Hello, and welcome to the DNB Quarterly Conference Call. My name is Caroline, 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 lines will be on listen-only mode. However, you'll have an opportunity to ask questions at the end of the call. 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 the call to your host, Rune Helland, to begin today's call. Thank you.
Thank you very much, and very welcome to all of you to DNB's third quarter presentation, analyst call. Here in Oslo, around the table, we have gathered with, of course, Kjerstin and Ida. Ingjerd Blekeli Spiten, Head of Personal Banking, and Harald Serck-Hanssen, Head of Corporate Banking, Alexander Opstad, Head of Markets, and Sverre Krog, Head of Risk. Ida will start by giving you the highlights for the quarter before we open up for questions. So please, Ida.
Thank you, Rune, and thanks for everyone dialing. I thought I'll start with a bit of a macro update, as that also something that is on everyone's agenda, including ours. The Norwegian economy has continued to show resilience to higher inflation and rates, but we are now seeing signs that indicate that the monetary policy is having effect, with the latest inflation numbers coming in lower than anticipated by the Norwegian Central Bank. Headline inflation was down by 1.5 percentage points from August and came in at 3.3% year-on-year. Core inflation was also down from 6.3% to 5.7% in September. Household consumption fell by 0.2% in August and is expected to decline by 0.6% in 2023, driven by weaker purchasing power.
Unemployment remains low at 1.9%, and even though it is expected to increase somewhat, it is still expected to remain at historically low levels at around 2.4%. Wage growth is expected to be around 5.5% in 2023 and 5.2% in 2024, with real wages starting to increase again in 2024. House prices is holding up well, with only a small drop of 0.2% in September. House prices has year to date increased by 3.7%. Following these latest news from the Norwegian Central Bank.
The Norwegian Central Bank has hiked the key policy rate twice during the quarter and a nd is now at 4.25, and has also indicated that they look to increase the key policy rate in December by another 25 basis points, landing at a peak at 4.5, and then expected to remain at that level until end of 2024, and then gradually come down towards 3.25. If we look at the results delivered from DNB today for the quarter, a return on equity comes in at 16.3%, driven by strong performance across customer segments as well as product areas. Net interest income is up 3.2%, driven by repricing effects. We are also seeing a strong development in the underlying portfolio.
Loan growth was down by 0.3% in the, in the quarter, a tapering credit demand from the personal customers, driven by a slower housing market, increased amortization, and less refinancing, as is also natural given the situation we are in today. Corporate customer had a lower activity coming out of the summer months, but picked up towards the end of the quarter, and we see a good pipeline moving into the fourth quarter. The profits were stable during the quarter, with a seasonal decrease in the personal customers and an increase in corporate banking.
Even though we're not giving a nominal guidance on the two latest repricings that will be implemented or will have an effect in end of October and end of November, respectively, we can confirm that they are expected to have a significant positive tailwind, and annual effect on NII also going forward. Net commissions and fees came in, high this quarter. It was a record high third quarter, up 10.5% from the corresponding quarter last year. It's driven by delivery, strong deliveries across product areas, and we see that we benefit from the robust and well-diversified fee platform. Impairment provision came in at NOK 937 million this quarter, primarily driven by customer-specific events in corporate customers, with corporate customers that we've followed very closely for some time and, has been on our radar.
There has been modest uptick in request for installment holidays and early past due payments in personal customers, but they still are at historically low levels, even though they are increasing today. We, however, remain very comfortable with the portfolio, both, both in personal customers that remains very solid, but also in corporate customers, where we don't see a structural change or negative development, and also see a good diversification. Earnings per share was up 7.8% from the second quarter of 2023, and 31.2% from the corresponding quarter last year. Core Tier 1 capital ratio comes in at 18.3. This is 110 basis points above the long-term expectation. I thought I'll just give a bit of brief in terms of what we're seeing this quarter, as there are several moving parts.
First of all we see a deduction of the finalized share buyback program that we finalized yesterday of up 1.5% of total outstanding shares. That reduces the Core Tier 1 capital ratio by 50 basis points. In addition to that, the Core Tier 1 capital ratio is reduced by the new share buyback program that we are announcing and initiating today of another 1%, or 30 basis points in the Core Tier 1 capital ratio. In addition to that, there is a new accounting standard and accounting practice that means that we are now changing the way that we are taking the retained profits into account when adding the profits to the Core Tier 1 capital ratio.
