Hello, and welcome to the conference call for investors and analysts. My name is Suzanne, and I will be your coordinator for today's event. Please note this call is being recorded, and for the duration of the call, your lines will be on listen-only. However, you'll have the opportunity to ask questions. This can be done by pressing star one on your telephone keypad to register your question. If you require assistance at any point, please press star zero and you'll be connected to an operator. I will now hand over to your host, Rune Helland, to begin today's conference. Thank you.
Thanks so much, and hello to everyone and welcome to DNB's second quarter analyst call. Here in Oslo, we have a full executive team and with Kjerstin Braathen, Ida Lerner, and Head of Personal Banking, Ingjerd Blekeli Spiten, Head of Corporate Banking, Harald Serck-Hanssen, and Head of Wealth Management, Håkon Hansen. Ida will start by giving you the highlights for the quarter. Please, Ida.
Absolutely. Thank you for taking time to participate in this call. As Kjerstin pointed to in her presentation, part of the presentation earlier today, volatility is the word that stands out. Volatility in capital markets and volatility in currencies. Having said that, we deliver a very strong result and solid asset quality. I thought I'll start with just give a brief update on the development we're seeing on a macro perspective. We see a continued high activity level in the Norwegian economy. GDP growth for 2022 is expected to come in at 3.5% and then normalizing towards 1% in the following years.
Inflation has been higher than previously expected, and core inflation is now at 3.6%, well above the long-term targeted level by Norwegian Central Bank , but still lower than most European economies. Norwegian Central Bank has increased its rates by another 50 basis points in June to now 125 basis points and also increased the interest rate path ahead. They expect to peak at approximately 3% towards the mid-2023. Unemployment levels remains to be low at 1.7%, and it's also expected to remain low throughout the coming years. Investment levels is expected to grow in the years ahead, but it is important, of course, to acknowledge that Norway, even though being in a relatively strong position, still will be affected by the geopolitical and macroeconomic global development.
When moving on to our own results for the second quarter, we are very happy to see that we are delivering good and strong results across customer segments as well as product areas. The return on equity for the quarter comes in at 13.3%, and we have a profitable growth, loan growth in both personal customers and corporate banking of now up 3.3% in the quarter. Net interest income up 22.5% from the second quarter same last year and 10.3% from the first quarter this year. This is driven by profitable volume growth and higher interest rates to customers. Net commission and fees comes in at NOK 2.8 billion, very close to the record high level we saw in the second quarter of 2021.
It really shows the strong performance across most areas despite the market turmoil we're seeing in the quarter. We see we have a robust and well-diversified portfolio, where 98.9% of the portfolio is in stage one and two, and we are also acknowledging net reversals of impairment provisions this quarter. Earnings per share comes in at NOK 4.91 in the quarter, and our Tier One capital ratio is 18%, well above the FSA expectation at 16.7, and we are still very happy with the strong capital capitalization and solidity in the bank. With that, I think we'll open up for Q&A.
Yes, please.
Thank you. As a reminder, if you'd like to ask a question on today's call, please press star one on your telephone keypad. To withdraw your question, please press star two. The first question comes from the line of Nick Davey from BNP Paribas Exane. Please go ahead.
Hello, good afternoon. Thanks for taking my questions. Two questions, please. Firstly, on capital, you mentioned you're very happy with the level of capitalization. Obviously, your requirement is going up next year, and I think if I pro forma your capital base for a 60% payout ratio, you're about at your FSA target. Could I just ask you to talk about your comfort on capital from here? Are you getting close to the point where you have to choose between loan growth and buybacks? The second question on the loan growth that you're seeing, it's been very dynamic in places like oil and gas. Could you talk us through a few angles on that? One, are there any caps on your lending exposure to some of those segments that become binding from here?
Is there a bit of this loan growth you put down to bond markets being shut? Just how sustainable you think the loan growth might be as a result? Thank you.
Maybe I can start and you can fill in maybe across all three, actually. On capital, we are comfortable. I'm sure as you note, we have a strong capital generating ability in our earnings. We have a strong lending growth in the first half. We've said that we will continue to prioritize growth in the personal customer sectors as well as SME. On the large corporate, we expect the growth to be substantially less in the second half than it was in the first half. With regards to our dividend policy and capital position, we prioritize cash dividends and paying an increased cash dividend per share per year. With regards to buyback, I would say that we prioritize profitable business with our customers.
