liquidity in the Nordic fixed income markets made the market making services and the management of the risk held to support our fixed income franchise difficult. The effect was partly mitigated by our FX business that saw a positive development. Market conditions became more supportive in the second half of the year, trading income in our rates business improved to a more normalized level, supported by initiatives taken to lower risk utilization. Higher trading income from the banking units contributed positively and confirms the strong customer activity we saw in 2022 within other types of income. The result of other activities was negatively impacted by various value adjustments, including mark-to-market effects in group treasury and from the accounting treatment of directly owned securities issued by Danske Bank.
The interest rate hedge in Northern Ireland had a negative impact for the full year, but recovered significantly in Q4 due to lower interest rates. Please note that this should be seen in the context of a strong uplift in NII in Northern Ireland, which more than countered the valuation of the hedge. Slide nine, please. Let's take a look at our operating expenses. Total costs in 2022 were clearly affected by the additional Estonia related provision and the goodwill impairment charge in Danica booked in Q3. Outside of these effects, operating expenses came in higher than in 2021 due to the provision for the debt collection case of DKK 0.9 billion.
The provision was increased by DKK 0.3 billion in Q4, driven by further validation of the customer compensation model to ensure that our total provision is sufficient to cover the expected cost of the solution. We expect sustained elevated costs for remediation of legacy issues of approximately DKK 1.1 billion also in 2023. Excluding this item, operating expenses came in slightly lower than the year before, due mainly to progress on structural cost takeouts and in efficiency gains, resulting in lower staff costs, amongst other things. During 2022, the total number of FTEs came down by more than 700, despite the planned upstaffing within AML and compliance. Throughout 2022, costs continued to be impacted by elevated legacy remediation costs, which, however, were almost in line with our expectation.
The increased Swedish Resolution Fund contribution and an increase in inflation and IT costs driven by expenses of a one-off nature also drove costs higher. Expenses in Q4 were, as I just mentioned, impacted by the additional provision for the debt collection case of DKK 0.3 billion. Staff costs increased due to inflation and higher severance pay. We saw slightly higher costs for legacy-related cases in particular. Finally, in Q4, the final settlement in December with the U.S. and Danish authorities led to an adjustment of the provision of DKK 0.2 billion. Continuing our efforts to improve operational efficiency is increasingly a key focus area for us, given that our forecasting progress incorporates an increase in inflationary pressure that will be a headwind going forward.
No doubt the level in 2022 was higher than initially anticipated, it was driven by our deliberate decisions and was in many cases characterized by items of a one-off nature that help put legacy cases behind us and enhance the foundation for achieving the cost income targets we have outlined. Slide 10, please. Here we outline our strong credit portfolio and trends in impairments. While the macro outlook deteriorated further during Q4, and the implication of the higher interest rates are expected to impact both corporates and household, the quality of our lending book remains strong. We continue to see limited downward migration of exposure. As a result of recoveries in our oil and gas portfolio, as well as post-pandemic recoveries in general, the share of net exposure in Stage 3 continued to trend down as single name deterioration remained very modest.
Net new single name impairments resulted in reversals for the quarter, which were, however, mitigated by the updated macro scenarios in our models, which led to charges of DKK 0.8 billion, as well as additional post-model adjustments of DKK 0.6 billion to provide a further cushion against potential credit deterioration throughout 2023, not yet evident in our portfolio or captured through macroeconomic scenarios. The total impairments of DKK 774 billion booked in Q4 brings our full year loan losses to just under DKK 1.6 billion, which is in line with our expected through-the-cycle loan losses level of around 8 basis points. Over the course of 2022, these charges were by and large driven by the adjusted macro scenarios to reflect the higher inflation rate and lower growth expectations, as well as additional PMAs and the DKK 650 million impact from the debt collection case.
