Hello, welcome to the DNB Q2 conference call. My name is Valeria, and I'll be your coordinator for today's event. Please note, this call is being recorded, and for the duration of the call, your line 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 you over to your host, Mr. Rune Helland, to begin today's conference. Thank you.
Thank you so much. Hello, everyone, and welcome to DNB's second quarter analyst call. Around the table here in Oslo, we are gathered most of the executive team, including Kjerstin, Ida, Ingjerd, and Harald, and they are ready to answer your questions. Ida will start by giving the highlights from the quarter, and then we will open up for questions. Ida?
Yes, thank you all for dialing in. I thought I'll start with a bit of the macro update. The Norwegian economy continues to show resilience and has continued to grow during the quarter. However, at a somewhat lower pace than previously. We expect growth to come in at around 1.2% for the year, driven by, amongst others, a healthy activity level in several industries across the geography. Inflation continued to surprise on the upside and came in at 7%. The core inflation came in at 7% in June. The central bank has hiked interest rates on two occasions, by 25 basis points in May and 50 basis points in June.
The key policy rate is now at 3.75, and the latest forecast from Norges Bank estimates a peak at 4.25 towards the end of this year, to remain at that level until end of 2024, then slowly start to come down, more to the levels around 3%. Inflation is expected to peak this year then subsequently come down as we move towards the second part of the next year. If you look at the Norwegian household, they continue to show resilience. They are on average, robust and have a good financial health. Unemployment levels remains at very low levels, 1.8%, and employment and the ability to service debt remains key in a country where a record number of employees own their own home and rates are primarily floating.
We are also seeing that real wage inflation is expected to return to positive growth in 2024. Turning to the second quarter results of the bank. We continue to show a strong performance across the board, across segments as well as product areas, and also show a solid asset quality. The profit for the period was NOK 9.5 billion, return on equity at 15.6% for the quarter, showing a solid result across customer segments. NII, Net Interest Income, is up 4.3%, well in line with what we've given in terms of expectation on NII effects from the repricing we've seen so far, up 32.2% from the second quarter, 2022.
This is primarily driven by profitable lending growth in all segments, as well as successful repricing, higher deposit volumes in personal customers, and overall higher interest rates. Net commission and fees continues to deliver strong results also in this quarter, up 10.2% from the second quarter, 2022. This is an all-time high second quarter, with strong deliveries across product areas and showing a robust and well-diversified fee platform. Impairment provision is NOK 871 million, 75%, or NOK 653 million, is related to a legacy foreign currency portfolio in runoff.
That impairment is stemming from the fact that the EU Court of Justice came with a judgment in June related to one bank's foreign currency portfolio in Poland, which led us to set aside reserves for the increased legal risk associated with the legacy portfolio stemming from before 2012. In addition to that, there are some impairment provisions in corporate customers, totaling NOK 215 million. That is related to a few customer-specific situations that were partly offset by reversals of impairment provisions in the offshore sector. The portfolio in corporate customers remains robust, we don't see structural changes, such as extraordinary drawings on available liquidity facilities or overdue payments.
On the personal customer portfolio, the portfolio remains strong and robust also, where we're seeing now. Our customers continue to be in dialogue with us, mainly seeking advice on how to manage increased costs and interest rates. Core Tier 1 capital ratio is 18.9, 180 basis points above the regulatory expectation. Leverage ratio at 6.6. I think I am there.
Thank you very much, we will open up for questions.
Ladies and gentlemen, as a reminder, if you'd like to ask questions or make contribution on today's call, please press star one. To withdraw your question, please press star two. Our first question is from Namita Samtani, from Barclays. Please go ahead.
Hi, thanks for taking my questions. My first question is just on net interest income. As the Norges Bank keeps increasing interest rates, how does DNB's rate sensitivity stay at 25 bps equals to NOK 1.1 billion? I'm just slightly surprised DNB can keep this sensitivity as rates keep going back, keep going up. Is DNB holding back on saying to deposit holders, or how are you able to uphold the sensitivity? Can you just confirm the rate sensitivity for the May hike is 25 bps, is NOK 1.1 billion, for June, for the 50 bps, it's NOK 2.2 billion. Secondly, just some questions on the asset management side and related to page 66 of the fact book.
firstly, the retail commission margin, it used to be around 57 to 58 basis points in 2022. So far this year in 2023, it's 50 to 51 basis points. Why has the margin declined so much? secondly, on the institutional side, the commission margin remained flat at around 14 basis points quarter on quarter, and there have been outflows, yet income from this product line has increased quarter on quarter. Thanks.
