Thank you operator, and hello everyone. Welcome to the conference call for Danske Bank's Financial Results for the First Nine M onths of 2021. Thank you all for taking the time to listen in to this call today. My name is Claus Ingar Jensen, and I'm Head of Danske Bank's Investor Relations. With me today I have CEO Carsten Egeriis and our CFO Stephan Engels. Slide one, please. In today's call, we will present Danske Bank's financial results for the first nine months of 2021 and provide an update on our 2023 ambitions. We aim to keep this presentation to around 30 minutes. After the presentation, we will open up for a Q&A session as usual, and afterwards please feel free to contact the Investor Relations department if you have any more questions. I will now hand over to Carsten.
Thanks, Claus. Let me start by saying that in today's presentation of our financial results, I will start with a summary of developments in the past period. Then Stephan will follow up with more detailed comments on the financial numbers before I present the update of our plan towards 2023. In many ways, the first nine months of 2021 was a period of steady progress, not only for the Nordic societies, which have returned to normal after a successful rollout of vaccine programs, but also progress for us at Danske Bank. In all of our markets, the reopening of society has been followed by a strong recovery in almost all sectors of the economies. This has led to high customer activity, including demand for financial advice and solutions, and we have clearly benefited from that.
Growth in new lending, however, continued to be at low level, due not only to government support facilities and elevated deposit levels for both personal and corporate customers, but also to a shift in preference among corporates from traditional bank lending to finance solutions in the capital markets. That led to higher activity and strong growth for sustainable finance solutions, in particular, an area where we continue to capitalize on our strong platform and unique advisory competencies. There was also clear progress in relation to our personal customers. In this segment, our increased focus on investment advisory services is paying off, and this clearly underpinned our financial performance. Furthermore, in the personal customer segment in Denmark, the repricing initiatives for deposits initiated with effect in 2021 had a stabilizing effect on net interest income.
In the third quarter, improvements in deposit margins more than offset the pressure from negative lending effects. From a digital perspective, we're also making progress on becoming a more efficient bank. We've come a long way with our transformation, as evidenced by simplification of internal processes and improvement of customer journeys, where we've seen high adoption rates of 95% on our District platform for business customers, and also positive feedback from both advisors and customers after having increased e-meetings to more than 60%. Financially, the first nine months showed good progress, with Q3 representing another quarter of sustained improvement. Profit before tax came in at DKK 12 billion, up from DKK 4.7 billion in the same period the year before, driven by stronger income, lower operating expenses, and a significant decline in loan impairment charges.
The result is equivalent to a return on shareholder equity of 7.3%. Clearly a step in the right direction. However, not at the desired level, and as I will explain later, we've updated our plan to ensure that we can meet our updated financial ambitions. We continued the execution of planned cost management initiatives, as evidenced by lower expenses in the first nine months of the year. Credit quality remained strong, supported not only by the strong macroeconomic conditions we have seen in connection with the reopening of societies, but also by the fact that financially our customers have fared well during the pandemic. All in all, a result for the first nine months characterized by good progress in many areas and thus a solid starting point for our dedicated work on further improvements in the coming period.
Over to Stephan for more details on the financial results.
Slide three, please. Thank you, Carsten. Yeah, overall the results were based on good progress for all key reporting lines. Based on reported net profit, our result almost tripled from the same period last year, and the result for the third quarter was up 19%. Total income came in 4% higher than the same period the year before, based on a positive development in all income lines. Net interest income stabilized because of the repricing initiatives we have taken for deposits. However, the effect was offset by overall margin pressure, lower lending volume, and a change in the loan product mix. Looking at the third quarter in isolation, the repricing effect was clearly visible and more than offsets the effects of primarily lower volumes as well as a lower effect from the TLTRO funding.
Our fee income was up 13% and was the most significant driver of the increase in income compared to the same period last year. As Carsten just mentioned, two drivers are behind this positive development. Firstly, strong business momentum in our capital markets-related business following increased demand for sustainable finance solutions, and secondly, increase in investment activity among retail customers. The increase in overall economic activity following the reopening of the societies also made a positive contribution to fee income. In the third quarter, fee income was slightly down despite increased momentum in income from investment activities. Income from capital markets-related activities, which was extraordinarily high in Q2, was also impacted by summer holiday seasonality. Income from trading activities was lower compared to last year, which benefited from high customer activity following the rebound in the financial markets after the outbreak of the pandemic.
In the third quarter, trading income came in lower due to more difficult market conditions for LC&I and seasonality. However, we continue to see a positive development for trading income at P&BC as a result of higher customer activity. Our insurance activities at Danica Pension saw a positive development, and the result was up 19% from the year earlier period. The improved result came from strong business momentum and a positive investment result, but also from a better result in health and accident business. The strong business momentum was driven by a good inflow of new customers, resulting in an increase of 39% in premiums. In the third quarter, we continued to see a strong development, including further improvement in health and accident business. Net income was up 21% from the level in Q2, despite the effect of an accounting correction of DKK 250 million.
