Good afternoon, and welcome to the Danske Bank Q3 2026 Pre-Close Call. My name is Claus Ingar Jensen, and I am Head of Investor Relations. In addition, Olav Jørgensen and Nicolai Tvernø from our IR team are also on the call. Please note that this call is being recorded for compliance reasons, and the script used for this call will be published on the Investor Relations website after the call. Given that we conduct this call via Teams, please be aware that if you want to ask questions, you must log on via the Teams app or your browser. If you participate via a telephone line, the IR team will be available for questions after the call. In today's call, I will highlight relevant public data and macroeconomic trends in our markets.
I will go through the major P&L lines and comment on capital at the end. Afterwards, we will open for a Q&A session. For the sake of good order, I would also like to highlight the following. I will only answer questions related to already disclosed information as well as publicly available information, unless otherwise noted. In connection with this, I wish to highlight that developments in specific indices may not always have the same effect on our performance. Firstly, I would like to give a brief comment on the most recent macroeconomic development in our markets based on the Nordic Outlook, published in early September by our macro research team. The economies have proved resilient with solid labor markets despite high uncertainty, as higher energy prices have led to inflationary pressure.
In our house view from Danske Bank Macro Research, we expect the ECB and the Danish Central Bank to hike by a total of 100 basis points in 2026, including the hikes in June and September that have already been done, and then two additional hikes of 25 basis points in October and December. Focusing on the Danish economy, the solid economic development is expected to continue with around 4% GDP growth in 2026, with continued strong support from the pharmaceutical sector. Employment levels and growing disposable incomes is supporting household finances. However, consumer sentiment continues to be low. Housing market activity continues to be solid, although there are signs that the activity and house prices in the Copenhagen area are slowing.
Now let's have a look at net interest income. The hikes from ECB in June and September were included as part of our full year NII guidance of slightly above DKK 38 billion. The hike that occurred in September is not expected to have an impact on our Q3 number. Keep in mind that the contribution to deposit margins in Q3 from the June hike will be partly countered by effects from our deposit hedge, given the higher short-term rates. As a reminder, the deposit hedge was increased gradually during last year, such that our bond and derivatives portfolio account for around DKK 190 billion in addition to our loan hedge. The effects I just highlighted are included in our overall sensitivity guidance. While the majority of our sensitivity is related to euro and Danish kroner, we don't see policy rate tailwinds for NOK and SEK in the third quarter.
Keep that in mind when applying our overall group sensitivity, which we reiterated at our Q2 release and is estimated as a positive effect of around DKK 450 million per 25 basis points hike. However, note that there are typically price lags in the few months after a rate hike. In addition, we estimate a year two and year three up and down effect of DKK 300 million and DKK 100 million respectively. Regarding recent volume development, we refer to public sector statistics released on 25th of September. The sector data showed solid Danish volume trends continuing. Please keep in mind that sector development is not an indication of how our volumes necessarily have developed, with the retail lending growth typically more muted when we look at our lending group growth overall.
When it comes to deposits, we are starting to see a gradual shift to higher saving rate products where we pass through more of the rate hikes to customers. All else equal, this churn will have an impact on deposit margins. Please note that the third quarter has one more interest day compared to the second quarter. The day effect is estimated to be around DKK 75 million. As always, please be mindful of currency fluctuations in the markets where we operate. During the third quarter and as of last Friday, SEK has depreciated by around 2% against the Danish kroner, whereas NOK has appreciated more than 3.5%. Pound sterling has been roughly flat. Looking at funding costs, we note that the three-month CIBOR has increased by almost 25 basis points. NIBOR with almost 10 basis points, while STIBOR has been roughly flat, all based on quarterly averages.
This will all else equal, add some pressure to lending margins until facilities are fully reset. With respect to our wholesale funding costs, we expect an increase relative to Q2. With the transactions we have executed in the third quarter, we have now issued a total of DKK 85 billion so far during 2026, well in line with our full-year funding plan of DKK 90 billion- DKK 110 billion of debt issuance across instruments. This includes a multi-tranche Scandi currency AT1 in the middle of August, equivalent to DKK 5 billion. Please visit danskebank.com, the debt section, for further details on terms and pricing for our issuance. Turning to fee income. In respect to fee income, we will start by noting that the development is, as always, subject to conditions in the financial markets, refinancing activity, and the general activity level among our customers.