Should I start with the NII sensitivity? It's important for me to emphasize that we're not giving any guidance on future repricings or interest rate changes. What we commented on in the presentation was the effects, the annual effect on NII that we expect when it comes to the latest two repricings that we have announced. In all, it's three times 25 basis points. For that, we've said that per 25 basis points, we assess that we will have an annual NII effect of NOK 1.1 billion, in line with the latest repricing that we saw late last quarter.
When it comes to sensitivities overall, I think it's important to point to, first of all, that we're seeing a continued profitable growth in personal customers, as well as in corporate banking, also in this quarter. In addition to that, it's important to point to the competition and the competitors' behavior. We see that our competitors behave rational, and we're also seeing that that continues in the quarter. Even though there's definitely a fierce and strong competition in the market, we are also seeing, a rational behavior and focus on profitability above growth, as well as their loyalty to return on equity targets.
As to your question, on asset management and the margin for the various segments, let me just firstly start by saying that we have an attractive growth in assets under management in total for the period, with a 13.5% growth stemming from both net positive flows and increasing market valuations. That is positive for the revenue in total. For the retail segment, which is a segment that we prioritize and where we see recurring increases on a monthly basis, stemming from both the defined contribution pension schemes, as well as our discretionary agreements on the savings side.
The change that you see in the margin from the fourth quarter to the first quarter is related to a change in pricing structure, where we have introduced a platform fee for our customers and slightly reduced margin for the product. The revenue to DNB as a whole is intact, but there is an increased revenue in personal banking and a reduced revenue for asset management. The slight reduction of 1 bp from the first to second quarter must be seen in context of the trend from actively managed fund towards retail fund. This is something that we have commented upon over time. It has a very small and gradual effect, and it seems to be leveling off. Margins on institutional volumes, less attractive, as you're saying, 14 basis points.
We did see some outflow in the quarter. That has a lesser effect to the revenue in total. All in all, increased revenue from the fact that assets under management are growing with positive net inflows and increased valuations. Margins are overall, I would actually qualify them as stable.
Thanks very much.
We have another question from Sophie Peterzens from J.P. Morgan. Please go ahead.
Hi, here is Sophie from JP Morgan. Just going back to the legacy provision for DNB Bank Polska. You have NOK 4.8 billion of these FX loans and NOK 944 million of provisions, which is around 20% coverage. The other Polish banks or European banks with Polish operations are all guiding to reach at least 80%-100% coverage on the FX mortgages in Poland. Could you just give details why you think kind of 20% coverage is the right level for DNB and kind of what court cases you have already had? Maybe also if you could give what the peak loan book for Poland was in the past. That would be my first question.
The second question would be that inflation was a little bit higher in June at 7%. How should we think about the cost outlook, are you going to reiterating your previous cost guidance, or how should we think about the salary increases to come? Is there kind of risk that salary is coming in higher than expected next year? The final question would be: Could you just give the date when you did the resubmission for the 1.5% share buyback program? That's all from me. Thank you.
Okay, thank you for a very good question, Sophie. If I start with the DNB legacy portfolio that is in run-up and has been in run-up for a very long time, actually, from 2012. It now amounts to NOK 5.8 billion in total, and NOK 4.8 billion of that is related to currency loans. The currency loans is in all, the absolute majority of that is euros, and not Swiss francs, as is the case for some other banks operating in Poland, which I understand also has a larger effect on impairment levels. I can't naturally not comment upon other banks assessments, and I haven't heard the numbers that you're pointing to. I know that the Polish FSA has done a stress test that indicates impairment levels of up to 80%-90%.
