Good afternoon, everyone, and welcome to DNB's investor call. I'm Rune Helland, and with me here in Oslo, I have the CFO, Ottar Ertzeid, and the CRO, Ida Lerner. We also have from Treasury, Thor Tellefsen. Due to DNB's participation in investor calls at Morgan Stanley's conference tomorrow, and to uncertain times and high volatility in the capital markets, we decided to give all investors and sell-side analysts equal treatment and make ourselves available, and give you all an opportunity to ask your questions directly to management of DNB. I'm sure we'll not be able to answer all your questions, but we will do our best. Before we start the Q&A, our CFO, Ottar Ertzeid, would like to give you some of our main messages. Over to you, Ottar.
Thank you, Rune. The foundations for handling volatile times are put in place when times are good. DNB benefits from entering this year better capitalized than ever, better financed than ever, and with a higher credit rating than ever. Common Equity Tier 1 at year-end was at 18.6% versus a requirement of 17.1%, including the management buffer or LR2 guidance. We thus have a higher headroom above requirements than ever before. After reductions in the countercyclical buffers in Norway, Sweden, Denmark and the U.K., the Common Equity Tier 1 requirement is now 15.7%, leaving a high headroom of 2.9% towards the actual level at year-end. We have an AT1, an alternative Tier 1 call later this month, but this was refinanced, pre-funded in the fourth quarter last year, in line with our conservative policy of pre-funding, in order not to take any risk on market conditions.
With regard to financing, we pre-funded almost NOK 60 billion in senior notes in November and December, as these were grandfathered as MREL-eligible requirements. We enter this year better financed than ever and with zero long-term funding requirements for the entire first half of 2020. The steps management took in the latter part of 2019 regarding capital efficiency and financing really pays off during these times. Last year, the bank received a AA rating from Standard & Poor's, in addition to the AA rating we have from Moody's. This means that we presently have the best possible short-term ratings of A-1+ P-1, from both the large rating agencies, and that's the same rating as the government of Norway. Our credit rating has never been better, we benefit from this during these volatile times.
We have each quarter reported the market value effects of the so-called basis swaps and the US dollar alternative Tier 1. As we have explained, these basis swaps are hedging instruments for volatile times. These days, this is really paying off and compensating for negative mark-to-market effects from credit spreads, CVAs, and DVAs. The US dollar alternative Tier 1 will give significant positive gains with today's FX rates. To calm the markets, the Norwegian Central Bank last week stated that each week going forward, they will offer loans at attractive rates. We have no need for such loans and not ask for them.
We will print the COVID bonds in the amount of 50 billion NOK, which we will use as collateral for such loans, and deposit the proceeds with the Central Bank and at the same rate as for the loans, and have this as an extra liquidity reserve going forward. Thus, the liquidity of the bank has never been better, the solidity of the bank has never been better, and the credit rating of the bank has never been better. Moving on to operations these days with the virus environment, the bank operates fully as normal. Staff have been split on several geographical locations, and a number of critical functions are spread among these locations. A lot of staff is working at home, to leave space for others at the ordinary office premises.
In other words, bank is operating fully as normal and will continue to do so also going forward. At our Capital Markets Day, we explained that the monetary flexibility of the Central Bank with a policy rate of 150 basis points, it gives the Central Bank handling room or leeway, should they feel that this is necessary. Last week, the Central Bank lowered their policy rate with 50 basis points to 100 basis points. At the same time, they guided for a 25 basis point additional reduction in the policy rate in June and a 20% probability for a further 25 basis point reduction during the third quarter.
However, market conditions change, and the market currently expects a larger cut and earlier than this. We have lowered our rates on loans to personal customers up to 35 basis points from May 1st, and deposits up to 30 basis points effective May 15th. Certain SME loans have also seen a rate reduction of 35 basis points effective mid-April. Following the significant fall in interest rates and also in equity prices, the life insurance company of the group have postponed paying dividends, which was planned for the first quarter, and will make a decision that later this year, later in the second quarter. At the Capital Markets Day, we reviewed the uniquely strong financial and fiscal position of the Norwegian government. These muscles are now being used to assist businesses in Norway being impacted by the virus situation.
