Good morning, everyone. Welcome to the conference call for Danske Bank's financial results for the first nine months of 2023. My name is Claus Ingar Jensen. I'm Head of Danske Bank's Investor Relations, and with me today, I have our CEO, Carsten Egeriis, and our CFO, Stephan Engels. 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, and I would also like to welcome you to our conference call for the financial report for the first nine months of the year. The first nine months of 2023 marked a period of sustained and even increased geopolitical risk, which, combined with inflation and rate hikes, has impacted the macroeconomic landscape and thereby our operating environment. Central banks' efforts to fight inflation have led to a sharp rise in interest rates. However, as the increase we have seen in core inflation seems to be sticky, and given central banks' readiness to hike rates further, we may be looking at a higher-for-longer interest rate and inflation rate scenario. Although the short-term effect on most of our customers has been muted and smaller than what we previously anticipated, we've yet to see how the longer-term impact of higher interest rates will materialize.
This adds to the already limited visibility for the economic outlook. In this environment, bank profitability in general has benefited from more normalized interest rate levels and from lower than normal loan losses, mainly attributable to model-driven charges. This is also the case for our performance in the first nine months. The return on shareholders' equity was 12.5% for the period, driven by a satisfying development in profitability as our cost-income ratio improved from above 67% for the same period last year to now 49%, supported by a loan loss ratio of only 2 basis points. When measured against the financial targets of our 2023 plan, I'm pleased to see that we are on track to significantly exceed our revised target set at the end of 2022.
Although the year has not yet come to an end, I dare to say that the outlook for the financial results for the full year is not only a solid contribution to our efforts to restore profitability, but also a promising start to our upcoming new strategy period. Our performance is based on sustained execution of our commercial agenda, at the same time as customer activity has held up well. A strong proof point is the positive trend for income generated by our customers' daily banking activities, which clearly illustrates the resilient nature of our business. Investment and housing market activity slowed, impacted by the uncertain economic outlook. However, investment-driven income improved in the second and the third quarters. The same goes for capital market activities, which not only improved relative to the same period last year, but also quarter-on-quarter.
This was clearly based on our ability to benefit from more constructive market conditions and strong delivery on our sustainability-related ambitions. Our lending and deposit business was fairly stable in the third quarter, however, with a clearly positive trend for some of our focus segments. I'll just mention two observations before I comment in more detail on the next slide. We've seen continued progress for our mortgage business in Denmark. In a market characterized by low activity, I'm pleased to see that we have grown our share of new lending in Q3 for both the business and the retail segment, and for the latter, our front book market share exceeded the back book market share in Q3. The decline in lending at large corporate and institutions, which was not unexpected, should be seen in the context of the recovery that we've seen in capital market activities.
Deposit volumes remained relatively stable in the third quarter when measured in terms of stable and operational deposits, whereas non-operational deposits at LC&I saw an increase. In Denmark, we continued to see an increase in retail deposits in Q3 that was driven partly by our well-recognized offering within savings products. Credit quality remained strong, with limited credit deterioration impairments recognized, which led to a net charge of DKK 0.3 billion recognized in Q3. As we had no charges in our previous report, this also represents the charges for the first nine months. We've maintained a strong capital position, and at the end of Q3, our capital ratio improved to 18.8%.
On the basis of the satisfying performance for the first nine months, we narrow our financial guidance for the full year, and we now expect net profits to be between DKK 19.5 billion and DKK 20.5 billion for 2023. Slide 2, please. Despite the economic slowdown in the regions in which we operate, we continue to see progress across our three main business units. At Personal Customers, the operational performance was strengthened further by a continued expansion of deposit margins, and as a result, profitability more than doubled from the level a year ago. As a result of healthy household finances and good customer activity, activity-related fees remained solid. Sentiment on the housing market has improved throughout the year so far, although transaction and remortgaging activity remained low relative to the same period last year.
The higher interest rates and uncertainty related to the new property tax appraisals in Denmark will likely continue to be an overhang affecting customers. In respect to volumes, deposits at PC remained strong despite seasonality effects related to summer spending and the expected natural attrition from PC Norway. In Denmark, we continue to see a positive inflow into transaction accounts, as well as saving products, and our diligent pricing measures also contribute to our holistic value proposition and improvement in overall customer satisfaction. As investment products in the light of higher interest rates have become more attractive, we've also seen a steadily higher inflow during 2023 in assets under custody. In terms of our recognized deposit savings products, migration has moderated during Q3, where the inflow amounted to DKK 5 billion.
Overall, a solid testament to the quality of our offerings and applicable solutions for self-service in our mobile banking app. In terms of lending volumes, the stabilization of the housing market in Denmark added support in the third quarter, and we continue to see strong demand for our flexible product offerings, with more customers opting for our Danske Bolig Fri home loan product, for which volumes were up another 3% this quarter. Along with the traction on front book market shares at Realkredit Danmark that I highlighted earlier, this progress is particularly pleasing as we continue our efforts to regain our fair share of the Danish retail mortgage market. We continue to execute on our digital and our non-digital initiatives, and during the third quarter, we added more customer-friendly mobile banking features, such as the possibility of opening high-yield savings accounts and making automated monthly investments.