Having said that, both they and the other external consultants, as well as the auditors, have been clear in saying that they see that as highly unlikely to be the outcome. The assessment that we've done is our best estimate as of today, both based on our composition or our portfolio, the historical development in that portfolio, in addition to the fact that it's predominantly euro loans. We are also, if you look at the number of customers that are seeking contact with us, because that's really what's important here as well, we aren't seeing an increase or a massive inflow of requests or a dialogue with increased dialogue with customers. This is, in our view, the best estimate assessment based on the knowledge we have today.
We would also say that it's fairly conservative, bearing in mind what we're seeing today. As you're right to point to, we have already previously taken some reserves based on this portfolio. Now, due to the new judgment coming from the EU Court of Justice, we deemed it necessary to increase those impairment levels. On inflation, stop me, Kjerstin, if you wanna comment on that. On inflation, we haven't given any cost guidance, that's important for me to just reemphasize. We are focusing on a cost-to-income ratio below 40%. Bearing in mind where we are today on the income side, that could perhaps not be seen as being less ambitious.
I need to emphasize that we are continuously focusing on our cost base and are always, as you know, also actively looking at efficiencies, automation, and where we can decrease costs. That's also why we highlighted that on the capital markets today. When it comes to cost or wage inflation, the wage inflation is still expected to be around 5.5% in Norway this year and 4.7% next year. We haven't changed the assessment based on that. If you look at the negotiations with the trade unions, actually, the number they're talking about is more in line of 5.2%.
We've actually have an assessment higher than that from our macroeconomist and therefore also in our assessment. We continue to work on the number of FTEs as well as costs overall, and we'll naturally continue to do that. Apart from that, I don't have any more comments or cost guidance.
As to the date, I don't-
Oh, yeah.
I don't think that we are, I mean, that was a couple of weeks ago. It's more than a couple of weeks ago. It's, I don't think we comment on the specific date. I mean, this is a process that the KNF manages. I think that's the most important comment. Yeah.
Okay, that's clear. Thank you.
Ladies and gentlemen, as a reminder, press star 1 to register your question. Our next question is from Ulrik Årdal Zürcher from Nordea. Please go ahead.
Hi, Ulrich here. Thank you for taking my questions. I was wondering why did you lower the buyback amount, even if you had to subtract the whole 2.5%? You should have more than enough headroom to be far above the requirement, even with the full subtraction. Also, given that you are very overcapitalized, you have very good earnings. If the buyback applications should, like, drag out in time, that's if, would you consider a special dividend that year instead? Lastly, it's a bit technical, but I was just wondering if you had some sort of sensitivity you could share with us on, let's say, house prices fall with 10% and commercial real estate prices falls 20%.
Like, what is your risk-weighted asset sensitivity to such a scenario? Thank you.
I think the comments we've made on why we lowered the amount is we would agree with you. We are very comfortable in our headroom on the capital situation, but we view the share buyback as a flexible tool, and in order to maintain that flexibility, the intention is to split up in somewhat smaller portions in view of the subtraction from capital.
as to, what we would or would not do if we do not, receive the approval, I think it's too soon to say. The important thing is that we are very committed to delivering on our dividend policy and our commitment to pay out excess, capital to shareholder over time. We're comfortable that we will have the ability to, do so. In terms of sensitivity, I think that's a difficult one, Ida?
Yeah, I think what's most important for us to point to, first of all, I should start by saying that we aren't providing any sensitivities. The main reason for that is that housing prices as well as valuation of real estate properties is not the main driver for the risk-weighted assets changes in the portfolio. It's actually underlying credit quality of the portfolio. Therefore, I would say point to unemployment as being one important area to look at, in addition to when it comes to commercial real estate, it's of course, vacancy rates and rental prices, as well as the underlying cash flow development in those companies.
We predominantly or we have a very strict credit policy, whereby we focus on corporate lending to commercial real estate and have very, very limited exposure to special purpose vehicles with financial owners, that are more sensitive to these kind of fluctuations. For us, cash flow, strong owners, and corporate lending are the main focus area and also have the main impact on impairment levels in commercial real estate.
That's very clear. Thank you. If I may just one last one. You're insourcing a lot of IT consultants, but I see that your IT consultant bill is maybe not decreasing. Is any reasons for that?