Buyback is a tool that we use if we have excess capital to optimize around the desired capital position. Given what we see, we are very comfortable that we will be able to continue to serve customers as well as delivering on this dividend policy to our customers. With regards to our activity across the various business sectors, we have over the past year substantially rebalanced and reduced our activity to cyclical industry. It's been more a sideways development, but also continued to reduce over the past few years our exposure to oil and gas offshore and shipping. This quarter, again, we had increased for the first time in a long time somewhat the exposure to shipping, but we're still only slightly above 2%.
We do not have caps in these areas, but we do not foresee overall substantial growth towards cyclical industries such as maritime and offshore. I'm sure you might be aware that we've also set targets for reductions of indirect emissions from these portfolios. Our intention is to achieve those through working with customers and not reducing exposure. But it doesn't either sort of pave the way for substantial growth across these sectors. Our growth will be diversified across all of the sectors that we are engaged in.
I think, Nick, it's Harald, Head of Corporate Banking. I could add that if you're looking at the exposure at default figure, it's affected mainly by two things. First of all, the exposure on oil and gas is all basically dollar-related, so you have a strong currency effect on those numbers. Secondly, we have, as we also referred to in the previous quarter, we have the negative mark-to-market effect on derivatives exposure on gas. It's important to emphasize these are not traders, these are E&P companies with real production and diversified production. It's a right-way risk. It's also partly possibly with the rest of the debt. It's not a credit issue, but it is kind of showing increasing our exposure on oil and gas.
It will run off largely within the next year.
Okay, thank you.
The next question comes from the line of Sofie Peterzéns from JP Morgan. Please go ahead.
Here is Sofie from JP Morgan. Apologies if my question was already answered. I was just looking at the customer margin in your presentation, and although it's up two basis points quarter-over-quarter, it looks very flat year-over-year. It was also 1.18%. It was 1.18% in the second quarter last year, and now it's just 1.2%. I'm just wondering why didn't actually go up more than two basis points year-over-year considering that rates have gone up 1.25%. My second question would be on the Sbanken synergies.
Earlier today you didn't give any details on the level of synergies, but when should we expect it to kind of get a better idea around growth synergies and capital synergies? Is it at your Capital Markets Day or earlier? If you could just share some color on that. Thank you.
Thank you, Sofie. I believe your first question was related to the volume weighted spread towards customers, and you're asking why that doesn't increase more. It's important to say this is the cost of the pricing facing the customers measured against the money market rates. That should stay more or less stable. We've seen somewhat of an increase. More meaningful maybe to link it to the actual NII revenue is to look at the net interest margin, because there you will also find the revenue related to amortization and fees that reflects the activity level in the business and also the increased income on the equity, the capital employed by the business unit. This is why you see a higher increase in that part of the margin.
I hope that was clear. I'll hand it over to Ida for a comment.
Well, when it comes to Sbanken, first of all, we're very happy to see.
That's underway that we're doing together with them in deciding on how Sbanken will continue to flourish under the ownership of DNB. We have said that we will come back with a bit more details in terms of numbers and synergies later on during the fall.
Is that with the third quarter results, or is it with the Capital Markets Day, or is it kind of with the fourth quarter results? It would just be helpful to know when we get a little bit more details.
That we haven't decided yet.
Okay.
We have a Capital Markets Day on the 15th of November, and then we also have the third quarterly results during the fall and in between. Somewhere there we should be able to expect more information from us.
Okay. Kind of related to that, the Capital Markets Day that you have on the 15th of November, what should our expectation be? More of the same or is something kind of more transformational?
We will come back. Yeah, we will come back to you with that. Now it's just save the date.
Okay. Thank you.
The next question comes from the line of Alex Demetriou from Credit Suisse. Please go ahead.
Hi, team. Thank you for taking my question. Just two, if I may. In the fact book, it says you have about NOK 9.3 billion of total loan impairment provisions. Are you able to disclose how much of those are overlays? Just, secondly, in the past, you were talking about a level of capital headroom just above the regulatory requirement. Are you able to just remind us what that level is? Thank you.
If we start with the impairment provisions, we have previously said and reiterate that we don't give any exact numbers in terms of the management overlays. But as pointed to or say in the presentation, we are of course making adjustments in terms of what we're seeing, where the uncertainty has more impact on what part of the portfolio. It's something that we follow very closely and also make changes quarter on quarter. When it comes to the headroom on top of the FSA expectation, we are also saying that we aren't specifying that more concretely, but that we want to have some room to maneuver to make sure that we also are having an acceptable level in terms of to handle potential short-term fluctuations such as FX risks.
