A very good morning to you all, and welcome to this DNB broadcast and the presentation of DNB's third quarter results. We hope you are safe and sound in these peculiar times. We are very happy to have you with us, even if you're sitting in the kitchen, the living room, or even bedrooms scattered all across Europe. We started 15 minutes later today due to the results of a Swedish bank that we know that some of you want to follow as well. Now we are on fire and ready to present the numbers for DNB. We'll open up for questions in about 30 minutes. You're more than welcome to type in your questions in the electronic form next to what you're viewing right now. Our extremely fit Head of IR, Rune, will ask the questions on your behalf.
We'll start with leaving the stage for Kjerstin.
Thank you, Thomas, and a very good morning to all of you who are here and all of you who are following us on the web call. Today, we are delivering a strong set of results for the third quarter, and if I were to be challenged on describing the customer activity and the business with one word during this quarter, the word would be normal. Delivering normal in a world that is so far from normal, we believe is a strong testament to how well the Norwegian economy and business activity is fairing in a very challenging economic situation for the world, more challenging than we've seen for decades. We believe that what we see is the advantages of being an advanced digital economy and an advanced digital society.
We continue to be highly motivated by being labeled as a part of the solution for the crisis and the situation we are in. We are grateful for the trust that our customers continue to show us by giving us their business and telling us that they are increasingly satisfied. I cannot start without saying that I am impressed by the relentless efforts from our team that work under far-from-normal circumstances during the quarter to deliver on our customers' needs and challenges. We have very often talked about the resilience of our earnings. When we look at our trailing 12 months earnings before losses during the past year, it is above NOK 33 billion. Once again, this is a testament to the resilience in our earnings in a challenging period for the world economy.
Our return on equity comes in at 9.5% for the quarter, underpinned by strong growth in personal customers and SMEs and lower losses than the previous quarter. NII is down compared to the previous quarter and last year. The customer margins during the quarter are stable, and the reduction from the previous quarter is mainly related to currency fluctuations. Third quarter, in terms of net commission and fees, is usually a slower quarter in the year due to the summer. We see a decrease from last year, but a growth compared to the third quarter last year of 2.1%. Here, usually, I like to highlight one or two areas, when in fact, this quarter, all the areas have delivered strong growth with the exception of money transfer that is impacted by the fact that people aren't traveling abroad. Impairment provisions, slightly under NOK 800 million for the quarter.
A lower number than we saw during the first two quarters of the year and in line with what we have guided. Main elements to highlight is that there is a reversal of reserves in the personal customer area. That we see most of the losses in the oil related sector. We continue to see a strong capital build-up. 70 basis points build up on the Common Equity Tier 1 during the quarter, where the major contributor is the earnings during the quarter. This confirms a very robust capital situation and a record high buffer towards both the required and the expected level by the government. You have noted the signals from the authorities where the FSA and the government has aligned themselves with the signals from the European Systemic Risk Board that has cautioned banks with regards to dividend distribution until the end of the year.
We will hold an extraordinary general assembly on the 30th of November, during which the board will ask for the authority to consider dividend for 2019 during the initial period next year until the next general assembly. The Norwegian economy saw a very sharp recovery after the lockdown period in March and April, and we continue to see this recovery, but we expect the pace of the recovery to be somewhat slower than we saw in the initial phase of the recovery as such. Mainland GDP grew for the fourth time in a row in August by 0.6%. The expected level for the year from DNB Markets is a contraction of 3.9%, but given that we are year- to- date now at - 3.9%, this may seem to be a conservative estimate. I would like to highlight two factors that have strongly contributed to the ongoing recovery.
The forceful monetary stimulus is zero interest rate policy. With more than 90% of Norwegians having floating interest rates on their mortgages, they see a reduction in costs and higher liquidity on their hands. They feel confident about their economic situation, we see growth in spending in retail as well as savings, and not the least, also in the housing market. Growth in house prices started early on in the recovery phase, house prices are now 5.8% higher than they were a year ago. The second factor is the ability to adapt and restructure on businesses. Quite rapidly, unemployment peaked to more than 10%. We have seen businesses adapt and restructure, now close to 70% of the workforce that were furloughed are back into their jobs or into new jobs. We've seen unemployment fall with the latest quarterly number being at 3.7%.
