Pre-close call

Jan 8, 2021

Summary

Q4 commentary indicated persistent Danish margin pressure, subdued lending and remortgaging below Q4 2019 levels. FY 2020 costs were expected near DKK 28bn, while dividend decisions remained subject to board and regulatory discussions.

Welcome to the Danske Bank Pre-close call Q4 2020. Throughout the call, all participants will be in a listen-only mode, and afterwards, there will be a question and answer session. Today, I am pleased to present Claus Ingar Jensen. Please begin your meeting. Thank you so much, operator. Happy New Year to all. Good afternoon, and welcome to the Danske Bank Q4 2020 pre-close call. My name is Claus Ingar Jensen, and I am Head of Investor Relations. With me, I have Robin Løfgren, Olav Jørgensen, and Sofie Hior Priess 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 data and one-offs that we should be aware of before the start of the silent period on January 14, ahead of the publication of our annual report 2020 on February 4. I will go through the P&L statement line by line and remark briefly on capital at the end. Afterwards, we will open up for a Q&A session. Before we start, as usual, I would like to briefly highlight the obvious. I will be commenting only on already disclosed information and one-offs, as well as publicly available data. In this connection, I wish to stress that developments in specific indices may not always have the same effect on our performance. I will limit my response to follow-up questions as to not include non-published information or qualitative remarks on performance in Q4. That said, let's start by having a look at net interest income. Please remember that Q4 has the same number of interest days as Q3. During the quarter, the Swedish krona appreciated by around 2% on average against the Danish krona, while the exchange rates of the Norwegian krona and the pound sterling were flat. Please note that these effects are calculated averages. On the funding side, we did not issue any benchmark funding in Q4, and please revisit page 30 of our Q3 conference call presentation to see the redemption profile for maturing funding. With regard to volume developments, we refer to publicly available sector statistics as the only externally available source of insight. According to these statistics, commercial deposits in Denmark seems to have stabilized at an elevated level, while lending volumes seems to be subdued. We have nothing to add to these statistics. COVID-19 is still expected to be a key determinant for demand for business loans and credit facilities, and thus the future demand for business credit facilities to mitigate the impact of the coronavirus pandemic is highly uncertain. With regard to margin development, we also refer to publicly available sector statistics as the only externally available source of insight. According to these statistics, the margin pressure continues in Denmark in certain areas, which confirms our view that the trend from Q3 of flat to lower margins would continue into Q4. During Q4, three-month STIBOR and CIBOR decreased 8 basis points and 2 basis points respectively, while three-month NIBOR increased 10 basis points on the basis of quarterly averages. To adapt to current market conditions, we cut the rate on Swedish fixed-rate mortgages with interest reset intervals of 1 to 10 years by between 11 and 47 basis points, with effect from the 1st of October 2020. This affects the front book immediately and the back book at the next interest reset. Please note that just over half of Swedish mortgages on our books are fixed rate. on the 15th of September, we announced that commercial customers in Denmark will be charged negative interest rates on their entire deposits. Previously, only deposits above DKK 200,000 were subject to negative interest rates. This affects the front book from the 16th of September 2020 and the back book from the 1st of January this year. This concludes our messages on net interest income. Looking at fee income, please remember that there was a compensation of between DKK 80 million and DKK 100 million to customers with the Danske Porteføljepleje managed account solutions booked in the third quarter. Most of it was booked on the fee line, and the rest was booked under costs. Please also note the usual seasonality of performance fees, which are typically booked in Q4. We cannot comment on the size of the performance fees for the full year 2020. In the past three years, Q4 performance fees have ranged from DKK 134 million to DKK 368 million. In Q4 2019, the performance fees amounted to DKK 358 million. Apart from this, fee income at Danske Bank is, as always, dependent on market developments in relation to our asset management business and on activity levels in relation to our banking operations. The markets have performed well in the fourth quarter, with an 8% increase in the OMXC25 index in Copenhagen and a 12% increase in the S&P 500 index, just to give a couple of examples. At Banking DK, remortgaging activity remained at a lower level than the 2019 record year. Remortgaging amounted to 18.18 billion in Q4, in line with Q3, but a significant decrease from the Q4 2019 level, which was 55 billion. The