Perfect. Thank you very much.
The next question comes from the line of Omar Keenan from Credit Suisse. Please go ahead.
Hello. Thanks very much for taking the questions. Could I please ask you on deposit beta. So when you look at the rate path going forward, you flagged that the Norwegian central bank rate is going to be above 3%. Can you talk about the evolution in the competitive environment for deposits, and how you would think about, you know, the rate sensitivity perhaps over the next 100 basis points of hikes? Thank you.
Thank you for your question, Omar. As we've said, the economic effects with rate increases only comes from our actual repricing in the market, and we are not really at the liberty to speak about that going forward. Just maybe to comment a little bit on the competitive situation, there is, we believe and we find that even after the latest repricing and what we see from behavior in the rest of the market, that we have competitive pricing. There is also a much higher attention level in general on lending margins than deposit margins. It's of course important for us to have competitive pricings on both.
Our position, the competitiveness in the competitive situation in the markets and our overall assessment are factors that we will consider in every situation where if there were to be any changes in rates.
That's great. Thank you very much.
The next question comes from the line of Riccardo Rovere from ODDO BHF. Please go ahead.
Good afternoon, everybody. Thanks for taking my question. I have three, if I may. The first one relates to the chart you show on page four of your presentation, the one in the middle of the slide, where you show the investments in Norway expected to increase. Aside from the fact that petroleum investment seems to be kind of sluggish. Aside from that, if I look at where we are in trying to reconstruct the size of 2021 as a bar, that the NOK 642 billion again at 2025 doesn't seem to be compatible with your 3%-4% loan growth. At some point, those investments will have to be financed by someone.
I was wondering whether over the next few years, you might eventually think that your loan book could grow more than 3%-4%. The second question I have is probably for Harald, I would say. I'm not 100% sure if before you stated you will keep shrinking exposure to oil and gas offshore and so on. If that is the case, I was wondering why would you do that given what's happening, the continent probably needs all the gas that you can extract out of the Norwegian shelf, given what's happening. The other question I have is on credit losses. We've seen reversals again in oil and gas and offshore.
If I remember correctly, 2020, you charged an enormous amount of provisions in Q1, partially Q2 2020, and that was mainly related to oil and gas. Now that the outlook has completely changed, can we expect, let's say, if prices remain where they are, that the level of provisions in oil and gas will continue to be extremely low, or at least we have stopped seeing any kind of provisions on the oil and gas and offshore? The last question I have is how should we square the fact that you are posting reversals of provisions in some areas, well, NOK 200 million in this quarter, with the fact that you have NOK 2.8 billion of shortfall to expected loss charged on your common equity tier one ratio, if I remember correctly, if I remember the number correctly?
Thanks.
Thanks for very good questions, Riccardo. I will comment on the first one, then leave the two next ones for Harald to start and then Ida maybe to round up with the last one. The chart on slide four in our presentation is related to investments across the mainland economy in Norway and the petroleum related sectors. I don't think you can extrapolate that to our 3%-4% growth, which is a mix of personal customers, SMEs that are very bank dependent on one side and our large corporate activity, where actually 50% of what we do is outside of Norway and very sector specific.
I think our main message with regards to our growth opportunities on the platform that we run is that we expect we should be able to do 3%-4% across the loan growth on an annual basis, even with some fluctuations in the economy, and we continue to say that. I think what the chart on page four shows is that there is a supporting environment in the Norwegian economy for that kind of a growth scenario. Now, can there be opportunities to grow more? Yes, in certain periods there can. I think this year is one of these periods where we're saying, given the strong and profitable growth we have seen in the first half of the year, we believe that we're likely to end up somewhat above 4%.
Our key priority is really for the growth to be profitable. Harald, maybe you want to comment on.
Yeah. No, I think it's a good question, Riccardo, because I think what you're alluding to is that there are a lot of very good risk rewards now on the hydrocarbons. It's no secret that it is a profitable market. Having said that, I think what we've said is as our CEO said, we've reduced our oil-related exposure by 50% over the last five years. What we've said for the time being is that we want to keep that stable. That is the plan we have today. We are going to shrink our exposure outside the North Sea, and we've already done that.