Actually, the last figure came in this week, and that was even lower at 3.5%. All in all, and certainly in a relative perspective, this is a very sound outlook for the Norwegian economy and thus also for our business. At the same time, there is reason to be cautious. We are fronted with a new situation on our hands with the pandemic. There is a lack of transparency with regards to how this is going to develop, and not the least, how long this will last. We know that the most significant driver for the economic activity is how successful the various countries in the world is in fighting the spreading of the virus. As most countries in Europe, Norway has also seen an increase in spreading after the summer.
As you can see from the illustration, we have been successful at containing it at a much lower level than unfortunately many of our colleagues in other European countries. The other point that I would like to highlight is related to the ability to respond if the situation should turn out to develop in a more negative direction than what we believe is the most likely scenario. There is ample room from the government to respond if the situation should deteriorate. You see the buildup of the value of the sovereign wealth fund. It is also important to point out that the stimulus so far, both related to the loan guarantee amount as well as the cash compensation, have been far less used than initially anticipated. The estimated spend from the wealth fund for this year is 3.9%.
When the government a few weeks back proposed a budget for next year, the proposed expected spending level is 3%. 3% is within the fiscal rule of spending for the sovereign wealth fund. In our view, this is also a strong signal of normalcy from the government with regards to spending. Also a strong signal that if need be, there is much more dry powder to respond to the development of the situation. A couple of highlights on the main business areas. Personal Customers has had a quarter with a substantial increase in activity during the quarter. Pre-tax operating profit came in at NOK 2.3 billion, 4.7% higher than the previous quarter.
We have seen a particular strong uptick in loan growth, 1.4% growth in mortgages, and a record number of house sales during the quarter where our real estate broker has taken, I'd say, more than their share of this increased market activity. We see and have confirmed a very robust portfolio. Hence, there is a net reversal during this quarter, and the overall portfolio quality is improved with a reduction of the non-performing part of the portfolio compared to last year. Lastly, the point I would like to make is related to savings. We had expected prior to COVID that we would see a strong growth in the savings markets. This trend is further underpinned by COVID. We see a strong increase in deposits. We see a strong inflow into funds, and see that we continue to take market share in this area.
From third quarter last year, there is an 18% growth in our assets under management in the retail sector, and we now have a market share of 34.8% in this area. Interestingly enough also, we see a very steep pickup in how we are selling these products, and 50% of these products are now sold directly on our mobile banking app, Spare, which is a very good development. Secondly, the corporate customer segment. It is important to point out that the profits prior to impairment remains at a stable level and the lower impairments, of course, after impairments, there is a substantial improvement. We see a very healthy growth in the SME sector. In fact, so far this year, we see a growth in the SME sector of more than 6%. Furthermore, there are very low losses in this sector and a stable portfolio quality throughout the quarter.
Stable portfolio quality development is also the top line for the remainder of the portfolio, where the challenging area that we would highlight continues to be the offshore sector, where we see most of the customer-specific losses. I guess we can say during the quarter that it was a relatively slow pickup after summer. August also remained quiet, but in September, activity came fully into the market, both in the corporate banking in terms of lending activity as well as in our markets business with capital markets activity. There is a substantially unhealthy pickup of the business with a very healthy, I would also say, pipeline going into the fourth quarter. With those few remarks, I will leave the floor to Ottar to take you more through the quarterly numbers.
Thank you, Kjerstin. The loan growth in the third quarter was 0.6%, which reflects a 1.4% loan growth in personal customers and a full 1.8% in SMEs, partly offset by lower loan volumes in large corporates. We maintain our guiding of around 3%-4% growth in loan volumes for the full year. The healthy growth in deposits continued in the third quarter, with 2.6% growth for the quarter, lifted by deposits among corporate customers. Year-to-date deposit growth was almost 14%, 8.5% for personal customers and close to 18% for corporate customers. Average loan volumes in the third quarter was affected by currency rates. Loan volumes at quarter end was 1.3% above the average for the quarter, providing positive momentum into the fourth quarter. In the third quarter, the deposit-to-loan ratio strengthened further to 68.2%, compared to 62% at the end of last year. Let's move on to margin development.