At Business Customers, we saw solid financial results, with profit before impairments up 17% from the same period last year. In the third quarter, NII was impacted by the allocation of MREL costs. Engagement with our business customers is gaining traction, and volumes developed favorably in the third quarter, despite the overall economic slowdown, as both lending and deposit volumes were up another 1% in the quarter. In respect to fee and trading income, we saw the impact of lower seasonal activity for FX, as well as lower service and property market-related fees. Despite this, we still saw the benefit of our subscription-based fee model, which, along with our cash management offering, remains a key example of increased customer engagement and the potential to improve our share of wallet among our business customers further.
Optimizing our pricing structure is a priority at Business Customers, and we are working diligently to align the pricing of our services and products to market levels with a holistic customer focus in mind. To ensure a better customer experience and a faster lead time for customer inquiries related to daily banking services, we've harmonized our customer support setup across the Nordic countries. We've also launched targeted District webinars with significant take-up from our business customers, which increases self-service awareness and adds to our digital and advisory value proposition. As a result, customers are highly satisfied with our support and our offerings. And then finally, touching on LC&I, during the third quarter, the capital markets became more constructive, and we generally saw improved activity across our franchise.
Particularly, the debt and equity capital markets started to see improved conditions, and we're pleased to have helped our customers capitalize on this opportunity. In debt capital markets, we saw a high volume of deals during the quarter, including more than DKK 10 billion raised in sustainable bonds and sustainability-linked notes, solidifying our number one position in Bloomberg league tables among Nordic banks. Our ability to provide advice and relevant product offerings, no matter the condition in the financial markets, is testament to our Tier one LC&I franchise. Customers opting for debt financing in the capital markets naturally affects our balance sheet volume, which was further affected by a normalization of liquidity facilities from the situation a year ago, when energy prices were very volatile. Despite the lower lending volume in the third quarter, we saw a stable development in NII on the back of continually approved deposit margins.
Fee income at LC&I was a particularly positive contributor in the third quarter, as the DCM activity I referred to before, along with generally solid activity within cash management and transaction banking, mitigated the seasonality-related decrease in trading income in Q3. Investment fees also made a positive contribution in the third quarter.... Assets under management have shown steady recovery through 2023 so far, driven by an improvement in the financial markets. Higher AUM was further supported by traction within net sales, where particularly in our private wealth management business, improved Q3. For the year to date and in Q3, Danske Invest has seen a net new inflow above its back book market share, thereby improving our market share and position further. Finally, the majority of our fund strategies have outperformed benchmarks, which also supports future inflows.
Overall, another strong quarter for LC&I, and our penetration to corporate clients continues to improve with added mandates and new relationships that are underpinning our new strategy, and also bodes well for a sustainable uplift in performance, regardless of the conditions in the capital markets. I'll now hand over to Stephan for a detailed walkthrough of the financials. Slide 3, over to Stephan.
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 a strong financial performance when comparing with the first nine months of last year. Net profit more than doubled when excluding the effect of the provision for the resolution of Estonia and the goodwill impairment charges in 2022. Net interest income saw strong progress in line with expectations. NII was up 46% from the level a year ago, as the normalization of interest rates and our own efforts to optimize pricing structures had a strong positive impact.
The improvements continued in the third quarter, where NII was up 10% from the preceding quarter, 6% adjusted for a one-off, as deposit margins in particular continued to benefit from normalized interest rate levels. Net fee income came in lower than the level a year ago. The decline was driven by overall lower housing market activity, as well as a decline in fees from lower assets under management. In Q3 however, fee income improved from the preceding quarter, due mainly to an increase in investment and capital market activities, whereas lending and general activity-based fees were stable relative to the level in Q2. Net trading income recovered from a low level a year ago when the financial market struggled with the impact of the Russian invasion of Ukraine.
In the first 9 months of this year, market conditions have been more supportive, at the same time as our fixed income franchise has benefited from a new strategy. Please note that Q3 included the impact of the release of a loss of DKK 0.8 billion from OCI, following the exit of the retail business in Norway. Net income from insurance improved from the low level last year when financial market uncertainty led to negative valuation effects. In the third quarter, the result improved slightly relative to the preceding quarter. However, an increase in claims in the health and accident business and a provision for potential customer compensation had an adverse effect on the result. The underlying business improved due to an increase in premiums of 12% on the basis of an inflow of new businesses relative to the year earlier period.
Other income amounted to DKK 0.4 billion in the third quarter, as the result included a gain of DKK 0.1 billion from the Infosys transaction. Operating expenses came in 4% lower than the level a year ago, which included one-off costs related to the debt collection case. The impact we have observed from higher inflation and elevated remediation cost has been more than mitigated by lower staff and remediation cost. In Q3, expenses fell 2% relative to Q2, primarily as a result of lower costs for remediation of legacy issues. Against this background, our cost income ratio in Q3 showed progress and stood at 48%, against 68% a year ago, and down from 52% in Q2.
