Pre-close call

Jan 9, 2024

Summary

Q4 guidance pointed to negligible impairments and a DKK 0.3bn FY charge, with an annual DKK 0.1bn NII tailwind from rate increases. Funding, capital sensitivity and market risks remained key discussion points.

Good afternoon, and welcome to the Danske Bank Q4 2023 Pre-close call. My name is Claus Ingar Jensen, and I am Head of Investor Relations. With me, I have Catherine Strøbek, Olav Jorgensen, and Nicolai Tverno 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, as well as one-offs you should be aware of before the start of the silent period on January 12, ahead of the publication of our 2023 annual report on February 2. I will go through the P&L statement line by line and comment on capital at the end, and afterwards, we will open up for a Q&A session. For the sake of good order, I would like to highlight the following. I will only answer questions related to already disclosed information as well as publicly available data as of December 31, unless otherwise noted. In this connection, I wish to stress the developments in specific indices may not always have the same effect on our performance. Let us start out with macro, where I would like to start by commenting on the current macroeconomic environment before we go through the line items. Compared to the uncertainties we faced in the beginning of 2023, the economy outlook now points increasingly to a soft landing across the major economies. Although market expectations clearly indicates that central bank policy rates have peaked, the long-term policies and inflation development remains uncertain. Additionally, the worrying development in the geopolitical landscape may lead to serious consequences across the global economies, as supply chains and commodity prices can quickly be disrupted. In the Nordic countries, we have seen a slowdown of GDP growth, but overall, the economies remain resilient. Particularly in Denmark, where the economy has been supported by the pharmaceutical sector. We see historically high employment rates, and household finances remain strong. For a more detailed macroeconomic outlook, please refer to our most recent economic outlook from December 5. The solid macroeconomic backdrop also drove the profit upgrade we announced on December 8, as the quality of our credit portfolio remains strong, and we now expect only negligible loan impairment charges for the fourth quarter. As always, be mindful about currency fluctuations in the regions we operate in. SEK has appreciated by around 3%, while NOK has appreciated slightly, and pound sterling has been roughly flat in Q4. With that, let us have a look at net interest income. Firstly, I would like to remind you that the Q3 NII benefited from a DKK 300 million one-off. Also note that there were no policy rate hikes in Q4 by the ECB, the Danmarks Nationalbank, or neither by the Swedish Riksbank. On the 13th of December, the Norges Bank increased policy rate by 25 basis points, and we have notified customers of various price changes, which will take effect during Q1. Specifically for Q4, and following the latest increase of 25 basis points in ECB and Danish policy rates back in September, we would like to reiterate an annual impact of around DKK 0.1 billion. This is obviously below our guided NII sensitivity as we reprice both transaction accounts as well as term deposits. As such, we announced that we would start paying 25 basis points on all transaction accounts in Denmark with deposits of up to DKK 50,000 effective from the 1st of October. We have also raised the interest rate on several saving products effective from the 18th of September. The significant pass-through should be viewed as a catching up of previous rate hikes. Looking at the sector overall, where we refer to publicly available data, the volume development is expected to be fairly muted across business segments. Lending demand may be impacted by uncertainties related to the macroeconomic slowdown and property price uncertainty. Please be aware that in respect to the lending statistics for Denmark from November, which recently have been published, we are not able to confirm the trend in the private lending volumes. Also, keep in mind that it is fair to assume a decrease in PC volumes, or personal customers volumes, to continue in Norway through the transition period. We continue to expect the transition to close by the end of 2024. On deposits, we expect an overall stable and elevated level to continue in Q4. The higher rates offered on our well-recognized saving products are likely to add further to the migration into these products in Q4. Additionally, the Swedish market in particular has been susceptible to fierce deposit price competition. Please note that Q4 has the same number of interest days as Q3. Related to our funding costs, the three-month STIBOR and NIBOR have risen by around eight and six basis points respectively in Q4, on the basis of quarterly averages. Please be aware that when we observe increases in NIBOR and STIBOR, the immediate impact on our NII is negative, as higher customer rates, in particular Norway, are subject to notice periods. Through the year, we have issued funding in various formats, including senior covered bonds and private placements, bringing the total amount of debt transactions to around DKK 95 billion year to date. This is in line with our public target to raise between DKK 80 billion and DKK 100 billion in 2023. Activity in Q4 included a green EUR 500 million five non-call four non-preferred senior priced at three-month EURIBOR plus 145 basis points, with settlement date on the 9th of November. On the other hand, we also redeemed a EUR 1.25 billion preferred senior on the 10th of November, with a spread of three-month EURIBOR plus 30 basis points. Please see danskebank.com debt section for further details on terms and pricing for each issuance. Finally, we reiterate our NII sensitivity of approximately plus DKK 600 million and 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 rate assets are gradually taking hold, we would, all else equal, expect