The Central Bank reduced the key policy rate from 1.5% to a quarter percent in March and further down to zero in May. We subsequently reduced customer loan rates in April and May, while deposit rates were reduced seven to eight weeks later. Since loan rates were reduced earlier than deposit rates, the effect of customer repricing was approximately fully reflected in the second quarter numbers. The net interest margin in the third quarter was 1.38%, four basis points lower than in the previous quarter. Volume-weighted combined spreads decreased two basis points. These changes reflect portfolio mix effects. Partly, the increased deposit-to-loan ratio, where deposits have lower margins than loans, and partly personal customers becoming a larger part of the total loan book with lower margins than for corporates. Moving on to net interest income.
As mentioned, the customer repricing after Norges Bank's policy rate cuts were reflected in the second quarter numbers. In the third quarter, one more interest rate day added NOK 91 million to net interest income. As we mentioned in the second quarter presentation, the second quarter included a NOK +39 million one-off effect from deposit guarantee fees. A stronger Norwegian krone currency reduced net interest income by NOK 151 million compared to the second quarter, while changes in margins and volume only had marginal effects. Moving on to commission and fees. Commission and fees show seasonal fluctuations with the summer holiday in the third quarter. Compared with the third quarter last year's, commission and fees increased 2.1% despite COVID-19 effects. Real estate broking increased 18%, reflecting the strong housing market as the CEO mentioned.
Investment banking fees were up 7% from the third quarter last year due to higher activity within debt capital markets. Fees from asset management and custody services increased 14% compared to the same quarter last year. 25% of this increase was from performance fees. The positive net inflow in assets under management continued in the third quarter, and assets under management are at an all-time high. Guarantee commissions continue to show a healthy growth, up 15% from the same quarter last year. Money transfer and banking services are still significantly impacted by COVID-19, as the CEO mentioned. Domestic use of cards has increased but does not fully compensate for a reduction in the more profitable use of cards internationally. Fees from the sale of insurance products were up 1% from the same quarter last year.
Overall, activity and commission and fees have developed more positively than expected one and two quarters ago. I can also add that other operating income from DNB Life and associated companies, mainly Fremtind and Luminor, also increased in the third quarter. Moving on to operating expenses. In the second quarter, we stated that pension expenses were approximately NOK 115 million higher than normal due to high return on the compensation scheme related to the closed defined benefit plan. In this quarter, the pension expenses are NOK 20-30 million higher than normal due to positive return on the same compensation scheme. This effect has been hedged, and the corresponding gain is recognized in gains on financial instruments. The agreement with Posten Norge AS to provide banking services will discontinue with a cost saving of NOK 61 million in the third quarter.
This was part of the cost initiatives we talked about at our Capital Markets Day last November. The service has been replaced by offering cash withdrawals and deposits in grocery stores throughout Norway. Performance-based salaries increased NOK 46 million in the quarter. Other expenses in the third quarter were approximately NOK 200 million lower than normal, partly due to COVID-19 effects and partly seasonal effects. This includes traveling, marketing, and IT. Moving on to asset quality. Impairment provisions in the third quarter totaled NOK 776 million, in line with our guiding that we expect these to be highest in the first half of 2020. For personal customers, we saw net reversals in stage 1 and 2 and NOK 360 million in total, particularly within the consumer finance portfolio. As the CEO mentioned, the Norwegian households are doing better than expected.