Other income was up 25%, due mainly to higher income from our real estate broker in Denmark, home, driven by generally higher turnover in the housing market. Operating expenses came in lower as our initiatives to reduce costs continued to yield results, and we saw the expected decline in cost for transformation and remediation. Excluding one-offs, mainly against tax-related items, expenses were down 6%. In the third quarter, costs were down 6% compared to the preceding quarter as we continued to see steady progress according to plan. However, higher costs for remediation of legacy issues impacted the result. Profit before loan impairment charges for the first nine months was thus up 15% from the same period last year and was up 3% against the preceding quarter, mainly due to lower expenses.
Besides the improvement in income, the change in impairment charges was a significant driver of the improvement in profit before tax, as charges for the first nine months amounted to only DKK 0.6 billion against DKK 6.3 billion for the same period last year. The corona-related post-model adjustments we recognized during 2020, however, largely have been kept to mitigate any pandemic-related tail risk. In the third quarter, impairment charges were further down with a net reversal of DKK 0.2 billion, driven mainly by models. The result of our non-core activities improved as the first 9 months of 2020 were impacted by losses related to the final exit from Estonia. Finally, let me touch on our capital position, which remains strong with a Core Tier One ratio of 18.1% by the end of the third quarter.
The risk exposure amount increased only slightly as the increase related to the implementation of EBA guidelines of DKK 22 billion in the third quarter was partly mitigated by other changes. The total EBA-related increase for the full year is now expected to be around DKK 90 billion, compared to our previous guidance of DKK 50 billion-DKK 70 billion. In a joint decision with the FSA, the Pillar 2 add-ons to be fulfilled by CET1 will be reduced by around 0.5 percentage points in Q4 to 2.5% as a result of agreed RIA increases associated with EBA guidelines. Slide four, please. Finally, from our side, we would like to comment on the revised financial outlook for 2021, where we maintain our expectation of a net profit of more than DKK 12 billion.
However, changes have been made to some of the individual lines. We still expect total income in 2021 to be higher than the level last year. In our previous guidance, we included the sale of our business activities in Luxembourg. However, the closing of the transaction will not take place until the first quarter next year. Total income will, however, include the gain from the sale of Aiia of approximately DKK 150 million. We have revised the outlook for total expenses, and we now expect total expenses to be slightly more than DKK 25 billion as a result of higher costs for compliance and remediation of legacy issues. The total expenses include tax-related one-offs of DKK 0.7 billion, of which DKK 0.2 billion will be recognized in Q4. Underlying expenses are still expected to be lower than DKK 24.5 billion.
In addition, in Q4, we expect higher charges for pension yield tax at Danica Pension, which will be recognized in net income from insurance business. Impairment charges are now expected to be no more than DKK 750 million, due primarily to lower model driven impairment charges as a result of better than expected macroeconomic recovery and overall improved credit quality. Slide six, please, and back to Carsten.
Thank you, Stephan. Now let's have a look at our 2023 ambitions. In 2019, we showed this slide when we announced our plan towards 2023. Today, we provide you with an update on where we are on this journey and how we have gradually enhanced our foundation and operational setup, making us well-positioned to deliver sustainable value creation. We recognize that there are still a number of challenges that need to be addressed, including completing our compliance remediation process, as well as fully regaining our fair share of the retail business in Denmark. We have, however, already seen tangible progress, and our operational efficiency and profitability is moving in the right direction towards a return on shareholders' equity of 8.5%-9% by 2023, with line of sight to sustainably delivering a return on shareholders' equity of 9%-10%.
As CEO of Danske Bank, my objectives extend beyond reaching a point in time profitability target in 2023. Doing what is right for the bank in the long run is the overarching principle according to which I steer. This has also been the principle underlying our review of our current plans. Over the past month, it's been extremely important for me to ensure that we had a thorough process with all relevant stakeholders in the organization, and also that we sufficiently scrutinized all aspects of our business model to properly leverage our strengths and address our challenges. With this increased level of transparency regarding our assumptions and business model, we're confident that our Nordic franchise allows for a ROE level of 9%-10% in a normalized state.
As a result of our dedication to our transformation agenda, we will, despite headwinds, deliver 8.5%-9% in 2023 in a sustainable way with a line of sight to a further uplift. Next slide, please. As we planned for two years ago, the key focus in 2020 and partly in 2021 was reversing the downward trend we saw at the time. The structural progress made since 2019 has been significant and has laid the tracks not only for 2023, but also for the years to come. We've accelerated our efforts to become a more efficient bank and have set up the required commercial organization and governance, while at the same time fundamentally revamping our development organization of more than 4,000 people, taking us to the next level in terms of catalyzing the digital journey.