This quarter, the number of the conversion of consultants is not primarily related to IT. It's actually primarily related to hiring, or the hired staff that is, we've done in more impersonal customers in the customer-fronting side, related to manpower, resources that are now converted to FTs. In addition to that, we are, of course, seeing a window of opportunity when it comes to being attractive employer for tech and engineers, and we will continue that conversion as well. You see an increase in IT costs, but that's both related to activity and capacity, which is, of course, something that will have a positive element also in terms of what we get out of our IT spend.
In addition to the fact that we are also, of course, in close negotiations with our most important, IT partners, as well as the third-party negotiations that are important for us also going forward.
Thank you very much.
Our next question is from Riccardo Rovere, from Mediobanca. Please go ahead.
Thanks. Thanks for taking my question, and good afternoon to everybody. Couple of questions, if I may. The first one is on NII. The fact that the NOK 1.1 billion sensitivity to 25 basis points higher rates is unchanged versus the previous quarter, despite rates keep going up. Does it mean that when you reprice, you have reached a level of pass-through to depositors that you think will not increase more than the level than that is today? That is the first question. The second question I have is on the capital return. Now, I don't know how, really how to say, but this story on the buyback, 2.5%, 1.75%, is such a small number that, you know, makes the whole discussion to me a bit a bit pointless. This number is very low.
Can't you just walk away from the buyback, given that it is more a pain than anything else, and just move your cash payout to higher levels? Would you need to be approved by anyone, if you had to bring the payout to, I don't know, 75%-80%, and, you know, and erase this, let's say, this saga on the buyback? Thanks.
Thank you for interesting questions, Riccardo. As to your questions on NII, I don't think we can confirm that this is the level it will be at. As we usually say, the impact on the margin depends on the actual repricing of the portfolios, and the extent of that will depend on what the market situation and competitive environment, and the movement of the money market rate is. That will have to be assessed on a case-by-case basis. Regardless, I think increasing rates is attractive to us, also amongst others, because we have a very large capital base of equity on our balance sheet, that makes more money in a higher interest rate environment, as well as some deposit on transactional accounts.
In relation to capital returns, we will just take note of your comments. Again, I reiterate that we are very committed to paying back.
C apital to shareholder or shareholders over time, and that we are comfortable in our ability to do so one way or the other.
Kjerstin, did you need to be approved by anyone to bring the cash flow out to 80%?
No. The regulatory framework is such that, we would be able to pay out up to 100% of the ordinary results as a cash dividend, without a specific approval.
Okay, thanks. That's the only thing I need. Thanks.
We have another question from Sophie Peterzens, from J.P. Morgan. Please go ahead.
Yeah. Hi, here is Sophie again from JP Morgan. Just a quick follow-up. Danske Bank has already been paying for a transaction account for some time in Norway and in Sweden. We have seen that most banks are paying for a transaction account. In Denmark, you also have a few banks paying for a transaction account. What's your kind of position on paying for a transaction account, especially if rates go to 4.25? Do you think that's something that you would consider? How do you think, if you look back in history, what would history suggest on paying for transaction accounts? Thank you.
Well, I think it's difficult to go back in history because a lot has happened in relation to the actual product of providing a transaction account, given all the regulatory obligations that banks have now been that now need to comply with, in order to offer such a product. Including, I would add, the important work of fraud prevention, in which we were pleased to see in the latest benchmark study that we have, that we're actually that we're actually performing well in relation to preventing fraud. This is valuable to customers. We have not changed the conditions on transactional accounts that are not interest rate carrying. There's a zero margin on those transactional accounts in our product offering.
At the same time, we have very attractive alternative for customers that we are proactively offering to customers, and see that selectively some are interested in, using as an alternative. Those who have longer term cash. For most companies in the SME side, who, these are working capital that frequently goes in and out of the accounts, and the amount just represents the average that sits on the accounts over time.
Okay. Thank you.
Ladies and gentlemen, as a final reminder, if you'd like to ask a question, please press star one. There are no further questions, I will hand you back to Mr. Rune Helland to conclude today's conference.
Thank you so much. Thank you so much for your questions and your interest, and the DNB team here, and also would very much like to wish you all a fantastic summer. Thank you so much.
Thank you. Bye.
Thank you for joining today's call. You may now disconnect.