The more negative development for personal customers provisioned for in the first quarter has not materialized. The non-performing portfolio for personal customers is actually lower now than before the pandemic. For corporate customers, impairment provisions totaled NOK 1.13 billion. 91% of this was within oil and offshore segment. stage 1 and 2 impairment provisions decreased as customers migrated to stage three, while stage three impairment provisions totaled NOK 1.33 billion in the oil and gas offshore segment and NOK 1.77 billion for corporate customers in total. Offshore customers now constitutes less than 1.5% over our exposure, down from 1.7% in the previous quarter, but remains the most challenging sector. In other corporate customer segments, impairment provisions totaled NOK 100 million. There have been no indications of deteriorating credit quality within the commercial real estate portfolio.
For the hotel and tourism industry, there was some negative migration, both within stage two and from stage two to stage three, but the total impact is still limited. We acknowledge that there are still significant uncertainties around the economic outlook. However, the overall portfolio quality is robust and well-diversified with only 1.3% in stage three. Moving on to capital. The leverage ratio increased 10 basis points to 6.9% in the third quarter, reflecting 50% of retained profits for the quarter, partly being offset by NOK 30 billion in increased deposits with central banks. The Common Equity Tier 1 requirement is 14.7% plus one percentage point in Pillar 2 guidance, giving a regulatory capital expectation of 15.7%. The Norwegian countercyclical capital buffer requirement was reduced in March. If it is increased again to the maximum rate, the capital expectation would increase to 16.9%.
The requirement will, at the earliest, be increased in the first quarter of 2022. The actual capital level was strengthened by 70 basis points in the quarter to 18.9%. The capital ratio is thus at an all-time high. The headroom above the minimum requirement is also at an all-time high. Norway has not yet implemented CRR2 or the quick fix to CRR2, which the European Union implemented in June. DNB's capital numbers are thus not impacted by CRR2, which is expected to be implemented sometime next year with a small positive effect. The dividend of NOK 9 per share for 2019 proposed earlier this year, and 50% of profits for 2020 are not included in the numbers I have mentioned. Several factors explain the 70 basis point increase in capital in the quarter. 50% of profit for the quarter increased capital by almost 30 basis points.
Positive credit migration added another 20 basis points. Reduced counterparty exposure for derivatives increased capital by 10 basis points, mainly due to the stronger Norwegian kroner currency and reversal of exposure increase we saw in the first quarter. Foreign exchange and other effects improved the ratio by close to 20 basis points, including the effect of higher provisions on non-performing exposures. In total, the actual capital level thus was strengthened by 70 basis points, as mentioned, to 18.9%. As mentioned, both the ratio and the headroom to the regulatory expectation is at an all-time high. To sum up the financials, return on equity, the cost income ratio, and earnings per share are negatively affected by Norges Bank's zero policy rate. The central bank last month kept the policy rate forecast largely unchanged with a first policy rate hike towards the end of 2022.
Return on equity and earnings per share are also impacted by high impairment provisions, and the return on equity also by higher average equity, reflecting that dividends were not paid as usual in the second quarter. Return on equity nevertheless increased from the first and second quarters to 9.5% this quarter. The cost income ratio was 42.5%. Earnings per share came in at NOK 3.41 and year to date, NOK 8.76. As the CEO mentioned, the board of directors has announced that an extraordinary general meeting will be held at the end of next month with three proposals on the agenda. The first proposal is to merge the holding company with DNB Bank, making the bank the parent company in the DNB Group.
This will make issuance of senior non-preferred or MREL capital less expensive than would have otherwise been the case, and it will make both governance and reporting more efficient. It is proposed that one share in DNB be exchanged for one share in DNB Bank. The merger is expected to take place in the middle of next year with accounting effect from the 1 of January 2021. The second proposal is to authorize the board of directors to decide on the distribution of dividends up to NOK 9 per share for 2019, valid between the 1 of January 2021 and the annual general meeting in the second quarter next year. The third proposal is to renew the board of directors share buyback authorization in the same amount as has been the case for several years. Use of share buyback authorizations are conditional on the approval from the Norwegian FSA.
In accordance with our dividend policy, priority will be given to pay out more than 50% of profits in cash dividends before share buybacks are considered. Thank you for your attention.