That means that we previously have used a retained profit of 50%, and we are now instead looking at doing or focusing on the last three years average last three years. That is then the adjustment that you will see, first of all, the first two quarters, where we previously did a 50% deduction. Now you will see an added effect from this quarter of 30 basis points. We will, however, just want to point to you that this is a pure accounting practice. This does not change our dividend policy, and you will also then see that this is in the fourth quarter results.
Once the board has decided on what cash dividend they are proposing to the annual general assembly, you will then see a finalized situation relating to the actual cash dividends.
Thank you, Ida. We will open up for questions, please.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. We will take the first question from line, Sofie Peterzens from JP Morgan. The line is open now. Please go ahead.
Yeah. Hi, here is Sofie from JP Morgan. Thanks very much for taking my question. So, I would have two questions. So the first question would be on the net interest income guidance going forward. I understand that you don't want to give any more a nominal NII guidance, but could you maybe just walk us through what the different moving parts are, and what the uncertainties are, and how you see kind of the deposit beta, how much repricing you're doing on the funding side, and also how much you're able to pass on the asset side, just to kind of help us forecast this number a little bit better going forward.
Then my second question would be around the NOK 800 million or it's likely more than NOK 800 million of stage three provisions in the corporate customer segment. If I look in your fact book, it says that it's linked to commercial real estate, residential properties and a little bit of fishing. Maybe just on the commercial real estate and residential property companies, where you increased your stage three provision, could you maybe just let us know if these exposures are in Norway, or are they outside of Norway? And maybe if you could just remind us how much commercial real estate exposure you have both inside and outside of Norway. Thank you.
Thank you. I'll try to address the NII question as much as I can, Sofie, but again, to reiterate, we have not provided nominal NII guidance previously either, but we've tried to guide you on the nominal effects as to the repricing, to everything else being equal. I would like to start by reiterating Ida's point about the two latter repricings that you have yet to see in our numbers have substantial positive effects on our business. And as you know, they both impact the equity as well as the volumes across the bank. And there is some tapering effect, but there's still a substantial positive impact to the business. Now, what are the moving bits and pieces?
Here it becomes difficult to be very specific, but obviously the moving bits and pieces are growth in deposits and lending on both personal customers and the business side, and also the product mix of such. We have talked slightly differently about the development that we see in personal customers versus corporate customers. On the lending side, we have expected for some time that credit demand from personal customer to become somewhat more muted, and I think this is what we see this quarter, and also a factor from customers deploying savings to prepay loans is playing into the growth number. This is a development that is not unlikely to continue, to put it that way.
If you look at the deposit development in isolation, keep in mind that there is a seasonal effect, also over summer. There was a negative development in deposits for personal customers, also last year, and fourth quarter is slightly different. On the corporate side, I'd say it's much more dependent on the magnitude of business that we are working on at the moment and to what extent that actually materializes.
Slightly more muted demand on the SME side, but we're still in a position where we are taking market share, but the larger volumes w ould be in the large corporates side, where, again, we confirm that there is substantial activity, but more uncertainty as to how and the deals will close and then exactly what time the volumes may potentially be drawn. But I think the trend you've been seeing for quite some time in terms of NII will continue, as we have not seen the full effect from the repricings, and the market expects a last and final rate hike in December. But somewhat a more tapered effect compared to what we have seen previously.
On the impact... Yeah, no, sorry, just a quick follow-up on the net interest income. So, I mean, previously, we saw between NOK 1.1 billion and NOK 1.5 billion higher net interest income from a 25 basis points kind of improvement. Should we expect that maybe, I read as it's going to or even give a nominal number, but maybe it's like somewhere similar to what we saw in the past of around NOK 800 million, or would you say that's a little bit overly optimistic?
We haven't given a nominal number, Sofie. So I... We try our best to give the guidance we can, but part of the reason why we're not giving it is because there are some more movement in bits and pieces. So really, you would have to make your own assessment. I just reiterate that there is a clear tailwind and that we feel quite good about the business overall, also in terms of activity and development going forward.
Yes.
Okay.
And in terms of the impairment levels, as you say, there are, as you can see from the facts, that there are different areas where you see increased impairments. That is, however, also driven by the purely macro factors. As we've talked about previous quarters, we moved to a model-based stage three impairments in the smaller segments in the small and medium-sized enterprises, and that would also then, if we change the macroeconomic, economical factors or add management overlays, that means that you will also see that to some extent in stage three related to the smaller small and medium-sized enterprise companies. If you look at the commercial real estate, in particular, this quarter, you see increased impairments in all three different stages.