With the mentioned addition to our Post-Model Adjustments, our buffer now stands at DKK 6.6 billion. While we are cautiously looking at a year of high uncertainty and take this into account in our outlook, we remain comfortable with our well-diversified and low-risk balance sheet, which is further supported by healthy household finances and generally low leverage. Headwinds in the corporate segment could naturally be expected with the current economic sentiment, and we are prudently managing accordingly to mitigate any tail risk that could emerge, which is also reflected in our financial guidance that I will outline in a moment. Before that, let's have a look at our capital position on the next slide, please. Slide 11. Our reported Q1 ratio at the end of the year increased to 17.8% from 16.9% at the end of the preceding quarter.
The increase includes the full effect of the net profit in Q4, in line with the board's proposal not to distribute a dividend for 2022. Additionally, lower capital deductions for our insurance activities in Danica Pension, driven by financial markets effects and a lower risk exposure amount added to the increase in CET1 ratio. The decrease in risk exposure amount was due mainly to decline in credit risk. Our fully phased-in quarter one requirement was 13.6% at the end of Q4, unchanged from the preceding quarter. We remain comfortable with Danske Bank's solid foundation and healthy buffer to current and future regulatory requirements. Slide 12, please. I would like to comment on our outlook for 2023, which of course is subject to uncertainty and depends on macroeconomic conditions and volume growth.
In respect to our income lines, we expect our income to grow, driven by higher NII and our continued efforts to drive the commercial momentum. Despite a high degree of uncertainty, we expect income from trading and insurance activities to recover from the levels in 2022. Our costs in 2023 are expected to be in the range of DKK 25 billion-DKK 25.5 billion, reflecting continued focus on cost management and despite pressure from inflation. The outlook includes sustained elevated costs for legacy remediation of approximately DKK 1.1 billion. For loan impairment charges, we expect up to DKK 3 billion, driven primarily by weaker economic macro outlook, affecting model-driven impairments. Finally, as Carsten announced previously, net profit for the year is expected to be in the range of DKK 15 billion-DKK 17 billion. Slide 13, please, and back to Claus.
Thank you, Stephan. Those were our initial comments and messages. We are now ready for your questions. Please limit yourself to two questions, and 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.
Ladies and gentlemen, we now begin the question and answer session. If you wish to ask a question, please press star one and one on your telephone. To withdraw your question, please press again star one and one. We are now taking the first question. Stand by. The first question from Namita Samtani from Barclays. Please go ahead. Your line is open.
Hi. Just a question on deposits in Denmark. I can see from the report most of the deposits are in maturity of 0-first month. What percentage of these are transaction accounts, and what percentage of those which are getting paid 50 basis points? Just to follow up on deposit rates in Denmark, Danske Bank is currently paying 50 basis points to deposit holders who have below 100,000 DKK. Do you believe this is a sustainable level? Why is the deposit rate paid to customers not more in line with where the base rate is? Thanks.
Let me start, and then Claus maybe can come up with some more statistical detail. In general, in Denmark, we don't pay any interest rates traditionally on the so-called transaction on MID accounts. What we have been seeing throughout the year is that there is an increased migration to more savings products or even term deposit products. Year-over-year it's 19%, but obviously most of that has been happening, call it throughout Q3 and Q4. In that sense, we expect that to go on. So far, I think the market has been, call it, relatively disciplined.
Again, going forward, and that's also reflected in the interest rate sensitivity, the ongoing pressure on disposable income, the most likely slightly uptick in unemployment as well as the possible effects of quantitative tightening will probably both affect the deposit volume in total as well as the product mix throughout the year. Claus, is there anything you want to add?
I don't think so.
Thanks very much.
Thank you for your question. We are now taking the next question. The next question from Sofie Peterzens from JP Morgan. Please go ahead. Your line is open.
