Good morning. Welcome to DNB and this live presentation of our third quarter results. A record quarter combined with a DNB office full of energetic DNB colleagues makes us really happy, and we are really happy to see so many of you back in the auditorium as well. We know it's a busy day for analysts following the Nordics today, so we are very happy to see so many of you back here today as well. If you are following us online, you can ask questions in the forum below this window. As usual, we'll start with Kjerstin taking us through the headlines, and Ottar taking us through the deeper numbers. Kjerstin.
Thank you, Thomas, a very warm welcome to all of you to this presentation of our third quarter numbers. I am pleased to share with you, as many of you know, the Norwegian economy fully opened in September and there are no restrictions left, which has led to an even higher economic activity than we have seen prior to the pandemic. The numbers reflect a very robust economy. We're humbled by the trust that our customers continue to give us by giving us their business, I'm really proud of the team that worked relentlessly with our customers to help them pursue their desires for opportunity, growth, and investments. With a profit of NOK 6.9 billion, this is in fact the strongest third quarter result ever in DNB. This number also adds up to a return on equity of 11.4% for the quarter.
Not that far from the minimum we targeted towards the end of 2023 of 12%. We also see that the rolling 12-month return on equity moves in the right direction and is now at 10.4%. We see positive jaws, compared to both the previous quarter and the third quarter last year, meaning that our revenue outgrows our cost, both compared to the previous quarter and then last year. I'm pleased to say that the revenue grows for the right reasons, if I can put it that way. We see profitable growth in the business. Mostly so in personal customers and SME, which leads to a growth in net interest income of 3.8% compared to the previous quarter.
Net commission and fees are down compared to a very strong second quarter, but the relative comparison is actually the same quarter last year, and their fees and commissions are up by more than 3%. The strongest areas contributing to the growth in fees and commissions this quarter is asset management and the activity in insurance. A strong macro alongside a very robust and well-diversified portfolio also results in losses coming in as a positive element this quarter. Earnings per share up by more than 25% compared to the same quarter last year, NOK 4.29 per share, and a solid basis for future dividends and growth. On the back of this solid set of numbers and a positive outlook for the business, the board has decided to pay a dividend for the year 2020 of NOK 9 per share. On many occasions, we've highlighted the resilience in our earnings.
Consistency, predictability, delivering on our targets, including our dividend policy, is something that we value very highly and that we strive very hard to deliver on. I'm pleased to say that with this decision from the board, we are fully delivering on our dividend policy for 2020, as we did for 2019, and we've seen then the resilience in earnings and the performance of the team, enabling us to fully deliver throughout the pandemic. More importantly, also from this quarter's results, we continue to see that we build capital from the business. This capital will enable us to continue to grow together with our customers and to deliver to our investors ahead, as well as carry through the intended acquisition of Sbanken. Here, we are still awaiting the final decision from the competition authorities that will come later this month or at the latest by mid-November.
The economy and the society is fully reopened, we already during the summer month actually saw an activity level that was back to the level we saw prior to the pandemic. Today we are at an even higher level than this. GDP growth for the year is expected to be 3.8%, with another 3.5% for 2022. We've also noted that Bloomberg, despite some gloomy predictions when the pandemic hit more than one and a half year ago now, has actually rated Norway as the most resilient country in facing the pandemic and also in handling this situation over the past couple of years. The results of this is actually that we've already seen the first rate hike from the central bank, who ticked up by 25 basis points, the central bank is forecasting another six rate hikes towards the end of 2024.
Unemployment 2.3, back to the level prior to the pandemic. No doubt, given that 80% of our results and activities stems from the Norwegian activities, this is a very solid backdrop for our business also ahead. I'd like to say just a few words about the general business areas. It is a strong quarter, both in personal customers and corporate customers. We continue to see healthy growth in loans in personal customers. The annualized growth rate in personal customers is a strong 3.7%. We continue to see growth also in deposits, however, more similar to the pattern that we would see prior to the pandemic, with growth slowing down towards the end of the quarter. Pre-tax profits in personal customers is down by 5%. This reflects the fact that we've seen growing money market rates during the quarter, which leads to a higher funding cost in this area.