Loan impairment charges came in lower than expected and reflected continually strong credit quality, which led to only a modest impairments of DKK 0.3 billion in the third quarter. I will comment on impairments in detail later. Finally, the tax expense in the third quarter of DKK 1.2 billion included a payment from the tax authorities of DKK 0.6 billion, due to a correction of taxes for earlier years. Net profit for the first nine months, thus amounted to DKK 15.5 billion, more than twice the results from the same period last year, and up 6% from the preceding quarter. Slide four, please. Let me take you through the recent developments in the net interest income. NII continued its positive trajectory with another 10% increase in the third quarter, adding to the year-on-year uplift of 46%.
While the strong trend benefited from the DKK 0.3 billion tax-related contribution we have flagged previously, it also indicates continued margin expansion as we have diligently adjusted our deposit pricing, including attractive saving products. Our total deposit volume remains strong, well-diversified, and with the majority of it being classified as stable or operational deposits. In the third quarter, we saw a positive inflow from our corporate and institutional customers, and outside the expected effect of our announced PC Norway divestment, the trend at personal customers remains solid. At PC Denmark, the level was supported by another DKK 5 billion in inflow to our Danske Indlån and Danske Top Rente savings products during the quarter. As a reflection of the overall slowdown in the economies, the trend in lending volumes has been subdued throughout the year.
In Q3, credit demand was overall stable, despite the impact of the run-off of credit and liquidity facilities related to the utility and energy space that spiked a year ago. In addition, the pickup in the debt capital markets has naturally led to a shift where we, as a leading Nordic investment bank, have advised our customers in relation to bond transactions instead of utilizing our own balance sheet. Lending margins remained impacted by the catching up to higher short-term funding costs and the lagging effects due to notice periods and the timing of repricing of loans in general. In addition, the allocation of capital cost is now reflected at business unit level and was the main driver behind the lending margin drag in the third quarter.
Along with the impact on business unit deposit margins from the overall management of interest rate risks in the banking book, this allocation had no group impact. This Q3 effect has been communicated previously and most recently in our pre-close call. Finally, on our NII sensitivity, we've seen a natural moderation as we have gotten more firmly into positive territory with the pricing considerations that follow. For the next 25 basis point uplift, we thus see around +DKK 600 million. However, as the balance sheet effects from our hold-to-maturity portfolio and unhedged fixed rate assets are gradually taking hold, we would, all else equal, expect to see a year 2 and a year 3 benefit of another DKK 300 million and DKK 200 million respectively. Slide 5, please. Next, let's have a look at fee income.
While the higher interest rates and the economic slowdown have led to lower housing market activity and credit demand, which impacted fee income from lending and guarantees relative to the same period last year, we saw a stabilization in the third quarter. In fact, overall fee income was up 5% from the preceding quarter, as activity-driven fees continued to benefit from stable consumer spending, along with good corporate activity related to our cash management services and transaction banking. As I alluded to on the previous slide, DCM activity is trending in the right direction, and we have been actively optimizing the capital position of our customers with appropriate bond financing. In addition, we saw a gradual improvement in ECM activity, while the execution of IPOs remained low despite a healthy pipeline.
On investment fees, the development since last year was driven primarily by lower customer activity, lower assets under management, and lower performance fees. When comparing with the preceding quarter, customers' investment activities rebounded, and we saw a recovery in fees generated by asset management due to an increase in assets under management, also supported by higher net sales to private banking customers. Slide 6, please. Then moving to the final income, that line that I will comment on, namely net trading income. Net trading income improved significantly in the first nine months and amounted to DKK 2.9 billion, which is a significant recovery from the low level in the same period last year. Higher customer activity, more supportive financial market conditions, and the benefits of the implementation of our new fixed income strategy have all been positive drivers for trading income.
In the third quarter, however, net trading income at LC&I declined somewhat, due mainly to seasonality over the summer. At personal customers and business customers, we report lower combined net trading income as activity levels normalized, for instance, within customer demand for FX hedging solutions. The interest rate re-hedge in Northern Ireland led to a positive impact both year-over-year and quarter-over-quarter, reflecting a combination of interest rate expectations and the reduced remaining life of the hedging instruments. Trading income at group functions was negatively affected by the reclassification of DKK 0.8 billion from OCI related to the quarter one FX hedge, following the exit of the retail banking business in Norway. Slide seven, please. Now, moving on with a closer look at our operating expenses. Overall, our cost development continues to progress according to plan.
Consequently, we reaffirm our full-year outlook for costs between DKK 25 billion and DKK 25.5 billion. Expenses came in 4% lower than the level a year ago, which included one-off costs. As our cost base this year is impacted by increasing inflationary pressure and elevated remediation costs, I'm pleased to see that we continue to benefit from a disciplined approach in our cost management. Relative to the same period last year, lower staff costs, reduced spending in general, and as expected, run-off of transformation costs drove costs down in the first nine months. Due to the gradual normalization of financial market conditions, performance-based compensation increased.
