Pre-close call

Jun 21, 2024

Summary

Management remained comfortable with full-year NII and cost expectations. Q2 commentary pointed to resilient Nordic activity, ongoing fee drivers and planned capital updates with results on July 19.

Good afternoon, and welcome to the Danske Bank Q2 2024 Pre-close call. My name is Claus Ingar Jensen, and I am Head of Investor Relations. With me, I have Lewis West and Olav Jørgensen from our IR team. 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 before the start of the silent period on June 28, ahead of the publication of our Q2 2024 report on July 19. I will go through the P&L statement line by line and comment on capital at the end. Afterwards, we will open up 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 data. Connected to this, I wish to stress that developments in specific indices may not always have the same effect on our performance. Before going through the income lines, I would like to start with a brief comment on the most recent macroeconomic development based on our Nordic Outlook from June. Through the second quarter of 2024, the Nordic economies have continued to show resilience in the higher rates environment. Recent economic data have furthermore been better than expected in early 2024, and expectations for some growth are now back across the Nordic region. In Denmark, the outlook for the second half has improved, and we now expect a moderate expansion even outside the already strong pharmaceutical sector. Household finances remain solid, supported by high employment and higher real wages. The expectation that growth will continue, combined with potentially lower interest rates, are unlikely to be positive factors for housing market activity. However, the effects will probably only be visible in the second half of the year. Although the outlook has turned more positive, uncertainty persists, driven by the geopolitical environment. Now, let's have a look at net interest income. We will start by reminding you that during the second quarter, there have been two central bank rate decisions. On May 8, the Swedish Central Bank decided to lower its policy rates with 25 basis points to 3.75%. ECB lowered its policy rates on June 6, which was also followed by Nationalbanken in Denmark. Following the cut by Nationalbanken, Danske Bank also lowered rates across our product portfolio as relevant. Changes to retail customer rates will be effective from August 1, while changes to business customers rates will be effective from July 1 and mid-August. As these changes had no impact in the second quarter, we will not go into further details on this call. Kindly note that the second quarter has the same number of interest days as the first quarter. The date effect is estimated to around DKK 90 million. Regarding recent volume developments, we refer to publicly available data. In terms of lending, we note that overall credit demand remained muted. In addition, we remind you that we cannot include further continued attrition from the PC Norway portfolio, which may have a negative impact on NII, as we saw in the first quarter. Looking at funding costs, we note that NIBOR has been flat, whereas STIBOR has been lower during the quarter. As always, please be mindful of currency fluctuations in the markets where we operate. Both SEK, NOK, and British pounds appreciated around 2% in the second quarter until now. In terms of wholesale funding, we issued around DKK 57 billion during the first and the second quarter, with around DKK 27 billion done in Q2 alone, progressing in line with our full year guidance of between DKK 80 billion and DKK 100 billion of debt issuance across instruments. Our issuance in the second quarter included a SEK Tier 2 benchmark transaction of SEK 4.25 billion, priced at 3-month EURIBOR, plus 166 basis points executed on May 16. Please visit danskebank.com, the debt section, for further details on terms and pricing for each issuance. Finally, on NII sensitivity, we reiterate our guidance of approximately plus or minus DKK 500 million per 25 basis points change across all currencies on average over the next 100 basis points within a 12-month period. As the balance sheet effects from our hold-to-maturity portfolio and unhedged fixed income of fixed rate assets are gradually taking hold, we would, all else equal, expect to see a year 2 and year 3 impact of another DKK 300 million and DKK 200 million respectively. Please note that by far, most of our sensitivity relates to DKK and euros in that order. In respect to fee income, we will start by noting that development is, as always, subject to conditions in the financial markets, housing market activity, and general activity level among our customers. Having said that, in general, we can note that the underlying positive drivers for our fee income that we saw in the first quarter are likely to continue in the second quarter. Let's then look at investment fees, which naturally are impacted by development in assets under management, as well as the investment activity among our customers. In the second quarter, we have noted that equity market globally have continued the positive trend observed during the first quarter with, however, some uncertainty related to development in June. For Danske Invest, we note the public available statistics from Finance Denmark that point to a positive development in market share for Danske Invest and a positive trend in inflows. Turning to activity-driven fees, we note that the Danish consumer sentiment, as measured by Statistics Denmark, continues its upward trend from the first quarter, though still negative. Looking at the latest consumer spending monitor from Danske Bank Research, we saw an increase in spending in real terms, meaning that consumer spending continues to grow. Turning to fee from our lending activities, we still note that activity in the Danish housing market remains subdued. Also, please be aware that we saw a positive seasonal effect from refinancing fees in the first