These efforts, among other things, have enabled solid progress in more recent quarters, and we've seen the commercial momentum pick up across our segments and continued progress with our financial crime remediation plans, where we are now moving into a business as usual operating model for KYC work and see both increased efficiency and quality. The solid progress has only been possible through a stringent focus on prioritization and execution, and by continuously adapting to all the changes happening around us. Next slide, please. As with any long-term plan, there comes a point when you have to review your assumptions and adjust accordingly. It was clearly difficult to anticipate the extent of the changes that we've had to adapt to. Taking a closer look at what has changed, I think it's obvious that our compliance remediation is significant.
As we have grown our capabilities in this area, our understanding of what needs to be done has also developed, and therefore our scope has grown beyond what we initially anticipated. It is clear as we make progress that the need for further investment in our control environment has been substantial. Continuing to allocate resources is the right course of action in order to improve the resilience of Danske Bank for the benefit of all our stakeholders. This is a journey that requires thorough efforts, and I want to emphasize that it is not an area in which we're willing to make compromises. Similarly, reversing the negative effect the Estonia case has had on our brand also takes time.
Although we continue to have a strong value proposition for all customer segments, our brand is particularly impacted in the personal customer segment in Denmark, and this has also negatively contributed to the growth assumptions of our original plan as we haven't seen the expected growth materialize. There is no quick fix for such a situation. It requires time, and it requires dedication. This is something we have also included as part of our commercial priorities, and our enhanced brand and marketing efforts are closely interlinked. We see no other way than to walk the talk by ensuring that it's clear to each individual customer, especially in the upper personal customer segment and for private banking and business customers, how strong our offerings are.
Lastly, the unresolved settlement of our legacy cases has also resulted in the need to carry additional capital buffers, something we had hoped would have been resolved by now, allowing us to better manage our capital position. As none of these factors will change overnight, we've gradually adjusted our plans to prudently compensate as much as possible, which is now enabling us to execute our commercial plans to continuously provide tangible financial uplift. Next slide, please. Our strengthened position and performance are particularly evident in corporate segments in which we are a leading Nordic wholesale bank and have seen increasing momentum being built up over the years. We have a strong value proposition in place, we're recognized for it, and the momentum is building.
From here, we have to sustain the strong momentum for LC&I, building on the high level of capital raising activity in 2021 to date. When our capabilities have been cemented in the market, as evidenced also by our ranking among the top institutions in league tables for a long period. We're ready to capture our customers' changing preferences for financing solutions, whether this be traditional balance sheet lending or capital raising, also within green and sustainability-linked products. The strong offerings and expertise at LC&I also support our focus on building momentum in relation to our business customers. In this segment, we see ancillary business continuously increasing, for instance, within investments, ECM, DCM, and green products. We see tremendous growth potential in this segment, and we have a strong position to capitalize on.
Being a leader within sustainable financing in both the Nordic and a global context serves as a good backdrop for supporting our business customers' green transition. To fully capture these growing opportunities, we will implement an improved service model to cater to the growing demand for more complex solutions that require specialist advisory services while expanding our self-service solutions for everyday banking and financing needs through additional digital offerings on our District platform, ultimately enabling a more efficient use of resources. LC&I and business customers have the right toolbox and platform in place to generate a sizable part of our required income uplift in the period towards 2023. Moving to our Danish retail business, we have a strong foundation. We have decades of experience and skilled employees, but given recent headwinds, we have struggled to capture our fair share of the growing market.
Nevertheless, our offerings and broad value proposition provide a strong platform to build from, and we're very focused on regaining our position in the housing market and improving our trajectory. Knowing we have an immediate need to break the recent year's trend, we've launched a series of relatively simple actions to reduce churn and to leverage our large customer base. Furthermore, in Denmark and our other Nordic markets, we will build on our growing momentum within investment sales to ensure they remain a key income driver. Having increased our income from investment activities by 20% over the past year, especially within private banking and personal customers, we believe the foundation is there. However, we remain more ambitious. We will strengthen our investment offerings through specialized advisory services and digital solutions, as well as further embed our sustainability expertise into investment products.
Finally, specifically for our personal customer businesses in other Nordic countries, we will ensure our partnership agreements are sufficiently profitable and further leverage the additional growth potential these agreements provide through our digital solutions to service customers more efficiently and profitably. Sweden, in particular, is a market where we see profitability opportunities by further leveraging the steadily growing customer base, and this is something we're already seeing results on. Later today, my fellow ELT colleagues will go through the initiatives in more detail. However, it should be clear that the sum of all of these initiatives and our recent progress sharpens our business model and provides the necessary uplift of our operational performance. Next slide, please. Accelerating our commercial momentum and enhancing our operational efficiency have been my key focus since taking over as CEO.
With our enhanced business model, coupled with momentum in our corporate segments and already launched initiatives, we're on the right track to deliver around DKK 43.5 billion by 2023 on our top line. On the cost side, we will continue to bring down underlying costs in a sustainable way through our focus on digital tools that enable self-service and increase adoption to allow for a better customer experience with lower structural cost. The progress we have already made on digitizing our processes serves as a strong enabler for further enhancement, coupled with ongoing adjustment of our organization and stringent focus on non-personnel costs. In parallel, the extended scope of our financial crime compliance remediation means an elevated need for resources until 2023. With the current scope and trajectory, we expect to finalize our financial crime remediation by the end of 2023.
