Good morning, everyone. Welcome to the conference call for Danske Bank's financial results for the first nine months of 2026. My name is Claus Ingar Jensen, and I am Head of Danske Bank's Investor Relations. With me today, I have our CEO, Carsten Egeriis, and our CFO, Cecile Hillary. We aim to keep this presentation to around 25 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 you over to Carsten. Slide two, please.
Thanks very much, Claus. Good morning, and thank you for joining us for our Q3 conference call, where I am pleased to share the highlights of Danske Bank's financial results for the first nine months. We delivered a solid third quarter supported by good customer activity and continued execution of our strategy. Core income grew 9% year-on-year alongside disciplined cost management and strong credit quality. Let me start with our customers.
The Nordic operating environment remains supportive of commercial activity. Corporate lending grew by more than 5% year-on-year, supporting market share gains across the Nordics. Deposits also remain strong, and within asset management, customers added more than DKK 5 billion of net inflows during the quarter, with contributions both from private banking and from mass retail. Credit demand, as reflected in volumes, was slightly affected by seasonal effects, while fair value movements in Realkredit Danmark bonds also impacted lending volumes.
Against that backdrop, the overall commercial performance remained resilient. This activity translated into solid financial results. Our return on equity for Q3 came in at a record high 15.1%, and the cost-to-income ratio of 43.9% tracks well within our full-year guidance of below 45%. Credit quality remains strong with net reversals of impairments. We also maintained a strong capital position. Our CET1 capital ratio increased to 17.2%, reflecting strong capital generation after dividend accrual.
The confirmed Pillar two release reduced regulatory requirements by 40 basis points, in line with previous communication. Given the solid financial performance in Q3, we have also narrowed our net profit guidance for the full year to a range between DKK 24 billion and DKK 25 billion, driven by an improved outlook for loan impairment charges, which we now expect to be no higher than DKK 600 million.
Overall, the quarter shows continued strategic execution supported by resilient customer activity, and despite a seasonally slower quarter, we are confident in our trajectory and the performance of our franchise going forward. Please turn to slide three. Let me turn to the performance of our business units. The key message here is that customer activity remains resilient across group. All three business units delivered income above the level a year ago, and each generated returns above its 2026 target.
The broad-based performance gives us confidence in the strength of our franchise and in the progress we are making against our strategic priorities. In personal customers, good activity and deposit margin effects supported income, while continued strong credit quality also contributed to a ROAC of 40%. Total income was just under DKK 5 billion, significantly above the level a year ago.
And nominal lending was up 1% year-over-year and stable compared to Q2, while deposits remained strong, growing 4% from last year, which should also be seen in light of the positive net inflow to assets under management. Business customers continue to build momentum, higher customer activity, growing fee income, and progress in our corporate offerings supported both income and volume growth, with ROAC increasing to 23%. Total income reached DKK 3.8 billion, with growth in both lending and deposits reflecting continued strength in business relationships.
In Large Corporates & Institutions, we saw continued strength across lending, asset management, financing, and also advisory activities. Our debt capital markets franchise also benefited from constructive bond issuance activity, and ROAC remains strong at 22%. Total income was DKK 4.7 billion above the level a year ago. Lending was stable quarter-on-quarter, reflecting seasonal effects while deposits increased 3%.
Relative to the same period last year, lending and deposits were up 5% and 13%, respectively. In summary, across the three businesses, this is a solid and a sustained performance. It reflects our strong customer franchise. It reflects our continued momentum and also our attractive profitability across the group. Then slide 4, please, and I will hand it over to Cecile.
Thank you, Carsten. Looking at the income statements, Q3 was another quarter of solid financial performance with good momentum in our core income lines, continued cost management, and strong credit quality. For the first nine months, total income was supported by growth in net interest income and fee income, underpinned by customer activity and higher volumes. Trading income was affected by market volatility, while income from our insurance business has performed well in the context of changing interest rate expectations.
Other income normalized after the DKK 231 million one-off in Q2. Compared with Q2, NII grew 3%, primarily driven by deposit margin expansion, and fee income was stable. Both trading and insurance income were affected by volatile market conditions. Costs remain in line with our guidance and reflect our continued focus on efficiency, driven by our tech and AI investments.