The Norwegian government has launched a state guarantee for NOK 50 billion in new bank loans to SMEs suffering from operating losses due to the virus situation. The government has also stated that this amount may be increased. The government has reestablished the Government Bond Fund, which will invest in bonds issued by Norwegian companies, initially NOK 50 billion there as well. They have also launched further initiatives, for example, unemployment benefits starting from the first day, and independent workers will receive 80% of the average income over the past three years. The government has also reduced the payroll obligation for employers making redundancies. These actions and also several others will reduce the negative impact on the Norwegian economy and also the negative impact for banks following the virus situation. We will now take questions and answers.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press dial one on your telephone keypad. Also, please note, in this meeting, you can only ask two questions per person and only one time. The first person who wants to ask a question is Jeff Davies from CG. Please go ahead. Your line is now open.
Hi there. Thank you very much for taking the time to do this call. A quick question. You mentioned about the basis swap impact and the AT1 impact offsetting some potentially more tricky areas on the trading line. Can you give us a little bit of color around that? Are there any specific parts of the trading line that you see going in the other direction? I think that would be very good to clarify. Second of all, very early to speak about loan losses, I know, but can you give us an idea of how much generic provisions or upfront provisions could be driven by the change in the oil price that we've already seen? Over what kind of period and what kind of moving average you use to factor those into the model? Thank you.
With regard to the first questions on market value changes, we expect that the market value changes on the US dollar AT1 and on the basis swaps will be higher than any negative impacts from, for example, credit spread widening on our bond holdings, which give a negative mark to market on bond holdings, and also any negative credit valuations on counterparty derivative exposure.
Okay. That's clear. Thank you.
As you rightly say, when it comes to potential impairments going forward, this is still very early days. What I think is important to highlight and what we've said before is that overall, we are comfortable with the portfolio that we have and the quality of that portfolio. As you could also see, we are moving into this rather challenging position from a very good and solid part or portfolio. When we look at the changes that we will see going forward, it's important to differentiate between what is the different stages in relation to the IFRS 9 model as well. Of course, when we look at the models for stage one and two impairments, there are several macroeconomic variables of which the oil price is one that has an impact.
It's important to keep in mind that the models incorporate an average of future expectations of several macroeconomic variables. I think that it's probably good to also highlight that the IFRS 9, it's built in the way that the majority of the impairments the bank expects will come from what's currently in stage 1 and stage 2, should be taken early on in the credit cycle. I can't really give you any more numbers in terms of what the effect of the oil price will have, but that's one variable of several macroeconomic variables.
That's very helpful. Thank you very much.
Before we let the next person through. Ladies and gentlemen, if you would like to ask a question, please press dial one on your telephone keypad. Please note, you can only ask two questions in this meeting per person. The next question comes from Johan Ekblom from UBS. Please go ahead. Your line is now open. Johan Ekblom from UBS, your phone line is now open. You can talk. Please unmute your phone locally.
Thank you. I was on mute. It's, I guess, a reflection of everyone working at home, et cetera. Just very quickly, continuing on the asset quality theme, if you go back to the last time we had oil at around NOK 30, you guided to about NOK 18 billion of loan losses over a three-year period. I guess that time around we didn't have the same broad-based stress in the wider economy, as we do this time. Is there any reason we should think that this time around should be a materially better outcome? How would you compare those two? Maybe relating to that, if I remember correctly, at the time you said that when we entered the last downturn, kind of a NOK 50 barrel was where you started to see pain. Clearly we've seen a lot of efficiency measures in the oil industry since then.
At what kind of levels do you see your clients running into material problems today?
Well, first of all, I think it's important to say that we are in a completely different situation when it comes to the portfolio and the way that it's being structured today compared to what it was when we entered into the last crisis. We have rather radically decreased exposure towards the cyclical industries if you compare it to last time around. I think it's also important to say that the companies themselves have adjusted their fixed cost base and also the variable cost base to a completely different picture than what was the case during the last oil crisis. I would actually say that the customers themselves are in a completely different situation than what they were at that point of time.