And that's also taking into account that we are seeing further uncertainties related to commercial real estate, and also thought that that would be prudent to look into in terms of potential further increases in impairments going forward. We have said, and we confirm, that we are 93% of our portfolio is in Norway, in commercial real estate. We only have a very limited exposure in Sweden, 5%, in a very selective part of the commercial real estate business in Sweden. We remain committed to that proportion, and I don't think we have explicitly said, but we can say that the impairments taken in commercial real estate this quarter is related to a Norwegian exposure.
We have a conservative credit strategy and have had for quite some time in commercial real estate. We focus on cash flow, residual value, and ownership. We have a high share of corporate, corporate financing and very limited exposure towards SPVs or financial owners.
That's very helpful. Thank you.
Thank you. We will take the next question from line, Riccardo Rovere from Mediobanca. The line is open now. Please go ahead.
Thank you. Thank you very much for taking my questions. Three, if I may. To get back one second to the fact that you don't want to provide the nominal amount for NII repricing for the recent hikes. On slide 27, presentation Q4 2020, Ottar was saying that historically, a 25 basis point change in key policy rate and subsequent repricing has impacted NII by approximately NOK 1 billion, actually. Is today completely different from the history that Ottar was referring to three years ago? That's the first question.
The second question I have is, m ay you please tell us if you have a hedge in place, where in case rates had to go down, or do you feel that this is an insurance that you don't need at the moment, as rates are supposed to stay around 4% for a while, according to what the Norges Bank says? The other question I have is, this quarter, we see NOK 900-something million provisions, and we also see trading at NOK 1.7 billion. So you have a lot of trading, and by magic, provisions go up by NOK 900 million. Now, maybe I'm going too far, but is there a sort of relationship between the two things, considering that you had the room on the trading side to kitchen sink some exposures here and there?
Maybe the very last question: What is the logic of changing the calculation of Core Tier 1 using an average payout of the past few quarters instead of 50%? Why changing it? What's the logic of doing it? Thanks.
Thank you for your very good questions as always, Ricardo. Taking us back to 2020 and the remarks made at that time, there are no huge changes to our business nor the market that makes the reference points substantially different. I would refer to the increase that we have seen in our deposit to loan ratio. If you are referring to third quarter 2020, we were probably closer to the 60% deposit to loan ratio rather than the 75% deposit to loan ratio that we are today. Beyond that, I wouldn't say that there are structural changes to the business nor the market as such, that changes that point of reference.
As for your second question, in terms of hedging of our deposit base, we do not do any hedges to our deposit base, so there is no sort of hedge or cliff point that makes a material shift in any way on the deposit pricing. Now, on to the financials. Please keep in mind that of the NOK 1.7 billion, there is a limited part of that that is related to trading. There is quite a high component of what we would call quality earnings in that number because all of the customer related revenue in FICC related to interest rate hedging, FX swaps, and FX hedging, as well as commodity derivatives are also in those numbers.
There is also a meaningful contribution this quarter from a positive mark-to-market effect on equity positions that we've taken in cases that we have restructured over time, and we have also realized some of those positions with additional gains, which plays into the overall quality of our credit work over time. That being said, there is also a larger component from trading, lesser so than the previous quarter, but a meaningful and higher contribution where we see that we are able to benefit from a more volatile market. But keep in mind that we only do this related to Norwegian interest rates and currency. We do not have a very broad trading activity. Having said that, there is no link at all to the number NOK 937 in terms of losses.
Those are purely related to credit-related losses to specific customers and not related to the trading. Losses related to that trading activity would actually appear in the exact same line on the financials. So if that shows up as a negative contribution, you should read that as a poor performance and loss on that activity, and you will not find it elsewhere in the account. Why change and make, you might say, life more difficult for those who are looking into our numbers on the core equity side? I don't think we are the right ones to answer. This is something that is desired and might be following guidelines from the point of view of the FSA. Again, we reiterate it's purely technical.
It will have no real, life impact, and it will be sort of settled, if I may put, use that kind of a word, at the end of each year, where our capital position is viewed against the actual dividend paid, just like it has been in previous years. But, we appreciate that it makes life a bit more difficult for those of you who are following us and, and comparing with peers.
Thanks. Thanks, Kjerstin. And if I may follow up just one second on the trading and credit losses. The... My question was, the items at fair value, that line of the P&L, this quarter was particularly strong, and I was wondering whether maybe this could have allowed you to make some more kitchen sinking on the credit line, given that you had this, I don't know, some hundreds of millions more than expected or than average or whatever, you know? That was the sense of the question.
