Pre-close call

Jun 25, 2021

Summary

A DKK 350m provision for the Swedish VAT case will weigh on Q2 costs, but full-year cost guidance is unchanged. REA is expected to rise by DKK 50bn–70bn in 2021 as EBA guidelines are implemented.

Welcome to the Danske Bank pre-close call Q2 2021. Throughout the call, all participants will be in listen-only mode, and afterwards, there will be a question and answer session. Just to remind you, the call is being recorded. I will now hand the floor to Claus Jensen. Please begin your meeting. Thank you, operator. Good afternoon and welcome to the Danske Bank Q2 2021 pre-close call. My name is Claus Ingar Jensen, and I am head of investor relations. With me, I have Olav Jansen, Patrick Spuesgard, Sophie Friis, 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. In today's call, I will highlight relevant public data and macro trends in our market as well as one-offs that you should be aware of. Before we start, the silent period on July 2nd ahead of the publication of our Q2 report on July 23rd. I will go through the P&L statement line by line and remark on capital at the end, and afterwards, we will open up for a Q&A session. Before we start, and for the sake of good order, I would like to briefly highlight the following. I will only answer questions related to already disclosed information and one-offs as well as publicly available data as of this Monday, June 21st, 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. Let's quickly touch upon the macroeconomic outlook before we move through the line items. I want to highlight that a number of macro forecasters, including the Danish Central Bank, continue to have a positive outlook for the remainder of 2021 and expect a fairly rapid recovery of economy activity, once the economy is no longer constrained by the COVID-19 restrictions. We have seen pent-up demand throughout May, with mobile and card transactions up 5%-10% from the same level in 2019, underpinning the robust economy and the expectation of a positive macroeconomic outlook for the remainder of 2021. In addition, we note that the Danish Central Bank has released a publication stating that banks are well equipped to counter the expiration of the government support packages. That said, let's start by having a look at net interest income. Please remember that the second quarter have one interest day more than Q1, with an NII impact of around DKK 30 million-DKK 40 million per day. During the quarter until this week, the Swedish krona is roughly flat against the Danish krona, while the exchange rates of the Norwegian krona and the pound sterling has appreciated around 2.5% and 0.5% respectively against the Danish krona on the basis of public data. As stated previously, COVID-19 and the availability of government support packages are expected to be key determinants of demand for business loans and credit facilities. Thus, the future demand for credit facilities to mitigate the impact of the coronavirus pandemic is highly uncertain. Keeping this in mind, let's turn to volume developments. We refer to publicly available sector statistics as the only externally available source of insight. According to these statistics, lending volumes in Denmark remain subdued, while business deposits seem to have stabilized on an elevated level. For households, the increase in deposits continues. However, data post the broader reopening is not yet fully available. We have nothing to add to these statistics. Coming to the interest rate environment, we note that interest rates generally have risen further since the start of it, and have also steepened with longer-term yields rising more than short-term yields. However, we do not expect a significant level of remortgaging activity, but continue to note that the interest rate development could affect the loan preferences from borrowers. With regard to margin development, we also refer to public available sector statistics as the only externally available source of insight. Our overall observation regarding margin development remain consistent with the trend observed in the first quarter. Since Q1, three-month STIBOR was almost flat, while NIBOR has decreased 19 basis points, one nine basis points, and CIBOR has increased two basis points, all on the basis of quarterly averages. On the funding side, we issued two benchmark bonds in the second quarter. The first one was an AT1 issuance of $750 million at a spread equivalent to 321 basis points over three-month EURIBOR. The second issuance was our second-ever green non-preferred senior of €500 million at a 93.7 basis point spread to three-month EURIBOR. This represents an about three to five basis points net issuance premium to conventional non-preferred senior issuance and an estimated premium of three basis points. On the other hand, in April, we gave notice of early redemptions of our 500 million Tier 2 notes with a coupon of 2.75%. The notes were effectively redeemed on the 19th of May at par. Please also revisit page 32 of our Q1 conference call presentation to see the redemption profile for maturing funding. With regards to deposit repricing, we have not announced any further changes since the initiatives we took ahead of the Q1 release. The initiatives announced on the 26th of April will not take effect until the 1st of July, but they are expected to have a positive impact of around 250 million, all else equal, in the second half of 2021, and a full-year effect of around 500 million. In this regard, please note our previous comment on sustained margin pressure. This concludes our messages on net interest income. Looking at fee income, we want to highlight three proxies, namely the general consumer spending, the development. Consumer spending remains above pre-COVID levels. The equity markets have been developing positively during the quarter. Mortgage bonds where callables have widened 20 to 25 basis points, whereas spread on non-callable bonds have been stable from the level in the last quarter. The yield spread between Danish bonds and German government bonds has widened by two basis points in the 10-year segment. Please note that Q1 included a positive one-off on the trading line of 227 million related to the sale of Visa shares. Looking at net income from insurance business, please be aware that a strong investment result in the insurance business contributed