to see a year two and year three benefit of another DKK 300 million and DKK 200 million respectively. Please note that by far, most of our sensitivity relates to DKK and EUR in that order. In respect to fee income, the development is always subject to market conditions in the financial markets, housing market activity, and the general activity level among our customers. Let us start with the development in investment fees. These will be subject to the development in assets under management and the investment appetite of our customers. In respect to performance fees from asset management, please recall that we normally book the majority of these in Q4, and we refer to table 234 in our Q3 Fact Book as a recent reference regarding our fund's performance. To that end, we have noted a positive development in equity markets and performance in fixed income markets towards the end of the year. Moving to activity-driven fees, we observed that while consumer sentiment as measured by Statistics Denmark has remained negative, the latest spending monitor by Danske Bank Macro Research shows an increase in November of around 2% in consumer spending in real terms comparing to the same period last year. Turning to fees from lending activities, housing market activity in Denmark has improved slightly, but remains at a subdued level relative to the peak in 2021. Also, please be aware that we had refinancing auction of adjustable rate mortgages in November. As a reference, income related to the Q4 2022 refinancing auctions amounted to approximately 50 million. We would also add that remortgaging activity has remained low in the fourth quarter. Capital markets activity has been overall stable in Q4, as customer activity in DCM remains solid, while activity in ECM continued to be muted. The level of M&A activity also continues to be low, but improved towards the end of the year. Now turning our focus to trading income. While we have observed benign financial market conditions, Q4 has historically been subject to seasonality from lower customer activity. We have observed lower Danish mortgage rates, and the 5% callable mortgage bonds have closed due to lower yield. Spreads on five-year non-callable bonds have tightened close to one percentage point. Additionally, we have seen strong sentiment on Danish government bonds in Q4 that performed versus euro peers, where the 10-year yield spread to German government bonds tightened by five basis points. With respect to our insurance activities, the investment result is always subject to valuation effects from developments in the financial markets. We have no comments on other income, and there are no one-off items for Q4. On costs, we have no specific comments regarding the quarterly development. As mentioned at the beginning, and as we communicated in our company announcement on the 8th of December, we expect negligible impairments in the fourth quarter of 2023. Therefore, we expect full-year loan impairment charges to be around DKK 0.3 billion. Only comment related to tax is that we expect a reduced tax expense of around DKK 0.3 billion to DKK 0.4 billion. From the year-end tax assessment related to tax from previous years, as we also announced on the 8th of December. We do not have any specific comments on REA or risk exposure amount, besides noting that market risk remains subject to 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 12th of January. Shortly after today's call, we will also start collecting consensus estimates with a contribution deadline on the 15th of January at noon. Please note that we will publish our 2023 annual report on the 2nd of February 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. Thank you. I can see we have a question from Sofie. Yeah. Hi, here is Sofie from J.P. Morgan. So, in terms of your rate sensitivity, you mentioned that it's 500 million for a 25 basis point hike in rates. But given that the rate expectations have moved quite a lot, how should we think about a potential NII impact from a 25 basis point cut in rates? Will it also be 500 million and 200 and 300 million in year 2 and year 3? Yeah. I'm not sure I've heard what you mentioned first. We have said +600 if rates go up and -500 if rates go down by 500 million. As you can see, Sofie, this is identical to the interest rate sensitivity we have communicated at Q3. We have no further comments to how rate outlook for 2024 will impact our NII. It will not have any impact for Q4, I can say. I believe we will make comments around that at our conference call on the 2nd of February, as this essentially is about the 2024. Yeah. No. Sorry, maybe I wasn't clear. I meant the year 2 and year 3 impact, how should we think about that in a negative rate environment with falling rates? Will it also be 200-300 million lower NII than in year 2 and 300 million in year 3? Yes. That is what we see for now. Whether there will be any changes is to be communicated on 2/2. But for now, we can confirm the sensitivity that I just repeated in our comments in this call. Okay. A DKK 1 billion for 25 basis point rate cut, basically? Yeah. With a year in. Okay. My second question, you mentioned that you repriced the deposits in Denmark, but could you also remind us what you are doing in Finland and how the deposits are paid in Finland? Are you paying on the average balance fees or kind of fluid balance, or how should we think about the balance fees that you are paying? Yeah. The new rate. I think we did the same in Finland at the time where we raised interest rates on transaction accounts in Denmark, i.e., on October 1 to 25 basis points on transaction accounts. In Sweden, we have 50 basis points interest rates on transaction accounts. That has been raised twice during the late summer and autumn. That is also on transaction accounts. The 25 basis point basically on transaction accounts will hit now in the fourth quarter for Finland. Yeah. Additional 25 in Sweden. Yeah 25 for Denmark. Yeah, that is correct. Okay. My final question. On the Danish potential real estate floors, is there any additional news on that item? Oh, you