Furthermore, please be mindful that Q3 always has an impact from seasonally lower activity during the summer. Corporate activity is generally solid and recent PMI statistics also encouraging, and consumer spending is also improving slightly despite the bearish consumer sentiment, according to recent data from Statistics Denmark. Both factors are continuing to underpin our everyday banking fees. With respect to investment fees, we note that this line is naturally impacted by the development in asset under management as well as the investment activity among our customers. In respect of fees generated from financing, we note that most Realkredit Danmark refinancing auctions for adjustable rate mortgages does not take place in the third quarter. Therefore, we expect income from refinancing fees in Q3 to be immaterial and lower relative to Q2.
Finally, concerning fee income from capital markets activity, we note that primary market activity has seen some impact from the recent volatility. ECM activity has been subdued and similar to activity fees. This will all else equal be affected by lower seasonal activity. Turning our focus to trading income, please note that customer-driven trading income, primarily in LC&I, is impacted by a continued reduced level of customer activity and a market sentiment, which has been cautious and seasonally slower summer activity. Danica's results are always subject to developments in the financial markets and in the health and accident business. We have no specific comments to other income, and while we reiterate our outlook on cost for full-year expenses of up to DKK 26 billion- DKK 26.5 billion in 2026, we expect the Q3 cost level to be in line with Q2, reflecting commercial activity and investment spend.
We have no specific comments to credit quality in the third quarter. As such, we reiterate full-year loan impairment guidance of around DKK 1 billion. We have no comments in respect to tax, and we have no one-offs relevant for the third quarter. Then capital. In respect to REA, we expect credit risk REA to reflect the trend in lending volumes. We also note that market risk REA remains subject to the volatility which we have seen in the financial markets, including change in interest rate expectations. Also, please note that the anticipated Pillar 2 relief related to resolved legacy case has been formally reviewed as part of the supervisory review and evaluation process. As previously guided, this will reduce our CET1 requirements by around 40 basis points and will be reflected in the third quarter numbers.
This concludes our initial comments. Before we move to the Q&A session, I would like to highlight that we begin our silent period on Thursday, [audio distorion] 8th October . We will shortly start to predict consensus estimates with a contribution deadline on Thursday, 8th October . Please note that we publish our Q3 interim report on 29th of October at 7:30 A.M. CET, and that the Q3 conference call for investors and analysts will take place at 8:30 A.M. We are now ready for the Q&A session. If you wish to ask questions, please use the raise your hand function.
I can see that we have a question from Andreas. Please go ahead, Andreas.
Hi, Claus. Yeah. Sorry I missed the first couple of minutes, but just on the NII. I was a bit interested in hearing that one of your peers talked about a negative impact on NII in the upcoming quarter from repricing of Danish mortgages. Today I was looking at some news in Denmark where you have this new campaign, you call it Toprente, which seems like you are hiking deposit rates a fair bit in various durations. Could you tell us a little bit on what we should expect on both an asset and liability side from these movements that we've seen in media?
I think when it comes to pricing of the traditional mortgage loans, the big players in Denmark have adopted a different pricing policy, at least for now. I know that there are some banks who have been repricing their back book, and some banks, including us, have repriced the front book for certain products and for certain customer segments. That explained why I didn't have the same comment as the bank you are referring to. Secondly, on deposit pricing, as I also mentioned during the call, we have seen a shift starting towards products with high interest rates, term deposits, and other saving products. This is an area where we have also done some repricing. If you go back a couple of quarters, the maximum interest rate you could get on the so-called Danske Toprente, which is our prime term deposit loan, was 1.85%. Now it's 2.35%.
That's an area where we have passed through some or all of the rate increases we have seen so far. But there are no rate hikes on other products. We have a product called Danske Indlån, which is a kind of hybrid saving product, where we have maintained the interest rates. But there are also products within private banking segment where there is an automatic reset when interest rates are going up, and these customers have, of course, also benefited from higher rates. I think that's the short answer, Andreas.
Yeah. Thanks. Just follow up on the first question then. You said that you repriced your front book. Could you tell us how much lower would the front book margin be compared to the back book, and how quickly would that reprice?
Well, I think that we have repriced the front book of specific products, and that has happened gradually over the first half of the year. We are probably now in a situation where there isn't that much of a difference between front book pricing for the different mortgage banks in Denmark. But I'm not able to provide you with any indication on how that will migrate into the back book over time.