Credit quality continues to be strong, with a well-provisioned portfolio and net reversals of impairments in Q3. Overall, the quarter shows resilient earnings quality, where NII further benefited from the rate hike. Fee income continues to be strong and costs are under control. I will now go through the key lines in more detail. Slide 5, please. Turning now to net interest income. We delivered a solid performance, with
NII up 4% year-on-year, supported by improved volumes and the contribution from our structural hedge. The quarterly development was also positive, with higher rates supporting an improvement in deposit margins. Alongside the positive volume trend, this underpinned the resilience of our net interest income. The other category primarily reflects Treasury's internal fund transfer pricing allocations. Importantly, these allocations have no impact on net interest income at group level.
Our structural hedge was impacted by higher short-term rates in Q3, but this was partly countered by higher income from our shareholder equity base, which remains unhedged and benefited from higher central bank rates. The notional of the structural hedge, including bonds and derivatives, was kept stable in Q3 at around DKK 190 billion, and as such, the structural hedge remains a key stabilizing feature of our NII profile. Finally, we have updated our interest rate sensitivity.
All else equal, a 25-basis-point increase in rates would add approximately DKK 400 million to NII in year one, DKK 350 million in year two, and DKK 100 million in year three. A 25-basis-point decrease will lead to an impact of around -DKK 550 million in year one, -DKK 250 million in year two, and -DKK 100 million in year three. The revised sensitivity reflects the current balance sheet composition.
For example, corporate lending facilities have pushed the NII benefits slightly further out in year two. Note, however, that the combined upside is the same total of DKK 850 million over three years as previously communicated. In summary, we see the NII trajectory as solid. Customer volumes are contributing positively, and with the recent rate hikes, this supports our income trajectory.
Finally, to address questions about expectations for NII for the full year, we reaffirm our expectation of NII to be slightly above DKK 38 billion for full year 2026, driven by continued volume growth and based on current market-implied rates, which do not include another hike until late in the year. Slide seven, please. Turning to fee income, this was a solid quarter despite typical Q3 seasonality. For the first nine months, net fee income increased by 14%. Importantly, the growth was broad-based across all four fee categories.
Investment fees were the largest contributor, driven by higher assets under management from consistently positive net inflows together with rising asset prices. Everyday banking fees were supported by continued demand for FX and cash management solutions. Lending and guarantee fees were driven by higher customer activity, particularly due to corporate credit demand. Capital markets fees were underpinned by a good performance from our DCM and advisory franchise. Compared with the second quarter, net fee income was broadly stable at DKK 4.1 billion.
Lending and guarantee fees declined mainly due to seasonality, including lower refinancing volumes for adjustable rates mortgages. This was mitigated by investment fee income, which remained a strong driver. Overall, the fee income development demonstrates the breadth of customer activity across our franchise and the benefit of a diversified fee base, even in a seasonally slower quarter. Looking towards Q4, we expect the current trend to continue.
However, given recent market volatility, we expect Q4 performance fees to be well below the historical average of around DKK 400 million. This development relates to fixed income funds performance given current volatility in fixed income markets. Slide seven, please. Turning to trading income, the result was lower year-over-year and quarter-over-quarter, reflecting both softer customer activity and negative fair value effects in Group Treasury.
Net trading income for the first nine months was DKK 1.5 billion, down 37% from the same period last year. The main driver was a lower result in LC&I, where customer activity in secondary fixed income markets remained subdued. For the third quarter, net trading income was DKK 397 million. We saw better customer activity in FX trading, but this was more than offset by lower income from fixed income trading in what is also a seasonally slower quarter.
The quarter was also affected by unrealized market value adjustments, together with other balance sheet movements in Group Treasury, which created negative accounting effects. These items fluctuate from quarter to quarter and do not reflect a corresponding change in business activity. Finally, as far as Q4 trading income is concerned, if the current market conditions persist, we expect trading income to be in line with Q3, all things equal.
In addition, there are typically seasonal effects leading to lower customer activity in trading at the end of the fourth quarter. I will now move on to the expense line. Slide eight, please. Turning to expenses, our cost trajectory remains in line with our full year guidance, with a Q3 cost-to-income ratio of 43.9%. Year-on-year, expenses were slightly higher, mainly due to staff costs, including severance and performance-based compensation.
This was more than offset by lower FCRP and remediation costs, showing continued progress in reducing legacy cost items and allowing for increased investments in tech and AI in line with our plans. Quarter-on-quarter, this trend was confirmed, and despite higher investment spend, the underlying cost development remains well controlled. We continue to make targeted Forward '28 investments in our digital and technology platform.
