Pre-close call

Mar 31, 2022

Summary

War-related uncertainty and market volatility cloud the Q1 outlook, though direct exposure was limited and capital remained strong. Margin pressure eased, while elevated remediation costs and market-sensitive fees weighed on earnings prospects.

I think we can start now. It is two minutes past, although I can hear that there are still some people joining the meeting. Anyway, good afternoon, and welcome to the Danske Bank Q1 2022 Pre-close call. My name is Claus Ingar Jensen, and I am Head of Investor Relations. With me, I have Olav Jørgensen, Patrick Skjødtgaard, and Nicolai Brun Tvernø 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. As this is the first time we conduct this call via Teams, please be aware that if you plan on asking questions, you should log on via the Teams app or your browser. If you are only online via a telephone line, the IR team is available after the call. In today's call, I will highlight relevant public data and macro trends in our markets, as well as one-offs that you should be aware of before the start of the silent period on April 8, ahead of the publication of our Q1 report on April 29. I will go through the P&L statement line by line and remark on capital at the end. Afterwards, we will open up for a Q&A session as usual. Before we start, and for the sake of good order, I would like to highlight the following. I will answer only questions related to already disclosed information and one-offs, as well as publicly available data as of March 28, 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. Firstly, I would like to comment on the current geopolitical situation. We are monitoring the war in Ukraine closely, and I would like to refer to our publication of March 8 regarding our very limited exposure to customers residing or established in Russia, Ukraine, and the Baltics. We also note a continually clouded visibility regarding secondary and third-round effects of the disruption in supply chain mechanism, including the energy supply chain. The Nordic economies in general are fundamentally strong economies, as we have seen during the pandemic, and they thus have a comforting starting point for weathering the implications of the war. Overall, we remain confident that our strong capital position, diversified business model, and credit exposure are important factors in order to adapt to the changes. That said, let us start by having a look at net interest income. Please remember that Q1 has two fewer interest days than Q4, with an NII impact of around DKK 30 million to DKK 40 million per day. During the quarter, the Swedish krona- is now joining. depreciated around 2% against the Danish kroner, while the exchange rate of the pound sterling was flat, and the Norwegian kroner appreciated around 5% against the Danish kroner on the basis of publicly available data. Regarding volume developments, we refer to publicly available sector statistics as the only externally available source of insight and note the positive trends for corporate lending in Denmark. In addition, we would like to remind you that the repayment of government Corona loans is expected to begin in April. As with the pandemic, we are well-positioned to support our customers in this transition, and we have launched initiatives to help our small business customers. With regard to margin developments, we also refer to publicly available sector statistics as the only externally available source of insight. Despite the increased interest rates for mortgages in Denmark, we continue to observe some margin pressure, but to a lesser degree than previously. Among other factors, we point to the trend we have observed over the last couple of quarters of a change in retail customers' preference for products with higher margins, such as interest-only and variable rate loans. Since Q4, 3-month CIBOR has remained flat, while STIBOR has increased around 7 basis points, and NIBOR has increased around 39 basis points, all on the basis of quarterly averages. With regard to interest rate changes, we remind that the Norwegian Central Bank raised benchmark interest rates to 0.50% on December 16, 2021. In relation to this, we increased our lending and deposit rates by up to 25 basis points for almost all customers, with effect from February 1 and February 23, respectively. Additionally, on February 3, we implemented minor pricing adjustments for mortgages for personal customers in Norway, including Akademikerne, taking effect for existing customers on March 16 and February 3 for new customers. Most recently, the Norwegian Central Bank announced its plan to hike the policy rate to 0.75% from 0.50%. As per this week, we have announced a 25 basis points price change for loans, taking effect from May 13 for existing loans and immediately for new loans, including Akademikerne. However, from April 20, to mitigate the development of market and funding rates, we also adjusted prices for home loans in Sweden with effect from January 1 and February 13, with up to 25 basis points and 81 basis points, respectively. Jakob Brink Finally, as a result of the two Bank of England rate hikes, we adjusted Danske Bank's reference rate in Northern Ireland as well, which from March 18 has been 0.75%. With this in mind, we would like to remind you that our overall NII sensitivity guidance in a +/- 25 basis points parallel shift in the interest yield curve across all currencies