Hi, here is Sofie from JP Morgan. Thank you very much for taking my question. Previously you guided for DKK 23.5 billion of costs, and now DKK 25 billion-DKK 25.5 billion. What could have happened with the DKK 2 billion of cost saves that we previously should have been expected? If you could maybe just give a little bit more detail around kind of what your inflation expectations are, salary increases that you're seeing, any other inflationary like growth, cost increases, and then how much the offsets are. That would be my first question. My second question is on loan losses. If you look in the Q3 , your Stage 3 loans were down quarter and quarter. You have DKK 6.6 billion of those model adjustments.
In the quarter, you saw lower risk exposure amounts from credit risk, which to me implies that the credit risk was lower. Why are you going for DKK 3 billion of loan losses in 2023? What are your assumptions for this? That basically I mean, to me, it seems that your credit quality is quite solid, shouldn't your loan losses come in lower in 2023? Thank you.
Hi, Sophie. Thanks for your questions. Just to take the loan loss rate question to start with. It's correct that we have seen a decreasing Stage 3 exposure. We continue to see very little negative rating migration and in fact, very little asset quality deterioration. We remain very comfortable with our asset quality. The DKK 3 billion, up to DKK 3 billion that we're guiding is in the light of an expectation of a mild recession and falling house prices and slightly increasing unemployment. You know, we remain, you know, careful in terms of what we see is a very uncertain environment, and that is why we're guiding up towards DKK 3 billion based on sort of the current uncertainty and those macro dynamics.
On costs, essentially, you can think about two main components of the increase from the initially guidance of DKK 23 and a half billion to now DKK 25 billion-DKK 25 and a half billion. One component is roughly DKK 1.1 billion of remediation associated with a higher than expected remediation cost on the debt collections case, as well as continued costs from, let's say, closing down the various different things we need to do on the back of the Estonia case. You'll recall we actually close that case, so to speak, with authorities at the very back end of 2022, and therefore there is still a tail of cost there. That's DKK 1 billion, and then the other DKK 1 billion, roughly speaking, is inflation.
Recall that the 23.5 was something given in 2021 way before we saw the quite, the much higher inflation, numbers. In terms of inflation assumptions, Stephan, that we're using those costs?
Yeah. I think I would add, maybe one interesting piece of information. If you already look at 2022 compared to our initial expectation, we have probably around DKK 300 million of inflationary pressure already in the cost base 2022. Secondly, if I can give you some numbers, the inflation in Denmark in 2022 was already 7.7%. I am not, I'm not in the forecasting business really, I think it gives us a bit of a flavor for 2023 as well.
Keep in mind that in Lithuania, where we have quite a substantial part of our cost base as well, inflation was well above 15% in 2022, and that will also clearly drive inflationary pressure mainly on staff cost, but also on all the other related services and indexed contracts that we have for 2023.
Thank you. That's very clear.
Yeah. hello? Can you hear me okay?
We hear you. Can we have the next question?
The next question from Omar Keenan from Credit Suisse.
Hello. Just checking. Can you hear me okay? Okay. I can't hear them. I'll ask my question. My question is related to the remediation cost. Could you please add some color around this validation of the customer compensation model? Can you give us really an idea as to what the maths is around working out some of these remediation costs, just so we can get a bit of comfort as to what the final expense might be, and whether you can also give us a look for 2024 on that, or can we be certain that 2023 will be the last year of that? My second question was on interest rate sensitivities.
I was wondering if you could just give us a bit of updated view, on your interest rate sensitivities in the various geographies. Thank you.
Yep. Thanks for the question. On the remediation question on debt collections. You know, essentially at the end of the summer, end of August last year, we presented this alternative solution to ensure that we could compensate all the customers that we needed to compensate. We also at the same time said that we needed to do more sample testing to validate that model. Our primary aim is of course, to compensate all the customers that need compensation as quickly as possible, which is why we're doing a model-based solution to compensate the customers.