These investments support AI-enabled growth and overall enhance our efficiency and resilience. Overall, we reaffirm our full year 2026 cost outlook of DKK 26 billion to DKK 26.5 billion, with a cost-to-income ratio expected to be below 45%. The message remains centered around increased efficiency and continued investment in strategic priorities. I will now move on to asset quality. Slide 9, please. Turning to asset quality, the picture remains strong.
Our diversified and stable credit portfolio continues to perform well, whilst we remain prudently provisioned given the macro and geopolitical environments. In Q3, further improvement in credit quality led to a net reversal of DKK 200 million. With a year-to-date level of impairment charges at DKK 65 million, we have revised our full year impairment guidance from around DKK 1 billion to no more than DKK 600 million, corresponding to approximately 3 basis points cost of risk. Macroeconomic charges remained modest in the quarter.
Our scenarios continue to reflect elevated uncertainty, including geopolitical risks, trade tensions, and market volatility, so that we capture the potential impact of a more severe and prolonged adverse environment. Post-model adjustments stood at DKK 5.2 billion, with a reallocation of provisions towards agriculture, given additional political tail risks. We continue to take a prudent approach in light of potential disruptions and uncertainty.
The total overlay of around 30 basis points is equivalent to almost four years of normalized cost of risk. Overall, asset quality continues to support the earnings profile and capital generation of the bank. I will now move on to capital. Slide 10, please. Turning to capital, our position remains strong. Our CET1 ratio increased by 20 basis points during the quarter to 17.2%, driven by retained earnings after the accrual of dividend.
Capital generation continued to be strong at 302 basis points annualized. Our total capital ratio increased to 21.3%, further supported by the issuance of a DKK 5 billion equivalent AT1 transaction to a broad Nordic investor base in Q3. Risk exposure amounts were broadly stable at DKK 847 billion. Lower credit risk exposure was countered by higher market risk REA that mainly reflected interest rate volatility.
Following the formal SREP review of the resolved legacy cases, our CET1 capital requirement has been reduced by around 40 basis points to 14.3%, as previously guided. This means that our management buffer to the regulatory requirements has improved to around 300 basis points. We continue to manage capital prudently. Our capital framework already includes an REA buffer of more than DKK 110 billion to absorb the transition and implementation of our IRB models.
That buffer has been recently reviewed in close alignment with our regulator, the Danish FSA. Looking ahead, our CET1 trajectory remains consistent with the glide path to move gradually towards our stated CET1 target of around 16% in 2028. This allows us to finance our growth plan and deliver on our capital distribution agenda.
In summary, the third quarter demonstrated strong capital generation, stable balance sheet management, and continued ability to deliver on both growth and distribution. Slide 11, please. Finally, turning to the financial outlook for 2026, we have narrowed our net profit guidance to a range of DKK 24 billion-DKK 25 billion, corresponding to a return on equity above 14%. The revised guidance is a result of impairment charges now expected to be no higher than DKK 600 million to reflect the quality of our credit portfolio.
We continue to expect total income to be somewhat above DKK 59 billion, supported by higher core banking income from strong customer activity, growing volumes, and the effects of recent policy rate hikes. We continue to see good commercial momentum across our businesses. We expect operating expenses to be in the range of DKK 26 billion-DKK 26.5 billion. This reflects our focus on growth, tech, and AI investment, and cost management. We expect our cost-to-income ratio to be below 45% for full year 2026. Slide 12, please, and back to Claus.
Thank you, Cecile. Those were our initial comments and messages. We are now ready for your questions. Please limit yourself to two questions. If you are listening to the conference call from our website, you are welcome to ask questions by email. 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. If you would like to ask a question over the phone lines, you will need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, you can press star one and one again. Please stand by while we compile the Q&A queue. Thank you. We will now begin with our first question. This is from Gulnara Saitkulova from Morgan Stanley. Please go ahead.
Hi. Good morning. Thank you for taking my questions. The first question on capital headwinds and tailwinds. You recently published a press release reaffirming your capital framework, including the DKK 110 billion-plus REA buffer for IRB model implementation, and clearly we've seen some sizable capital headwinds emerging from model reviews for the Nordic peers.
I wanted to understand how much comfort we should take from your announcement that the existing buffer fully capture the potential impact of all outstanding model reviews, including those that have not yet received the final regulatory approval. Could you provide some more color on which material reviews are still outstanding, the expected timing, and whether there are any additional capital headwinds and tailwinds that investors should consider as we look towards 2028?