In the third quarter, expenses came in 2% lower than in the second quarter, primarily as a result of continued decline in staff cost and transformation spend, but also from lower cost for the remediation of legacy issues. Slide 8, please. Let us take a look at our credit portfolio and the development we have seen this year so far. 9 months into the year, credit quality remains strong, seeing accumulated impairment charges of DKK 0.3 billion. This modest number is clearly below normalized charges and reflects the robust credit quality of our portfolio, backed by a macroeconomic environment that has developed more favorably than we initially expected for this year. For Q3 in isolation, the charges amounted to DKK 0.3 billion, based on an adjustment of scenarios in our macroeconomic models and minor credit deterioration related to very few single name exposures with more cyclical sectors.
Against this background, we have decided to repurpose a small part, a small part of our buffers to the more cyclical sectors, including commercial real estate. In addition, we have released DKK 0.1 billion in an overall assessment related to the few single name cases we have seen this quarter. We maintain our prudent approach in terms of management overlays with the PMAs equivalent to more than four years of normalized loan losses. In respect of commercial real estate, we maintain our conservative approach, and of this point, actual credit deterioration in this part of our portfolio remains limited. Given the strong credit quality, recoveries in the first half of the year, and lower than initially expected model-driven charges related to the macroeconomic outlook, we have revised the 2023 full year impairment guidance.
We now expect impairment charges of up to DKK 1 billion, significantly less than the initial guidance of up to DKK 3 billion when we started the year. Now, let us have a look at our capital position on slide 9, please. Our capital position remained at a strong level and was further supported by the capital generation in the third quarter, that took our reported CET1 capital ratio up to 18.8%. The increase in the CET1 capital ratio was primarily a result of the increase in net profit and a lower deduction related to Danica Pension, as well as the capital effects of the FX unwind related to PC Norway, as this was recycled from OCI and thus already reflected in our capital.
Our CET1 capital ratio includes the retained net profit for the quarter after accrued dividend of 60%, in line with the high end of the range of our dividend policy as usual. Our CET1 capital requirement increased to 14.3% as the Norwegian Systemic Risk Buffer has now been implemented. Our fully phased-in CET1 requirement is now at the same level as the reported number, but based on our current balance sheet composition, including the exposure of retail customers in Norway. Recently, the Danish Systemic Risk Council announced a new 7% capital add-on related to commercial real estate. As we have prudently managed our commercial real estate exposure and reserved a significant amount of PMAs, as highlighted on the previous slide, we find this approach much too simplistic and procyclical.
But if implemented in this form, it will add around 40 basis points to our fully phased-in requirement. We remain very comfortable with Danske Bank's healthy buffers to current and future regulatory requirements. Slide 10, please. Finally, I would like to comment on our outlook for 2023, which has now been narrowed. We now expect net profit for the full year in the range of DKK 19.5 billion-DKK 20.5 billion, including the impact of the Danish bank tax and various one-off items recognized during the first 9 months. We continue to expect a positive trend in net interest income based on the full year effects of the normalization of interest rates as a result of announced central bank rate hikes and our continued efforts to drive commercial momentum. Fee income is expected to be low, to be below the level in 2022.
Net trading income is expected to be at a normalized level, including the release from other comprehensive income of a loss on the CET1 FX hedge, attributable to the sale of our personal customers' business in Norway. Income from insurance business is expected to be lower than the normalized level due to negative valuation effects, higher health and accident claims, and a provision for a potential customer compensation. We maintain our outlook for operating expenses in 2023 to be in the range of DKK 25 billion-DKK 25.5 billion, including continually elevated remediation costs of approximately DKK 1.1 billion. The outlook reflects our continued focus on cost management, despite increasing inflationary pressure and initial investments as part of our Forward 2028 strategy.
We now expect loan impairment charges of up to DKK 1 billion due to continually strong credit quality recoveries in the first half of the year and lower than expected impact from model-driven charges related to the macroeconomic outlook. The outlook is, as usual, subject to financial market conditions. Slide 11, please, and back to Claus.
Thank you, Stephan. 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. And finally, 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, dear participants. Just as a reminder, if you wish to ask a question, please press *-
...one, one on your telephone keypad and wait for your name to be announced. To withdraw your question, please press * one one again. Please stand by, we'll compile the queue in the roster. This will take a few moments. Now we're going to take our first question, and it comes from line of Jakob Brink from Nordea. Your line is open. Please ask your question.
Thanks a lot, and good morning. Just one question on capital. So 4.5 percentage points buffer to the minimum requirement. You say 40 basis points potentially from the new CRE buffer in Denmark, but I guess there are also a few positives from when you sell the personal banking business in Norway. The systemic risk buffer here will be lower and also potentially the compliance buffer will go away. So at least 4.5%, I would say, after the adjustments. I don't know if you agree on that. But then following up on that, you mentioned in the Q2 report that there would be some discussions with the FSA around capital targets and capital requirements in connection with payouts.