mean on the capital add-on? Yeah. Yeah. The latest news, and now I am quoting some of the media in Denmark from late last week, is that the government agree that there should be this add-on, which has been proposed by the Systemic Risk Council. We have no further details around implementation for now. Okay. That is very clear. Thank you so much. Then there is a question from Jan. Yes. Thank you for taking my question. Regarding Sofie's first question about this implementation, what have you sort of taken into account when you have your target of 16% CET1 ratio? It is sort of above the minimum requirement and stuff like that. You previously said that Basel IV and certain elements in the CRR floor is also taken into that account. Is it any changes to your own target, even though that your minimum requirement cannot potentially move up in connection with these suggestions? As this has not been, this has up until now been a proposal. It is not something we have included in our numbers. Of course, we will start to do so once we know how and if, and when it will be implemented. I do not see, of course, subject to final decision, I do not see this as having a materiality that has the potential to change our capital targets. Perfect. Did you mention anything about dividend distribution or capital distribution this time around, other than that you, of course, will have your semi-annual dividends? Yeah. It's a part of our Q4 or the communication in the full year report will also be a recommendation from the board on dividend payments, as we normally do, of course, except for the years when we didn't pay out any dividends. But that will be communicated as part of our Q4 communication. Okay, perfect. Just one final from me, Simon. You mentioned on your, did you say 0.1 billion effect from the- Yes This time around 25 basis points? Yes. It means that you have very limited positive effect this quarter and some changes next quarter. Yeah. If one should have followed the NII sensitivities strictly and there hasn't been this catching up on interest rates, I would say that the normal sensitivity for those 25 basis points should rather be closer to DKK 500 million, but due to the effect we have seen from passing on interest rates, then the impact is more closer to DKK 0.1 billion, as I mentioned in the call. Perfect. Thanks a lot, sir. Over. Then Jakob Brink. Thank you. On your comments on trading income, can you just repeat that? You said so Europeans or Danish euro peers spreads have narrowed, but what did you say on the actual spread levels or rate levels? I said we have observed lower Danish mortgage rates, and the five-year callable mortgage bond have closed due to lower yields. Spreads on five-year non-callable bonds have tightened close to 1 percentage point. Additionally, we have seen strong sentiment on Danish government bonds in Q4 that performed versus in yield years. And the 10-year yield spread to German government bonds tightened by 5 basis points. That's the numbers we have mentioned. But normally, I think usually you would refer to spreads rather than levels, and of course, you do that the spread versus euro, but the absolute levels in Denmark, are you saying that they're important for trading income this quarter? Then my second or follow-up question would be, you upgraded your guidance on the 8th of December, and since then, I think rates were down another 40 basis points. Yeah Should we expect that you could even come out and beat if you actually have a sensitivity to rates this time? I think, in line with our revised fixed income strategy, I think the sensitivity on trading income lies more on customer activity than it does on the actual rate level. Because we have, as part of our new fixed income strategy, position taking in order to facilitate customer transaction, has been minimized compared to previously. That is why I would be cautious to put an equal sign between the trading income and the lower yields. Of course, it is to the extent that that can facilitate a higher customer activity. Yes, then it would be beneficial for trading. But there are slightly different dynamics for our trading income now with the new fixed income strategy. Okay. Thank you. That was all. You are welcome. And Yannick has one more question. Please go ahead, Yannick. Yeah. Thank you. Just one more question on the insurance activity. Yeah. We learned a lot about the insurance yesterday, about IFRS 17. So what kind of accounting are you actually using in Danica, and how is that transformed into the Danske Bank group accounts? Is it IFRS 17 fully through your use? Yeah. That was implemented during 2023. As you probably know, Yannick, we are reporting on a net basis in Danica, so it is the net income from insurance business that filters through into the financial highlights of the group. Yeah, and fully based on IFRS 17 numbers. Yeah. Thank you. A question from Namita. Hi, Claus. Just a quick one. Are you going to move the Norwegian personal customers business into discontinued operations, or does it stay in the P&L? Well, for the full year report, my strong expectation is that it will stay as it is. Once we are into the new strategy period, where there will be other changes to our reporting from new reporting guidelines, there will be changes in Q1 to our reporting. That is something we will come back to in due time in order for all analysts to prepare properly on what that will mean in practice. Thanks very much. Sofie, with one more question. Yeah, thank you. Just a follow-up on the DKK 0.1 billion NII headwind from the higher rates on the transaction deposits. No, it is tailwind, Sofie. It is tailwind. It is a tailwind. Oh, okay. Yeah. But is it an annual tailwind? Yes. Otherwise it would have been Okay. I wasn't Okay. It's a tailwind. Okay, makes sense. Good. That was all. Thank you. You are welcome. Okay, that seems to be the last question for today's call. If there isn't any more questions, I will just close here and say thank you for listening, and looking forward to talk to you at the Q4 results. Have a nice afternoon. Goodbye.