Thank you, Kjerstin and Ottar. As usual, we'll open up for questions. If you could be so kind to use the microphone in the aisle, to maintain your long-term lung capacity. That would be good. We'll start with Joakim Svingen, please, from Arctic.
Okay, good morning, and congrats with a great result. It seems perhaps the market doesn't believe in the dividend proposal and the share buyback authorization. Could you perhaps give some flavor? Have you had dialogue with the FSA on behalf here, and what's also the reason why you put the EGM before the 1st of January?
We had already announced in the spring that we would hold an extraordinary General Assembly during the fourth quarter, and there are several topics on the agenda. I think we can say what we know and what we see. The signals from the authority are aligned with the Systemic Risk Board, which have a timeline until the end of the year. The board has thus decided to ask the General Assembly for an authority to consider dividend distribution. While considering that, of course, they will have to assess the robustness of the financial position of the company, the economic outlook, and any signals from the authorities if there were to come any after January next year. Again, we reiterate that we have a very robust capital situation, in fact, a record level towards our required capital level.
Again, I think we highlight that the authority they intend to request is to pay a dividend up to the previously proposed NOK 9.
Okay, thanks. I was just wondering if you could add something to your loan loss guidance given the low impairments taken in Q3.
Add something to, sorry.
To the loan loss guidance lower in the second half. Could you be a bit more specific perhaps?
Well, I think our CFO was quite expansive in his comments. Largely, we see a continued picture that is consistent with what we saw in the second quarter. Due to IFRS 9, we thus take most of the impairments in the initial phase. If anything, I'd say we continue to see a better development than expected, certainly with the very robust quality in personal customers. Even more, I'd say, in the corporate portfolio, where we work very closely with the customers and assess the various parts of the portfolio that we highlighted as potentially COVID exposed, such as commercial real estate, such as hotels and tourism. We see a slight migration on the hotel side and tourism. That is a very small part of our portfolio. We've said that mainly our exposure is to the larger operators within the industry.
They have been able to raise flexibility to sustain the period. Of course, they have nowhere near the coverage they need to make money, but they have substantial reserves. There is an uncertainty with regards to how long this will last. It was, I think, very good for that part of the industry to see that the government came out this week prolonging the support to the travel and hotel industry by continuing to compensate a substantial part of their fixed cost longer than they do for other industries who don't really need it anymore.
Good.
Offshore, as we say, is challenging, and that is where the most of the work needs to be done, given also the situation they were in prior to COVID.
Okay, the final one was, you touched upon was within commercial real estate, there was migration of NOK 10 billion from stage one to two, I think. Is that primarily hotels then?
I don't think we are that detailed into which part of it it is. Again, that's a very small part of the portfolio. Commercial real estate in all is 10%. It can also be related to new business being done, and the movement. I wouldn't read too much into that.
Okay, thanks.
Thank you. Next up, Johan Ström, Carnegie.
Thank you. Three questions from me. First of all, on the dividend. Regardless of what date you potentially pay out the dividend next year, could you put the ex-dividend date for the shares in 2020?
No, the ex-dividend date will have to be after any decision being made by the board of directors. If and when the board of directors decide to use the authorization, and if they receive that authorization from the general assembly, the ex-dividend will be shortly after that board announcement.
Thank you. On the CET1 ratio, if you were to add back the NOK 9 dividend and accrued dividends during 2020, what would the CET1 ratio by Q3 would have been then?
Exactly 21.0.
21.0, okay, thank you. It seems like you're going to have strong loan growth in Q4. Do you think you're going to be able to end 2020 with a lower deposit-to-loan ratio?
We expect some normalization of the deposit development for a remaining part of the year. We do not expect the extremely strong development we have seen, particularly in the first half to continue the same strength throughout the year.
Thank you.
I think it's more important for us to see the underlying very healthy activity in the business development, and targeting profitable growth rather than the deposit to loan mixes where we are now.
Sure. Thank you.
Next in line, Thomas Svendsen, the same talent now representing a new bank, SEB. Congrats.
Good on thank you. Good morning. Three questions. On the commercial real estate, since your loan loss provision is so low, and you point out the risk is mostly on the downside, have you considered doing a precautionary strengthening of the loan loss reserves in commercial real estate?