Could you maybe elaborate on that in the light of the potential adjustments, minimum requirement, and where our insolvents stay, please?
Hey. Hi, Jakob. Thanks for the question. You broke up a little bit at the end, but I think I got the question. So you're right, the buffer is 450 basis points. You're also right to say that we expect, of course, a capital upside from the sale of PC Norway, which of course is an offset to the likely CRE buffer that we will get in the summer next year. Obviously, that has not been finally approved, but that's the expectation.
I think the guidance I will give you is the same that we also gave you in Q2, that we'll continue our discussions with the Danish FSA around both our Danish FSA stress testing and also where we believe the buffer should be. And I think we both as part of Q2 and as part of the strategy discussion in June, we've guided towards wanting to come out to the market with sort of an updated view on capital target and buffer in the summer, and next year would be a good time for that.
But we continue, as we say, to feel very good about our capital position, the buffer, and as we also said in June, we do believe that there is a opportunity to, over the strategy period that we set out, to distribute excess capital.
But would you say that... Would we have to wait until summer to see more than ordinary dividends? Given, I mean, so you have 450 basis points buffer, and, and that will probably increase in Q4 as you don't reserve for 100% payouts in Q4. So even higher buffer in Q4. So would you have to wait for this, for the discussions with the FSA to do buybacks, or do you feel so comfortable that you can do something already before?
I think for now, I'll leave it at saying that we'll update you on the buffer in the summer.
Okay, fair enough. Then, just on net interest income and your, your sensitivity you give on the NII slide on page 4, I believe it is, on year two and year three. So if we add those DKK 500 million additional in year three relative to year one, times the 16 times the rates have been raised 25 basis points, that gives us around DKK 8 billion support in year three relative to year one. With that in mind, do you see any way where net interest income will only be flat from 2023 to 2025? Or can you imagine anything negative enough to offset that support, i.e., migration or whatever?
I would say, Jakob. So just for everybody, you're talking about the year two and the year three sensitivity and sort of extrapolating based on the interest rate increases that we've had over time, sort of what the uplift in income is gonna be over the next coming years. I think that's the right way to think about it directionally. Obviously, that's all else equal, with our best views on deposit betas, on the behaviors that we're seeing right now. I don't know, Stefan, if you want to comment any further.
Yeah, I think the year three disclosure is obviously a further detail that we have given, haven't given so far. We have spoken about the DKK 300 million as a long-term benefit already at the Investor Day. And in that sense, multiplying the DKK 200 million by the 15 or 16 rate hikes, it gives you more like DKK 3 billion for 2025. And in that sense, I think that's the right way to look at it. As always, it's constant balance sheet and a number of other assumptions, but directionally, that's right. So what we are saying is basically, no, the NII has not peaked, and yes, we expect positive NII momentum going forward.
Okay. Very clear. Thanks a lot.
Thank you. Now we're going to take our next question. Just give us a moment. The next question comes to line of Sofie Peterzens from J.P. Morgan. Your line is open. Please ask your question.
Yeah, hi. Here is Sophie from J.P. Morgan. So just going back to the net interest income and, and the new guidance. So-
... I mean, how should we think about net interest income? Maybe first of all, given that if I look at the divisions in large corporates, net interest income was down quarter-over-quarter. In business banking, it was down quarter-over-quarter. In personal banking, it was up only 2% quarter-over-quarter, and in Northern Ireland, it was up only 2% quarter-over-quarter. And when I look at the slide, it seems that clearly you had the DKK 300 million benefit, but also everything else basically seems to come from treasury. So could you maybe just talk about how much like should we see a reversal, for example, of the -7% quarter-over-quarter decline that we saw in business banking in coming quarters?
Or how should we kind of think about the divisional net interest income going forward? And also, with your new guidance on kind of the DKK 200 million NII benefit in year three, could you also maybe just talk about, is there any new hedges that you have put in place? How much is coming from Finland, where the mortgages are kind of longer or 1-year fixed, basically, and it takes longer time to reprice it. So maybe if you could just talk a little bit about that. And then my second question would be around kind of asset quality. We saw now DKK 300 million of provision this quarter. It seems that the asset quality or that was a deterioration in the credit quality, and you guide for one up to DKK 1 billion for the full year.
Does it mean that we should expect kind of cost of risk to double to close to DKK 600 million in the fourth quarter? Is the kind of-- what's the run rate cost of risk for 2024? Thank you.
Thanks, Sofie. Let me give it a shot on NII, and Stephan, please add on. The way you should think about NII in Q3 is that... I think we've given a little bit more detail on page 8 of the presentation, you know, if you take off the one-off related to these tax liabilities, then that treasury income is income that should be seen as part and parcel of the overall net interest income for the business units as well. So although you see business unit BC and LC&I down, too, slightly down in Q3, one, there was a one-off MREL recharge, which we basically do as part of our funds transfer pricing.
