Pre-close call

Oct 9, 2020

Summary

Net profit guidance remained at least DKK 3bn amid second-wave uncertainty, while up to 1,600 staff reductions are planned over the next 6–12 months. Q3 revenue factors included subdued remortgaging, pricing changes and seasonal trading patterns.

Hello, and welcome to the Danske Bank conference call. Throughout the call, all participants will be in listen mode only, and afterwards there will be a question and answer session. Today, I am pleased to present Claus Jensen. Please go ahead with your meeting. Thank you so much, operator. Good afternoon, everybody, and welcome to the Danske Bank Q3 2020 pre-close call. My name is Claus Ingar Jensen, and I am the Head of Investor Relations. With me, I have John Dikman and Robin Lofgren 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 you should be aware of before the start of the silent period on October 14, ahead of the publication of our interim report for the first nine months of 2020 on November 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 the Q&A session. Before we start, I would like to briefly highlight the obvious. I will be communicating only on already disclosed information and one-offs as well as publicly available data. In this connection, I wish to stress that developments in the specific indices may not always have the same effect on our performance. I will limit my response to follow-up questions so as not to include non-published information or qualitative remarks on performance in the third quarter. That said, let's start on having a look at net interest income. Please remember that Q3 has one more interest date than Q2. Our usual guidance is for an NII impact of around DKK 30 million-DKK 40 million per day. During the quarter, the Norwegian krone and the Swedish krona appreciated around 2% each on average against the Danish krone, while the pound sterling depreciated around 1% on average. Please note that these effects are calculated averages. On the funding side, we issued both Tier 2 capital and non-preferred senior debt in the third quarter. Effective on September 2, we issued EUR 0.5 billion in Tier 2 capital at 196 basis points over three-month EURIBOR. Effective September 11, we issued $1.25 billion and $750 million in the non-preferred senior format at three-month EURIBOR + 81 basis points, and three-month EURIBOR + 110 basis points respectively. Please also revisit page 35 of our Q2 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, the upward trend in commercial deposits in Denmark seems to have continued in the third quarter. We have nothing to add to these statistics. However, please note our comments from Q2 that the elevated level of deposits as well as some of the short-term lending facilities provided to corporate customers should be seen in the context of the current uncertainty and are therefore not necessarily of a permanent nature. Market rates have declined during the third quarter, with three-month STIBOR and NIBOR decreasing 20 basis points and 18 basis points respectively. While three-month CIBOR decreased seven 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 two to 10 years by between 11 and 47 basis points with effect from the 1st of October. This affects the front book immediately and the back book at the next interest reset. Please note that just over half of the Swedish mortgages on our books are fixed-rate. As a response to the competitive situation in the Norwegian mortgage market, we have announced a cut of five basis points for our partnership customers in Akademikerne on both loans and deposits. For mortgages, this affects the front book from the 17th of August and the back book from the 24th of August. For deposits, the changes takes effect on the 20th of October. On 15th of September, we announced that commercial customers in Denmark will now 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 2021. This concludes our messages on net interest income. Looking at fee income, please remember that pension and insurance fees benefited from two extraordinary items in the second quarter, amounting to approximately DKK 200 million in total, as Q2 included a one-off tax gain and a reversal of a guarantee provision taken in Q1. Please also refer to the press release dated on the 4th of September 2020, in which we expect the compensation of between DKK 80 million and DKK 100 million for customers in the managed account solution at Danske Porteføljepleje. This compensation will be booked in Q3, with the majority booked on the fee line and the rest booked under costs. Apart from these items, 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 market has performed well in the second quarter, with an 11% increase in the OMXC25 index in Copenhagen and an 8% increase in the S&P 500 index this quarter, just to give a couple of examples. At Banking DK, remortgaging activity continues to be subdued compared to the very high levels in 2019. For Q3 specifically, remortgaging amounted to DKK 19 billion at Realkredit Danmark, which is slightly below the Q1 2020 level. As a rule of thumb, we typically earn around 50 basis points on remortgaging, with the majority booked as fee income and the rest split between trading income and NII in that order. Please note that the actual effect is uncertain as some customers may have chosen to leave Danske Bank. The significant slowdown in remortgaging activity is as 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. Q2 was affected by unusually high activity after a very difficult Q1, which is why Q2 cannot be extrapolated to Q3, which is typically affected by lower activity due to the summer holiday period. Also, please note that Q2 included positive XVA amounting to around DKK 200 million. For reference, the option-adjusted spread on Danish 30-year callable bonds and swap spreads on five-year non-callable bonds have narrowed by a further six to eight basis points since the end of the second quarter, while