Having said that, of course, as we've indicated before, offshore is and will continue to be the main challenging part in the portfolio, but it only accounts for 1.8% of total EAD in the bank as of today. I think it's also important to highlight that even though we made impairments within oil and gas last time around, we didn't experience any actual losses.
Thank you.
The next question comes from Martin Leitgeb from Goldman Sachs. Please go ahead, your line is now open.
Yes, good afternoon. First of all, many thanks for hosting this call. It is really helpful, particularly in these times. I was just wondering if you can comment a little bit on the prospect for capital distribution, just given the comments made by some of the central banks, in different jurisdictions of not using reduction in countercyclical buffers to increase payouts and so forth? Just looking back at 2019, the total payout ratio of DNB was around 78%, of which obviously, dividend were slightly below 60% and the rest was buybacks. How should we think about distribution this year? Should we think that the buybacks could come to a halt, just being conservative and be reevaluated once there is more clarity? Is also the possibility of a dividend capital to be paused, but given the dividend example, probably there is a bit of time to think about that?
Secondly, I was just wondering, you mentioned offshore as one of the risk areas you see. I was just wondering if you see which part of your loan book otherwise you would be most worried at this stage. Is that travel, hospitality, or any of the other sectors? If you could help us size how big these sectors are as a % of your total EADs. Thank you.
With regard to distribution, I think our dividend policy is well known. We're paying more than 50% of profits in cash dividends, combined with an ambition of increasing nominal dividend per share every year. On top of that, we have said that we will consider using buyback as a flexible tool for paying out capital, but it means that buybacks will vary from year to year. That is the residual, the flexible tool. With regard to distribution, we are of course aware of the statements by the central bank that the reductions in the countercyclical buffer shall not be used to increase further dividends from financial institutions.
The Norwegian FSA have also written a letter to all financial institutions in Norway, making the institutions aware of the fact that there has been a change of circumstances and ask the board of directors of each institution to consider if their original proposals are still valid. The bank's board of directors will do so within the deadline set by the FSA, which is March 23rd.
When it comes to the loan book and the portfolio as such, of course, as you've also rightly pointed out, the oil-related exposures, of course, have a direct impact of the decrease in the oil price. In addition to that, we would say that, of course, shipping as also being part of our portfolio, but only accounting for 3.1% of our total EAD, is also exposed. It is however important to highlight that it is also different segments, sub-segments within shipping, whereby some segments actually have an uptick in activity. We also see the fact that if China now recovers slightly in terms of production levels coming up again. Shipping might also have a positive impact of that on the areas that otherwise have been slowing down over the past few weeks. In addition to that, of course, cruise, hotel, and leisure is something that we follow very closely.
We don't have a significant exposure to cruise, also a large part of it is hedged by ECA guarantees. That's also important to highlight. When it comes to commercial real estate, it's mainly then hotels and shopping malls that will be affected. Having said that, we still feel fairly comfortable with the products that we have today and also the type of customers we have in our portfolio. It is important to highlight that this is naturally a situation that could develop in either way. The strong support that the Norwegian government have shown helps massively in a situation like this. In addition to that, of course, airlines is a sector which is struggling at the moment. DNB has minimal exposure to the airline industry as such.
Very clear. Thank you. Thank you very much.
Ladies and gentlemen, if you would like to ask a question in this meeting, please press star one. As we mentioned, two questions per person. The next question comes from Jacob Kruse from Autonomous. Please go ahead. Your line is now open.
Thank you. Can I first ask about the response from Norwegian SMEs to what has been seen so far, as far as you can see with the banks and your corporate? Are you getting requests for help? Are you getting material drawdowns on your credit lines? Just anything you can offer there in terms of understanding what you're seeing. Then, I guess my second question, you mentioned these guarantees and the hedging exposures on cruise, hotel, and leisure. Could you just add a little bit more detail to what that is and to what extent your exposures here are hedged? Thank you.