is +850, -600 million respectively. The effects come primarily from Danish kroner and euros. In Q1 on the funding side, we issued our third non-preferred senior, which was well-received by the market, judging by an over-subscription of almost 100%. The issue was a EUR 750 million five non-call four, at a price equal to Euribor + 92 basis points. Additionally, earlier this week, we issued a dual tranche US dollar non-preferred senior of US$2 billion, which was oversubscribed more than three times. The three non-call two of $750 million came in at a spread equivalent to three-month Euribor + 100 basis points, and the six non-call five of $1.25 billion, equivalent to three-month Euribor + 134 basis points. Although not directly linked to the funding on the NII line, we also gave notice on March 2 of our last equity accounted AT1 of EUR 750 million with an 8.78 coupon and effective call date on April 6. In conclusion, with regards to funding, we have good access to the market, despite the uncertainty and somewhat elevated spreads we have seen during the first quarter. Our fee income is, as always, dependent on market conditions for the capital markets, development of the equity markets, and the general activity level in our banking operations. Starting off with capital markets, there is no doubt that 2021 was a very strong year in terms of activity, both for the market in general and for Danske Bank, which translated into record high fee levels, which included a landmark deal booked in Q1 2021. During the first quarter of 2022, it is clear that the uncertainty in the markets following the Russian invasion has an impact on capital markets activity in the short term, as customers have now adapted more of a wait-and-see position. With reference to publicly available Bloomberg League Table at the end of February for DCM and sustainable finance issuance, we remain in a strong position relative to peers especially, and demand related to the green transition remains high. On ECM, we have a good pipeline going into 2022. However, the Russian-Ukrainian War has led to low market activity in general, with very few new deals being launched. On the investment side, first of all, we remind about the seasonality of our performance fees bookings in Q4, which amounted to DKK 0.3 billion in Q4 2021. Next, we observe the correction in the equity markets in January, followed by high volatility, and then the Russian-Ukrainian War. As a result, at closing of March 28th, the OMXC25 Index was down 11% and the S&P 500 was down 4%. Please note that the negative development in the financial markets will have an impact on our asset under management, which, combined with the current volatility, could be notable headwinds for our investment fee performance. For activity-driven fees, we refer to our publicly available spending monitor paper, in which Dankort and MobilePay data shows spending slightly up from the level in 2019, even when adjusted for the currently high inflation rate. The most recent consumer confidence number in Denmark reflect the uncertainty related to the war, but the Danish economy comes from a strong position with low unemployment and healthy public finances as well as strong household finances. Yet increasing prices in general must be assumed to have some effect on the activity level overall. For lending fees, we should divide activity into three categories, namely the property market activity, the remortgaging activity, and the refinancing of variable rate loans all in Denmark. In terms of the first category, we note that the activity level in general is slowing slightly from a very strong level last year. However, we are working diligently to improve trend of our market share. For the second category, the development in the interest rates in Denmark has enabled some of our customers to benefit from remortgaging, and we generally see good activity. Finally, with regards to refinancing of the around DKK 80 billion up for refinancing in the market for April 1st. We have in Danske around DKK 46 billion, which will have a seasonally small positive effect on fee income in Q1, historically of around DKK 80 million. DKK 80 million. Turning to net trading income, we see good customer activity at our FX desk during the quarter. However, please bear in mind that our FIC trading has historically been negatively biased towards higher spreads. Volatility in the Danish mortgage market has been significant given both the uncertainty of the central bank response to higher inflation and the Russian and Ukrainian war. Spreads on callable bonds have seen quite different developments, with lower coupons at nearly unchanged and higher coupons at 20 to 30 basis points wider, with significant daily volatility during the quarter. Five-year non-callable bonds have seen more issuance and spreads are five to nine basis points wider than the start of the year. Danish government bonds have also seen spread volatility versus German government bonds. However, 10-year Danish German spreads towards end of the quarter are three basis points wider. Finally, please remember that we do not have any commodities trading desk. Looking at net income from insurance business, we would like to remind you about the very strong contribution from the financial markets last year, and point to the negative developments in the market at the start of this year, which may have a negative effect on earnings in Q1. In addition, the