Earnings Call: Q1 2021

Apr 29, 2021

Good morning, and welcome to DNB's presentation and the presentation of the results for the Q1. Now this is the Q4 without any one of you present here in Bjorka in Oslo. Hopefully, you are safe and sound behind your computer screens. We miss you a lot, even the ones with SL recommendation. We will open up for questions in about 30 minutes. So please use the form below to ask your questions, and we will ask them on behalf of you here in this auditorium. As usual, we will open up and start the show with Kerstin and Ottar taking you through the numbers. Go ahead, Kathryn. Thank you, Thomas, and good morning, ladies and gentlemen, and a very warm welcome to this presentation of our Q1 results. By local lockdowns during the Q1 as well, we see less and less of an impact of this To the economy and in our numbers, we live in a world that continue to be affected by the pandemic. But 1 year into the pandemic, it is clear that Norway has fared well from a relative perspective, both with regards to dealing with the pandemic as well as the economic effect. Activity has been high Across all of the customer segments in the quarter as such, and the team has Formed very well in this environment, which results in a very solid start to the year. Our return on equity comes in at 10% for the quarter. This is a clear from the level that we saw during the quarters of 2020. And this is despite the fact that we carry a lot of equity on our balance sheet. For illustration purposes, if we had added or taken out the dividend that was distributed in the month of March, The return on equity for the quarter would have been 10.5%. The earnings of the quarter continues to show the resilience That we've talked about, and it comes in line with the earnings in the 4th quarter, while the costs are down. Picking up already from a high level of activity, we see increased activity in several areas, such as capital markets and savings and investments. And this leads to Historically high level of commission and fees for the 1st quarters, usually not the highest quarter from a seasonal perspective, But fees and commissions are up by more than 5% compared to the 4th quarter and close to 18% from the same quarter last year. Earnings per share comes in at 3.65%, a 60% growth compared to the Q1 last year. All in all, this leads to a solid buildup of by 50 basis points in the quarter to 19.2%, solidifying our position with a record high buffer towards the required level from the authorities. The Norwegian economy continues to recover. Recovery is slightly less than expected during the first But the outlook going forward has been further improved by analysts. And the expectations for economic growth Now from DNB Markets is for a growth level of 3.7% for this year and 3.5% for next year. Vaccines are progressing. More than 20 3% of the population have received a vaccination, and they expect to be more or less done by the month of August, which will have a further positive impact on the economy. In light of the recovery and reduced cost And expenses due to a zero interest rate level, we continue to see consumer confidence picking up. People feel good about their economy and optimism continue to be on the rise. Given Economic recovery. The Norwegian Central Bank also continues to signal interest rate hikes. All in all, in aggregate, 6 interest rate hikes expected until the end of 2024, the first one expected towards the second half of this year. Registered unemployment is now at 4.3%, a low number if we compare ourselves to many around us, but a level that is higher than before entering the pandemic. Substantially reduced From a year ago, expected to continue to reduce as the society further opens up. And the important thing now is to get even more people back to work and certainly the young ones who have been particularly impacted by the pandemic. We continue to grow and develop our business in line with our strategy. And a few comments on the ongoing transaction that I'm sure most of you have heard about. A few weeks ago, we announced Our interest and our offer to buy 100 percent of the shares in S Banken. Despite being different in size, We strongly believe that there are more similarities than differences between our 2 organizations. Both digital leaders, both in the front with regards to innovation and chasing to deliver the best customer experience to our customers. There is a strong both strategic and financial rationale for the transaction. And we are convinced That combining our 2 organization and the competences across these 2 organizations will lead to even improved offerings to of our customers. The transaction is ongoing. The offering period is now open for Shareholders to accept until the 24th May and thereafter go through authority approval process with an estimated closing, if it develops as we desire, in the Q3 of this year. We increasingly see the benefit of having a leading position across digital, and the Trend of digitization just continues to scale throughout the pandemic. We see this across all of our customer channels. For an example, in savings and investments, we have seen a 50% growth in customers on the savings platform Spare during the Q1. We see an exponential growth in fund being sold on this platform. A total of NOK 7,000,000,000 was sold for during last year. And this year, already more than NOK 3,000,000,000 Funds and investments have been sold across the Spider platform. We now have more than 1,000,000 active customers on our mobile banking platform And 600,000 daily visits. So customer interactions continue to be higher than ever. Consumers have been rapid in changing behavior. And despite many shops being closed, we continue to shop. And the growth in e commerce in the past 12 months has been 18%. We see this translate In a lot of businesses wanting to sell products and services digitally