Pre-close call

Jun 23, 2023

Summary

NII benefited from rate and currency dynamics, while housing and equity-market activity remained weak. Norway disposal-related one-offs are expected to yield a minor positive Q2 net-profit impact; an accelerated dividend targets the upper end of policy, subject to board approval.

Good afternoon, everybody, and welcome to the Danske Bank Q2 2023 pre-close call. My name is Claus Ingar Jensen, and I am Head of Investor Relations. With me I have Olav, Katrine, and Nicolai 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 that you should be aware of before the start of the silent period of June 20, ahead of the publication of our interim report on July 21. 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. Before we start, and 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 June 20, unless otherwise noted. In this connection, I wish to stress that developments in specific indices may not always have the same effect on our performance. I would like to start by commenting on the current macroeconomic backdrop before we go through the line items. Short-term economic sentiment has improved recently, supported by strong labor markets and more positive data points concerning the Danish housing market. However, the longer-term economic outlook remains uncertain, and the full effect of monetary tightening remain to be seen. Central banks' mandates are to bring down inflation, and despite lower energy prices, which have helped improve inflation indicators lately, core inflation still remains above target. Our most recent economic outlook from June 20 projects higher central bank rates expected to reach peak level in 2024. With that, let's have a look on net interest income. As always, please note the impact of currency fluctuations in the region in which we operate. In the period from the beginning of the quarter until June 20, we have seen depreciation of the Swedish and Norwegian krone by approximately 4%, whereas the pound sterling has appreciated around 3%. Also, please further note that Q2 has one more interest day than Q1, with an estimated effect of DKK 80 to DKK 85 million. Regarding volume developments, we refer to publicly available sector statistics as the only externally available source of insight. The most recent data as of April 2023 points to a largely flat volume development compared to the first quarter. Overall, we note that the housing market activity remains subdued compared to the previous quarter. Since Q1, three months STIBOR and NIBOR has risen around 50 basis points 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 are subject to notice periods of up to 6 weeks. In the first quarter, ECB and the Danish Central Bank hiked rates in February by 50 basis points and 35 basis points respectively, and again in March, each by 50 basis points. In the second quarter, ECB and the Danish Central Bank hiked rates in May by 25 basis points, and each by 25 basis points on the 15th of June. We confirm our current NII sensitivity of approximately DKK 700 million per 25 basis points uplift across the curve and across all currencies on average over the next 100 basis points within a 12-month period. Please note that by far, most of our sensitivity relates to Danish krone and euros in that order. Further to the increases in policy rates, we have adjusted our deposit rates for certain products in Denmark. The interest rates on saving products for retail has been raised by approximately 25 basis points, with effect from the 1st of May. The interest rates on transaction accounts, which represents the vast majority of retail deposits in Denmark, are currently unchanged at 0%. With respect to our operations in the Nordics, we continued to adjust pricing following central bank hikes and local market competition. Turning to wholesale funding, we remain comfortable with our overall funding position and market access, which was underpinned by the strong demand for the benchmark issuance we have executed so far this year, which in total amount to debt transactions of more than DKK 50 billion year to date. On the 14th of June, we executed EUR 1 billion green 7-year non-call 6 non-preferred senior bond priced at mid-swap plus 170 basis points. Please see danskebank.com, the debt section for further details on terms and pricing for each issuance. Finally, on NII, please be aware that the move you saw in Q1 from trading to NII related to our interest rate risk management will be allocated to the appropriate business units from the second quarter. Going forward, this will be reflected in the BU margins. To be clear, this does not affect the group NII. Let's turn to fee income. In respect of fee income, the development is 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. This will always be subject to asset under management and the investment appetite of our customers, which could be negatively affected by uncertainty in the financial markets. Please note that the higher interest rates we have observed in the second quarter may have a negative valuation impact on asset under management, all else equal. Turning to activity-driven fees, we have noted that the latest consumer sentiment measures from Statistics Denmark are still negative, however, slightly improving. According to our recent Spending Monitor by Danske Bank Macro Research, we are not able to point to any material changes in consumer spending Q over Q, as service spending continues to perform well, whereas spending on goods is overall down. Turning to fees from lending activities. Despite improving housing market activity in Denmark from a very low level, the number of transactions, including May this year, is approximately 35% lower compared to the peak in 2021. Lending volume measured by new RD loans to the retail segment is down more than 50% from Q1 2022 to Q1 2023. Also, please be aware that we saw a positive seasonal effect from refinancing fees in the first quarter of DKK 0.1 billion, while we do not have any significant refinancing activity in the second quarter. In addition, remortgaging