Okay, I understand what you are thinking about. I must say that we have a very sort of stringent policy in terms of how we Idaluate our risk positions and reserves, impairments that we take every quarter. And as Ida already alluded to, these are customer-specific situations. Primarily, there is very little model-based, and I think it would be very hard for us to argue model-based reserves based on an active quarter in trading. But I think I understand what you were referring to. But trading is more based on volatility and general market sentiment. And again, I reiterate, close to NOK 800 million of that revenue is customer-related, dependent on the activity.
But I would also agree that there is a higher quality in the bulk of the NOK 1.7 billion compared to the contribution we saw last, last quarter in this area.
Okay. No, that's clear. Thank you very much. Thanks a lot.
Thank you. We will take the next question from line, Ulrik Zurcher from Nordea. The line is open now. Please go ahead.
Yeah. Thank you. Three questions from me. First one, is the FTE increase Q-on-Q fully reflected in salary costs for the quarter? Or is there some, like, timing effects that we should be aware of going into Q4, for example, that FTEs came in late in the quarter? Second, like, how should we think about the lending growth, the mix going forward? Is the best case, like, around flat for households, and then we have to see the corporate demands? Or do you think we'll get an uptick in household lending, for example? And three, last time I checked, you hadn't actually posted on your website the changes for the mortgage-backed book on the back of the last rate hike.
I was just wondering if the customers have gotten the price hikes in their emails or whatever, or if you haven't decided yet? Thank you.
I'll just quickly do the latter. We have announced and informed customers of the price changes related to the most recent rate hike, but it has not yet been implemented into our portfolio and thus not yet visible in our numbers, which it will be partially in the fourth quarter and then fully in the first quarter. And then I'll leave the two others to Ida.
In terms of FTEs and salary costs, first of all, we have an increase in number of FTEs this quarter, also due to the fact that we are, as we saw in the second quarter, shifting some of the short what has been hired help before into full-time employees due to regulatory requirements from the Working Environment Act that came into place, and we referred to in the second quarter. So when it comes to overall costs, there is not such a significant increase in number of employees that I would say that that would have a significant bearing in terms of the salary costs for the fourth quarter.
So, they come in throughout the quarter, but you have also then this quarter seen a negative or a reduction in costs associated with hired help, as you should then also see in the fourth quarter. In addition to that, we have also converted, as we've talked about before, engineers, in terms of external consultants into internal engineers, that would then also reduce the cost associated with external consultants and add on in terms of salary costs. In terms of the lending growth, and if we could just talk about what we're seeing today, as we commented on before, that we're seeing a dampening effect in the personal customer segment, which is very natural as we are today.
That was also expected and anticipated, given the macroeconomic developments. In terms of the corporate customer side, as I pointed to, we saw an uptick in the activity towards the end of the quarter and a positive development also going forward. We reiterate our long-term expectation or target of having a profitable loan growth between 3%-4% on an annual basis through the cycle. We still mean that that would be possible given our platform in particular in the industries that still have growth potential also in the macroeconomic development that we see today, and also in terms of renewable financing and sustainability also going forward.
Okay, so just a follow-up on the operating costs. So, your operating cost is sort of... It reflects a normalized level? There is nothing...
Our operating cost is the cost that we have associated to the number of FTEs we have today. But then, of course, there is a variable part that we referred to in the presentation or that I referred to in the presentation as well, where we have a lower activity-based cost in the third quarter, and we, as for seasonal effects, expect that to increase in the fourth quarter.
Yeah, okay. That's very clear. Thank you.
Thank you. If there's no further question at this time. We will take the next question from line, Jacob Kruse from Autonomous. The line is open now. Please go ahead.
Hi, thank you. Just wanted to follow up on the cost discussion a little bit. So, I guess about two questions. Well, first, I think you said on the pre-close that maybe pension expenses would go a little bit higher going forward. I think it was a little bit lower this quarter compared to previous recent quarters. So would you be able to give some idea what kind of run rate you would imagine there? And secondly, just on the staff growth, when you talk about this shift from hired help into permanent staff, is that the majority of the staff increase that we should ignore or is it a subset? So just to think about 2024 cost trajectories.
Thank you.
Sorry, if we just start with the operating expenses, and you referred to in terms of the pension cost. The pension cost is, of course, also dependent on the development in the underlying capital markets, as you know, as we've talked about before. You can also see that that's partly hedged, and has a counter part. When talking about the normalized pension cost, I think what was referred to in the pre-call was that it's moving from NOK 400 to NOK 420. So there's not a massive change, but still a shift that we want to point to. Apart from that, we aren't seeing a change.
If I understood your question correctly, you asked whether the majority of the FTE increase was related to conversion of temporary employees, and that is correct. That is the majority part of the increase, and then should be more neutral on the cost side because they were already.