With the rate hike, as you're well aware, we have announced a repricing according to the rate hike by the central bank, and this will take effect in mid-November. We're also showing you how activity grows on our mobile banking platform, because while working with the customers to lend and conclude business every day, we also work on the future activity. A lot of this business is actually being done in the digital space, as you well know. Our ability to understand our customers, to read their desires and understand how we can create value is extremely important for the future business. A couple of years back, we launched our cloud-native mobile banking app. We've consistently delivered more activity than the actually high ambitions that were set.
We now have more than 1 million active users on this app, which is twice as much as we had on the previous mobile banking app. This is a strong sentiment and foundation also for the future business in personal banking. Corporate banking, an even stronger quarter, I would say. Also here, profitable growth, SME in particular, where we see an annualized growth pace year-to-date of more than 8%. Certainly, I'm sure you see the substantial uptick compared to the same quarter last year. Here, obviously, macroeconomic situation and asset quality plays a big role. The activity in capital markets have been somewhat slower on the equity side, but very high on the debt side, enabling us to pursue our ambitions to originate and distribute, namely underwrite transactions and sell out in the market.
This is extremely important in large corporates to get an acceptable return on allocated capital. In this quarter, corporate banking is delivering a return of 15.6%. Strong activity on the pension side, strong activity on asset management are the key contributors to other income. We see a very healthy development in pensions where we are now, again, number one in the market. Now I will leave the floor to one of the most influential people in DNB over the past two decades and to my wingman over the past two years. What is more fittingly than the best third quarter ever in DNB's history to leave to our CFO, Ottar, to go through the details? Ottar.
Thank you, Kjerstin. Good morning. I would like to start with the balance sheet and volume development. Loan growth for personal customers was 0.7%, and for corporate customers, 0.5% in the third quarter. The high loan growth for SMEs continued in the quarter with a growth of 1.6%, while large corporate loans decreased 0.4%. Total loan growth in the quarter was thus 0.6%. Year to date, annualized loan growth was 3.7% for personal customers, 2.9% for corporate customers, and 3.3% in total, adjusted for FX. We still expect annual total loan growth of around 3%-4% going forward. The strong growth in deposits continued for corporate customers in the third quarter with a growth of 3.6%.
For personal customers, we saw a pattern back to the pre-pandemic situation with deposit growth in the second quarter due to the holiday allowances being paid in June and then used throughout the summer. Total deposits grew 1.7% in the third quarter. The deposit-to-loan ratio in the customer segments was strengthened further to 75.5%, compared to 69.5% at the beginning of the year. Now on to margin development. Net interest margin was stable in the third quarter. Higher growth for deposits than for loans had a negative mix impact of 1 basis point, both on net interest margin and volume-weighted combined spreads compared with the second quarter. Spreads on lending and deposits are impacted by the 12 basis points higher average three months NOK NIBOR rate in the third quarter, increasing deposit spreads and reducing lending spreads and volume-weighted combined spreads.
The bank has close to zero net exposure to NIBOR, as the NIBOR effect on customer spreads are largely offset by the effect of interest on equity. Moving on to net interest income. Net interest income in the quarter increased NOK 357 million or 3.8% from the previous quarter. One additional interest rate day contributed NOK 89 million, while a weaker average NOK currency added NOK 73 million. Higher average loan and deposit volumes increased NII by NOK 41 million, while amortization effects and fees increased by NOK 71 million from a low level in the second quarter.
Lower funding costs increased NII by NOK 13 million, reflecting our attractive funding terms and increased deposit-to-loan ratio. The effects of the higher NOK money market rate for spreads and interest on equity were close to zero, in line with what I just mentioned. Net interest income will be impacted by the announced customer repricing effective from mid-November.