Sorry. If we could start with the SME. Of course, this is still very early days considering the fact that the government proposal only came out on one Sunday evening, and we also had the full closure of Norway as such late last week. We haven't seen any massive drawdowns or changes in terms of customer behavior as of today. We are looking also at the tools that the banks have in terms of supporting our customers in extending amortization periods or reducing the requirements for amortizations as well. This is something that we are, of course, following very closely and are supporting the Norwegian and our customers as well with. Generally, it's too early days to see any radical changes in customer behavior. We haven't seen that as of now.
I can mention that the state guarantees being announced on Sunday is specifically targeted at this area to help these SMEs going forward, and it will just be very helpful.
Yeah. I'm sorry, your second question was related to ECA guarantees?
Yes, exactly. Just to understand what the volumes are there and what the impact will be of those if in a more difficult scenario.
Well, if you say that we have less than 1% of total EAD in cruise, it's a very small amount just as such. In addition to that, we then have export credit agency guarantees, which means that 50% of the amount that we have as exposure is guaranteed by most often the case, state-owned guarantee agencies. That means that we essentially have a government risk on that rather than actual customer risk.
Okay. Thank you. Sorry, those governments, they are not where the ship has flagged. It's where the company-
It's well-rated governments.
Okay. Thank you very much.
Thank you.
The next question comes from Sofie Peterzens from JP Morgan. Please go ahead. Your line is now open.
Yeah. Hi, here is Sofie from JP Morgan. I was wondering if you could just talk a little bit about your view on interest rates and what your expectation is, how low do you think the Norwegian interest rates go? Do you expect them to go to zero? Could you also give sensitivity on what every 25 basis point impacts or every 25 basis point cut in the interest rate, what impact it has on your net interest income? My second question would be on fee income. How should we think about fee income in the coming quarters? How much are your assets under management down, both on the growth or also on the life insurance side, and how should we think about any potential impact on fees from payments?
Your corporate finance activity was very strong last year, so if you could just talk a little bit about the fee outlook. Thank you.
With regard to the rate outlook, on Friday, the central bank said that their path going forward is a 25 basis point further cut in June, and a small 20% probability of a second rate cut of 25 basis points in the third quarter, which will leave the rate at the level of 0.5%, but then most likely having the bottom of 0.75%. The market currently expects more. On the other hand, the central bank has previously stated that they do not look very positively on a too low interest rate environment, but it remains to be seen what they actually do. Their guiding is for a 25 basis point cut from today's level. With regard to interest rate sensitivity, the situation is still as we have communicated before, that we have little direct interest rate exposure.
A small positive exposure towards falling interest rates, NIBOR, but the major impact will be from any adjustment of the customer rates. Until we adjust the customer rates, the impact will be limited. With regard to fee levels, of course, the investment banking area, as you mentioned, they will temporarily see a decline in activities since the markets are very slow for the time being. Traditionally, this will pick up at a later time, as you probably know, as the underlying financing needs are still there. With regard to fee income in other areas, the decline in market value of equities will have a negative impact on asset management and also on the life insurance company, the defined contribution area. From the starting point, the sensitivity is approximately NOK 12 million per 1 percentage point decline in equity values. NOK 12 million annually.
Okay, that's very clear. Just on the interest rates, one more follow-up question, if I may. When rates were going up, you guided that every 25 basis points roughly has NOK 1 billion or a NOK 1 billion plus initially impact on your net interest income. Is it fair to assume that when rates go down 25 basis points, that we should assume NII to be NOK 1 billion lower?
It sounds a logical way of thinking. At the same time, it's very important to stress that both money market rates and credit spreads are very volatile for the time being. We will not give any precise guiding for the moment. Your reasoning is easy to follow.
Okay, great. Thank you.
Ladies and gentlemen, if you would like to ask a question, please press dial one now. The next question comes from Ulrik Fuchser of Danske Bank. Please go ahead, your line is now open.
Yeah, hello. I was wondering if you want to suspend down payments for mortgage clients, Could that get in your way? Does that need to be suspended? Two, I was wondering what measures, if you have any thoughts on that, would you like to see from the Norwegian government on Thursday that would help you? Thank you.