In the process of doing those additional sample tests, it turns out that particularly the older customers that have been with us before 2004, it is very difficult to do that e-extrapolation, and therefore we've decided to provision a further amount to ensure that we have a robust compensation amount. This is of course a process that we also ongoing discuss with our independent expert who's overseeing this work. I think I can say that we feel as comfortable as we can that we now have provision for the cost. We would expect, if anything, a substantially lower remediation cost in 2024. On interest rate sensitivities, we guide to DKK 700 million-DKK 800 million.
Clearly there's lots of assumptions around behavioral aspects to this, amongst others, ongoing pricing competition, to what extent customers will move more of their deposits into saving products, both saving accounts and saving products. I think there is also an aspect of an expectation of further savings depletion as unemployment increases and inflation persists. I don't know if you want to say anything on NI sensitivities across geography?
The only, the only little, the only little comment I would make that DKK 700 million-800 million is the 25 basis points parallel shift of the curve theory, and across all currencies. I think without again getting into forecasting, I think you need to keep in mind that there's probably differences in what we can expect in rate moves going forward between SEK, NOK, euros and also the UK pound, which our Northern Ireland operation is in.
Can you tell us how the DKK 700 million-DKK 800 million is split between different currencies?
That is very assumption driven.
You can say, Omar Keenan, that this is very much linked to the deposit positions we're having.
Yeah.
That's why a majority is against Danish kroner and euros.
That's great. Thank you very much. Thank you for your question. We are now taking the next question. The next question from Jean-Henri de Gerlache from ABGC. Please go ahead. Your line is open.
Thing. Operator, we don't hear any question. If you wanna move to the next question perhaps.
Yes, sir. We are now taking the next question. The next question from Riccardo Rovere from Mediobanca. Please go ahead. Your line is open.
Good morning. Good morning, everybody. Hope you can hear me. Couple of questions if I may. The first one is on the guidance on sorry, credit losses of 2023. The rough DKK 3 billion indication that you provide, this includes some use release of overlays or do you expect this to keep to remain part of the furniture for the whole 2023 and maybe and maybe onward? If you can share a little bit of your thoughts around this topic. The second question I have just for me to understand it correctly. The DKK 1.1 billion remediation cost that you see in 2023, is this a number that we can say is written in the stone?
Can it be wobbles around this number given that, you know, this quarter there is another DKK 300 million. You know, is DKK 1.1 billion your best and maybe final assessment on where we should land on this line, on this topic? Thanks.
Thanks, Riccardo. On the remediation cost, the approximately DKK 1.1 billion is our best estimate of the total remediation costs after having of course worked on this for quite some time now and with quite a high degree of confidence. As I mentioned, you know, any tail of remediation cost into 2024, we see as being substantially lower if anything. On your question to what extent the up to DKK 3 billion would include also releasing post model adjustments. You know, that really depends, right? The up to DKK 3 billion depends on sort of a recession with falling house prices and higher unemployment.
It would require of course, that we saw quite large decreases in housing. Some increasing unemployment and defaults that lead us to actually have to then transfer some of the post-model adjustments because that's what they're there for, to actual Stage 1, Stage 2 provisions, if you see what I mean. It is a question mark. The DKK 3 billion and potential PMAs, that would be the total worst case scenario, if you will, based on our current macro outlook. Again, that is based on a very uncertain environment. Of course, again, quite a deterioration on many of the different macro variables, if you see what I mean.
I would probably like to add just for reference that our local regulator has been public with a clear statement that they would not think that anybody should use PMAs in 2023 to kind of cover what they would think of as being normal losses. That is something that remains to be seen throughout the year then.
Thanks. Very clear. Thank you.
Thank you for your question. We are now taking the first question. The next question from Joachim Gunell from HSBC. Please go ahead. Your line is open.
Good morning. Joachim Gunell, HSBC. Two follow-up questions, please. First of all, on your NII and the whole beta story, probably make it more simple. Can you give us a share of the retail deposits which are currently in transaction accounts with 0 interest and probably just in some which are interest-bearing accounts now or year-end 2022, and what you expect how much shift to the end of 2023? Secondly, on the loan losses, why do you have such a negative picture on unemployment? We currently see, first of all, in most markets, unemployment data, except for probably U.K., being better than expected. Also, on the macro model changes with all the data being better than expected, what triggered the macro model change in your view? Thank you.