Yeah. Good morning. Thank you very much. No, I think on the REA and modeling side, we're very comfortable with our position. We have the buffer that was mentioned, and that buffer, in fact, has been updated regularly over the last few years as we have been updating our model frameworks and applications, and in line with regular reviews from the Danish FSA. We continue to work on the various different model applications.
Some have been improved and approved, and some are still in pipeline, but all of them have been regularly discussed with the regulator. Again, we feel very comfortable with the REA buffer that we have in place today.
Thank you. Another question on deposit mix shift. You've previously highlighted the gradual shift towards high-yielding savings products. Could you elaborate on what's driving that mix shift? Is it primarily customers optimizing their balances within Danske Bank, or are you seeing increasing competitive pressure on deposit pricing? Looking ahead, in Q4 and beginning of 2027, how should we think about the pace of that migration and the implications for deposit betas, particularly across the personal customers, business customers, and LC&I? Thank you.
Thank you for your question, Gulnara. Actually, let me clarify things on the deposit side. The first thing to say is that we continue to see good growth on our deposit stock. Obviously, we guided in April towards a growth of 1% to 2% on the deposit side. We have seen deposits actually stronger, right? Year-on-year, actually, we have seen more around the sort of 7%. The first thing to mention is obviously the strength that we see in our deposit development.
The second thing to say is that clearly we have benefited from the rate hike. Clearly in Q3, the June hike is fully embedded and obviously, in Q4, the September hike will also play a part in NII development. The deposit beta that we have seen so far has been lower than our expectations. Now, of course, over time, especially if we have got more rate hikes, December, et cetera, things might obviously evolve. But so far it has been lower, but that is captured in our NII sensitivity.
To address the deposit mix shift. We actually do not see currently evidence of mix shift appearing in any material way. As a matter of fact, and you will see that in our fact book, the time deposits that we have as a proportion to our deposits remains fairly low, including in our personal customer sector. So of course it could change, of course it could evolve, but right now we are not seeing any evidence of any material shift, and certainly we are not seeing any impact in our numbers either.
Thank you.
Thank you. We will now take our next question. This is from Shrey Srivastava from Citi. Please go ahead.
Hi, and thank you very much for taking my questions. Two, please, from me. The first is on the fee prints. I know that despite the substantially stronger fee print today, you have not upgraded your guidance on core banking income, and I assume that means you haven't upgraded your guidance on fees. Can you explain why that is? Can you break down the components of the fee beat and which you expect to recur and which you expect not to?
The second question is on the negative in this quarter from short-term rates and the structural hedge. In connection with the move from bonds to swaps, have you altered the duration characteristics of the replicating portfolio at all? When can we expect to see positive Q on Q development here with the interest rate assumptions from your economists? Thank you.
Thanks very much. Let me take the fee question, then I'll let Cecile talk around the bonds to swaps and the associated duration dynamics. On the fee print, as you say, we printed a solid Q3 fee print both Q on Q, given typical seasonality in Q3, but also certainly year-on-year, and we see good momentum in all fee lines. The Q4 specific question when we talk about how we think about the fee line in Q4 is that, in general, you should see it as we continue to see momentum in all the core fee lines, general banking, investment fees, financing fees.
However, what we also note is that there is a fee component that we have, which is related to our fixed income hedge funds, which will be impacted as it looks today from the movements in spreads the last couple of months. Last year, I think we printed around DKK 900 million fee related to fixed income hedge funds. The average is somewhere between DKK 400 million to DKK 500 million if we look at the last many years.
Given how fixed income has moved in the last few months, we expect the current fees associated with that particular asset class to be well below the average. That is the dynamic. You should think about that all other fee lines and the core trajectory and momentum, we feel very comfortable with.
Okay. Let me take the-
Cecile, do you want to take the other one?
Mm-hmm. I'll take the second question on the structural hedge. The shift from bond to swaps is gradual. We still hold a majority of bonds in our structural hedge portfolio, in any case. But it doesn't change the duration of the structural hedge, which remains around three years. I'll obviously remind you that we also have a loan hedge, which also remains around two years.
The notional doesn't change either for the bond and derivative hedge, which is at DKK 190 billion. Again, what I would say is that it's a significant lift to income in 2026. Then given the current rate environment, the effect tails off next year and the year after. I will remind you as well that clearly the structural hedge impact is fully baked into the NII sensitivity that we give you.
Thank you. The negative on the structural hedge Q on Q is to do with the swap component, if I'm not mistaken?
Well, this year, no, I wouldn't focus on it. Obviously on a quarterly basis, given the various maturities and when they roll off, it can be slightly positive or slightly negative, but you shouldn't focus on that. Overall, for the year, it remains a strong positive.