I think we commented on that. There were some reserves taken in the very initial phase of COVID. Beyond that, we have continued to follow the portfolio very closely and are, I’d say, loyal to our modeling. What we account for is our best judgment and what we see in accordance with our modeling. Areas that we look particularly closely is our shopping malls, they are hotel properties, they are properties with tenants in the oil and gas related sector. Given the development that we see, we haven’t found reason to take more reserves than what you see during the quarter.
Of course, the significant reserves were taken in the first quarter when we updated the macro forecasts in accordance with IFRS 9 rules to provision for expected losses going forward.
Okay. Two more questions. On the deposit margins, they increased somewhat Q over Q. Should we expect the increase to continue over the next quarters as you fine tune your pricing? Secondly, you gave guidance on the loan growth. Should we expect a stable business mix in that guidance?
I think loan growth, our best estimate and expectation we've given for the year is 3%- 4%. It's been a more challenging year to guide in, but given that we're today at 3.3, we are likely to sort of be within that range, also, obviously, depending on currency fluctuations. As Ottar is mentioning, we do expect some leveling off of the deposit trend. It's extremely hard to give any type of guidance when it comes to asset mix as such. With regards to margins, it's also very hard to be specific for several reasons. I think what we can say is that we continue to optimize and work for profitable development, both on the lending side and on the deposit side.
We've seen a very good pickup on the personal customer side during the quarter, in particular in September, and we're now booking new business at higher prices than the average book that we currently have. Not saying that that will have a material impact on the lending book and on the overall margin, but there is no back book pressure in terms of how we see the market today.
Thank you.
Okay. Rune Helland, our digital ninja. Any questions from the internet?
Sure is. A question from Christoffer Adams from Kepler Cheuvreux. Some small banks seems to be pricing mortgages more aggressively now. Is it your impression that the competitive pressure is increasing?
The mortgage market in Norway is very competitive, and that is good for the customers. Overall, the margins that we have seen during this quarter are stable. We have competitive prices, but more so we believe that our healthy growth during the quarter is related to a very well-performing and successful sales force. We do have the impression with a strong pickup in activity that actually some are challenged in terms of processing the very high activity we have seen. In fact, if we look at finance certificates compared to last year, there's a growth of more than 30% and a record high conversion rate at above 70%. It's a competitive market, but it's also important to be efficient, highly digital, and process in a good manner, and we feel that we've performed well during the quarter.
A question from Nils Christian Øyen, SpareBank 1. CET1 is very solid. Will a low solvency ratio in the life company have any impact on DNB's dividend capacity?
The solvency ratio in the life insurance company imply that in the short and medium term cannot expect any upstreaming of capital from the life insurance company to the bank or the holding company. There is no need for adding capital into the life insurance company. They are well capitalized with a solvency margin of 176% under the transitional rules.
A question from Ulrik now, Nordea. Why is the tax rate guidance for 2021 and 2022 raised from 21%-23%?
The interest rate differential between Norway and the U.S. has come down, and that negatively impacts the tax allocation and the total tax bill for the bank. That's the reason why we have a 23% guidance for 2021 and 2022.
A question from Adam Barrass from Berenberg. Have you discussed the 2019 dividend proposal with the finance minister?
We have a close dialogue, I'd say, with the Norwegian authorities, in general, both the FSA and the Ministry of Finance. I think that is what we can comment on in that sense.
Well, one question from Vegard Toverud, Pareto. How much of the NOK 380 million personal loan loss provision reversal is related to consumer finance? How much of this was built up in the first half of 2020?
The vast majority is related to consumer finance, and that amount was provisioned for in the first quarter when we updated the macro forecast.
Okay. I think those were the main questions.
Okay. Any more local questions in the room? No? All set. Okay. Thank you so much for joining us, and you're more than welcome to join the conference call at 1:30 P.M. local Oslo time later today. For media, you can address Vibeke Hansen, Head of Media at the back. Thank you so much. Have a nice day.