positively in Q1. Finally in Q1 included a negative one-off of 200 million, negative related to an ongoing provision to cover a method change for PAL tax within the health and accident portfolio. We do not have any specific comments on other income. This concludes our comments on the income lines. On our costs, please be aware that the Q1- Apologies, ladies and gentlemen. We seem to have some technical difficulties with Claus' line. We are just going to try and reconnect that and then get back to you. We are just going to put the call on hold for a moment whilst we do that. Apologies for the delay, ladies and gentlemen. We are back connected now, so I will hand you back to Claus. Hello, everybody. Sorry for the inconvenience here, but I was completely disconnected. But as far as I can understand from the operator, I left you when I concluded our comments on the income line, so I will now make comments on costs. On our costs, please be aware that the Q1 numbers included negative one-offs of 272 million related to provisions for home office allowance to employees and upcoming changes to our VAT setup. Now, let us turn to the second quarter. On the 24th of June, meaning yesterday, we received the Swedish authorities' ruling on the Swedish VAT case related to the VAT set up in Sweden. As a consequence of the ruling, we will make a provision to cover the upcoming changes of approximately 350 million on our cost line in our Q2 numbers. Other than that, we do not have any specific comments regarding our cost development. In respect to credit quality, we have nothing to add from when we published our Q1 report. We do not have any specific comments on the non-core and tax lines. This concludes our comments on the P&L. As a final point, I would like to touch on capital. As always, our capital will be impacted by earnings less the dividend payout. We reiterate our guidance on implementation of EBA guidelines, where we expect REA to increase by DKK 50 billion to DKK 70 billion for 2021. We do expect to front-load some of the remaining increases in the second quarter with an increase of around DKK 26 billion. In Q1, the effect of the EBA guidelines implementation was DKK 12 billion. The risk exposure amount is, as always, subject to general market volatility and FX movements as well as growth. Finally, on the 22nd of June, the Danish Systemic Risk Council advised the Minister for Business and Financial Affairs to fully reciprocate the Norwegian 4.5% systemic risk buffer and risk-weight floors for residential real estate and commercial real estate. The Danish Systemic Risk Council, however, notes the 18-month transition period for the Norwegian systemic risk buffer. We will comment on the impact for the group once we have further clarity from the ministry. Further, the council also recommended an increase in the countercyclical buffer in Denmark from the current 0% to 1% effective from the end of September 2022, as per the normal one-year transition period. This is in line with our expectation and planning. The Ministry for Business and Financial Affairs have announced that the recommendation will be followed. Preliminary calculations indicate an increase of around 0.5% of the fully phased-in in the CET1 capital requirements. The exact number will be disclosed as part of our half-year results. The council expects to recommend a further increase to 2% before the end of 2021, with effect from the start of 2023. 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 the 2nd of July. Shortly, we will also start collecting consensus estimates with a contribution deadline on the 8th of July in the business. We will publish our Q2 2021 report on the 23rd of July at 7:30 CET. Please note that the conference call for investors and analysts will take place at 8:30 CET. Operator, we are now ready for the Q&A session. Thank you. If you wish to ask a question, please dial 01 on your telephone keypads now to enter the queue. Once your name is announced, you can ask your question. If you find your question is answered before it's your turn to speak, you can dial 02 to cancel. There will be a brief pause now whilst we register your questions. Our first question comes from the line of Sofie Peterzens of J.P. Morgan. Please go ahead. Your line is open. Yeah. Hi, here is Sofie from J.P. Morgan. I actually also missed a little bit on the comments that you made on fees and the trading, because for me the line cut off, but maybe it was just me. So if you could just very briefly comment there. My second question, there was some news earlier today about Danske Bank getting basically charged for breaching market laws. Any additional color you can give here? What does it mean? Any potential fines? That would be much appreciated. Thank you. Yeah. Hi, Sofie. To start with your second question, no, we have issued a press release in respect to the case on the market abuse and the preliminary charges, where our Chief Compliance Officer, Philippe Vollot, is stating that this is a case that actually goes back to 2019, and it is a case that has been mentioned in June of last year. We have already made significant investments to strengthen our trade surveillance, and we will, of course, fully cooperate with the authorities. Other than that, we do not have any comments, and we have now been, what you call, preliminary charged, and based from the Danish authorities, we will see what that will lead to. The only thing I think we can be pretty sure of is that this would probably take quite a long time before we will have a result. When it comes to a potential fine, that is too early to speculate, and we do not really have any history that we can lean up against when it comes to fines for these type of cases. Sorry to hear that you were cut off on the comments of fee income, but what we basically highlighted here is that we have seen a slightly positive development in some of the equity market indices that we are following. We are also seeing a good level of activity within our ECM and DCM business. Although you should be aware that Q1 was affected by a couple of extraordinary transactions. On the trading line, we highlighted some spread widening on the Danish mortgages, and we also highlighted curve steepening and a small widening of the yield spread between Danish and German bonds on the government side. We also highlighted that we saw a