Thank you very much.
Thank you. We will now take the next question. This is from Namita Samtani from Barclays. Please go ahead.
Morning, and thank you for taking my questions. My first one, just to follow up on the structural hedge, can I just confirm it's going to be a neutral impact in 2027 and 2028? Secondly, it looks like on personal lending, Danske's growing below the market, and it looks like total personal lending was flattish quarter-on-quarter. I just wondered whether it's an active decision to not engage in competition which could impact margins, or any color here would be great. Thank you.
Thanks, Namita. On the lending question, if you adjust for the fair value impacts related to the Realkredit Danmark bonds, we see a slight growth quarter-on-quarter in RD lending, and also slight growth on the bank lending side. We're fully focused on competing in the mortgage space and see relative good momentum. If we also look at it over the last couple of years, relative good momentum in that space. But clearly we're also very cognizant of where we want to play and where we want to compete.
To your point, you also see that in margins. We're maintaining margins in that space despite the very heavy competition. It's an important product for our customers. We continue to focus on delivering a strong value proposition, including on the mortgage side. Again, we do see growth in both the mortgage lending products. Do you want to comment on the structural hedge?
Yes, I'll take the structural hedge. The way we look at structural hedge, and not all banks present it in the same way, right? But the way we look at the structural hedge income is as a net impact. In terms of the net impact, it was positive this year. It still is positive this year in the current rate environment. But given market implied rates, it will be negative next year and the year after. But again, this is fully baked into on a NII sensitivity.
Clearly, we are geared to higher rates, and obviously we see positive impact net nets from deposit margins impacts, as well as structural hedge combined and shareholder equity investments as well. On a combined basis, clearly, we remain positively geared to rates. But to answer specifically your question on the structural hedge, Namita, this is indeed going to be a negative contribution next year and the year after.
That's helpful. Thanks very much.
Thank you. We will now take the next question. This is from Sofie Peterzéns from Goldman Sachs. Please go ahead.
Yeah. Hi, here is Sophie from Goldman. Thanks a lot for taking my question. My first question would be around your costs. So you had already a 44% cost income ratio in the first 9 months of this year. You upgraded the cost income ratio target for 2026. How should we think about the upside risk to your 2028 cost income target of below 43%?
If you could just talk about that. My second question would be, how should we think about excess capital deployment, given that we saw 40 basis points decline in your requirements, you have more excess capital, what is the priority for you after growth? Is it share buybacks or special dividends or M&A? If it is M&A, what could potentially be of interest? Thank you.
Thank you. Let me start with the capital question, and then I will let Cecile comment on the upside risk to cost versus 2028 plan. On the capital side, as part of our strategy refresh in Q1, we gave an updated capital plan, and updated expectations on where we are going to stand with capital, including the Pillar 2 release that we announced today. That is very much in line with what we have already said. The plan is to get to a 16% CET1 at the end of 2028. The priority for us is to grow organically. We have a plan with a 3% to 4% growth rate on the lending side of things. We continue to execute on that plan.
We also, as part of the plans earlier this year, updated our dividend policy to 60% to 70% dividend, and we also committed to extra capital distribution above and beyond that. So I would say, Sophie, very much the capital plans, including what you see here in Q3, is very much in line with what we already communicated, and the strategy remains the same, both in terms of first priority around growth and then around the distribution commitments that we have already made.
Let me take, Sophie, your question on the cost income ratio and trajectory towards 2028. In summary, this trajectory is exactly as planned. We are confident with delivering the cost income ratio in 2028 of up to and no greater than 43%.
That still very much holds. We continue to see good trajectory when it comes to general cost management, but also the AI investments that we are doing right now, and the benefits that we are seeing already in 2026, the one that we are expecting in 2027, and therefore the linear trajectory to the DKK 2 billion run rates in terms of benefits from these AI investments by 2028, we see them progressing and materializing in time. In summary, we are confident about our cost income ratio trajectory towards 2028 and the guidance we gave.
Thank you.
Thank you. Next question today is from Andreas Håkansson from Nordea. Please go ahead.
Thank you, and good morning, everyone. Cecile, I heard you said that the trading in Q4 is going to be more similar to Q3, and I was just looking at consensus, that is looking for probably over DKK 900 million for the fourth quarter. If you have that lower trading and your NII sensitivity is a little bit lower, what is it, DKK 50 million lower per 25 basis points, and we had two hikes. On Shrey's question, it did not sound like you wanted committed to higher fees in the fourth quarter. What is really driving the upgraded guidance apart from loan loss? Is it anything else, or are you actually being a bit softer on revenues?