the spread between Danish and German 10-year government bonds has been rather stable in the same period. Please note that income from the auctions of Danish variable rate mortgage bonds for refinancing purposes is typically booked in Q4 and Q1, and therefore no material income is expected in Q3 2020. Please also note that trading income includes the investment result from the health and accident business at Danica Pension. We do not have any specific comments on other income, so this concludes our comments on the income lines. If we look at the cost line, we have not communicated any one-off items, and we have no specific comments to add on cost developments during the quarter. With regard to loan impairment charges, we reiterate our message from Q2 that we expect most of the impairment charges needed for 2020 to have been recognized in the first half of the year. We do not have any specific comments on the non-core and tag clients. This concludes our comments on the P&L. As a final point, I would like to touch on capital. As always, our capital position will be impacted by earnings, less a 60% dividend accrual. The risk exposure amount is, as always, subject to general market volatility and FX movements as well as growth. Please note that in the second quarter, we guided that the risk exposure amount is expected to increase by around 3% during the second half of 2020 and to continue to increase into 2021, due mainly to the implementation of revised EBA guidelines and technical standards. We expect this to partly impact Q3. 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 14th of October. Shortly, we will also start collecting consensus estimates with a contribution deadline on the 20th of October. Finally, we will publish our interim report for the first nine months of 2020 on the 4th of November. Operator, we are now ready for the Q&A session. Thank you. Thank you. If you wish to ask an audio question, you may do so by pressing 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. Again, it is 01 on your telephone keypad if you wish to ask an audio question. There will be a brief pause whilst we wait for questions to be registered. Our first question comes from Mads Thinggaard from ABG. Please, question. Hi. Thank you. Mads from ABG here. Thank you for taking my question, or questions. I have, I think, two here. The first one is on capital and the REA uptick, Claus, you were talking about before. Is it possible to give a bit more whether the 3% up on REA is front or back-end loaded in the second half of 2020? I have no specific numbers, but to our understanding, it will be distributed over both quarters, and that is why we are highlighting that there will be an effect for the third quarter. Okay. Then referring to your press release from October 8th on the execution on the Better Bank plan. I mean, the FTE planned, FTE reductions. I can see you have a deadline. Was that October 25th or something for the voluntary part of the plan? Can you give us a bit more on the time aspect of when the FTEs are actually reduced? Will most of the cuts be executed before the end of 2020? Or what kind of profile do you see here? No, I think what we can say here is that is actually a repetition of what we also said at Q2, that there will be staff cuts in 2020, and there will be staff cuts into 2021. The number up to 1,600 is for the next six to 12 months. But I cannot give you an exact number of what will happen. I can only say that this is the standard way to do it, that we will offer these packages and then based on what kind of reception they will get then we unfortunately will also have to take action when we know the result. But I can't give you any more insight in how much will be acute, a 2020 thing, and how much will be a 2021 thing. Okay. Thank you. What about the transformation cost? Is that the same pattern that you or expectation you put out before, between 2020 and 2021? Yes, we expect that we will have, as we stated in the Q2, DKK 1.5 billion of transformation costs, and the previously announced up to DKK 2 billion of that, approximately DKK 500 million will fall in 2021. Yes. There is no changes to that, and there is no changes to our cost outlook as the announced staff reductions is us executing on what we previously have stated. Okay. Severance settlements for this year's cuts, that would be a Q4 item. Is that correct? That is correct, yes. Okay, thanks, Claus. You are welcome. Thank you. Our next question comes from Jakob Brink from Nordea. Please go ahead with your question. Thank you. Just coming back to the cost question. The split in the second half of the year between Q3 and Q4, is it possible to just be a little more specific? Normally, or at least last year, if you take that was a pretty, or it was a DKK 300 million decline quarter-on-quarter in Q3, and I guess historically it has been a somewhat lower cost quarter. Should we expect that to this year and then a very back-end loaded, or is there any other cost that will then be booked in Q3 just to give us some help here? No, I think there will always be some kind of seasonality for the rest of the year, and as this is also a year where we are booking quite substantial transformation costs, there could be a more seasonality effect than what you usually see in a year without any transformation costs. But I am not able to provide any specific numbers here. Okay, fair enough. On your health and accident, you mentioned just before, you didn't say anything specifically, but you have obviously raised prices. Is that what you meant, and what kind of magnitude should we be looking for here in Q3? I would not look for any material impact from that. That is my understanding. Okay. Thank you. That was all for me. Thank you. Our next question comes from Per Grønborg from SEB. Please go ahead with the question. Yes, thank you. Two questions from my side. The first one on the staff reductions you announced, was it yesterday? Is that primarily