Subsequently, within 18-24 months, our financial crime compliance cost level will improve towards a steady-state level, broadly in line with our original plan. As a result, we expect total cost to come in at around DKK 23.5 billion in 2023, and thus to keep improving our cost-to-income ratio throughout the period. As a result of our dedicated focus on and continuous prioritization of enhancing our foundation, we are now well-positioned to execute on our next phase and to reach our profitability potential. It won't happen overnight, but we have line of sight towards a cost-to-income ratio in the low 50s% and to sustainably improving profitability. Next slide, please. Let's take a look at how we arrive at our ROE target.
As mentioned, we remain confident in our ability to enhance operational efficiency, and with our current trajectory, we have a line of sight to a normalized return on equity of 9%-10%. Let's first focus on getting above 8.5% by 2023. From our current position, we will see the necessary uplift from the underlying income growth, which coupled with our structural cost improvements, will enhance profitability by 2023. Although we do assume a drag from credit risks as impairments will start to normalize. That leaves the last component, which is our capital position. Rightsizing our capital position is a key element while factoring in new requirements in a prudent manner. It is clear that for some time now we have been operating with a capital position well above our target of 16%.
For the purpose of calculating our ROE in 2023, we assume a normalized equity level and the resolution of current uncertainties. We know, however, that the timing of when we reach a normalized equity level is subject to uncertainty, but we've made the following assumptions. First one is we consider our projected equity level for the end of 2021 to be sufficiently prudent and also around the level it should be in 2023. We remain, and this is number two, we remain mindful about incorporating future regulatory requirements as we always do, and this includes the Norwegian systemic risk buffer and the reactivation of the countercyclical buffer. Point three, the vast majority of the REA increases related to EBA guidelines also addresses the majority of Basel IV and will have been implemented by the end of the year 2021.
The fourth point, while we have no clarity on the outcome related to the AML settlement, we do assume some Pillar 2 relief on the back of a potential AML resolution. In addition, along with the Basel IV implementation, we expect that it going forward will lead to a review of our capital requirements in order to avoid double counting. Factoring all these things in, we believe that by being well above our 16% capital target, which remains sufficiently prudent. As a result, with all reasonable and prudent assumptions, the basis for our 8.5%-9% ROE is a common equity level in line with what we expect to end up with in 2021.
Beyond this point, profitability will be further enhanced as the effects of our commercial initiatives will fully materialize and our AML and compliance costs reach a steady state. As such, we're confident in our ability to sustainably deliver 9%-10%. Before we open for Q&A, let me make it clear that Danske Bank has a very strong foundation. We've invested materially in our operational setup, and we're now ready to continue to deliver sustainable value creation. Next slide, please, and then Claus, I'll hand over to you.
Thank you, Carsten. Those were our initial comments and messages. We are now ready for your questions. Please limit yourself to two questions. If you are listening to the conference call from our website, you're welcome to ask questions by email. A transcript of this conference call will be added to our website within the next few days. Operator, we are ready for the Q&A session.
Thank you. If you do wish to ask a question, please press zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. Our first question comes from the line of Jakob Brink from Nordea. Please go ahead.
Thanks a lot and good morning. On the absolute revenue target in 2023, could you maybe elaborate a bit on the growth from the current roughly DKK 42 billion level to DKK 43.5 billion? What will be the drivers if you should split this between pricing initiatives and activity/volumes?
Yeah. Hi. Morning, Jakob. Thanks for that question. By the way, we'll go much more into the machine room on that this afternoon with our business unit heads. Roughly speaking, if you look at the DKK 1 billion-DKK 1.5 billion of revenue increase, it's about a 2% CAGR year-on-year. As we look at the momentum that we're seeing in the business today, the revenue increases will be broadly split by our three key business areas. LC&I, business banking, and then across retail banking. Let's say roughly DKK half a billion, a third, a third coming from each business. Look, it's gonna be a mix, obviously between what drives those key business areas, but we see it as very much a continuation of the momentum that we're seeing across those three main business areas. Then, as I said, we'll go into much more detail on it this afternoon.
Okay. Thanks. I guess just to follow up on that, you mentioned in your presentation that you will do a handful of initiatives to stop the market share losses on mortgages in Denmark. I'm just a bit curious, what are those initiatives, please?
Yeah. Yeah, I mean, the Danish mortgage business is clearly very important for us. We see some momentum in the third quarter, so we're seeing a larger net lending and market share in the third quarter. But look, we have a number of initiatives that includes things like decision in principle or [Non-English content] that we're rolling out, much more focus and a much better proposition for younger customers, improving our remortgaging processes, including the digital capabilities around that, slicker credit processes, including how we look at affordability. We have a long list of different levers that are in execution as we speak.