significant slowdown in remortgaging activity is expected and in line with our full-year guidance for fee income. Turning to trading income, please note that we do not guide on this specific line item. Q3 saw decent activity despite the summer holiday period. Activity levels among our customers are typically subdued in Q4. Also, please note that Q3 included a positive XVA amounting to around DKK 300 million. For reference, the option-adjusted spreads on Danish 30-year callable bonds have tightened 12 to 15 basis points, and the swap spreads on five-year non-callable bonds have narrowed by a further 6 to 7 basis points since the end of Q3. While the spread between Danish and German 10-year government bonds remained unchanged. Please note that the income from the auction of Danish variable rate mortgage bonds for refinancing purposes is typically booked in Q4 and in Q1. In Q4 2020, we expect lower income from refinancing as the auction size was smaller than in Q4 2019, when we booked DKK 61.61 million in refinancing income. Please also note that the high remortgaging activity in Q4 2019 had a positive impact on net trading income. The investment result of the health and accident business at Danica Pension is included in trading income as well. We do not have any specific comments on other income. This concludes our comments on income lines. If we look at the cost line, we stick to our guidance for full-year costs to land around DKK 28 billion. In addition, full-year may also include an extraordinary amortization of intangible assets. Please note that Q4 normally includes various cost items always booked at year-end. With regard to loan impairment charges, we reiterate our message from Q3 that we expect by far most of the impairment charges needed for 2020 to have been recognized in the first nine months of the year. We do not have any specific comments on the non-core and on the 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. As we have accrued 60% of net profit for dividends over the first three quarters of 2020, the dividend accrual amount in Q4 will be adjusted to achieve the full-year payout ratio that the board of directors decides to propose and which will be stated in the annual report. The risk exposure amount is, as always, subject to general market volatility and FX movements as well as growth. Please note that in Q3, we guided for that the risk exposure amount is expected to increase by between DKK 20 billion and DKK 30 billion during Q4 due to model updates related to further implementation of EBA guidelines. 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 January 14. Shortly, we will also start collecting consensus estimates with a contribution deadline on January 20. Finally, we will publish our annual report 2020 on February 4. Operator, we are now ready for the Q&A session. Thank you. If you do wish to ask a question, please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. There will just be a brief pause while any questions are being registered. Our first question comes from the line of Sofie Peterzens from J.P. Morgan. Please go ahead. Yeah. Hi, here is Sofie from J.P. Morgan. I just wanted to have a clarification. You mentioned that you potentially are going to have an IT write-down with the fourth quarter results, but could you just clarify that is going to be included in the DKK 28 billion cost guidance that you have given for 2020? Thank you, Sofie. What we have stated at Q3 in respect to expenses is that we expect expenses for the full year to be around DKK 28 billion, including the planned costs for the Better Bank transformation. In addition, full-year may also include a small extraordinary amortization of intangible assets. So it is coming on top of the around DKK 28 billion. Okay. That is clear. My second question would be around the dividend. I know you, as you mentioned also in this call, you have accrued 60%, but Denmark is now following the EBA or EBA guidelines on dividends. How should we think about a 2020 dividend? Will you initially say about the 15% in the first nine months, and then in the fourth quarter, anything above that? Or how should we think about the dividend? I think it will not change compared to the method we have used over the last many years. We will make an adjustment to the dividend in Q4 because we have made this 60% accrual in three quarters. Then when we know the exact dividend payout, then there will be an adjustment. So that will essentially be exactly the same. The uncertain part right now is, of course, the regulatory impact here, where the Danish FSA have communicated their overall view, which you can find on their website, in respect to the dividend payments for 2020 and 2021. As far as we can see, there will be a discussion between the Danish FSA and the banks, of course, on an individual basis to assess the individual bank's ability to pay out dividends. The outcome of that is, of course, not something I can comment on right now. Actually, I do not know. We will have to wait until Q4, and this is where we typically will announce what the dividend will be, so on February 4. Okay. In terms of the discussions, for example, the ECB said that most of the