80% of our activity on the oil and gas side is now related to the North Sea, where we see the best risk reward and also the best players from an ESG point of view.
Harald, just sorry to interrupt.
Please.
Basically you're saying that out of your oil and gas exposures in general, part is, inverted commas, Norwegian, part is out of Norway. The part out of Norway will go down. The overall will stay kind of flat, which means that the Norwegian part is gonna go up. Do I get it right?
Yes, that's a good way of saying. We shouldn't say Norwegian, we should say North Sea, because we're also.
North Sea. Okay. Yeah.
Very active in the U.K. sector of the North Sea.
Okay
which has been an interesting market, and that's handled from our good colleagues in London. Yes. You know, the reason it's always tempting when you have a super profitability in an area to expand, but I think we have to take a long-term perspective. We don't want to have too much exposure in the cyclical industries, and we also pay attention to the EU Taxonomy and the emission targets that we set as a bank. That's another reason why we want to keep this exposure stable, even if there are attractive business opportunities. In terms of net write-backs, you know, we have taken write-backs on the oil-related and in particular on offshore over the last few quarters.
As you point out, there are more provisions there in the bucket. All I can say is that, you know, we do loan loss clearance at the end of every quarter, and the loan loss provisions or the write backs we've taken now.
They reflect our best assumptions on a company-specific basis, and it reflects the activity level and the day rates we see on offshore supply vessels and oil rigs at the moment. It's basically the development in the market from now that will determine whether we will be able to take more write backs within this segment.
also just to point to Riccardo, in 2020, the main impairment we took was not related to oil and gas, but offshore. It's important to distinguish between oil and gas and offshore as such. we have-
But, but-
Yeah.
Sorry to interrupt. The outlook on offshore versus six months ago has completely changed, and maybe it has changed for quite a long time ahead of us. I mean, the continent needs, one way or the other, needs to replace or want to replace the gas that coming out of Russia, right or wrong, you know, that is what is happening. I mean, there is only one country that can provide that, and it's you.
You're quite right. There is this strengthening sentiment in the sector as Harald has also commented on. I think all we can say is that currently the outlook is reflected in our numbers. We have already taken back substantial amounts compared to what was taken. There are also still an oversupply of certain assets, in particular in the supply industry, of vessels that are so-called in cold lay-up. The cost of remobilizing that puts the limits to how quickly the market actually can scale back. The rates for now, they are very attractive.
I think we've said you can see the quality of the work that is being done, both through reversals on company-specific situations that are done, and also by the fact that we have positive market values on some of the equity positions that we're taking. We are saying that you should be cautious. I mean, these are hard to know how they will develop in the future, and we would like to caution and say that you shouldn't expect those just gradually to tick in every quarter. This will vary from quarter to quarter and depend on how the market situation develops. Now, if I may just quickly on your fourth question, which is more of a technical nature, if I got you right, you're asking how can we take reversals when, in our calculation of required CET1 we haven't.
We're adding capital because our reserve base is lower than what's in the capital regulation is viewed as normalized losses. I think it's important to say that these are two different rule sets. What is related to core equity and required capital on the one hand, and IFRS 9 related to reserves on the other hand. They shouldn't be mixed together. Under IFRS 9, we do take reserves at any given time in accordance with our models. For stage one and two, there are two factors that impact these reserves. That is the macroeconomic situation and the outlook for the coming three years and the quality of the credit portfolio.
Now, the quality of the credit portfolio has somewhat actually improved in the second quarter, and there is a change on the retail customers that is more a technical ask that leads to the reserves in the second quarter. The other factor, and for stage three, these are individual assessments of individual companies. How that moves has nothing to do with the aggregate level that is on our books at any given time and wouldn't impact the calculation of required core equity, if you want.
Okay. Yeah. That's very clear. Thank you. Thank you very much.
Before we move on to the next question, as a final reminder, if you'd like to ask a question on today's call, please press star one on your telephone keypad now. The next question comes from the line of Namita Samtani from Barclays. Please go ahead.
Hi, and thanks for taking the questions. I've got three, please. Firstly, can you tell us the average LTV on the commercial real estate book? Secondly, when are the next salary negotiations set to take place, and what are your expectations in terms of wage inflation going forward for DNB? Lastly, just on the asset management revenues, I see they grow quarter-over-quarter, but the AUM has declined. Just wondering how that works. Thanks.