Okay, thanks. If I may just a last one on costs. As far as I can see from your graph, roughly DKK 600 million-DKK 700 million. Basically you're increasing the implicit cost target in 2023 by around DKK 1.5 billion since the original plan. You have also sold MobilePay in the meantime, which I guess you didn't know, so maybe around DKK 2 billion. Only DKK 600 million-DKK 700 million of this seems to come from the lower compliance cost, if I read your graph correctly. What is the remaining roughly DKK 1.4 billion or so? What kind of investments are we talking about here?
Look, I mean, if you look at the cost out and you really look at underlying costs between 2021 and 2023, it's probably around DKK 1 billion of underlying costs that we're taking out. That underlying cost is gonna come from continuing digitization and automation of our processes. We've already shown progress on this. We have e-meetings at over 60% now. We have adoption rates across many of our digital tools going up, and that will get more momentum and will allow us to take costs out. We're also gonna have some of that underlying cost out come from compliance, as our Chief Compliance Officer will also talk about later this afternoon. That's about DKK 200 million. More of it will come in 2024 and 2025, but it's also important.
We also have a number of remediation cases ongoing right now, both the debt collections case, but also obviously the ongoing costs related to Estonia are not immaterial costs out that will also contribute to the underlying cost out between 2021 and 2023.
Sorry, I was maybe unclear. Basically what I meant was that when you gave the target in the 2019 Q3 report, the implicit cost target for 2023 was around the same level, DKK 23.5 billion. Since then you have reallocated Danica, so now the implicit target is around DKK 22 billion, or it was. Today you tell us that it's DKK 23.5 billion, so why is it higher by DKK 1.5 billion?
Yes. Stephan, why don't you go through the details on that please?
Hi, Jakob. Stephan here. Good morning. Very rough bridge. One part is obviously, as you mentioned yourself, a higher compliance cost than we have factored in, the Swedish banking tax, which is roughly another DKK 300-DKK 400 million. We also expect slightly higher resolution costs, so that covers quite a bit of it. Let's also be very transparent on this one. We originally in 2019 said low fifties cost-income ratio and for 2023 at least, on our way to the 9%-10% trajectory, we are more like mid-fifties cost-income ratio, and that is driven by a number of the topics that Carsten just mentioned.
Okay. Thanks a lot. Very clear.
The next question comes from the line of Per Grønborg from SEB. Please go ahead.
Yes, good morning. I think I would just limit me to a single question at this early stage. Continue along the lines that Jakob asked into. Of the original targeted DKK 5 billion in cost reductions, how much have you delivered by now, and how much do you expect to be able to deliver by 2023?
Yeah. Hi. Morning, Per. Look, I think underlying, and I'm not gonna go into the exact numbers, but if you look at underlying over the last couple of years, you know, at the top FTE level, we've taken roughly 500 FTEs out, right? 65% of our cost base is FTEs. Now, if you normalize for compliance, it's probably more like double. We have seen underlying costs out from digitization and automation as evidenced by the FTE trajectory and also normalizing for the higher level of FTEs we have in compliance and financial crime, which is transitory in nature, as I discussed before, extra high costs that we have in relation to other remediation cases. I don't know, Stephan, if you wanna say anything further.
Yeah. Again, it's always tricky to bridge to old assumptions and plans, but let me try to say at least or shed some light on it. One, if we compare the 2019 old 2023 goal with the new 2023 goal, you need to obviously have in mind the additional, call it, DKK 1 billion for compliance, plus Swedish banking tax and the little topics I just mentioned a second ago. You need to keep in mind that the Danica restatement lies between these two numbers as well. If you then look against where we have started and where we are gonna end in 2023, then you can see that we have probably a comparable cost take out of somewhere between DKK 4 billion and DKK 4.5 billion.
We haven't really gotten the DKK 5 billion, but in total it's between DKK 4 billion and DKK 4.5 billion. We can. Claus is probably happy after the call to go through the more specific details, but that's what the rough number is.
Okay. I'll talk with Claus afterwards. Thank you.
Thanks, Per.
The next question comes from the line of Sofie Peterzens from J.P. Morgan. Please go ahead.
Yeah, thank you. My first question would be on your insurance income. You say that there was an increase in the single premium due to an inflow of new business customers. How sustainable is this, and should we expect or is it more like a one-off, or should we expect this trend to continue? My second question would be on Handelsbanken exiting Denmark. What kind of opportunities do you see here? Is it something that you would consider buying? Do you see kind of customers switching from one bank and into to Danske? Kind of, just your thoughts there. Just a final clarification question.
On the EBA guidelines, now that you guide for DKK 90 billion of EBA, or REA increases from the EBA guidelines, what do you expect for Basel IV? If you could just give the details there. Thank you.