sale of Danica Norway is still expected to be approved in H1 2022, and is expected to have a one-off effect of DKK 400 million, exempted from tax. With regard to other income, we want to remind you that the sale of our Luxembourg activities will be included in our Q1 numbers. The gain is in line with our guidance of around DKK 340 million pre-tax, and DKK 250 million post-tax. Please also note that the closing of the transaction relating to MobilePay merger is still expected in 2022, and will result in a one-off gain of DKK 400 million to DKK 500 million exempted from tax. This concludes our comments on the income lines. If we look at the cost line, please remember that Q4 included higher performance-based compensation, partly related to the higher activity level. Furthermore, with the current high level of inflation, we expect the potential impact for Danske Bank to be on our salary costs. In Denmark, a significant part of our employees are covered by collective agreements with pre-agreed salary increases. The current agreement is up for negotiation during 2023. Moreover, as we have guided for, we expect remediation costs to remain at an elevated level throughout 2022, including the first quarter. Turning to the impairment line. Turning to the impairment line and credit quality, we have a few things we want you to have on top of mind. Firstly, our limited direct exposure to the war. Secondly, in Q1 2021, despite recognizing net reversals for the quarter in total, we made notable changes to our macro model, reflecting the higher risk of potential severe macroeconomic scenario at the time, in the midst of the pandemic uncertainty, which led to charges of around DKK 0.4 billion in Q4. Subsequently, societies more or less reopened in the early part of 2022. Thirdly, there are fundamental differences between the abrupt lockdown of societies across the world in Q1 2020 and the current situation. Moreover, we have largely kept our PMAs in place following the pandemic, and in general, we have a strong credit quality as well as a well diversified and diverse credit portfolio. That said, there is no doubt that the macroeconomic indicators will and have changed, and visibility regarding the medium to longer term effects is more uncertain. We do not have any comments on non-core or the tax line, and this includes our comments on the P&L. As a final point, I would like to touch on capital. As always, capital will be impacted by earnings, less the dividend payout. As approved at the AGM, we have distributed DKK 2 per share of 2021 net profit with an intended DKK 5.5 to be paid out in tranches after each interim report in 2022. The latter part is currently reflected in the shareholders' equity, but will not be included in the CT1 ratio. Last week, it was decided to increase the Norwegian countercyclical buffer to 2.5%, effective from the 31st of March 2023. This will impact our fully phased-in capital requirement in our Q1 report, where the basis so far has been 2%, hence a limited group impact of around 0.06%. However, the 2.5% was already accounted for in our capital planning. Moreover, we have noted the Danish Systemic Risk Board's recommendation to increase the countercyclical buffer to 2.5% from 2% in Q1 of 2023. It is now exiting. We would like to remind you that this has not been approved by the ministry and will not be reflected in our fully phased-in requirements until it is approved. However, for reference, 2.5% is already included in our capital planning. Contrary to the past several quarters, we do not have any specific comments to risk exposure amount besides that market risk is always 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 April 8. Shortly after today's call, we will also start collecting consensus estimates with a contribution deadline on April 11, end of business. Please note that we will publish our Q1 2022 report on April 29 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 think we have one question. Yeah. Is it from me? Yeah. Hi, Sofie. Yeah, hi. Just a quick question. Your Swedish peers are booking the Swedish banking tax as a separate line on their cost of risk. How are you going to book the Swedish banking tax? It will be part of our cost line. In the cost disclosure part of our fact book, we will also start to show bank tax resolution fund contribution in a separate line, so you are able to identify it. But overall, it will be part of the cost line. The banking tax is in the cost line, but the resolution fund fee is also in the cost line. Yes But you will give more details around this so that. Yes. You will be able to identify the number which includes banking tax and resolution fund fees in one separate line in the fact book. Okay, perfect. Thank you. Okay, any more questions? I think we have one from Mads. Hi, Mads. Yeah. Hi. Filling in for Peggo Boy here. Yes. Just to follow up on Sofie's question, have you disclosed the sizes of the resolution fund fee and the bank tax? We have said that in the outlook. is now exiting. For our cost for this year, we have said that there will be a cost of around DKK 0.4 billion for the Swedish banking tax and higher resolution fund fee. I think you can assume that the vast majority of that is for the Swedish banking tax. Okay. Thank you. Any more questions? It doesn't seem to be the case. Then I would just thank you all for participating, and looking forward to talk to you in the future. Bye-bye.