Just if I can take the macro model change. I think it's clear that there is still an extremely uncertain environment with still very high inflation, expectations of increasing rates with house pricing falling in all Nordic countries and with an expectation clearly as we see the macro weakening that unemployment will go up. You look at car sales during 2022, this is Denmark examples, we're down 20%. That's the level of just around financial crisis. If you look at housing activity on new mortgage loans in Denmark, it was one-tenth of the activity in Q4 versus Q1. If you look at new openings of SMB companies in Denmark, it's probably down by about 20%.
We see consumer spending down in December in Denmark, 9.3% when you adjust for inflation and energy consumption. There's plenty of data that unfortunately supports a weaker macro environment that we're going into, and we want to be very vigilant around that and also careful in terms of how we navigate through that, and that's why we say up to DKK 3 billion. Clearly, if things change to the more favorable, that will be a benefit for our customers and for the business. Do you wanna just mention on the split on-
Yes.
transactional accounts versus
Yes.
Others?
Happy to do so. We have on a group basis approximately DKK 1 billion in transaction accounts and DKK 125 billion sitting in time deposits. The time deposit has increased by approximately 25% or approximately DKK 25 billion from the end of 2021 to the end of 2022. We do not have it on a country basis, but I think that the changes on the time deposit reflects that we are returning to a normalized interest rate environment where there is a focus on getting a positive interest rate on time deposits again.
Thank you.
Thank you for your question. We are now taking the next question. The next question from Maria Semikhatova from Citi. Please go ahead. Your line is open.
Yes, hello. Thank you for the presentation. A couple of questions. First of all, on your outlook for 2023, you expect higher core income. Maybe you could give us a little bit more flavor on NII. What is your assumption for the policy rate at the ECB and the Danish Central Bank? On the NII sensitivity that you provided, this is for the 25 basis points. Do you expect to have a similar impact, let's say, for the consequent 75 basis points, or there should be a diminishing impact here? Then on fee income, if you have any view on, let's say, direction, if we take into account a very elevated remortgaging activity last year and also expected pressure on consumption.
Second minor question, just to clarify, your comment on the regulatory stance on these PMAs. In what cases you can actually utilize this DKK 6.6 billion of post-model adjustments this year? Thank you.
Okay. Let me just take a couple of things, and then I'll hand it over to Stephan. Thanks for the question. On the post-model adjustments, there's no, there's no regulation around that we, that we cannot release those post-model adjustments when we actually see losses. I mean, clearly that's important to note. I think the signal from the Danish regulator is more to say that they believe that the macro environment will be tougher and that banks should be extremely careful around releasing post-model adjustments with high uncertainty, which is not unusual. Just to be clear, of course, we can release those PMAs as we see increases in Stage 1 and Stage 2s in the different segments.
On fee income, I would say we probably expect, you know, roughly flat fee income, all depending on market conditions, probably slightly up. Overall on core banking income, so both NII and fee we're guiding that income will increase.
Yeah. Again, on NII sensitivity, DKK 700-800 per 25 basis points for the next rate hikes is the assumption. Again, with the reflecting on the discussion which we had earlier, split between the different currencies. ECB is the important one for us. Keep in mind there's also other currencies where at least from today's point of view, I wouldn't see too many rate hikes coming anytime soon, most likely, you know.
Operator, can we have the last question, please?
Just to clarify this DKK 700.
Sorry, go on.
Is she-
We are now taking the next question.
The last question.
This question from Johan Ekblom from UBS.
Last question.
Please go ahead. Your line is open.