No, look, we continue to see very good development in core banking income. Just to be a bit more precise on the fee income line, Carsten mentioned, I will reiterate, that we actually see very good momentum across all four categories of the fee income lines, right? Investment fees, obviously daily banking activities, as well as financing fees and capital markets.
We expect these in Q4, all things being equal, we expect that fee income coming from these four categories should be higher than Q3. This is our expectation. This is what we are seeing in terms of the commercial momentum. The performance fees is a separate topic, right? The separate performance fees is obviously linked to the fixed income funds and the fixed income funds performance.
Currently, we expect an amount which is again well below the average, which is around DKK 400 million, right, compared to obviously DKK 900 million last year. However, we still see again, that the core banking lines together, so NII and fee income will drive total income. Insurance income is developing well, in line with our expectations. Trading income, of course, I need to reiterate, will depend on the development in markets in Q4. If it stays the same, it will be as we've guided. If it improves, clearly it could be better.
Okay. Then a second question. Looking at Swedish retail, and maybe it's for Carsten, we tracked the monthly data in Sweden, and you haven't really seen any loan growth in Swedish retail for a long time. It's normally shrinking. A couple of years ago, you said that you want to steer the Swedish retail bank more towards mass affluent and so on. Is that shrinkage, is it planned and/or how successful are you to move over to wealthier clients?
Yeah. No, thanks very much for that. Of course, we'd always like to see more growth, but it is absolutely right. You've understood it right, that our strategy has been and continues to be to reposition the Swedish business towards a more mass affluent private banking focus, including rolling out the value proposition that we've also been rolling out in Denmark, including Panorama, including the Aladdin investment tools, including the financial assistant, the mobile bank, including strengthening advisory.
That's the primary focus. Today, what we're seeing is that we are increasing the inflow in the number of customers in our chosen and focus segments. We also see growth in, for instance, the investment and managed funds side of things. That is exactly what we're trying to do, is to increase the share of wallet and the profitability focused on those customer segments.
And that does mean that there are certain pockets of the customer segments where we are less focused, and that does, of course, impact the growth on the mortgage side. But having said that, we are also very much focused on wanting to continue to be competitive on the lending side, and that will also be a continued focus.
Okay. Thank you.
Thanks.
Thank you. We will now take the next question. This is from Martin Gregers Birk from SEB. Please go ahead.
Thank you so much. Two questions. The first one on NII. If I strip out the DKK 92 million one-off base effect from last quarter, strip out the FX effect and also the day effect, I guess underlying NII is only up by DKK 80 million Q on Q. So could you please help me walk through your own NII assumptions for the coming two, three quarters? Since, I do not know, I sit back with the feeling that it is perhaps a little bit slow out of the starting blocks than I had expected. And then last question also on NII or loan growth, I guess, and I guess this is just a follow-up to one of the past questions.
If you take your Danish personal customers' loan growth, and if you adjust for the fair value adjustments, your current growth rate is close to a third of what the market is currently growing. What are the priorities here? I guess your 39% return on allocated capital, you cannot grow new lending on that return ratio. Are you happy with it, and then happy with a pure margin business if I can put it on a needle?
Yeah. Thanks a lot, Martin, for the questions. Look, first of all, on NII, we feel very good about the NII momentum and the trajectory, and if I look at the last couple of years, I think actually we have been in our own internal views and guidance that we have been given, been pretty close to the guidance and the forecast that we have given. That is because we feel very comfortable about understanding the dynamics of our business, the growth of our business, and the underlying NII.
So, rather than maybe small one-offs quarter on quarter here and there, again, I look back at the several many last quarters, and we felt very comfortable and good about both the guidance and the actual delivery on NII. We are guiding to NII slightly above DKK 38. We continue to feel good about that given the trajectory. You see the bridge in the presentation.
I think the NII continues to be robust when you look quarter on quarter, driven both by volumes and margins. There again, I think important to look at it not just quarter on quarter, but also year on year. On the loan growth question, this is of course specific again to PC Denmark. It is true that we are not growing as fast as the market in the mortgage space.
But it is also true that we are really focused on building a strong value proposition, particularly focused on the mass affluent and private banking space. There of course, some of the key metrics to look at is the fact that we are taking market share on the investment side, and we are number one in Denmark on the investment side, and also see really good momentum there.
