Ladies and gentlemen, thank you for standing by, and welcome to the Danske Bank press briefing. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. For your information, this conference is being recorded today. Now, I would like to hand the conference over to your speaker today, the CEO, Chris Vogelzang. Please go ahead, sir.
Thank you, operator. This is Chris Vogelzang speaking, and apologies for the delay. We had some technical issues, but it's all been sorted out now, so very good. Welcome, and thank you for joining. We would like to give you an update on the financial results for the first quarter of 2020 and the overall situation of the bank. We encourage you to ask questions, and we will answer them later in the call. I'd first like to start by introducing Stephan Engels, who is on the call. He's our new CFO, has joined months ago, and is now completely in charge of the financial area of the bank. Carsten Egeriis, our Chief Risk Officer, and both of them, together with me, we will be ready to answer any questions you have. Okay, next slide, please. Okay.
Before COVID-19, the first month of the year showed a fundamentally robust business with good customer activity and lending growth. In Denmark, high remortgaging activities contributed positively, while all other core markets saw lending growth among commercial customers. Sweden also saw growth among retail customers. The financial results for the first quarter are, of course, heavily impacted by the coronavirus pandemic, most notably in two significant ways, impairments and trading income. Danske Bank continues to be one of the best-capitalized banks in Europe, which puts us in a good position to continue to support our customers through the downturn with a broad range of initiatives, and this remains our key priority. Next slide, please. As you can see, we have and we will continue to go a long way to help our customers through this challenging situation.
We will look at the situation of each individual person or business and then assess how we can best help them. For some, it will be offering deferment on payments on their home loan for up to six months. For others, deferring the payment on their car loan or temporarily extending their overdraft facility will be the best solution. Businesses are also able to defer payments and obtain increases in overdraft facilities and facility limits. Furthermore, we have been able, as a bank, to operate for 100% as an organization with almost 20,000 people, employees working from home. We have been in a dialogue with more than 100,000 customers, both in the retail and the business segment.
Overall, I'm actually quite proud of what we have been able to achieve as an organization, both as an operation with the fact that we have so many people working from home and still able to service our clients, and I think we can demonstrate that we have had so far and we will continue to have a very constructive role in the current situation in the countries. I think this is the time that we go to the next slide, please, and that we ask the CFO to go through the overall results.
Good morning, everybody, also from my side. I think we focus on the three lines that are the ones that we want to look at. One is NII. You can see it's down 1% from Q1 2019. You need to keep in mind that also this line has kind of a little bit of a corona setback in the sense that currency exchange rates have been producing quite some headwinds. If you would adjust for that, NII would have been up. What we have seen is increased volumes that are partly offsetting the continued margin pressure, both from the low interest rate environment as well as still higher funding costs. Banking Nordic in specific had very solid business activity. Lending volumes are offsetting the FX headwinds in Sweden and Norway. The trading income is down 82% from the same period last year.
The negative impact came very late in the quarter, basically completely associated with the COVID-19 thing. We've seen very turbulent financial markets with significant volatility in rates and equities, and we have seen everything going just the down way, which is also a somewhat new experience. We have had significant wider credit spreads that had a negative impact on trading income, mainly through negative XVA adjustments of DKK 0.3 billion that are driven by our derivative portfolio.
April, just to say that as well, is materializing a lot better. A lot of the amounts here that we have booked in Q1 are valuation rather than cashflow issues. Impairments stood at DKK 4.3 billion and Carsten will shed a lot more light on that. Let me just put it in three little buckets. One is changes to macroeconomic assumptions in the IFRS 9 model, which we are just applying the way it is intended to be applied. There's charges against sectors severely affected by the pandemic, as well as single name exposures, primarily in oil and gas. With that, I will hand over to Carsten. Next slide.
Thank you, Stephan. Yeah, as you all see, good morning, everybody. The impairments are up quite significantly in Q1. This is, of course, a reflection of a very uncertain environment that we're looking into. As Stephan alluded to, basically if you step back, there is three key components. The first component is the macro environment. We model our future losses, expected credit losses, with a weighted view on the macroeconomic environment that we're looking into. You will see in the details that we've reported this morning that we look into a macro environment which is uncertainty with GDP contraction over the next couple of years, as well as quite a significant increase in unemployment and with falling house prices. That impacts the impairment for about half of the total amount that we report today.