Then you should see the treasury income as income that over time gets distributed out to the business unit. So going back to our guidance of year 1, year 2, year 3, and our view on where NII and net interest margins are, we expect both for the group but also for the business units that we will see increasing NII and increasing them into next year. Then I think you asked about some of the balance sheet dynamics. We do have the hold-to-collect portfolio that continues to sort of replenish over time, if you will. So lower yielding rolling off and higher yielding coming in. It's average maturity of 3.5 years.
So that, of course, continues to support NII, and again, gets distributed back to the business units. Then you mentioned the other balance sheet affects the fixed-rate loans in Finland and Sweden. And again, of course, those are also rolling off. They were unhedged, they're rolling off, and they get replenished with higher-yielding assets and also gets distributed back to the BUs, where obviously that NII belongs. So hopefully that was clear. On asset quality-
Maybe-
Yeah, sorry. Go on.
Yeah, sorry. Just like on the kind of fixed rate loans in Finland and Sweden and in terms of the hedge, is it fair to assume that roughly half of the DKK 300 million in year two comes from the hedge and the other half from the fixed rate loans, or has the mix changed?
I mean, what I can say is it's about, you know, DKK 300 billion in total. Half of it is hold to collect, the other half is a split between these two loans. So, you know, hopefully, that's helpful and answers the question.
Sofie, to your question, we have not taken any new hedges. We are just following, call it the program. You can debate whether the assumption of longer higher for longer rates is a change, and that helps the numbers a bit because there's the assumption that we can replenish the books with higher rates for longer, but as such, we haven't changed the strategy or anything. And again, in that context, the lending margins in the segments are stable quarter-over-quarter if you exclude this allocation effect, which we have done to make sure that the segments price and steer their businesses correctly. And as Carsten said, on group level, it's neutral anyway.
On asset quality, Sophie, so, you know, the DKK 300 million year to date is clearly a low loan loss rate. You know, we continue to see pretty stable asset quality on personal customers. On the business side, we do see some negative rating migration, mainly in sort of construction, building, development area. That's also where you see the bulk of the provisions, and the increase in stage three is driven by, you know, a few names in development and construction. You know, we continue to see that the transmission effects of higher interest rates will impact impairment higher, and they will normalize and increase into next year. You know, it's incredibly difficult to say where we land next year.
You know, we'll give an update on that as part of our year-end guidance. Our best view right now is up to DKK 1 billion in for this year, which obviously would mean roughly DKK 700 million in in Q4. But it's not that we have anything specific where we see that that will happen. We obviously have a robust post-model adjustment in place. We also use that ongoing, so you saw a slight increase in post-model adjustments in Q3, which is basically construction names going from stage one, stage two, into stage three. So we see that mechanism working as it should.
Thank you. That's very clear.
Thank you. Now we'll go and take our next question. Just give us a moment. The next question comes to the line of Johannes Thomsen from HSBC. Your line is open. Please ask your question.
Good morning, everybody, Johannes Thomsen. Some follow-up questions first. Just on NII, a more general one. Do you expect the Danish National Bank to really follow every ECB move and stick to the pack? Or could you imagine due to different economic environment in Denmark, that they cut the rates earlier than expected? And secondly, on your asset quality again, could you add some more color where the few single cases, was this in an industry cluster, or was it really across the landscape of different industries? And what would be needed to see a normalized cost of risk in the next two years? What scenario do you need to run?
And probably last but not least, just some more color on the relatively strong performance of investment products despite the lower asset base. Did you do any fee changes or anything? Thank you.
Yeah, thanks for that. So on the question on the Danish National Bank and following ECB, obviously there is a 40 basis points difference today, 4% ECB, 3.6% Danish National Bank. You know, the clear expectation, or my clear expectation, is that the Danish National Bank will continue to follow the ECB within that kind of range. There is no question that the Danish National Bank is very clear on, you know, on focusing on inflation targets, and is just as clear, I think, as the ECB on that, that is their absolutely foremost and biggest priority.
But, Johannes, if your question is would I expect that there would be a bigger range between the ECB and the Danish National Bank? I would not expect so. I would expect that this range is sort of more or less as wide as it gets, plus, minus. Asset quality, the deterioration is really very it's a few names. It's in development, and it's in construction. That is basically what's driving the increase in stage three and the provisions we see. So to your question, is it broad-based? It is not broad-based. We don't see any broad-based deterioration. We see deterioration in some of these interest rate-sensitive industries, construction and development, and that's what's driving. What scenario would drive more normalized impairments?
Look, incredibly difficult to say because you have a lag effect from the rising interest rates to how that's gonna play out in the portfolio. So, you know, normalized going forward is that you see, you know, more clarity on on inflation, and you see, I think, rates coming back down to, let's say, a more normalized level. You know, we've used 2% in our plan. I mean, right now, I think there is a lot to be said about interest rates being, you know, maybe having peaked, but the interest rate path being higher for longer, and that would clearly impact interest rate-sensitive sectors.