The positive NII effect from this announced repricing is expected to be approximately NOK 1.5 billion, reflecting the high deposit-to-loan ratio. The negative floor effect on deposit margins was strongest for the last key policy rate cut last year, and thus, the opposite is the case for this first rate hike now. Let's take a look at commission and fees. Commission and fees show seasonal fluctuations and increased 3.2% from the same quarter last year. Real estate broking fees decreased 14% from this quarter, when activity was extraordinarily high after the central bank policy rate cut and the suspension of lending regulations. Investment banking fees were up 3.3%. Equity capital market fees decreased, while debt capital market fees showed healthy growth. Asset management and custody fees increased 25%, lifted by both net inflow and all-time high assets under management.
Money transfer fees increased by 7%, reflecting uptick in international traveling activity following the lifting of the COVID restrictions. This was offset by increased fees paid within banking services in other areas. Fees from the sale of insurance products increased by 6.1%. Fees from the defined benefit schemes, which are in runoff, they decreased, while fees from defined contribution pension and particularly non-life insurance show healthy growth. DNB is now the largest player within defined contribution pensions in Norway. Let's go on to costs. Operating expenses decreased by NOK 287 million or 4.7% from the previous quarter. Pension expenses were approximately NOK 80 million higher than normal in the second quarter, and in the third quarter, approximately NOK 60 million lower than normal due to low return on the compensation scheme related to the closed defined benefit scheme.
This return has been hedged and a corresponding lower gain of NOK 58 million is recognized in gains on financial instruments. IT expenses decreased by NOK 120 million due to capitalization of IT development, of which approximately two-thirds is related to the first and second quarter. Variable salaries declined by NOK 38 million due to the lower commission and fee income. Expenses in the third quarter is also reflected by the seasonally lower activity. Now on to asset quality. In the third quarter, we had NOK 200 million in net reversals of impairment provisions due to NOK 314 million in reversals on performing loans in stages one and two, reflecting improved credit quality and slightly improved macro. For personal customers, impairment provisions totaled a modest NOK 26 million, reflecting the high-quality portfolio. The decrease in non-performing consumer finance loans continued this quarter.
For corporate customers, we saw net reversals of NOK 227 million due to NOK 289 million in reversals in stages one and two. The reversals were mainly related to customers in the shipping and oil and gas segments. Impairment provisions within offshore increased by NOK 32 million in the quarter. Offshore now only constitutes 1.2% of our portfolio, but still remains the most challenging segment. We reiterate that the overall portfolio is robust and well-diversified, as the CEO stated, but as mentioned before, please bear in mind that losses will vary from quarter- to- quarter. Moving on to capital. The healthy capital generation continued this quarter, and 50% of profits added 33 basis points to the Common Equity Tier 1 ratio. Lending growth and counterparty exposure increased the risk exposure amount and reduced the capital ratio by 13 basis points.
The Common Equity Tier 1 ratio increased 15 basis points from the previous quarter to 19.24%. The capital supervisory requirement and expectation are unchanged at 14.9% and 15.9%, respectively. The Norwegian countercyclical buffer requirement will increase by 50 basis points from June next year, and by an additional 50 basis points at year-end 2022 to 2%. It is expected to return to the maximum level of 2.5% at some point in time. In our capital planning, we assume full Norwegian countercyclical buffer, and increased Swedish and Danish countercyclical buffer requirements of 2%, and thus a capital expectation of 17.1%. The current 210 basis point headroom above this 17.1% provides ample headroom for the cash offer for Sbanken, which initially is expected to reduce the capital ratio by approximately 120 basis points.
The Norwegian FSA kept the Pillar 2 Requirement and P illar 2 Guidance from 2019 unchanged last year due to the pandemic. During the fourth quarter, we expect an updated Pillar 2 Requirement and guidance from the FSA in effect from year-end. The leverage ratio increased by 10 basis points to 6.8%, excluding exposures to central banks, the leverage ratio was 8.2%. We are confident that our capital position will make it possible to fully deliver on our dividend policy also going forward. To sum up the quarter, operating performance was strong, with total income growing 5.5% from the second quarter and 7% from the same quarter last year. Lower operating expenses and further net reversals of impairment provisions also contributed to the increase in return on equity to 11.4%. If the 2020 dividend had been paid in the second quarter as normal, return on equity would have been 12.1%.