That we have seen strong growth on the deposit side, at the same time, as seeing more funds flow into the asset management side of things. Very strong increase in the daily banking, everyday banking that our customers do with us. We are seeing, again, increased inflows in customers in our chosen segment. So we believe we are taking market share on that front as well. Lending is of course an important product, and as I mentioned earlier in the call, we of course compete on that and we price selectively, in our chosen market segments.
But it is just one product as a part of a much broader franchise, where, as you will know, the large income and profitability drivers are very substantial when you take in the savings, the investments, and the everyday banking fee side of things.
All right. Thanks. Then maybe just a last question. I guess the lesson for 2026 has been that loan growth on group level, it doesn't really cost you anything in terms of risk exposure amount. You're now cruising into a headroom of close to 300 basis points and even with the 100% payout ratios over the coming year. How do you see that trajectory heading down to 16%?
Yeah. So you should see it as we previously guided on 3% to 4% lending growth. We continue to feel good about that forecast. So you should see the REA dynamics moving. Of course, it's always depending on mix and on asset quality and so forth. But you should see that as moving in a way that it sort of supports that we'll get to the 16% CET1 in 2028.
I think it's very difficult to comment because REA is a mix of, again, customer dynamics, asset quality, customer mix. As you'll know, a lot of the growth has been driven the last couple of years by LC&I. We spoke about that in the speech, 13% year-on-year growth. That's typically investment grade, lower REA relative consuming business, just to give one example. So it really depends on the dynamics, but you should see the REA growth moving somewhat in line with lending growth. Do you want to comment, Cecile, on any one of these?
I'll just comment briefly indeed on the capital trajectory. It is true, obviously, that we have a large buffer of 300 basis points, larger than the management buffer of 150-200 basis points that we've guided towards. Whilst, I would say that the regulatory capital risk or headwinds, et cetera, is reducing, right? We've actually seen the materialization of the reduction of Pillar 2, et cetera. So if anything, we've got what I feel is very good level of clarity towards 2028 when it comes to capital.
Just to let you know that the 300 basis points management buffer in part is covering for some of our AT1 deficit, which is of course deliberate. We don't want to have outstanding extra capital if we can avoid it. So some of this 300 basis points covers AT1, and the glide path remains the same towards the 16%, 2028 target. Whilst we expect, as Carsten was mentioning, it will allow us to maintain our capital distribution policy alongside our growth objectives.
All right. Thanks.
Thank you. The next question today comes from Riccardo Rovere from Mediobanca. Please go ahead.
Thanks. Thanks a lot for taking my question. Just one. When I look at your financial statements, your balance sheet, and I sum up all the various assets that should generate credit risk. So loans to banks, loans to customers, loans at fair value, and investment securities, amortised cost, or through other comprehensive income.
The balance sheet, if the numbers I have in front of me are kind of correct, is up almost DKK 70 billion, and the credit risk RWA under IRB standardized and counterparty risk is down DKK 4 billion in the quarter. Can you elaborate how this can be possible? Is there a rating migration? PMAs are unchanged, so it looks like the risk profile you see in general doesn't change. How can it be? Thanks.
Sure. Yes, absolutely. Riccardo, thank you for the question. I would say a good observation, particularly in a shorter timeframe since we released our results this morning. Our data and the main sort of evolution, because obviously, we have indeed increased on the credit exposure, whilst you see, in fact, a stabilization of REA, which includes, in fact, a reduction of credit risk REA with a slight increase of market risk REA, which is obviously due to the current market.
Why do we see this credit risk REA reduction? This is because our data and systems become better over time with the investments that we're doing in our digital capabilities. That allows us to be more precise and more accurate in calculating these REAs. That explains, the last few months in particular, explains why we've seen this reduction. Clearly, I mean, taking a step back, the quality of our portfolio obviously supports that.
Sorry, Cecile. Is it a matter of better allocating the collaterals?
Better calculations, more accurate data, allowing us to effectively remove some buffers linked to uncertainty in calculations. That's how I would call it.
Right.
Yeah.
Okay. All right. Okay, thanks.
Thank you. We will now take our next question. This is from Alexander Vilstrup-Jørgensen from DNB Carnegie. Please go ahead.
Yeah, good morning, and thank you for taking my questions as well. I have two. First, on competition within your various segments, how do you see the competition in the sector, both within PC, BC, and LC&I? Should we expect pressure on lending margins from here, or do you see pricing discipline improving? That would be my first question.