You know, the higher interest impairments that we thought we would get this year, it's not unlikely that those higher impairments will come in in the coming years instead, but I'll wait till the year end to give more detailed guidance on that. On the investment side, the investments business is a business that we've focused a lot on improving over the last couple of years. We've clearly underperformed on the retail side of our investments business, where, you know, new flow market share has been under stock market share.
It's something that we worked on, and through increasing customer flows, through better digital solutions, through more focus, through more advisory time, those are the type of things that are, you know, that are improving the flows, and that's part of our strategy, it's part of our focus. So it's not, to your point, it's not that we're sort of, you know, doing anything on the pricing as such.
... Thank you.
Thank you. Now we're going to take our next question. And the next question comes from the line of Martin Birke from SEB. Your line is open. Please ask your question.
Thank you so much. Just coming back to your initial comments, Carsten, on rate environments almost changing by the hour. If we assume that your rates by 2026 is gonna be 100 basis points higher than the 2%-2.5% that you have set out in your 2026 target, what is the sensitivities to the DKK 56 billion total income number that you have put in there? That's my first question.
I think it's an interesting question because I think it is very uncertain how, you know, deposit betas and pricing plays out, should rates remain so high for so long. My clearest view would be that that would, from an NII perspective, from an income perspective, clearly be supportive for the business and would clearly be a tailwind for the business. It goes without saying that that, of course, needs to be done in a way that the economy still performs and that it doesn't flow through in a negative way into the real economy. And I think that's a lot about like if there...
It could be that rates stay long and inflation rates stay elevated, but if the path is more transparent, is more visible, is less volatile, you know, I do think that you could have a balance, that where the economy still, you know, performs, and you still have reasonable growth while having higher rates, which and that scenario would clearly be supportive to the business.
Okay. Thank you. And then perhaps a couple of questions on today's numbers. First of all, on your lending development, also deposit development, what do you see from the postponement of Danish VATs and corporate taxes? And then the second question on your FTE bridge, it seems like the number of FTEs is coming down by quite a lot in Q3. Do you have any explanation for that?
Yeah, I mean, on the FTEs, I would say FTEs are pretty flat, and the reduction in FTEs is solely driven by, you know, our sale of Danske IT to Infosys, and the partnership we have with Infosys. So those FTEs, they move off our books and move on to Infosys. And again, remember, the partnership with Infosys is a very important part of our strategy. We have a belief, and we're already seeing that Infosys can help us not only accelerate our digital and technological transformation, but also help us scale up to meet the goals that we have as part of our strategy. But yeah, the FTE changes there is driven by that.
Then, I mean, in terms of VAT taxes, on the business side, look, it should be a mild positive. I think it's too early to say, Martin, you know, to what extent and how much that will have an impact.
Okay. All right. Thank you.
Thank you. Now we're going to take our next question. The question comes from, from the line of Riccardo Rovere from Mediobanca. Your line is open. Please ask your question.
Thanks for taking my two questions. The first one is on risk-weighted assets, which go down a little bit in the quarter, is mostly market risk, if I'm understanding correctly. But aside that, you know, we see in other countries, in Scandinavia, we see risk-weighted assets going up and up and up for various reasons. I was wondering whether in the discussions you're having with the Danish FSA with regards to capital strategy, capital updates, whatever, should we expect, let's say, any kind of change in the amount of risk-weighted assets going forward, because of regulatory changes other than Basel IV or something or some, let's say, some other additions or whatever? And the second question I have is on the digital euro.
The ECB wants to go ahead with the project, and I was wondering whether you see this as an opportunity, as a challenge, whether you plan eventually to have more investments related to that over the next few years. Any thoughts on that would be, let's say, helpful. Thanks.
Thanks for that. I think on the REA side, you know, we already, over the last few years, sort of, you know, preempted some of the big regulatory changes, the EBA guidelines, and so that is included in our REA number. Then, as you know, the REA number is not that sensitive to, you know, smaller macro moves because it's already seen from a through-the-cycle modeling perspective. And therefore, the relative sensitivity is not that large, and I think that's important to understand. So we would not see any big shifts in REA, and we don't see any, you know, immediate regulatory pieces other than, as you said, Basel IV, which is sort of further out.
And then, yeah, as you noted, we saw some reduction in market risk REA, which is driven by a decision to hedge some of, let's say, the tail risks on some of the positions that we have, which we believe gets us a better return and a better optimization of the trading book, including capital, of course. Then on digital euro, look, I think it's too early to say. If you look at the Nordics, the Nordics is extremely digital already, right? I mean, you know, digital payments is the norm in the Nordics. And so from sort of a consumer experience perspective, you know, it's less clear of what the pain point is.
I think it is clear that ECB is moving towards a digital euro. I think it'll take some time. You know, the Danish Central Bank is obviously watching as well and looking at it, and we are as a sector as well. So, you know, we're sticking close to it and we'll see how it goes, but I don't have any other sort of insights on it at this time.