instead of physically. And in the past 12 months, 15 new businesses have started using Vipps as a payment method in order to sell products and services. Lastly, we continue to strengthen our efforts as an actively accelerator into the sustainable future. And today, clearly, commit to deliver a net zero emission from our activities in 2015. We do not believe that this is about exiting and more believe in impacting. We are looking to support and proactively accelerate the transition with our customers into the new economy as well as scaling our financings in Renewables and also into the new solutions needed. We have set clear targets for our ambitions to continue to raise to contribute to raise capital for renewables as well as green Property financing by 2025, and we are on track to deliver on these targets. A few words on the main business areas. A strong performance in the quarter from the personal customer area. We continue to see profitable growth both in lending and deposits. The growth for the past 12 months In the area on the lending side is 2.8% and 4.6% in deposits. High activity across many areas has led also to a growth in income from other areas than lending. We see high levels of real estate brokerage. We see high levels of sales of insurance. And not the least, we see a very high activity level in savings and investments. And here, we have highlighted the trend over time, building on the picture I just drew for Our savings platform in full showing you the development of the assets under management in the retail sector for the past couple of years. A very strong growth of 57% in assets under management for the past 12 months. We continue to focus specifically in this area and believe that we are well positioned for a trend that will continue to be attractive as we move forward. A very robust portfolio is demonstrated through very low losses in this area and overall a Strong quarter for personal customers. Across corporate banking, we also see a very high level of activity, Very attractive growth in the SME sector, where the 12 months growth pace is in the area of 6% And the growth in deposits across corporate banking, that is even higher than what we see in the personal customer area. Also for larger corporates, the activity has been high during the quarter. But a lesser part of that activity translates into Growing our balance sheet lending, which is slightly reduced compared to the previous quarter. This is due to a very high activity in Capital Markets, combined with our desire to continue to push forward on the originate to distribute strategy that we've talked about, This lead to an increasing pace in the turnover of capital and an increasing number of deals having to be done in order to see growth. We continue to see a high pace of activity coming into the Q2. The growth in large corporates will vary from quarter to quarter, But we certainly believe we have an attractive platform to profitably grow this part of the business going forward. 1st quarter this year is a record income in the corporation across Markets and Corporate Banking. And it's interesting also due to the fact that usually the Q4 is the highest seasonally period for this activity. Net reversals due to a couple of customer specific situations also contribute positively, And we see an improved return on allocated capital in this area from previous quarter, which is now above 14%. High activity in markets leads to a pretax result in this area of more than SEK 1,000,000,000 for the Q1. And DNB Life activity comes in at SEK 460,000,000, also a good quarter for our business in the life insurance company. And with that, I will leave the floor to Ottar to comment more on the results. Thank you, Jastien, and good morning. The positive loan growth for personal customers continued in the Q1 with 0.6%. The high loan growth for SMEs also continued with 2.3% FX adjusted. For Large Corporates, loan volume declined 1.4% adjusted for FX, reflecting the strong debt to capital markets and originate and distribute activity as CND in commission and fees and as the CEO mentioned. Total loan growth was thus 0.2% currency adjusted. Average loan volumes It was affected by an increase in the value of the NOK towards other currencies of around 5%. Adjusted for this, average loans were stable. Loan growth In Large Corporates is expected to pick up, as the CEO mentioned, and we thus continue to expect around 3% to 4% Annual total loan growth. The healthy growth in deposits continued with 2% for personal customers, 7% for corporate customers and 5% in total. The deposit to loan ratio thus strengthened to almost 70% from 65% at year end. This strong development for deposits will be increasingly valuable with the forecasted policy rate hikes by the Norwegian Central Bank. And now on to margin development. Net interest margin and volumated combined spreads In the Q1 are affected by portfolio mix effects, partly the high growth for deposits compared to loans And partly personal loans growing more than corporate customer loans. The mix between personal customer and corporate customer loans reduced lending spreads by approximately 1 basis point. The effect of increased deposits to loans accounts for 2 of the 4 basis point change in combined spreads. Spreads are also impacted by the 7 basis point average increase in the NOK money market rate from the previous quarter, Increasing deposit spreads but reducing lending and combined spreads. The bank has close to 0 net exposure towards NIBOR as the NIBOR effect on customer spreads is largely offset by higher interest on equity. The annual resolution fund fee in Poland was paid in the Q1 and had a small negative impact On net interest margin, moving on to net interest income. Lower funding costs increased net interest income by NOK 56,000,000 reflecting our attractive funding terms and the increased deposit to