Okay. Thank you.
I think we have a question from Sofie. Please go ahead, Sofie.
Yeah. Thanks a lot for taking my question. Just going back on the shift in the savings products. Could you give us any magnitude? How do you think about what share of your deposits potentially move to this product?
I am not able to give you any third quarter numbers as you probably can imagine. But if you look at the fact book, we have a table there called 175 where you will see term deposits for our personal customers business unit. And there you will see that already from the first quarter into the second quarter, it went up by around DKK 3 billion, and I would expect that to go up even further in the third quarter. That is the total of term deposits we have, so it also includes what we have in Sweden and in Finland. However, the vast majority will be the product that I referred to before.
Okay. That is very clear. You mentioned that the refinancing mortgage fees are going to be material this quarter. Could you just remind us?
Not material. No.
Yeah, not material. Could you just remind us how much the refinancing fees were in the second quarter?
I think the refinancing fee in the second quarter were close to DKK 100 million.
Okay. My last question, we have seen some noise around the pig farmers and agricultural sector in Denmark. How should we think about the potential asset quality, or is it a non-issue? Any color you can add here?
Well, whether it is going to be a non-issue, well, of course, I cannot say, but as you know, because you have followed Danske Bank for a while, Sofie, there has always been a little bit of volatility for the agricultural exposure for many reasons. Higher, lower, I would say volatility on input and output prices, diseases, tariffs, which we now experience from China, the ban of exporting products to Russia, just to mention a few. I think the current issue in Denmark is a combination of two things. First of all, that the lower output prices, and the second one being that with the new government, there will be new rules implemented for pig breeding. That has caused a lot of protests in Denmark and could, of course, also over time be an issue for earnings among the pig producers in Denmark.
I think that is what the issue is about. We have a very well-provisioned book in agriculture. We have 2.2% of our credit exposure to agriculture. 14% of that is to pig breeding. The other part is for different types of agricultural production. We have PMAs of DKK 800 million against agriculture. This is not something that keeps us awake at night, but of course, we monitor the development. Please also remember that the exposure we have in Danske Bank is to a large extent collateralized exposure from Realkredit Danmark lending to the, I would say the bricks and mortar among the farmers.
Okay. That is very clear. Thank you.
Riccardo, please go ahead.
Yes, thanks. Thanks, Claus. Just a quick one. If I understand it correctly, on asset quality, at some point you stated that you have not much to add, and you continue to have this DKK 1 billion guidance for the full year. Are you kind of referring, what do you have in mind when you say this kind of statement? Do you have in mind the first half of what we have seen or the second quarter in terms of asset, in terms of provisions? On PMAs, how should we thinking about them? They remain fairly stable. It is still a fairly large amount. Asset quality over the past several quarters has been fairly strong. So how should we think about all these things? Thanks.
Well, I think the comment I made were, of course, related to the third quarter, where we haven't seen any, or don't expect to see any deterioration in the credit quality. But we still keep our full year guidance of around DKK 1 billion. In respect to the PMAs, of course, we assess the PMAs on a quarterly basis. If you go back in time, you will see that there has been some reclassification where we have moved PMAs from one type of exposure to another. We have also reduced our PMAs that are coming from a level which is much higher than what you can see right now. But I would say overall, the market is characterized by very strong credit quality, and that is something we have repeated for a couple of quarters.
That is why we don't have anything more to add for the third quarter.
Okay, thanks.
Okay. Thank you so much for your questions. If there are no further questions, I would thank you for your participation and[crosstalk].
Sorry Claus, I have one question.
Okay.
Yeah.
I am ready.
J ust one question regarding your structural hedge. We have seen three-year swap rates increasing lately, and I was just wondering how we should see the contribution from your structural hedge to your net interest income in the coming quarters.
Well, I think in general it is working as it should. It is a hedge. We will over time see a continued or higher positive contribution from lending margins. In general terms, of course, the magnitude depends very much on pass-through and so on, whereas the impact or the effects in the hedge goes the other way. In that way, it actually works quite fine, meaning that over time, the contribution from the hedge will go down if interest rates continues to go up.
All right.
I think that is the dynamics we see, and that is very much as expected.
Okay. Thank you.
You are welcome. Okay. If that was the last question, thank you so much for your participation, and have a very nice afternoon. Goodbye.