Thank you. I hope you hear me now. Two questions. The first one is the volume side. Could you shed some light into what you think about volume growth into 2023? The second one is on the FTEs. you seems to have still a quite flat level on the AML's national crime prevention full-time employees. When should we think about taking those out of your numbers? Is it in 23, or 24 or 25? Thank you.
Thanks for that. We hear you now. Thank you. Yeah, on the compliance and financial crime related FTEs, we previously guided that they would flatten out into 2022. Then we would expect some reduction into 2023, but not materially. Then we would expect reduction going into 2024 and 2025. We have a financial crime remediation plan that we expect to finalize during 2023. Also as part of the post-resolution obligations from closing the case. We're very much on track on that, and we continue with the trajectory on what we had earlier referred to as the AML hump, e.g., that, you know, roughly flat in 2022, 2023, and then reducing in 2024 and 2025. We still believe in that trajectory.
You know, in terms of volume growth in 2023, clearly difficult to predict at this stage. I mean, we continue to see pretty good activity with our business customers, but lower activity certainly than the second half of last year. As I mentioned in the comment before, housing activity is clearly subdued. I think overall sort of volume activity a little bit mixed, but at right now looking subdued. Of course, if macro, and there is more clarity you can say around macro despite the uncertainty picks up, then perhaps we'll see that pick up in later quarters during the year.
Thank you. Can I just have one follow-up on the FTEs?
Yes.
The 3.6 you have, should we think those going down to half of it, or is it go down to 0 into 2025?
No, no. We I think we always if you take the financial crime aspect of it, which is really a large part of the 3,500, we had guided to a cost going from around DKK 2.6 billion-DKK 2.7 billion to DKK 1.5 billion-DKK 1.7 billion. So you can see that as maybe a roughly 25% reduction. Most of that cost is related to FTEs. Clearly, we need to, of course, remind ourselves that inflation, of course, is higher than when we set that, those ranges, but the trajectory is on course, and then we'll have to see.
Perfect. Thank you for your time.
Thank you.
We have received a question over email from Jacob Frank in Nordea, and I will just read it out loud. Regarding the 2023 guidance, I annualized Q4 revenues and subtract DKK 25.3 billion of cost and DKK 3 billion loan losses and tax, and take out tax, I get to DKK 17.2. You write NII will increase in 2023, why only DKK 15 billion-DKK 17 billion of net profit guidance? I understand no rate hikes included in guidance. Is that correct? Using the DKK 16 billion net profit and 16% CET1, I get to 11% return on equity, why 9%-10% long term?
Long question, let me take them one by one, we see, thanks, Jacob Frank. I think in terms of annualizing Q4, you just need to keep in mind that there is some one-offs, both in terms of the sale of MobilePay and also in terms of the adjustment of the Estonia fine. If you take that out, it's you need to just be sure of that when you annualize those numbers. The second point is that clearly we're guiding to an up to DKK 3 billion loan loss rate, which is slightly higher than what you saw in Q4. What did I miss? On NII.
I would still say that we should be cautious whether the trading result and the insurance result in Q4 are really indicative for what we see throughout all of 2023. We have said we see a recovery year-over-year. We have not said that we really expect it to return to normalized. Then whatever, I think the last part, I wasn't sure whether I got that right. If you divide, call it, whatever your number was, and I think it's quite a bit too high. You need to still apply a call it proper equity level, which we still guess or if we still think will be in the range of DKK 170 billion, as we have also previously guided.
I think you had questions on the 9%-10% ROE that we set in 2021, Q3 2021. We will look at what we believe is the updated longer term ROE guidelines. We'll do that as part of our strategic update probably before summer. We will not sort of guide on the longer term ROE today.
Just to give you clearly some credit. It is clear if you at least take the midpoint of the range that we are giving, we are slightly ahead of the eight and a half to nine that we have so far discussed.
All right. Thank you all for your interest in Danske Bank and your questions. Much appreciated, and as always, please reach out to Claus in our IR department if you have any other questions. Thank you.