And that's the case on a full year basis as well, not just the isolated?
Yeah. No, well, well, we, we referred to this in the second quarter, and we referred to it yet again this quarter, but the increase that we've seen is also then on top of that, we've also had an somewhat of an FTE increase related to strategically important areas, such as I referred to converting external consultants into internal engineers and, and full-time employees there. As well as that, we've other areas where we have seen that we, we would like to increase the, the expertise and the strategic competence. But apart from that, overall, the, the conversion, as well as the conversion of external consultants, as well as the conversion of hired help into full-time employees, should have a neutral effect.
But then, of course, you need to bear in mind that we have a wage inflationary pressure on top of that, that will add in terms of the overall cost related to FTE.
Okay, great. Thank you very much.
Thank you. We will take the next question from line. Sofie Peterzens from JP Morgan. Thank you.
Yeah, hi. Here is Sofie again from JP Morgan. So, just a follow-up question. On the share buyback, you announced today a 1% share buyback, and you did the 1.5% basically in the third quarter. But how should we think about share buybacks going forward? Is it fair to assume that the new run rate will be around 1% share buyback per quarter, or how should we kind of think about it? And also, if you could maybe just discuss a little bit, how long did it take you to get the share buyback approval this time around? Is it easier to get an approval for 1% share buyback than 3.5%?
And then, my second question would be, just on capital going forward. Are there any capital headwinds or tailwinds that we should be aware of? And then, just finally, clarification. In the net interest income road map that you have on slide 10, there is other, which was -NOK 112 million. Could you just elaborate what that other includes? Thank you.
Yes. So let's start with the share buyback. First of all, I just want to reiterate that our dividend policy stands firm, and we will continue to focus on paying out excess capital to our shareholders. And we will also prioritize a nominal increase in nominal cash dividends year on year. In addition to that, we will use share buybacks as a flexibility tool to optimize the capital position. And I believe that we've shown this this year, that that's something that we have started with again and will continuously use as the flexibility tool that we think is good. So we've completed the 1.5%, as of yesterday, and are now then initiating the 1% again.
In terms of what we also commented on in the second quarter results was that we believe, due to the fact that the new change in practice, that we are re-deducting the full amount of the share buybacks as of when we receive an approval from the FSA, means that we will split the application as well as the share buyback program into smaller pieces going forward. That's also what I think this is a testament on. Apart from that, I don't think I can give you any further guidance in terms of future outlook or application process. But as you see, we are happy that we can that we've been able to announce the other program today when we now were finalized with the other one.
When it comes to capital headwinds, I mean, we are not aware of anything in particular that would mean capital headwinds. But of course, you are well aware of the annual SREP process that we have that we expect to have a clarification on towards the end of this year, and which will then have an effect from the thirty-first of December. In addition to that, we have, or we always have a dialogue with the regulator in terms of IRB models, and that's something that we continuously have and will continue to have. But apart from that, I wouldn't say that we have anything to add in terms of capital tailwinds or headwinds. And in terms of CRR3, we have also commented that overall, that should be fairly neutral for DNB.
NII, NOK 110.
Oh, sorry. The NII. Sorry, I'm sorry, Sofie. NII, the NOK 110, that is a mixture of different parts of the NII bracket. You can see it's treasury, it's long-term funding, but it's also interest rates paid on the impaired part of the portfolio. So that these are aspects or parts that will be moving quarter-over-quarter, and as you can also see from the fact books that they have been.
Thank you. That's clear.
Thank you. We will take the next question from line, Riccardo Rovere from Mediobanca. The line is open now, please go ahead.
So thanks for taking a couple of follow-ups, if I may. The first one is again on the change in the policy. The retained earnings of past three years, does this include buybacks, too? Or is just on cash dividends, just so I can better understand their thinking. And the second thing I wanted to ask you is, the loan book, the loan portfolio in this quarter is kinda flatish, which is diverging remarkably from statistics for the whole country, which were pointing to 4%, kind of 4% corporate and retail, more or less. How can it be possible that the largest bank in Norway differs so much from countrywide statistics? Why is that? How can you diverge so much this quarter? Thanks.
Should I start with the first question? That is purely cash dividends. In terms of the loan book, I think what you need to look at, if you look at the overall picture in terms of loan growth, that's also unsecured lending, part of that loan growth, where we are don't have as much growth as others might have. Well, apart from that, we believe that we are in a good position to grow in line with the market, as Kjerstin pointed to in her presentation or in the presentation previously today. And we will reiterate that as well.
Thanks. Thank you very much.
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