on the banking side? Are there any share of compliance costs in that as well, or is that way too early? Can you say anything about that? It will be across all business units, including also head office functions and also all countries. So across the board. Okay. Going back to the floor on corporate deposit that you have lowered from 200,000 to zero. Is it fair to assume that this will yield somewhere between DKK 60 million and DKK 120 million, then that amount will be at least doubled due to the temporary floor at 500? We have not disclosed specifically the effect of the floor of 500 that we have introduced previously. We have only disclosed the number of customers it has affected. I am not able to confirm any specific NII impact from the pricing action we have taken here, unfortunately. Because the range seems reasonable to you, or that was more the question? I have no further comments, Per. Okay, welcome. Okay. Thank you. Okay. Thank you. Our next question comes from Martin Bergenborg from Carnegie. Please go ahead with your question. Hey, thank you. Just two questions from my side. The first one is on your guidance and just from sort of the top down, what would it take for you guys to put a bracket around your net profit guidance for this year? Say $3 billion to $6 billion in net profit this year. Second of all, on the dividend, have you guys heard any rumors, any speculations from the European Systemic Risk Board in this regard? Yeah. Well, thank you for your questions, Martin, and starting with your second question, no. To my knowledge, the latest we have when it comes to the European Systemic Risk Board is the recommendation they have issued for local regulators, and the Danish regulator has decided that they will agree with this recommendation. That is from over the summer where they said that they would recommend banks not to pay out dividends, doing share buyback programs or excessive bonuses for the remainder of this year. So that is the latest we have heard. Okay. All right. Could you elaborate a little bit on your- No, yeah. I am just curious so when do we come to a point usually you guys guide in brackets. So you guys usually guide in net profit intervals of DKK 2 billion, and I am just curious to know from a communication point of view, when do we get far enough into the year where you guys would resume your normal communication around your net profit guidance? Yeah. Of course, we have reinstated the guidance at the time where we felt that there was a little less uncertainty compared to the beginning of the Corona crisis. We are, of course, constantly monitoring the situation. So I would say we fully understand that the net profit guidance we have now, which is at least DKK 3 billion, is maybe not as useful as a normal guidance. So we are constantly looking into when we can change that. But of course, let's see what is going to happen here at the third quarter, whether we have more clarity on the situation. As you also know, we are moving into maybe a little bit more uncertainty due to the so-called second wave, but on the other hand, we are also approaching year-end. So of course, for the remainder of the year, there shouldn't be that much uncertainty as we have seen before. Okay, appreciate it. Thank you. Thank you. Just as a reminder, if you do wish to ask an audio question, you may do so by pressing 01 on your telephone keypad. Again, it's 01 on your telephone keypad if you wish to ask an audio question. Our next question comes from Sofie Peterzens from J.P. Morgan. Please go ahead with your question. Yeah. Hi. Here is Sofie Peterzens from J.P. Morgan. I was wondering, are you going to book any IT intangible capital benefits in the third quarter, or has that now been pushed to the fourth quarter? Yeah. No, not to my knowledge. Let's see what will happen in the fourth quarter. Okay. What about, my second question, there were some press rumors about your CEO having been to the U.S. Was it last week? Is there anything further that you can comment on this press article, and do we have any more clarity on when we essentially could get the potential fine from the U.S.? Yeah, we also saw this article. No, Sofie Peterzens, we have been quite clear in saying that we have an ongoing dialogue with the authorities that are involved in the Estonia case, and whether this dialogue takes place over the phone in Denmark or in the U.S., that is not something we would like to comment on. We would like to stick to what we have said, and that is that we have a communication and a dialogue with the respective authorities. Okay, so there is nothing you can add in terms of the potential, when we potentially could get clarity on a potential U.S. fine? No, unfortunately not. Besides that, we expect that we will conclude our internal investigation in Q4 and some of the work streams already in the third quarter. Our ambition is to get a joint resolution on the case. That is essentially also what we stated at Q2, and I don't have anything more to add to that. Okay. Just very final quick follow-up. What was the rationale for cutting the mortgage rates in Sweden? Sorry, I didn't get that. Sorry. What was the rationale for changing the mortgage rates in Sweden? Yeah, that was simply to adapt to the market conditions that we see in the Swedish retail market for the time being. Okay. That was everything from my side. Thank you. Okay. Thank you so much. Thank you. There appears to be no further questions, so I will hand back to the speakers for any other remarks. Okay. Thank you so much for calling in, and for your questions. I think we have made it very clear that we are moving into our silent on October 14. We are available until then if there should be any follow-up questions, and then we would be very happy to receive contributions for consensus with a deadline on Tuesday, October 20. Thank you so much, everybody, and have a nice weekend. This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.