Thanks, Sofie. Let me take the Danish business opportunities, and then I'll hand over, Stephan, to you on the insurance income and the Basel IV. Look, if you look at the third quarter, we do see momentum in the Danish retail business. We've seen increased investment activity. We've seen, as I mentioned before, increasing lending and increasing market share on the housing side. We've also seen a slight increase in our NII quarter-on-quarter, driven by the repricing activities that we've done. If we look at our customer flows, although we still have a negative net flow of customers, it's stabilized, and it's at lower levels than it's been before. We see momentum. It's clearly not where we'd like it to be, and so we're fully focused on continuing to accelerate that momentum.
It's about more investment products. It's about better digital services. It's about sustainable products. I mentioned before some of the initiatives that we're doing on the, on the housing front. Those would be some examples.
On the other two questions, the insurance business indeed has seen an extremely strong year, 2021, also on the back of a number of, call it, first places in league tables in terms of customer returns and the like. That obviously has sparked interest. Also the link with our private clients business, obviously driven by the negative interest rate environment, I guess has probably helped a bit. In general, though, I would make the remark that the result of the insurance business this year is obviously also driven by extremely good returns in the assets under management.
In that sense, it's not a one-off, but I would still think that going forward, the profit levels that we are seeing this year are probably at the upper end of any range that I would expect. I wouldn't extrapolate that into the future. On Basel IV, I think, also reflecting on what Carsten said earlier, the REA increases reflecting EBA guidelines are obviously our way to cater for the Basel IV requirements. If you look at our capital assumptions for the 2023 capital, that includes our understanding of what a Basel IV requirement would look like. I have to say on a basis prior to the latest release from the European Commission, again, we all know that still needs to find its way into legal requirements on a country basis.
At first glance, if that is what it is, it probably it definitely does not hold any downside to the current view we have on the 2023, and thereby starting point 2024 capital for Danske.
Just to clarify that the Basel IV basically won't have any impact once the DKK 90 billion of EBA guidelines are fully adopted.
No. The implementation of the EBA guidelines basically buffers or mitigates the Basel IV impact. That was also the stated intention in the 2019 plan to avoid any cliff kind of edge at the end of 2023 when it was originally anticipated Basel IV would start 2024. It's now delayed by another year. But what the simple message is the capital ratio of 16% reflects our understanding of a pre-EC release requirement of Basel IV for Danske Bank.
Okay. If I may just a final one. On the cost side, you target DKK 26.6 billion of costs. No, nothing. Sorry. That's fine. That was everything on my side.
Okay, no problem. Thanks, Sofie.
The next question comes from the line of Mads Thinggaard from ABG. Please go ahead.
Yes. Thank you. I would like the first question to start with the, I mean, you're seeing a CET1 level around 16%, normalized from, I guess, above 16% short-term or medium-term before. Do you factor in a potential Danish systemic risk buffer in that view? Would be one thing I would like to hear about. Then also on your Nordic strategy. I think Sofie mentioned it before with looking into Handelsbanken in Denmark, but are you looking at your Nordic franchise? Are you having a strategic review of Norway and Sweden and Finland or how does that fit into this strategy update? Thanks.
Hi, Mads. Thanks. We haven't calculated anything on the speculation on the additional Danish systemic risk buffer, just to be clear on that. On the Nordic strategy, we're fully focused on our Nordic universal banking model, including being a challenger retail bank across our Nordic countries. We feel that we've had good traction on our partnership model over the last years, and we've also seen progress on actually being able to deepen relationships with our customers across Norway and Sweden particularly.
However, clearly the growth needs to be profitable, and that is a key focus from my side, from the team side, is to continue to improve profitability with the partnership agreements that we have across the Nordics, and that of course we are continuing to watch very closely.
Yeah. Now I guess we saw that Handelsbanken they lost the patience, I guess, with underperformers. How big is your patience with these areas?
Look, I think we have a very different model, in fact, than Handelsbanken. I think we also have strong corporate and SME businesses across our Nordic countries and clearly run on one platform. I think you have to be patient to build out a sustainable strong share of wallet and relationships with customers, but clearly it needs to be profitable, and that is what we're very focused on.
Okay. Then just to come back to the capital question, just to get an overview here. So you have, I mean, if we do get a Danish systemic risk buffer and you are not doing a global AML settlement before 2023, then that's a drag compared to your new ROE target, or is it in the kind of span?
Yeah, look, I don't wanna speculate too much on that. Clearly the Estonia case is not something that's within our gift, but we also felt that it was prudent to set our guidance in 2023, also from a comparable perspective with assumption that a resolution has been made. We are not in control of timing on the resolution. You know, that would be speculation.
And, and you can al-
Okay.
You can also add, by the way, we have included, as we have said, the Norwegian risk buffer completely in the calculation. You can also speculate whether all the prerequisites that have been publicly added, including the full introduction of the CRD V will really happen by the end of 2023. I think there's, as always, some pros and cons, some threats and opportunities. Let's see.