loan ratio. The annual resolution fund fee in Poland reduced Net interest income by SEK 23,000,000 stronger average NOK currency had an impact of SEK 106,000,000, While effects of higher NOK money market rates and effects of spreads reduced net interest income by SEK 73,000,000 Two less interest rate days had an effect of NOK 159,000,000. Next, let's take a look at commission and fees. The strong performance in commission fees continued in the quarter. Commissioner fees show seasonal fluctuations with the Q1 usually being slower than the 4th. Commission fees nevertheless increased 5.5% from the 4th quarter and almost 18% compared to the Q1 last year. Real estate broking fees increased 14% from the Q1 of the previous years, reflecting the strong housing market. Investment banking fees were up 94% from the Q1 last year with very high activity in both debt and equity capital markets as well as equities brokerage. Asset Management and custody fees increased 20% from the Q1 of 2020, reflecting both positive net inflow and all time high assets under management. Money transfer and banking services are still significantly impacted by the COVID situation, particularly the profitable international use of cards and currency ATM withdrawals. Fees were down NOK 97,000,000 or 23% compared to the Q1 of last year. Fees from the sale of insurance products increased 7% or SEK 42,000,000, evenly split between life and non life insurance. From late this year, we expect a similar one off negative effect From the new owned pension account scheme, we expect this to be compensated by volume growth and improved pricing for risk products going forward. Overall, commission and fees have developed more positively than expected with exception of money transfer and banking services, which are still materially impacted by COVID restrictions. Let's go on to costs. Operating expenses in the Q1 in the 4th quarter, sorry, included full provisions for the possible administrative fine announced in December of NOK 400,000,000. Operating expenses in the Q1 include nonrecurring restructuring expenses relating to our withdrawal from Poland. These restructuring expenses are offset by temporary positive cost effects due to COVID within traveling, training and marketing events. Personnel expenses in the first quarter are positively by a SEK 58,000,000 one off reversal of 2 high accruals for variable pay in the Q4 of last year. Pension expenses in the quarter were approximately at the normal level. And now on to asset quality. In the Q1, there were SEK 110,000,000 in net reversals of impairment provisions, reflecting the robust portfolio quality and gradually improved macro forecasts since the Q1 of last year. For personal customers, impairment provisions totaled only SEK 24,000,000 reflecting the high quality portfolio. The decrease in nonperforming consumer loans continued. For corporate customers, we saw net reversals of NOK 135,000,000. Offshore remains the most challenging segment And impairment provisions increased SEK 187,000,000. This was more than offset by reversals within oil and gas and the shipping segment, particularly within container shipping. In other corporate customer segments, impairment provisions totaled SEK 147,000,000. Exposures in Stage 2 are reduced. From January 1, the new definition of default from European Banking Authority was implemented with a probation period in Stage 3 after the fall situation has ended. Adjusted for SEK 4,000,000,000 of exposure in probation, there was a reduction also in Stage 3 exposures. We reiterate that the overall portfolio quality is robust and well diversified. But please bear in mind that losses will vary from quarter to quarter. Moving on to capital. The healthy capital generation continued in the Q1. 50% of profits added 30 basis points to capital. Reduced counterparty exposure for derivatives added another 10 basis points, while a stronger Norwegian and lower market risk also contributed positively. The capital ratio thus increased 50 basis points to an all time high level of 19.2%. The capital requirement is 15%, the supervisory expectations 16%, including Pillar 2 guidance of 100 basis points. The capital headroom above the supervisor expectation is thus at an all time high of 320 basis points. The Norwegian Central Bank has stated that it expects to give advice To increase the countercyclical buffer requirement again in effect next year from today's 1% and expects the countercyclical buffer to return to the maximum level of 2.5% at some point in time. In our capital planning, we assume full countercyclical buffer requirement and a capital expectation of 17.1%. The current 210 basis point headroom above this 17.1% provides ample headroom for the cash offer for Svankeen, which will reduce the capital ratio by approximately 100 basis points. The leverage ratio decreased 20 basis points to 6.9% Due to increased deposits with central banks and remains well above Nordic peers and also well above the supervisor expectation of 6%. To sum up the quarter, Operating performance was strong, particularly for commission and fees and impairments. Return on equity was 10% despite the Nordiskarsbank policy rate still being at 0 and despite negative effects of the pandemic on fees from money transfer and banking services. The 2019 dividend was paid out in March this year. Without this extra equity during the quarter, Return on equity would have been 10.5% as the CEO mentioned. The Annual General Meeting this week gave the Board of Directors authorization to pay out 2020 dividends of up to NOK 9 per share in the Q4 of this year. The cost income ratio improved to 43.6 Percent in the quarter. Earnings per share was NOK 3.65, an increase of 60% from the Q1 last year, As the CEO mentioned, the strong capital built with an all time capital headroom is facilitating the cash offer for S Banken, which is expected to be accretive for return on equity, cost income and earnings per share. Thank you for your attention. Thank you, Kristin and Oterre, for diving into the numbers. Now we will open up for questions. And with us, we have Head of Investor Relations, Rune Hella, who will ask the questions on your behalf. We have a few questions from the audience, and we'll start with Joakim Singe from Arctic. He has Three questions. 