The cost income ratio was 40.1%, or 41.3%, excluding mark-to-market effects from additional tier one and basis swaps. Earnings per share came in at NOK 4.29, an increase of 26% from the same quarter last year, and year-to-date earnings per share were NOK 11.95. The repricing from mid-November, the forecasted six additional rate hikes from the central bank, and the cash offer for Sbanken are expected to be accretive for return on equity, cost income, and earnings per share. Finally, as the CEO mentioned, the board of directors has decided to pay out a dividend of NOK 9 per share for 2020. The ex-dividend date will be one week from today, October 28th. The resilience in profitability and solid capital position have thus made it possible to fully deliver on our dividend policy also during the pandemic years.
This also includes our ambition of increasing the dividend per share every year, paying NOK 8.4 for 2019, and now NOK 9 for 2020. Thank you.
Thank you, Kjerstin and Ottar. We have obviously room for questions as well. We have two runners with microphones, so if you could wait for getting the microphone that'd be all right. Without mentioning any names, Jan-Erik, we'll limit ourselves to two questions per round, please.
Okay. I will send three decades for Ottar and Kjerstin since I worked with him in the 1990s as well. Thank you for your hard work, Ottar. It's been a pleasure for you serving the shareholders in DNB. Congratulations and good luck for the future. Back to questions. What kind of mitigating factors have you done to persuade the competitive authorities to go through with the transaction next week, or as you said, what could bring it even to mid-November? Is it further negotiations that could bring that outcome? Secondly, the NOK 1.5 billion guiding you have on net interest income, is it a new average guiding for the next six rate hikes, or is it this first one, which is different from the next ones? On the same question, is any lending margin contraction including in that NOK 1.5 billion guiding? Thank you.
I think that was three questions, Jan Erik. It is well known that there has been an extension in the process with the competition authority with Sbanken, and that we have put on the table some alleviating measures. We have not provided any further detail than this, it's also well known that the area that the competition authority is focusing on is the area related to the distribution of savings products, and that their activity in the mortgage market and more traditional banking activity, if I can call it that, was already cleared prior to the summer. That this might come only in the end of November is due to how these kinds of processes are run. The NOK 1.5 billion is related to the repricing that has been done and our estimates of the impact of this.
As you're well aware, we cannot guide on any future initiatives because the positive impact in Norway from the raising interest rates only come when and if we actually reprice the contracts with our customers. I'm sure that you listened carefully and took well note of what the CFO clearly said, that it is the mix of products, but it's also the floor effect that impacts the estimated number for this adjustment that has been done for the first rate hike.
We have Vegard Toverud.
Thank you. You had some small reversals on the oil and gas offshore segment this quarter. Last year, a significant part of all loan loss provisions were in the same segment. As the world now looks, could we expect some reversals from those provisions going forward?
I think the majority of the reserves taken last year was offshore, not oil and gas in general. As the CFO stated, we've taken some small impairments in the offshore segment also this quarter, and we continue to say that this sector is the most challenging. We have taken a lot of reserves. We feel comfortable with the level we've taken. There can always be customer-specific situations. This is the third quarter that we are booking reversals, but in other sectors than offshore, and smaller numbers, more due to the broader portfolio quality and stage two, as we've seen the strongest index in ClarkSea Index for shipping in a very long time, as an example. The macro outlook is strong, but we are very careful in indicating that there would be meaningful reversals in the offshore sector. That market still has a long way to go.
Activity is picking up somewhat, but it has a long way to go before it's really in balance.
Okay. Thank you. On your outlook for further loan growth, you stick to your 3%-4% guiding. Could you give us some details about the composition on that, what you think about the private market, and then connecting that to the potential six interest rate hikes?