one-off of DKK 220 million related to the sale of Visa shares back in the first quarter. Otherwise, this script that we have used today will be uploaded on the website, and you can see our full comments later today. Okay. That's very clear. Thank you. Thank you. We have one further question in the queue. Just as a reminder to participants, if you do wish to ask a question, please dial zero one on your telephone keypads now. The next question comes from the line of Jakob Brink of Nordea. Please go ahead. Your line is open. Thank you, and good afternoon. Claus, just coming back to the cost seasonality. I think we asked, Stephan answered a question at the Q1 conference call where he said that we should expect roughly flat cost for the first three quarters and then the normal Q4 seasonality. With the two one-offs, the one in Q1 and Q2, could you just try and bake that into his answer from the Q1? Should we expect the underlying level to be flat, or what trend are we looking at? Yeah. I think that is what he was hinting at when he made that comment. You can add the one-offs that we have talked about in this call. How do those one-offs impact your full-year guidance of the costs? We do not see any reasons to change the full-year guidance on costs as a consequence of what we have announced today. Okay. You knew that already or is the under- The full-year guidance still stands. We have not concluded on the month so far. We know that there is a one-off coming related to the Swedish VAT issue as we described before. But in a bank like Danske Bank, we have a number of one-offs every quarter, and as we have not come to the end of June yet, it is too early to make any comments on whether there should be other one-offs. But this one which came yesterday is a material, one of the kind, and that is why we find it prudent to inform you on this call in order to form the Q2 consensus estimates as correctly as possible. Okay. Thank you. Thank you. We have one further question in the queue. That is from the line of Adrian Cighi of Credit Suisse. Please go ahead. Your line is open. Hi there. Thank you very much, Claus. Sorry, I could not hear this, maybe you discussed it, but I had some technical issues myself. I am trying to see if you have discussed sort of the interest rate sensitivity you have to a Norwegian rate increase. We have seen Norges Bank become quite a bit more hawkish there. Have you disclosed any sort of sensitivities in the past that you might be able to refer to? I would think that would be fine. No, I am sorry, but we have not. We have only disclosed the sensitivity on the group level from a 25 basis points parallel shift in the yield curves, but not specifically for the Norwegian market. Okay. Thank you. Thank you. The next is from the line of Per Grønborg of SEB. Please go ahead. Your line is open. Yes, thank you. One single question, Claus. The Swedish VAT, this DKK 350 million, what does that cover? Three, four years, five years? Anything you can do to offset it, structuring your business differently? We have, as you would have seen, we took a provision in Q1 of DKK 150 million to change the overall VAT setup in the bank. The DKK 350 million is a provision that is aimed at repaying VAT to the Swedish authorities for a period back in time. I do not have the exact number of years here, but we feel that this should be fully covering what we see of potential claims from the Swedish authorities. We have not disclosed how much the change will affect our numbers going forward as we are now entering into a kind of a new regime. To my knowledge, it is not a material number, but maybe we can comment more on that at the Q2 call. Okay. Thank you. Thank you. We have had one further question come through. That is from the line of Max Tingard of ABG. Please go ahead. Your line is open. Yeah. Hi, Claus. Just one question here on the capital requirements that are going up now. You point to this systemic risk buffer in Norway and the countercyclical buffers. Could you put some light on how much do you expect to add to your total capital requirement in 2023 compared to today when you do your capital planning? No, as I also said, we will not comment on the exact effect of the systemic risk buffer in Norway before we have the final decision from the minister in Denmark. That is not something we can make any comments on. I think we have made comments as far as we can go. The systemic, the countercyclical buffer effect will be approximately 50 bps here at Q2. That is what we can see so far. Once we have more clarity around what the minister is going to say around the Norwegian issue, then we will disclose that, of course. Yeah. I mean, Further implementation of countercyclical buffers will await the decision by the Minister, and he has only approved the 1% taking effect from the end of September of next year. Yeah. The reason I ask is that you have pointed to sometimes that as the EBA technical guidelines drives up REA, then you could lower your CET1 target at some point. Is that something that could be at risk with all these buffers and other requirements going up? No. I think we have said that we will probably move into a buffer target instead of having this fixed above 16% target that we have from now. But we are awaiting clarity on a number of issues, including also this fine issue. Then when implementing more and more EBA guidelines, we are also having discussions with the Danish FSA on whether some of the existing Pillar 2 requirements can be reduced. That could be the use of internal models for which we are taking quite a decent chunk in our Pillar 2 today. That would be an area where I would expect the Pillar 2 requirement to be lowered as we are moving into a less internal model-driven way of doing things going forward. But there is essentially nothing new here compared to what we have stated already, and we are not able to put any numbers on it. Okay. Thanks, Claus. Thank you. Once again, if there are any further questions, please dial zero one on your telephone keypads now. As there are no further questions at this time, I will hand back to Claus for the closing comments. Yes. Thank you very much for your interest. Again, apologize for the technical breakup, but I am sure we made it. And also thank you so much for the questions you had today. So just to say, have a nice weekend, everybody. Goodbye.