quarter of DKK 0.1 billion. In the second quarter, we expect broadly the same level of refinancing fees from, for instance, short-end floating rate mortgages. We have not seen any significant remortgaging activity in the second quarter. Finally, on capital markets activity, we see good financial market sentiment overall with debt capital market especially having good customer activity. Equity capital raising activity, however, is still low. Now turning our focus to trading income. Noting that the main driver of our trading income is customer activity. Overall bond spreads have been unchanged during the second quarter, with some volatility driven by elevated political risk in France. The strong sentiments on Danish government bonds have continued in the second quarter, and spreads to EUR peers have tightened further. Please be reminded that, as mentioned in the Q1 2024 interim report, we have fully aligned our reporting to IFRS 17. Therefore, we reiterate that this has changed our general expectations for normalized trading income from previously around DKK 4 billion per annum to now around DKK 3 billion per annum, subject to market conditions. In respect to Danica, we have no specific comments for Q2. Please be aware that Danica's result are always subject to developments in the financial markets and in the health and accident business. For other income, kindly note that in the first quarter, other income was lower, driven by asset finance, primarily due to lower sales of assets. Assuming a continued low level of assets available for resale in our leasing business, we expect this to continue in the second quarter. We have no specific comments regarding the quarterly development in costs. In terms of the announced DKK 0.6 billion of non-recurring costs for 2024, please note that most of these costs relates to our new domicile and will be distributed over the rest of the year, with DKK 0.1 billion recognized in the second quarter. We have no specific comments on impairments and credit quality other than to note that the benign macroeconomic environment continues to support credit quality. We do not have any comments with respect to tax. In respect to one-offs, there are no new one-offs to be communicated for Q2 2024, except as mentioned above. When comparing year-over-year, we reiterate one-off items booked in the second quarter of 2023, which had an impact on other income trading and the tax line. We do not have any specific comments on REA, besides noting that market risk remains subject to the volatility in the market. This concludes our initial comments in this pre-close call. Before we move to the Q&A session, I would like to highlight that we enter our silent period on the 28th of June. At the beginning of next week, we will also start collecting consensus estimates with a contribution deadline on Monday the 1st of July at noon. Regarding consensus numbers, we reiterate that the number you input with respect to share buyback should be the announced amount for the particular calendar period. Please note that we will publish our Q2 results on the 19th of July at 7:30 A.M. CET, and that the 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 a question, please use the raise your hand function. I can see we have one question from Jan Erik. Please go ahead, Jan Erik. Yes. Thank you. I have a couple questions. The first one is, previously I have stated that you were happy with the NII for the full year and also the cost guidance or cost level into the IR consensus. Is that still valid for comment, or is that something that it's forward-looking, so we cannot comment on? We are comfortable with both issues, or both statements, you can say. Both the NII, with full year expectation and also the cost outlook. Yes. Okay, perfect. Second, you have moved some FX related fees or trading to the fee line. Did you really comment anything on that specific line or in the fee comment you gave, or was that forgotten? No, we did it in Q1, Jan Erik. In Q1, we also made an eight-month restatement Yes, I know. of both fees and trading. The reason why I would Yeah. Sorry, it was more about what was the comment. Is there any comment on that specific line this time around, the one that you have moved to the fees line? Okay. Thank you. No, it's unchanged compared to the last quarter. Thank you. That's all from my side. You're welcome. Then we have Sofie Peterzens. Please go ahead. Yeah. Sorry, trying to see if I get it to work in the office. Yeah. So I also have just two questions. The first one is on capital. You previously alluded to that we should expect a capital update with the second quarter. Is that still the case? Should we expect some additional details on your capital targets minimum levels? Also on the risk weights on commercial real estate exposures in Denmark, can you just remind us what the latest is here? Thank you. Yes. We are now approximately six months into the new strategy period. We are planning to do an update with the Q2 result on what we have achieved so far, that includes also an update on the capital issues from the 7th of June of last year. That is what you should expect. Of course, at this point in time, I cannot go into further details what exactly we are going to say. I think, Sofie, that we have to wait for the 19th of July. Our communication is essentially unchanged from Q1. We will do an update. I can only point to the relevant slide in the slide deck from the CMD of last year, where we have a number of moving parts in our capital bridge, that will also be part of the update on the 19th of July. I think that is how far I can go, which is not that far. Can you just remind us what the commercial real estate risk weight is like? Yeah. It will have an impact of approximately 30 basis points taking place at Q2. Okay. That was all from me. Thank you very much. You are welcome. Okay, it does not look like there is any other questions. So, thank you for listening, thanks for the questions, and I wish you a very nice weekend. Goodbye.