With regard to the first question, the government has made very clear that the regulations apply for new loans and that it will not prevent us for assisting customers by deferring installments on existing loans. We have stated that we will actually help customers, in the situations you mentioned, going forward without impacting in any way the regulations we abide by.
Measurements from a Norwegian government.
Yeah. We are very happy with the steps and initiatives launched by the Norwegian government. We believe that they are very relevant and address the needs of the business community and also the households in an adequate way. We have no further proposals beyond what is actually being launched by the Norwegian government.
Okay. Thank you very much.
The next question comes from Peter Kessiakoff from SEB. Please go ahead, your line is now open.
Yes. Hi, thank you. Just two quick questions, and one is a follow-up from before, when asked on the credit facilities and the drawdowns. I guess the question previously related more to SMEs. Looking at large corporates, are you seeing any trends there? I guess there's a lot of articles out saying that owners are telling their companies to make sure that they draw down the facilities in order to sit with liquidity in this environment. That would be the first question. The second one is just on IFRS 9.
I guess, coming back to one of the questions previously in terms of the implications on the declining oil price and perhaps macro scenarios. When looking at loan loss provisions going into, say, 2020 or in general the sensitivity, to what extent do the macro forecasts or scenarios have any meaningful impact on the loan loss ratio in a given year?
Would you like to start with the first one on drawdown?
So far we've seen very little change in behavior from corporates. I think it's still early on. When the government guarantees come into place, I would assume that it would be more attractive for SMEs to use this going forward. So far we see very little change in behavior.
That also goes for the larger customers in the former LCI segment. When it comes to IFRS 9, I'll try to see if I understand your question correctly, we report this in three different stages, where the first and the second stage the impairment comes from a model-based scenario. Whereby the third stage is individual impairment. This is based on the individual assessment of each company or customer. When we looked at the different scenarios and also the macroeconomic variables, that is both an indication of this year but also taking into account the next three years.
I guess my question is partly relating to that. If you look at a given year, the number of, or the drift of clients going into stage 2 and perhaps stage 3, I would assume that that has a more meaningful impact on the loan loss ratio compared to perhaps changes to the assumptions and perhaps the amount of provisions being made in stage one and stage two.
The assumptions that we make in the Expected Credit Loss model has an impact on how the customers moves as well within the different stages, because we also look at different sectors and different segments within the bank.
That in itself has an impact. In addition to that, you of course have the fact that the banks aren't taking, or we aren't taking all impairments up front, but we should take the majority and being based on the best estimate at a given point of time.
All right. Thanks.
Ladies and gentlemen, again, if you would like to ask a question in this meeting, please press star one on your telephone keypad. Again, please note that you can only ask two question per person. The next question come from Roy Myklebust from Melesio Invest AS. Please go ahead, your line is now open. Roy, please open your phone line up locally if you're on mute. Roy Myklebust, your phone line is open for your question.
Hello?
Yes. Hello, Roy. Your phone line is open. Please ask a question. Thank you.
It's Jan Erik Gjerland from ABG. The installment free period, is it so that those clients who are offered a installment free period, either household or corporates, will they move into the stage two part of your credit line under the IFRS 9?
Yes. If the customers are marked with forbearance, which they will be, then they move into stage 2.
Okay. Secondly, on the risk-weighted asset side on the migration, could you give any light or shed some sensitivity on how much a client must migrate to see any effect on your credit side? Have you given any sensitivity to how much that could mean on your risk-weighted asset side?
No. Well, we've done the internal estimations, but we aren't providing any guidance on that extent.
Okay. The soft loans you will be granting will go into stage two as a higher loan loss phase than the stage 1 as such?
What's important to emphasize there as well, and then we come into very model technical things, is that it also depends of course, on the credit quality of that customer. Even if you would have a large amount of customers within the retail portfolio, that's private individuals moving into stage two, that wouldn't necessarily mean that you would have a massive increase in impairments related to that, because that's also based on what we expect from the credit worthiness of those customers overall.
Okay. Thank you.
Ladies and gentlemen, there's only one person left in the queue, so if you would like to have opportunity to ask a question, please press star one now. The next question and the only question in the queue is from Christoffer Adams from Kepler. Please go ahead, your line is now open.