Sure. When it comes to average loan-to-value ratios in commercial real estate, we have not stated that explicitly, but we are very comfortable with those levels across the different sub-segments, as well. When it comes to wage inflation, we are anticipating or the Norwegian economy as such is anticipating wage inflation in the region of up to 3.8%. We expect to be in the region of that or slightly above that due to the fact of the composition of our staffing. Assets under management growth, would you like to comment on that, Håkon?
Yes, I can do that shortly. You're right, assets under management declined, but it's basically due to asset mix. We kept the level of assets more or less flattish on the retail side, which is the most important for the margins. The drop and outflow from the institutional part is mainly in bond funds.
With lower margins.
There's also an improvement in the custody revenue, Namita. When you look at this category in the commissions and fees slides, a big part of the increase actually stems from better results in our custody activity.
That's perfect. Thank you very much.
The last question comes from the line of Johan Ekblom. Please go ahead.
Thank you very much. Maybe to pick up on that last comment, I mean, the huge increase in custody fees, I know it's a small overall contribution, but is that a large growth in assets under custody, or is there anything else there we need to think about? Just two brief questions. Norges Bank recently put out a financial stability report and seemed to be forecasting a 20% drop in commercial real estate values. What impact would you expect that to have on your ECL? I'm assuming you'll still be well covered, but some impact would surely be expected. Finally, just on the volumes, if I compare period end and average volumes, it looks like there was a very strong growth into the end of the quarter.
Is that an FX effect, or should we expect to see a, you know, higher run rate in terms of volume growth into the third quarter?
Alex, do the first one, and then Ida for the second and Harald for the third.
Hi, it's Alex from DNB Markets. The uptick in custody fees is largely driven by an increase in assets under custody, and it mainly relates to one particular client relationship.
Yep. On the commercial real estate portfolio, first of all, I just want to highlight that we are very comfortable with the portfolio that we have and also the fact that it's diversified across subsegments. We've also seen that loan-to-value levels have been reduced in parallel with the falling yield levels, and we are also very comfortable with the fact that our portfolio would sustain a shift in terms of valuation. Of course, should that have a significant impact, that would have an effect in terms of migration, but we do several stress tests and scenario analysis and are comfortable with that portfolio also from that point of view.
Your last question, Johan, regarding volume growth. Yeah, you're correct. There has been increase in loan volumes through the quarter, but we expect that to slow down in the third and fourth quarter. There are three main reasons for that. One is that, actually one third of the loan growth in the second quarter came from increased drawings on overdrafts, which is a seasonal effect that we haven't seen the last two years because of COVID, but that normally occurs in the second quarter. That accounts for one third of the increased volumes. We've also had a weakening of the Norwegian krone, and assuming a stable currency, we would not have a recurring effect on that in the second half of the year.
We also expect the somewhat reduced loan demand and we will manage, as our CEO referred to, our large corporate exposure to reach the desired growth rate of DNB, and we will continue to grow on the SME side in order to maintain or even increase a market share in a market that's very valuable long term for DNB.
Thank you. Maybe just to come back to one different aspect on the fees. The money transfer fees we saw were, I think, the second highest quarter ever. Is that purely a normalization of activity levels, or is there any kind of extraordinarily positive impacts there?
I think that's well spotted, Johan. It's a multitude of effects, but I don't think that we're highlighting any single effects. In addition to the market actually normalizing, I think the team has also done a great job over the past two years in increasing efficiency and reducing the costs related to these kind of services. There's an impact both ways, and I understand that the impacts on the cost side are actually higher than the revenue side, which means that if people are traveling and using their cards and using services from abroad also in the summer, there should be more potential on the revenue side.
Perfect. Thank you very much.
We have another question from the line of Riccardo Rovere. Please go ahead.
Thanks. Thanks again for taking this follow-up. With regard to AT1s, you have, if I remember correctly, you called one instrument right at the end of March. Are you okay with the capital structure as it is today?
We are okay with the capital structure as it is today, but we are also saying that we are looking to fund ourselves in AT1s and Tier Two during the.
Okay. Thanks.
There are no further questions, so I'll hand back to your host to conclude today's conference. Thank you.
Thank you.
All right. Thank you. We'd like to thank you for the questions, and we would like to also wish you a nice summer holiday whenever that is coming for you. Thank you very much.
Thanks. Bye.
Thank you.
Thank you for joining today's call. You may now disconnect. Hosts, please.