discussions you have to inform the GSE before January 15 about any plans to pay a dividend, and how to think about it. With the Danish FSA, is there also a deadline when you have to inform them on your intention to pay a dividend? Well, I think there is always a communication about capital distribution with the bank and the FSA. That's quite normal. That's something we have every year. Of course, this year it will be impacted by the situation around the COVID-19 impact on banks or financial institutions' ability to make capital distribution. I don't think I can make any further comments, Sofie, simply because this is also new for us. Okay. That's very clear. Thank you very much. You are welcome. The next question comes from the line of Per Kronborg from SEB. Please go ahead. Yes, thank you. Hi, Claus. One single question. The 1,600 layoffs Danske Bank announced three months ago, can you give us an update? We have seen, what is it, 520 together for the Danish operations. Has there been anything out in the public domain about what has happened in the rest of the Nordics? For that sake, in the Baltics. Yeah. To my knowledge, no, but maybe Robin, have you seen anything here? Can you assist me here, please? No, I would also say that there is nothing here that you have missed. From what I've seen, there is the voluntary redundancy program that was already carried out some months ago, which is roughly half of the number that you said. Then there was a round just before Christmas, which was the second part of the number that you mentioned. So I think we are in agreement here. Okay. Thank you. The next question comes from the line of Jacob Kruse from Autonomous. Please go ahead. On funding and the MREL requirement update that came from the Danish authorities. Could you just say anything about, given where you stand today and the current spreads, how funding costs might impact NII in 2021, and where you are for NPS issuance? Are you fully done with that in the new requirements? Thank you. Well, I think we are almost where we would like to be. So in that sense, I do not think that it will mean that much to us. When we are looking at the new MREL requirement, we can see that they are in line with what we expected and what we have seen previously. There is a little bit more flexibility in the numbers right now. There is, of course, also the option for using senior preferred to some extent. But if you look into our redemption profile for 2021, which you also can find in the latest conference call presentation from Q3, you will see that the amount of expiring NPS funding in 2021 is quite limited. So for refinancing purposes, there is not that much need. But of course, as we measure the need out of a REA development, a balance sheet development can, of course, mean that there will be in NPS issuance going forward, despite that we are in a good position right now. Okay. Thank you. Just as a reminder, if you do wish to ask a question, please press 01 on your telephone keypad now. Our next question comes from the line of Mads Thinggaard from ABG. Please go ahead. Yeah. Hi, Claus. Mads from ABG here. I just have one question, and that is a bit about the credit risk consumption on REA. We had, as far as I can tell, no real negative migration on your risk-rated assets and especially on the corporate exposure due to COVID-19 so far. Is that an extra effect that could come at year-end due to new assessments or something like that? Or is it more or less the same thing we should expect as the other quarters? Sorry, Mads, I missed the first part of your question. Yeah. Can you please repeat that? I am simply curious whether there will be a Q4 effect on where you put in your exposure when it comes to risk rates due to COVID-19. Will there be a new assessment that will differ from the other quarters due to year-end? Okay. You mean whether we, as a consequence of a potential model update, would see any credit migration? Yeah. Looking into the exposure, I don't know, perhaps a bit careful at the end. Yeah. No, that is not what we see. We have, as I also mentioned during the call, we have guided for this impact on the credit risk REA from the model updates. That amounts to between DKK 20 billion and DKK 30 billion, and that would be by far the most significant impact as we see it right now. Okay. What about the market risk? It dropped in Q3. Was that a very low level in Q3 or? No, the market risk is a reflection of that. There is a kind of delay here because you look back at a, I think it is a 90-day moving average here. As we had quite an elevated market risk from the COVID-19 crisis back in the spring, this is the effect coming into the third quarter. That is the explanation. Okay. Thanks, Claus. As there seems to be no further questions, I will hand it back to you, Claus, for closing remarks. Okay. Well, thank you very much for your interest and for calling in and for your good questions. We are still here if there should be any follow-up questions, as we will not go into silent before the 14th, which is late next week. On that happy note, I wish you all a good weekend. Bye. This concludes the conference call. Thank you all for attending. You may now disconnect your lines.