Thanks for that. Look, I think I would describe competition as being strong, an intense competition. In fact, as has been the case, I think, for the last many years. My observation is not that there is anything specific to call out that has changed in Q3 or even the last few quarters. I think the pricing discipline is relatively robust in the sense that there is a focus also from our competition, and in general in the market, of ensuring that we meet and exceed cost of capital and meet return targets that are there.
I said earlier in the year that we expected margins to be roughly flat. That is also what we have seen. Yeah, nothing particular and new to report. It continues to be intense, but also I think it continues to be relatively disciplined.
Okay. Thank you. Moving over to my second question, it relates to your Northern Irish business. Would you ever consider divesting your Northern Irish business over time? I can see that in your 2028 strategy, you outline ambitions for PC, BC, and LC&I across the Nordic markets, but you provide little detail on the Northern Irish business. Given that the business appears somewhat outside your broader Nordic strategic focus, how do you see its role in the group going forward?
Yeah, look, we really like our Northern Irish business. It's a very strong business, strong profitability, very well-diversified, very long deposits, and a strong team there. It is a business that sits on our one platform and has all the benefits of sitting on our one platform, and that's an important consideration. Look, I've also said before that it is, of course, not part of our core Nordic strategy, and therefore, we'll ongoing, of course, look at whether there is or could be a better owner of that business. But we like the business, and we continue to invest in it.
Very clear. Thank you.
Thank you. We will now take the next question. This is from Isobel Hettrick from Autonomous Research. Please go ahead.
Hi there, it's Isobel from Autonomous Research. Thanks for taking my questions. My questions actually focus on your announcement last week that you're enabling your business customers to connect their AI agents to your platform and access their banking data. My first question is, what drove this development? Was it client interest? Do you have plans to roll it out to the retail customers? My second question is, more broadly, what risks do you see from customers using AI agents regarding deposit stickiness, brand loyalty, and do you have any plans to mitigate potential impacts here? Thank you.
Yeah. No, thanks for that. Obviously this is a hot topic, to say the least, and developments are just going so fast. On the MCP side, yes, it is something that our customers demand. Again, just for everybody on the call, giving them access to our premium APIs via MCP so they can use their own agentic tools to read their own data is something that's increasingly important. Customers can themselves make their own user interfaces and tools using that data for treasury management, cash management purposes and so forth.
We of course, want to enable that for our customers. We don't immediately have plans on the personal customer side, but I could easily see that that is where the market is going as well. Obviously, there are premium APIs available, but in terms of consumer customers building their own user interfaces, having access to their data, to some extent they can do that already, but doing it with agentic tools, you could also imagine could be something that will happen.
Certainly, we're very much looking at both risks and opportunities in terms of how intermediation and disintermediation from agentic capabilities will play out. We're investing very heavily in the space, and we'll continue to look at both how we can support our customers and continue, of course, to build competitive advantage and strengthen our value proposition to our customers.
Thank you.
Thank you. We have one more question. The last question today is from Hari Sivakumaran from KBW. Please go ahead.
Hi there. Could I ask a question on Danica? We have had a couple of good quarters. I am just wondering how much of that is operational improvement and how much that may be volatility driven. Also on 4Q costs, the full year guidance implies a bit of a range. Maybe some color on where it may end up in 4Q. Thanks.
Yeah. On Danica, it is very much driven by ongoing improvements in the health and accident area, which has previously been a significant challenge for the whole sector and also for us. We have significantly improved our operational capabilities around the management, both proactively and reactively on the health and accident claims, and seeing improved operational management, but also improved trends around that.
I would very much put the main sort of drivers down to health and accident. Then at the same time, of course, the investment results swings as per market, but we actually have in fact seen pretty strong investment results as we look at those year to date. Then maybe on the cost guidance as well.
Yes, on the cost guidance. Indeed, we have given a guidance of between DKK 26 billion-DKK 26.5 billion for the year, with the cost to income ratio below 45%. Look, I am not going to refine the guidance further, but I will say two things. One, our cost management plan is going exactly as we anticipated at the beginning of the year. There is nothing that we feel is out of our forecast. That is the first thing I would say.
Secondly, of course, we have in mind our trajectory towards the cost to income ratio of up to and no greater than 43% in 2028, and we intend to be firmly going in that direction. Beyond that, I am not going to make any other comments.
All right. Thank you very much, everyone, for your interest in Danske Bank. We really appreciate it. Thanks for your questions. As always, please do reach out to Investor Relations if any other questions. Thanks a lot. Take care.