We have a post-model adjustment, so overlays against both oil and gas, as well as a few other corona-related sectors that we see as the most highly impacted sectors. Finally, the individual credit deterioration names, the names we have in non-performing loan status, where we take quite significant impairment, about 70% of that impairment against oil and gas names. That's, of course, reflecting both the macro environment, which impacts demand for oil and gas, but of course also the geopolitical aspects impacting the oil price. If we then go to the next page, just to speak about capital and liquidity for a second. As Chris alluded to, we come out Q1 with very strong capital figures. We of course canceled our dividends, and that's partly reflected in the higher CET1 ratio. At the same time, of course, we've had a release of the countercyclical buffer.
You in fact now see a buffer to the legal requirement of 440 basis points, excuse me, which is a very significant buffer and ensures that we can really lean into this crisis, that we can act as the shock absorber that we should be, and that we can help support our customers and clients. I should say, just from a liquidity perspective, you don't see the numbers on this page, but we end the quarter at above 150% liquidity coverage ratio, significantly above previous quarters and well above regulatory requirements. With that, I will hand back to Chris to close off before we open to questions.
Right. Next slide, please. All right. You can see our expectation for 2020. As uncertainty prevails for the impact of the coronavirus pandemic, the uncertainty for the guidance is also higher than usual, reflecting the limited visibility on the macroeconomic situation and the development in the financial markets. Uncertainty also relates to customer activity, market developments and economic conditions, including developments in monetary policy at central banks. Based on the same thorough analysis as always and our best estimates of income and cost, we aim to reach a net profit of at least DKK 3 billion in 2020. Next slide, please. Okay. I think we should now open up for questions. I don't know exactly how that's going to work, but I'm sure everybody does. Please, operator, open the floor for any questions for Stephan, Carsten or myself.
Thank you. Ladies and gentlemen, we now begin the question- and-a nswer session. As a reminder, if you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press the hash key. We have our first question coming from the line of Nikolaj Skydsgaard from Reuters. Please ask your question.
Good morning, guys. First question.
Morning
from me. I was thinking, could you put some words on how is this going to affect your current 2023 plan? I know you kept your ROE target, but anything in this plan that might get affected by this sort of extraordinary circumstance?
We are-
Yeah. No, yeah. Let's start with.
No, go ahead. That's the first question.
Okay.
Second question.
The second question would be how much does your current impairment last you? Can we look into further rises in your impairment this year? Yeah, thanks.
I'll take the first question. Carsten will take the second question. The first question is, we are still very, very confident that we will be able to reach the 2023 targets. Obviously, this year we face headwinds. We do not see any reason to doubt the fact that we, in 2023, will be able to reach our 9 to 10 ROE target. Obviously, we will, in the course of the next years, see whether the composition of the ROE or the way you calculate it is going to be a bit different, either in cost or in revenues. For the moment, as I've always said, that even in headwinds, we should be able to get that done. Carsten.
Yeah, let me take the impairment question. How long will this last us, I think the question was, and sort of the outlook for the rest of the year. We've taken impairment that is reflecting the macroeconomic environment that I laid out, quite a severe recession with GDP contraction, falling house prices, and increasing unemployment. All else equal with the macro environment flowing through the rest of the year, then we feel quite comfortable with the macro component of it. Of course, it is highly uncertain what the fiscal and monetary stimulus will do in terms of pickup in the economy. All is equal, that's the case. If we look into the rest of the year, I would say that we've taken a substantial part of the impairments in the first quarter, with uncertainties of course, both from a macro and an oil price perspective remaining.
Okay, thank you.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press star one, and if you wish to cancel your request, please press the hash key. Yes, we have another question coming from the line of Peter Levring from Børsen. Please ask your question.
Yes. Good morning, gentlemen. Just wanted to ask you a little bit about your trading income. Just basically, there's been a lot of how various banks have come out on trading in the first quarter has been very different, and not as coherent or not as unanimous as in previous quarters. I just wanted to ask, how big an impact did your market making in Danish covered bonds have on the trading results? If you could perhaps elaborate a little bit on the remarks you have in the report on the equity options impact on trading revenue in the quarter.
Stefan.
Yes.
Good question.