2 on NII. Retail growth was soft in Q1. Do you see it As necessary to adjust your prices to gain more traction. And number 2, have you noticed any changed Behavior amongst your customers after the announced offer to S. Banken? And his third question, What are the key drivers for the reversals within shipping offshore and CRE? I'll answer the first two and then Notte maybe can comment on the last one. We do not I mean, the growth in Q1 was fully accordance with expected and worked for, I think, on the personal customer and SME. There, we continue to see a 12 month And SME, there we continue to see a 12 month growth pace around 3% for personal customers and around 6% for SME. And then as I explained in the large corporate, the activity level is high, but the growth on a quarterly basis is impacted by the activity level in We have rapidly turned transaction around, syndicated volume into the market and refinanced in the bond market. And the activity in Capital Markets as well as the growth in large corporates will vary from quarter to quarter. But over time, We certainly believe we have the platform to grow this profitably and maintain our growth expectations of 3% to 4% for the year. Sort of pricing, we can't comment specifically, but there's nothing in the operating model as such that indicates need to change. On the contrary, I'd say on the personal customer part, we've probably been closer to growing at our market share in the past 6 to 9 months than we've been in a long time. 2nd question, no, we have not Seen any changed behavior from our customers after the offering of Westbanken, and there hasn't been any sort of impact to traffic into the call centers or our digital Panel as a result of this, but more an excited organization that looks forward to the opportunity of hopefully combining our entities and cooperating with the competent team of Sbanken. With regard To impairment provisions, it's important to emphasize that in Offshore, we took increased provisions in the quarter. The reversals are in the oil segment and company specific and also, of course, reflect a better oil price this year than we saw at the same time last year. With regard to shipping, the improvement is particularly in container shipping, reflecting global Macro, global trade and also the healthy conditions in that shipping segment. Ottar, we got 2 more questions regarding the impairment. So from Ulrik Serhic from Nordea. How do you think about your provisioning level in relation to the potential for an increase in, for example, bankruptcies when physical and monetary conditions are tightened. And then also a question from Jaelan. Have you taken all your COVID-nineteen provision back now? Or how should we read your guidance of offshore being the toughest area? And that losses could vary from quarter to quarter. I'd say in relation to bankruptcies, There is nothing that we see across the SME portfolio. We follow closely the Delayed payments over a short period of time. And actually, the losses across the SME portfolio continues to be Below normalized levels, and the portfolio is robust and diversified. Some pressure is natural to be expected Once the fees from the public sector tax, the VAT and so on starts to be claimed again. But bear in mind that we have seen historically low bankruptcies. And even in normal conditions, this hasn't been Very visible across our portfolio. Part of the sectors that struggle the most in a lockdown society, Pubs, cultural activities and so on is an extremely limited part of our portfolio. So there's no Concern, but we should, of course, bear in mind that we haven't seen all of the effects of the pandemic, but we feel very confident About our portfolio in the SME sector. Have we taken all the provisions back? I mean you're familiar with IFRS We have exchanged 1 of the more challenging quarters in 2020 with a better quarter at the end of the 3 year period. We have taken some write backs in previous quarters as you've seen on personal customers, but We haven't fully taken back all of the reversals that was set aside during 2020 in view of slight uncertainties. But it's very hard and not desirable, I think, to try to paint the picture as it goes forward, I think the important thing to say for this quarter is that it is impacted by company specific situations where we see write backs. Beyond that, our message on impairments is, as before, a very solid portfolio with offshore Remaining the challenging area, but we have conservative reserves across that portfolio. Very good. We have a question regarding the capital from Niels Oeygen, Spider Bank in End Markets. Have you made any initial calculations on the impact on the CET1 if the Norwegian FSA's suggested revision of IRB framework is implemented. It's still too early to quantify the effects So that draft, and it's also important to point out that still a draft out for comment from the Finance Norway Banking Association. So it's too early to give any numbers on potential effects. But of course, if implemented, it will be a negative effect. But it's also important to highlight, as Ottar is saying, the process is ongoing. We don't know the final Outcome, but we remain very committed and confident about our dividend policy going forward. Okay. I think that actually concludes the Q and A session. Thank you so much for joining us this Good morning. We are happy to invite you to the investor call at 1:30 CET. Stay healthy. Summer is coming. Have a great day.