I think we guide overall for the group, but I think what we can say is that we continue to prioritize personal customers and SME. This is also where we have seen the strongest growth in the past. In large corporate, as I stated, we're focused on the quick turnover of capital because this is very helpful for the return on allocated capital. Of course, we don't have a crystal ball on the market, but the estimate is that credit growth will be in the area of 5% also as we move ahead. That should mean a healthy growth in personal customers. We're also very clear that we prioritize profitability over growth. I think our belief is that we'll probably continue to see the highest growth in personal customers and SME, and that large corporate will more also depend on the activity level in capital markets.
The guiding 3%- 4% must be understood on a group level, and this depends on the market development.
Excellent. Thank you.
Okay, next one up is Thomas Svendsen, SEB, far behind on an aisle seat.
Yes, good morning. Two questions. Do you think it's realistic to reach your 12% ROE target next year? That's question number one. Question number two, when looking on your loan book, we see that the cyclical parts of the loan book is continuing down, including shipping, pure shipping. Should we expect shipping to continue down in absolute terms in lending, or are you prepared to grow in shipping?
You're quite right. Over the past several years, we've taken down the cyclical parts of our book substantially across commercial real estate, shipping, and oil related, but we have not set a target in the past couple of years to continue to reduce. This has been a factor of market development and in the individual decisions. We do not have a target to continue to reduce exposure in these areas. As you all well know, we've set targets towards 2030 to reduce the footprint of our exposure in this area, but not the exposure as such. Here we selectively do business that is in accordance with our strategy, and we will continue to do so.
Over time, I think it's also a fair assumption to think that other areas will grow even more, and that is probably the key factor that you've been seeing also over the past quarters. With regards to our trajectory towards the 12%, we have not changed. We've talked about achieving this towards the end of 2023. We are not making any amendments today to the outset financial targets that we have communicated. Maintain what we've said previously, that there is not one factor that will take us towards the target. This is dependent on the market situation, macro development, customer activity, but also our achievement in our strategic positioning and performance across various fee areas, investment banking, asset management, saving, and insurance, but also succeeding on cost measures as well as asset quality.
The target stands towards 2023, but we will of course do our utmost to deliver the best possible results in the markets we're operating.
Thank you. On our third row. Next question is from Johan Ström, Carnegie.
Thank you. Two questions from me as well. First of all, on the capital side, I think the least we can say is that the capital position is comfortable, but at 18% CET1 ratio adjusted for Sbanken, do you feel that you sit on excess capital or is this the level where you strive to be in a year or so?
You can answer.
For the time being, we are focusing on paying the 2020 dividend we announced today. Furthermore, on the acquisition of Sbanken, which will initially consume up to 120 basis points, and further discussions will depend on that outcome. We reiterate what we have stated before, that we have no plans to sit on excess capital. We will try to pay out excess capital one way or the other.
Very clear. Thank you. Then continuing on loan growth, I guess asking what Vegard was asking in a different way. Have you seen any slowdown in mortgage loan applications or general activity on the back of the rate hikes? We're seeing a surge in electricity prices, petrol. There's inflation everywhere. Are you seeing any new trends in credit demand for personal customers?
I wouldn't say that we do. We see a normalization compared to the third quarter last year, there you need to keep in mind that third quarter last year was really boosted by a temporary relief under the restrictions that banks are under on mortgages. You can also see the impact of that on the real estate brokerage, that the activity in the housing market as such is lower this third quarter than last year. Our read on that is that that is due to an exceptionally high activity level last year. Of course, we note that electricity prices are high. That gets a lot of attention. We continue to see deposits still at a very healthy level, and we do not yet see any impacts of this on the housing market.
It's also important to point out that last year, of course, we had growing house prices at a quite high level. This has leveled out, and we see much more sustainable growth in the housing market, and that is also important, we think.
Thank you. Good luck with that. Thank you.