Thanks, thanks a lot, Carsten, and thanks very sincere. Thanks.
Thank you. Now we're going to take our next question. The next question comes from the line of Jan Erik Gjerland from ABG Sundal Collier. Your line is open, please ask your question.
Thank you for taking my questions as well. I have a question on the cost side. You have always shown some nice development on the cost side, and I just wonder how much are left of your sort of remediation costs and excess cost today versus your expectations of what will go out next year? Also, back to Martin's question on the FTEs. Did these FTEs go out late in the quarter or early in the quarter? And how should we think about your FTEs on your financial crime and prevention side? When is they going to come off a little bit, as I think we were sort of guided from on the Capital Markets Day in June? Thank you.
Yeah, thanks for that, Jan. Yeah, on the costs, the remediation portion of that is roughly DKK 1.1 billion annualized. That's related to debt collections, and you should see that that cost would come substantially down into next year. So there is still some tail, but substantially down from the DKK 1.1 billion. Then the other cost component, which is let's say structurally or short term higher, is, as you point out, the financial crime costs. And the FTEs, as you see from financial crime, has been fairly stable over the last 2-3 years. We have said that those costs and FTEs will come down to 25.
So if I take it from a cost perspective, we said that the financial crime costs were DKK 2.3 billion, roughly, this year. A little bit lower, coming down to a range between DKK 1.5 billion and DKK 1.7 billion in 2025. So I think your question on FTEs and will they come down, they should come down roughly in line with that cost trajectory, so between 20% and 30% over the next two years. And that's very much in line with, our clear guidance, which is that, you know, we'll largely close the financial crime remediation plan, end of this year and into January. And then, you know, we'll continue, obviously, to, to work on, on all the initiatives we have around automation and digitization, in that space. But hopefully that gives you a steer.
Operator, can-
Is this-
Go ahead, Jan.
Yeah, just have one follow-up. On the inflation side, when it comes to cost inflation, will the sort of these take out of costs, as you said, the remediation of DKK 1.1 billion and other cost structure, take your cost base down? Or do you think inflation and general wage inflation will sort of make it flattish from here?
I think when you then look at costs going into next year and also over the strategy period, you know, we very clearly said we're gonna invest in the business. It is a growth and an investment case. So we will invest roughly DKK 1 billion more a year in automation and digitization. Then, of course, we'll see some inflation, and I think you could probably say inflation next year is somewhere between 3.5%-4%. And then you'll of course see some offset from automation and digitization. You'll have seen that sort of the guidance for out to 2026. We gave DKK 56 billion of income and DKK 26 billion of costs, so that's out to 2026.
We'll give you more detail on cost guidance at the end of the year. But you should not see that. You should not just take the cost today and take those costs out. You should take those costs out, then you should add inflation and some investments as well, as you look at costs for next year. But we'll come back with more details on that.
Thank you very much.
Operator, can we have the last question, please?
Yes, of course. Now we're going to take our last question for today. The last question comes from the line of Jakob Kruse from Autonomous. Your line is open, please ask your question.
Hi. Thank you very much for taking the question. Can I just try to clarify a little bit on the net interest income side? When you talk about the application of rate hikes, I think you said 15-16 rate hikes on the DKK 200 billion in year three, which I guess should start coming through next year and the year after, and then... But then we also have the initial DKK 300 million. Just how much of the benefits are already in the numbers as of Q3 2023? And I guess, you know, what, how much is left to be done or left to be capitalized on in 2024 and 2025?
And then maybe I could just also back to capital, you're at 18.8% capital, you have a 16% target level. There seems to be relatively few things impacting your your regulatory requirements. So is this still just a question of moving slowly and being mindful of your history when it comes to capital distribution? Or is there anything more sort of tangible that you're looking at? Thank you.
Jakob, just on the capital, you know, I think we said in June, target above 16%, and that we come back, you know, this summer. I think this coming summer. I think you should see that the ongoing discussions around capital buffer and capital targets is very much also a clear correlation to a very uncertain environment, where the regulators, of course, are looking at stress testing and looking at the environment closely, and are looking at the sort of general dynamics. So there is no other sort of specific regulatory pieces I can point to. Obviously, the CRE buffer is a new one since June, but there is nothing else I can point towards.
Then, Stephan, maybe you wanna just talk to the NII.
Yeah. Very briefly on this NII question. What we currently see, Jakob, is less of a drag from the hedges rather than a positive contribution to the NII in the sense of supporting it. So I think I gave you a bit of a hint on what is going on in Northern Ireland, where the hedge is running off, and in that sense, the NII starts to benefit. But on group level, it still is a drag that will then turn into a positive support in the future.
Okay. Thank you very much. Thank you.
All right. Well, thank you very much, everyone, for your interest in Danske Bank and for your questions this morning. As always, please reach out to Claus and the team in Investor Relations if you have more questions. Thanks very much!