activity is well below the high level from last year. Activity in the capital markets has improved during the second quarter, driven by higher activity in debt capital markets, while activity remains very low in equity capital markets. Now turning the focus to trading income. Please note that the continued uncertainty about central bank rates has continued to drive bond yields higher in a volatile market environment. Additionally, spreads on Danish mortgage bonds have widened during the second quarter, driven by banking turmoil at the end of Q1 and spillover effects from perceived higher risks in the Swedish real estate sector. The 10-year yield spread between Danish and German government bonds has widened 8 basis points due to low interest in Danish government bonds and weak market sentiment. Regarding our insurance activities, please be aware that higher, longer-term interest rates and credit spreads may have a negative valuation effect on investment portfolios. Then other income. In connection with the planned disposal of our personal customer business in Norway, we will incur a negative one-off in other income related to prudent valuation of the portfolio and expected transaction costs. This negative one-off will, however, be slightly offset by a positive one-off booked under trading income and a positive tax-related one-off, meaning that the total sum of these one-offs are expected to have a minor positive impact on net profit for the second quarter. In addition, as the calculation of the final effect is still ongoing, we will elaborate on the exact impact in the interim report for the second quarter. This concludes our comments on the income lines. Then turning to costs. We have no comments regarding the quarterly development in costs. The results of the new collective agreement for employees in Denmark will not take effect until the 1st of July. On the tax line, we refer to our previous comment concerning a potential tax-related one-off. Now turning to impairments and credit quality. In general, we remain comfortable with our credit quality, and we note that the risk of recession appears to be easing as per our latest Nordic Outlook from the 20th of June. While uncertainty related to the macroeconomic outlook in the second half of the year remains, these effects will naturally be reflected in our model-driven impairments for the period. This concludes our comments on the P&L. Then capital. Finally, as we announced at the Investor Day on the 7th of June, we intend to pay an accelerated dividend by the H1 result, targeting the higher end of our 40%-60% policy range, subject to approval by the board of directors. The record day will be the 25th of July, and the payment date will be the 26th of July. We do not have any specific comments on 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 on to the Q&A session, I would like to highlight that we enter our silent period on June 30, and shortly after today's call, we will also start collecting consensus estimates with a contribution deadline on July 3, end of day. Please note that we will publish our Q2 interim report on July 21 at 7:30 A.M. CET, and that the conference call for investors and analysts will take place at 8:30 CET. 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 Jakob Brink, Nordea. Hey, Jakob. Hi, Claus. Thank you. Just two quick ones. I am not sure I understood your last comment regarding asset quality. You said that your macroeconomists are now seeing lower risk of hard recession, but then you said something about the uncertainty would be reflected in provisions for the period. I am not quite sure I understood that part. Well, you can say it is true that the latest outlook paints a slightly more positive picture of the development. But that outlook, as it comes very late in the quarter, that will not be the basis of our assessments of impairment charges in the second quarter. Just to be very clear on this. Okay. The lower risk of recession is not reflected in Q2 provisions, but then on the other hand, has anything then deteriorated during the quarter? Is that Yeah. No, not as we can see it. No. Okay, good. On your, I appreciate that it sounds like you do not have the exact numbers, but all the one-offs Yeah Just sort of the magnitude on each one of them, could you, is that possible? Just sort of roughly Yeah. Is it a bit There are still some estimations ongoing, and that's why we are holding a little bit back, providing you with more details. You can assume that the trading impact would probably be a couple of hundred million DKK plus. That's the number I can give you. I do not have the tax number for now, but for the trading line, that is essentially what you should be looking for. As I said, overall, there will be probably a minor positive impact on the net profit. Okay. Very good. That's all for me. Thank you. You are welcome, Jakob. Any more questions? Martin Birk, please go ahead. Yes. Actually, just one practical question. Will you guys be sending out restatements? I assume that Norway Retail will move to a non-core from your Q2 report. No, we cannot confirm that Norway will be moved to a non-core. No. No restatements is planned for now. Okay. All right. That was it. Thank you. Okay. Well, it does not look like we have any more questions, so let us just conclude on this call. Actually, I have one. Oh, sorry. Okay, Jakob. Can I get in? Sorry, just one more. Yes, we are still open. We are still open for questions. I guess you said it as well, but on the capital markets related fees, looking at actual activity on ECM and M&A, it looks like you are down quite a lot, actually, Q on Q. Yeah. Is it fair to assume that net net it will still? Yeah It looks at least on equity related as if it is significantly down. Is that? Yep. That is the right takeaway. Yes. Okay. Very good. Thank you. Otherwise, if there isn't any more questions, we are open for questions outside this call up until the silent period starts next Friday. With that, I just wish you all a very nice weekend and Midsummer evening. Goodbye. Thank you. Bye.