Yeah. Thank you for the question. Again, trading income has had one main part, which is the XVA losses driven by higher funding spreads, basically flowing into the funding valuation adjustment. That is about DKK 340 million, DKK 344 million in the quarter. The other part is, as you rightfully suspected, driven by the significant spread widening in global cash bonds that followed also the large equity market during March. It led also to market losses on both our mortgage bonds and credit trading assets. We have been maintaining our, let's say, purpose in this market and have been keeping the mortgage markets specifically afloat, which again, has led to these valuations.
Okay. If I may just throw in a follow-up. You don't have that many numbers on trading volume or trading activity volumes. How engaged or how active have your markets people been in this quarter? Has it been a busy one?
The first two have been pretty busy. In the C&I area, both on credit as well as on equity. There we have seen pretty good activity, again, more or less completely wiped out by the March adjustments and the March market development. I think it is also the April hadn't finished completely by now. We can definitely say that April has picked up nicely.
Okay.
Can I add something to that?
We've also, as a bank, taken our obligation and our duty to make a market for Danish bonds, mortgage bonds. That's not always easy. In these markets, you actually might lose money on it. If we wouldn't, and we are the largest market maker in Denmark, that would have a significant impact on the housing market. We took our responsibility, and we lost money on it, so be it.
Okay. Could you elaborate a little bit about it, the size of the loss on the market making?
No, we don't always disclose that.
I don't want to spread it out to detail, but if you look at the overall number and detect the DKK 344 from the XVA, there's not too many buckets to spread it about it.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Mathias Hagemann from Børsen. Please ask your question.
Yes, good morning. There seems to be two schools in the way of writing the loan impairments right now. You've chosen to take a huge loan impairment this quarter. Why did you choose that path?
Yeah. No, I think you're absolutely right. You do see quite a large divergence between banks, both across U.K., Europe, and certainly in the Nordics. We've chosen to take the approach which we think is entirely aligned with accounting principles and, of course, also importantly, entirely aligned with the Danish FSA and their guideline, and that is to really ensure that we are reflecting as much as possible the current macro environment and the expected macro environment in our impairments. We believe that we have a robust balance sheet, a robust business, and that we should be taking impairment in a timely manner, and that's exactly what we believe that we've done.
A follow-up, have you done this to please the authorities or because you wanted to?
No, absolutely not. Of course, we follow guidelines and regulatory requirements, but we believe that this is the right thing to do. As I said, it's important that we realistically, and as realistically as possible, given the uncertainty, reflect impairments appropriately. I think that creates more transparency, and I think that creates more trust in the bank overall.
If I may add from the pure accounting perspective, that was why IFRS 9 was designed the way it was originally designed, which is that you take losses, at least accounting-wise, early rather than spreading them unnecessarily out.
One thing I would say, I think it is helpful that the Danish Regulator came out with clear guidance to Danish banks around the macro scenarios that could be used, because that helps create much more consistency and also ensures that there isn't too much discrepancy between what is being used amongst banks. In that sense, I think that's useful.
Okay. Just a follow-up for that about the loan impairments. You said in your press release this morning that you would see an upturn in 2021. What do you base that on?
Yeah, look, I think it would be unprecedented and highly unlikely that all the fiscal and monetary stimulus that we see being given in the society not to help the macro environment. Our base view is that in fact, you will see economic activity pick up as the economy slowly opens again and as the stimulus takes effect.
I have one last question. The banking sector has been heavily criticized for wanting to pay out dividends, which you of course canceled, but you also been criticized about raising the amount of money you have to buy a new home. Do you think that criticism has been fair?
Let's answer that question as follows. We are in very good cooperation with the Danish government, and we support fully their interventions, et cetera, in the Danish economic world. We take our share. The fact that you actually see these large impairments also shows how intense we're actually, at the moment, involved with the Danish and Nordic economies. We're all out there. I've given you in the introduction also the things we're doing right now. That's all good. However, we also have a responsibility towards our clients and to make sure that clients do not take any unnecessary or irresponsible risks. The fact that we, for a very small segment of the clients, indeed increased our requirements a bit, we feel that it is actually the responsible thing to do and is also something we have learned from the last financial crisis, mid last decade.
Overall, we are very, very much aligned with the Danish authorities.
The criticism has not been fair, or yes or no?
Sorry?
The critique of the bank has been fair or what? Or unfair?