Okay. Okay, fair enough. Thank you.
Thanks, Mads.
The next question comes from the line of Jacob Kruse from Autonomous. Please go ahead.
Hi. Thank you. Two questions. Firstly on the capital levels. The DKK 90 billion RWA inflation from guidelines, could you just say how much of that was already in numbers by the end of Q3? I found the language a bit difficult to follow in the interim report there. And secondly, on cost, you say you've taken out about 500 staff. I think the implied levels for the previous plan was closer to 5,000 staff in the back office. At least that was my understanding of it. When you say you have another DKK 4 billion-DKK 4.5 billion of cost to be taken out, does that still mean that for the next couple of years you're looking at very significant staff reductions at the bank? Thank you.
Yeah. I mean, let me just take the cost question, and then Stephan, you can add both on that and the capital levels. As I said before, I mean net is 500, but the actual number, if you normalize for the compliance FTE is quite a lot higher. Also, if you then look at FTEs out to 2023, we will continue to see, and that's gonna be a natural adaptation to increased automation, digitization, and our customers using the various digital tools that I also spoke about before. You will see a natural reduction in FTE. I'm not gonna speculate on the number that you mentioned. That FTE number is not something that I recognize. Stephan.
On the REA inflation, the guidance for the year consistently has been between DKK 50 billion and DKK 70 billion of REA inflation. Keep in mind that was REA inflation basically among other things on our way to Basel IV or Basel III final framework. The new guidance is DKK 90 billion for the year, but we also have a Pillar 2 relief for that in exchange, as I've mentioned in our speech.
Yes. You say in the interim, for the first nine months of 2021, we saw REA increase by about DKK 18 billion due to the EBA roadmap. Does that mean we have DKK 72 billion? That sounds wrong, because I think you did more than that in the first half of the year. Just how much is the Q4 REA increase to get to DKK 90 billion?
It's about DKK 30 billion. You take the DKK 50 billion-DKK 70 billion, the midpoint is roughly DKK 60 billion, which is what we have been trailing on, so it adds another DKK 30 billion.
Okay. You did the DKK 50 billion to DKK 70 billion, so it's DKK 30 billion in-
Yeah.
Okay, thank you.
Thanks, Jacob.
Thank you.
The next question comes from the line of Martin Gregers Birk from Carnegie. Please go ahead.
Thank you. Just sort of checking along the lines of previous questions. I mean, I guess you also address both your Danish mortgage market, which you again this quarter show another loss of market share. Isn't the key problem here that you have a big competitor which is significantly cheaper on all products than you are? When you look at your personal Nordic Personal Bank, I guess sort of this topic and cross-sales, that's a topic that we had talked about since 2017. It hasn't worked so far. Why is that gonna work going forward?
Yeah. Thanks, Martin. On Danish mortgages, you're right, we're still below our natural mortgage share. As I mentioned, we've actually been increasing our mortgage market share versus the first couple of quarters in Q3. I don't believe that it's only a price game. I believe that it's about a fulfillment process, it's about the digital tools, it's about what kind of total bank relationship and experience that you can create. Of course, price is important, but other things are also important. On the Nordic cross-sales, as I mentioned before, we have seen progress in cross-sale activity. We have seen progress in increasing, for instance, investment sales and ancillary income across Norway and Sweden.
As I mentioned before, it does take time, and I understand and appreciate that we've talked about it since 2017. We will accelerate that, and we will do it with a very, very key focus on doing it from a profitable perspective. That is a must.
Do you think it's realistic that Danske Bank in the Nordic markets, personal customers Nordic markets are ever gonna deliver returns similar to the returns generated by the incumbent banks?
I think that over time, if the partnerships, the digital tools, and the value proposition is there, that it's entirely feasible to have a digital retail model which is competitive on returns to the incumbent banks.
Okay. Is that a key argument for being in those markets that you need to deliver returns similar to the incumbent banks?
Yes. That's a key requirement.
Okay. Thank you. Just maybe a quick follow-up, maybe a quick question. I don't know if I understood this correctly, but your Pillar 2 add-on that you assume should go away before 2023, does that also mean that the AML case will be, so to speak, done and dusted by 2023, or how should I think about that?
No. As I said before, the way you should think about is we have no control or no insight as to when the case will be resolved. For the matter of having a comparable ROE target for 2023, we're assuming that that Pillar 2 requirement can be taken out.
Okay. Very clear. Thanks.
Thanks, Martin.
The next question comes from the line of Antonio Reale from Morgan Stanley. Please go ahead.
Hi, good morning, everyone. It's Antonio Reale from Morgan Stanley. I have three questions, please. Apologies if they've been addressed already. I had some connection problems. First one is on NII. If I look at your initiatives back at the beginning of the year, you changed the threshold for negative rates on deposits from retail customers, and you've removed the threshold also on deposits from corporates. You've taken more initiatives in July, and repriced deposits further. I think you guided for a cumulative of DKK 500 million for the first measure, another DKK 250 million for the rest of the year. So DKK 750 million deposit contribution on NII from repricing of deposits.