We have Vegard from Pareto Securities.
One more question on loan losses and what we should expect going forward. If we look at the last couple of years, loan losses have been impressively low. What is your expectation for loan losses going forward?
We have not-
That's right.
Guided on loan losses, Vegard. We've only put out there what our historical average is. As you well know, having been following this sector for so long, you're hardly ever on average. The average level is 20 basis points-ish if we look at the 20 years historic losses. Having said that, we have taken down substantially the volatile parts of our book. Everything else equal, this should lead to lower losses going forward. This is also why we have a lower density of capital towards our exposure because there is a different mix effect in the portfolio. Now, in that period, IFRS 9 has also been introduced, should not impact the nominal losses but lead to a higher volatility, and I guess this is what we have seen also during the pandemic. Most important indicators are macroeconomic situation and our ability to understand the risk that we're taking.
I think also in hindsight here, we see NOK 25 million losses in the mortgage book of NOK 1,000 billion on mortgages. It's extremely robust, and we have a very diversified portfolio. Beyond that, you have to make your estimates. Sorry.
Thank you. Just the last one. If you had to guess will the Pillar 2 Requirement go up or down?
We are not guessing on Pillar 2 Requirements, but we can reiterate that there is an annual process where the FSA reviews our capital requirements. This is the qualitative assessment of our capital structure. This is an element that can go up and down. Usually we would have had that answer by now, but it's coming later in the fourth quarter.
Thank you. Unless we have a question again from Jan-Erik.
Thank you. Just a couple of follow-ups up. Vegard had a very good question on loan losses. What is left on your pandemic provisions, so to speak, rather than put it a different way? How much have you put aside and how much is left of that pandemic provision?
Most of the losses and reserves that we took in the pandemic were related to the offshore sector, but there is also an effect from a slower macro expectation that hit in at the time of the lockdown. Obviously there is this impact as for every quarter we move, we are replacing a poor quarter with a good quarter. Given where we are, there is still some sort of, to call it potential, in that effect. Beyond that, we're not being specific in terms of numbers that are there, but reserves are still at a little bit higher level than they were prior to the pandemic.
Okay, thank you. Just on some nitty-gritty stuff then. On the amortization of fees in the net interest income, could you just explain if that is coming from corporate clients that sort of refinance? Is it mortgage clients that refinance? Is it clients that actually leave you? How should we read that number depending on the refinancing?
As mentioned, it's compared to a relatively low number in the second quarter. Of the NOK 71 million in increased, NOK 21 million is from a redeemed loan, loans being repaid, and NOK 47 million from commitment fees on new business. The level activity on the new business side was good in the third quarter, and this is the corporate segment.
Perfect. The other income, it seems to be a little bit softer this time around. It's sort of mixed between associates, other non-specified income, and other areas. You won't talk about I heard, what about Vipps? When would you like to list it, what kind of income has come from Vipps this quarter?
Vipps does not have a material impact on our numbers this quarter. I think that is what we can say. We are extremely excited about the agreement to merge Vipps with MobilePay and the wallet in Finland, which will more than triple the number of users as well as corporate customers. I'd say that is really the priority for the company now, and continuing to target the e-commerce business to business part of the business that has seen tremendous growth and success in Norway as well as the other Nordic countries. For now, that's the priority.
Okay. Final from me then. On the cost side, you had IT capitalization in this quarter and some of it stems from as well first and the second quarter, if I understood it correctly. How should we read that going forward? Is that a new trend that you will capitalize on your balance sheet, or is it something just vary between quarters and projects?
Year to date, I would say we are back to a normal level. In the first half, we actually had a significant reduction in capitalized IT.
Okay. I think that concludes the Q&A session. We remind you that we have an investor call later this afternoon if you have any more questions, which I guess you have. Kjerstin is due to go live on Bloomberg in 15 minutes, but after that show, we will meet all the journalists in the media zone just outside. It has been an absolute pleasure to have you. Have a nice day.
Thank you.