Oh, no, I'm just saying that we have a view about responsibility we have for our clients. I'm not going into qualifications.
Okay. Thank you.
Thank you. Our next question comes from the line of Nikolaj Skydsgaard from Reuters. Please ask your question.
Hi again. Just a follow-up question. No, not a follow-up, a brand new question, actually. Regarding Danske Bank's reopening plans for your employees. Could you let us know a little bit about the status there? Which initiatives have you put in place to keep everyone safe? When are you starting to get people back in the offices and stuff like that? Could you put some color on that?
Sure. It's Carsten here. Obviously, a very relevant question. We sent roughly 20,000 employees home about a month ago. Of course, what we've been working on an ongoing basis, is what will a back to the office plan look like. We took the decision to, in Norway and Denmark, where we have reopened slightly in certain areas to get about 10% of our workforce back. Obviously, with all the health and safety precautions, and so forth. That was to ensure that we could slowly test that everything works from a real estate, from a canteen, from a health and safety perspective, from a communications perspective. What we're now doing is, of course, preparing wave two and three, we're also very cognizant that this needs to be done in a careful manner, aligned also with guidance from government.
Therefore, we await to see what happens from a government perspective, where we, of course, expect some more information to come out around the May 10th and 11th. We will then take a decision post that in terms of to what extent we bring further parts of the workforce back. Of course, it differs slightly country by country.
Okay, thank you.
Thank you. Next question comes from the line of Frances Schwartzkopff . Please ask your question.
Yes. Hello, Chris. You mentioned that you'll hit your ROE targets, but that the way of calculating that may change or may shift between cost and revenue. Can you elaborate given the dampened economic activity expected in the coming quarters and months?
Hi. Yeah. I think it's far too early, and I think I've said the same thing as I've said all along. Also, when we actually announced that if revenues will not pick up, we have also the possibility to do more in our cost line. We are six weeks into this crisis, and this is a 2023 target, so it doesn't change any of the measures we're taking now.
Okay, you're confident that, in other words, you're not trying to send the signal that people should be concerned for their jobs?
No, I'm not sending any other signal than I've said in the announcements around this plan.
Great. Thank you.
Thank you. As a reminder, if you wish to ask a question, please press star one, and if you wish to cancel your request, please press the hash key. We have another question coming from the line of Peter Nyholm from Inside Business. Please ask your question.
Yes, good morning. Carsten, you talked about a severe recession. Could you give us some numbers on that severe recession? How will it struck the economy when it comes to unemployment, housing prices, and so on? Could you elaborate on that, please? One more question about the impairments. In what sectors will be hit when it comes to retail industry, real estate, and so on? Could you tell us a bit about that as well?
Yeah. Hi, Peter.
Hi.
Yeah. Look, obviously impossible to have a crystal ball and to dictate exact macro assumptions. Also keep in mind, of course, that we closed Q1 in the middle of a lot of uncertainty. What we have tried to do is do a weighted average macro scenario, which has unemployment going up on a weighted average basis, if you look across the Nordic countries, by about 20%. House prices falling across a couple of years by about 6%, and then a slight GDP contraction. If you weight our scenarios that we also disclose, that's roughly the kind of macro scenario that will be reflected in the impairment figures that you have. I should there note that the main drivers of impairment is, of course, unemployment and house prices from a loss given default perspective.
Therefore, I wouldn't put too much weight onto exactly what the GDP percentage is. If you then look at the sectors that are most impacted, those would be oil-related exposures. It would be hotel, restaurants, and leisure. It would be transportation and would be retailing. It's important to note that if you then stand back and look at our total credit exposure of DKK 2,500 billion, it is less than 4% of the bank's exposure that are in these most highly impacted sectors. In fact, those are also sectors that we've been quite careful and selective on in the last few years, and in fact, where we've reduced exposure in aggregate over the last couple of years. Does that answer your question, Peter?
Yeah. Thanks a lot.
Thank you.
More questions?
There are no more questions on the line. Please continue.
Thank you very much. I want to thank you all for your questions. Our press colleagues are obviously open to answer more questions, and I'll be talking to some of you later today. Thank you very much for dialing in, and I hope you have a really nice and safe day. Thank you very much.
This concludes the conference for today. Thank you for participating. You may all disconnect.