Which, based on sort of the trend you've delivered on NII in the first nine months, implies quite a sharp underlying NII drop, about 4% year-on-year. Can you help us understand better what are the main drivers of such a large drop and how much of that you think you can recover next year? That's my first question. My second question is on costs. Maybe you've addressed this, but can you remind us already how much of your AML remediation expenses are included in your DKK 25 billion plus guidance for this year? And how do you see that progressing going forward in 2022 and 2023? If I remember right, I think you had something like DKK 3 billion or so of Danish kroner costs related to AML.
Where is that now and where is that going in your expectations? Very lastly, we've seen a number of banks, of course, announce special distribution to shareholders. Can you remind us how shall we think about the mix of dividends and buybacks going forward? How do you balance retaining the right amount of capital to provide for, you know, AML uncertainty with other potential capital headwinds we discussed.
Yeah.
Thank you.
Hi, Antonio. Thanks. Let me take these and then I'll ask Stephan to come in on further. On NII, look, the positives are as you mentioned them. The offsets to that are one, reducing demand for credit. So you do see the credit book stable, slightly decreasing in some of our retail and business banking businesses. Then at the same time, you see margin compression because of reduced higher margin bank lending and more, for example, lower LTV lending or longer-term fixed lending at lower margins.
Basically, that's how you should think about it, that you get tailwinds from the deposit repricing, but you get headwinds from reduced lending and then margin compression and mix. If I look ahead, and we also just executed updated deposit repricing last week as you saw. If I look ahead, you know, we'll continue to have tailwinds on deposit repricing, and that's a continued focus also in our LC&I business. Then we do believe that credit demand will pick up as government guarantee schemes and other things like that will fall away and therefore business lending demand will pick up. At the same time, I also believe that that margin pickup would be evident in our retail lending business given the market dynamics that we see.
The second question on costs on AML will in fact show a more detailed slide this afternoon with our chief compliance officer just explaining the compliance cost trends. They're at a higher level than what we had anticipated as mentioned before, and those higher levels will stay in 2022, come slightly down in 2023, and then will normalize towards 2024 and 2025. You'll see a detailed page on that, I believe in the presentation decks sent out, and also what we'll discuss this afternoon. On capital distribution, we continue to maintain 40%-60% dividend policy, and we're not at this stage commenting on any mix between that capital distribution or foresee any difference in that policy.
Yeah. It's post fine.
Okay. Thank you.
Operator, can we have the last question, please?
The last question comes from the line of Riccardo Rovere from Mediobanca. Please go ahead.
Thanks. Thanks for taking my question. Just a couple if I may. First of all, can you shed a little bit of light when you provide your guidance 2023 revenues and costs, what kind of rates do you expect over the next couple of years and inflation too, especially wage inflation? The second question I have is on when I look at slide 11, when I see DKK 170 billion equity, which should remain more or less the same. But in the meantime in the gray box, you also say that RWA should, well, the requirement is not clear to me, also take into account Basel IV. So just for me to just understand, your common equity tier one today is 18%, should go, if I understand it correctly, to 16%.
That should bring the equity down. In the meantime, your risk-adjusted assets because of the EBA guidelines, and I don't know about Basel IV implementation, will go up and the two things will balance each other. Do I get it right on, in looking at that slide? Thanks.
Thanks, Riccardo. Stephan, do you wanna take the capital question?
I hope I got it right. There's two messages here. One is if you look at the capital ratio, we're going to go down to a normalized level. I think that's the more proper way to phrase it. A normalized level of 16% as a CET1 goal, and that includes the regulatory minimum requirement, the Norwegian risk buffer, as well as the projected development of the countercyclical buffer. That's one. Secondly, if you talk about now what does it mean in nominal levels? It means that we will probably from growth of the lending book see some real inflation.
We do believe that at the end of this year, we have basically implemented RWA inflation from implementing EBA guideline. There's little bits and pieces to be done on models and other stuff. In principle, we arrive at in 2023 with our normalized capital assumption at something that covers all the at least more or less known additional capital requirements, also is reflective of Basel IV. On triangulation for the nominal level, we are basically around the same DKK 170 billion of equity that we are right now. You can ask the question how to get there, and that's also on page 11. There is obviously in this normalized model excess capital, but as Carsten just said, that is more a post-settlement discussion rather than a pre-settlement discussion.
On your first question, Riccardo, on the assumptions, we have assumed unchanged rates. Basically as is, including inflation, which is basically wage inflation of around 2.5%. No artificial tailwinds included in the planning.
Thank you. Thank you very much. Very clear. Thanks.
Very good. Thank you all for your interest in Danske Bank and for your questions this morning. As always, you can reach out to investor relations if any questions. I hope to see many of you this afternoon in our discussion with some of my ELT members. Thanks for that and hopefully see you this afternoon.