Thank you. DNB has communicated a reduction in mortgage rates of up to 35 basis points following the 50 basis point central bank rate cut. Typically you reduce much less than the up to level you communicate. Can you give us an indication or an estimate of the average rate cut?
Sorry, go on.
Second question. I believe the FSA has signaled a review of the bank's IRB models that the industry organization for the finance ministry in Norway has asked for that to be delayed. If you can update us on the status of that. Thanks.
Yeah. With regard to the first one, the 35 basis points, it's the same wording we have used when we increased rates. Again, I think you should think about it in the same way as you saw the rate changes when the rate went in the opposite direction. On the second question, on the proposal from the FSA with regard to how they look at IRB models, they have posted a statement on the FSA website stating that they will not go forward with any such proposal at this time.
Okay. Thank you.
We have two more questions coming in. The next one is from Thomas Ackerman from Fidelity. Please go ahead. Your line is now open.
Hi. Good afternoon. Thanks for making time for this call. Could I just ask you to repeat what you said on generating extra liquidity and the transactions you're planning with the central bank, please? I missed part of that.
Yeah. We entered into this year with the best financial situation ever since we pre-funded almost NOK 60 billion in senior debt before year-end, partly due to the MREL requirements going into effect and this debt being grandfathered. This means that we have no long-term funding requirements whatsoever in the first half of this year. The Bank of Norway offered before the weekend loans to all banks on very attractive terms. We will use those attractive terms to further bolster liquidity reserves. Even though we don't need the money, we'll just put that money on our account with the Bank of Norway.
Okay. Thanks for clarifying.
The next question comes from Roy Mittelbus again. This is the second time you do ask a question, so please, if you can just keep your question short. Thank you.
Thank you. Just wanted to shed some light on the cost side. What happened to the cost in this situation here? Is it so that some cost that is reduced due to your reduced activity? How do you sort of thinking about taking down the cost base further due to these circumstances?
We have not made any new cost guiding going forward. I don't think we have much to add on that, except that there will, of course, be some exchange rate effect from the weakening of Norwegian kroner in the cost number.
The bonuses, et cetera?
No changes in that area.
Okay. Thank you.
All right. If there are no more questions.
There is two more questions, if they could keep them to two questions each. Which do you want to let me to get question through? There is two persons who would like to ask a question.
Okay, great. We'll take two more questions then.
This will then be the last two question in this meeting. The next one is from you, Joachim Svenning from Arctic. Please go ahead.
Yes. Hi. Thanks for taking my question. It's just regarding provisions in the retail segment. Could you perhaps shed some light on how quickly the model adapts if you look at unemployment rates and house prices? Do you use monthly data, quarterly data, or how quickly will we see changes in the expected loss model? Thanks.
Well, as I'm sure you understand, unemployment rates and housing prices are parameters in the model as such, so that's rightly said. We have an update of the model every quarter, and that's made on a quarterly basis. If there should be any reasons to adjust that and change it quicker than that, we will naturally look at that. We follow the scenarios and have different scenarios whereby we update constantly.
Thanks for that.
Okay, thanks.
Yeah. I also would like to highlight that at this point of time, we have very low provisions in retail and in the personal customer segment.
Okay, thanks.
The last question for today is from Nora Rydne from E24. Please, the headline is now open.
Hi. I would just like to ask you if you could clarify if there will be paid out any dividends for the year over 2019, and if so, how those dividends will be paid out?
We have not paid out any dividends as the general assembly of DNB is in late April.
Yes, I understand that. Have you decided if those will be paid out, and if so, how?
The board of directors have put forward a proposal in February, which has been communicated to the market. The FSA has sent a letter to all banks and all financial institutions in Norway asking the boards to consider if those proposals are still valid. We have stated, of course, that we will reply to that letter by the deadline set by the FSA, which is the 23rd of March.
Okay. You can't say anything as of now on how you will consider the letter from the FSA?
No. No news in that area.
Okay. Thank you.
All right. Thank you all for participating. I hope you all will have a nice afternoon. Thank you