Earnings Call: Q3 2021

Oct 21, 2021

Good morning. Welcome to DNB and this live presentation of our 3rd quarter results. A record quarter combined with a DNB office full of energetic DNB colleagues make us really happy, and we are really happy to see so many of you back in the Torim as well. We know it's a busy day for analytics 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 form below this window. And as usual, we'll start with Kerstin taking through the headlights and Ottar taking us through the deeper numbers. Kerstet? Thank Thank you, Thomas, and a very warm welcome to all of you to this presentation of our 3rd quarter numbers. I am pleased To share with you, and 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 pandemics. 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. And I'm really proud of the team that work relentlessly with our customers to help them pursue their desires for opportunity, growth and investments. With a profit of SEK 6 SEK 900,000,000, 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 target 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 Q3 last year, meaning that our revenue outgrows our cost both compared to previous quarter and then last year. And 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, very strong 2nd quarter, but the relative comparison is actually the previous or the same quarter last year, and there 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 And 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 and 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. And 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 on to our investors ahead as well as carry through the intended acquisition of S Banken. 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, and we Already during the summer month actually saw an activity level that was back to the level we saw prior to the pandemic. And 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 1.5 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, We ticked up by 25 basis points. And the Central Bank is forecasting another Six rate hikes towards the end of 2024. Unemployment, NOK 2,300,000,000 back to the level prior to the pandemic. And 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. For our business also ahead. I'd like to say just a few words about the general business Yes, it is a strong quarter both in personal customers and corporate customers. We continue to see healthy growth in loans in personal customers, and the annualized growth rate in personal customers is a strong 3 point 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. Pretax profits in personal customers is down by 5%, and 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 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, and a lot of this business is actually being done in the digital space, as you well know. And our ability to understand our customers, to read their desires and understand how We can create value is extremely important for the future business. And 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 1,000,000 active users on this app, which is twice as much as we had on the previous mobile banking app. And 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 previous quarter last or 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. And in this quarter, corporate banking is delivering a return of 15.6 1%. Strong activity on the pension side, strong activity on asset management are the key contributors to Other income, and we see a very healthy development in pensions where we are now again number 1 in the market. So now I will leave the floor to one of the most influential people in DNB over the past to decades and to my wingman over the past 2 years. So what is more fittingly than the best 3rd quarter ever in DNB's history to leave to our CFO, Ottar, to go through the details. With that? Thank you, Jartijn. 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 3rd 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% to 4% going forward. The strong growth in deposits continued for corporate customers in the Q3 with a growth of 3.6%. For personal customers, we saw a pattern back to the pre pandemic situation with positive 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 3rd quarter. The deposit to loan ratio in the customer segments at the beginning of the year. And now on to margin development. Net interest margin was Stable in the Q3. Higher growth for deposits than for loans had a negative mix impact of 1 basis points, both on net interest margin and volumated combined spreads and during compared with the 2nd quarter. In the Q3, increasing deposit spreads and reducing lending spreads and volumated combined spreads. The bank has close to 0 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 357,000,000 or 3.8 percent from the previous quarter. One additional interest rate day contributed NOK 89,000,000 while a weaker average non currency added NOK 73,000,000. Higher average loan and deposit volumes increased NII by NOK 41,000,000 while amortization effects And fees increased by NOK 71,000,000 from a low level in the 2nd quarter. Lower funding costs increased NII by NOK 13,000,000 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 We're close to 0, 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 1,500,000,000 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 of the Central Bank policy rate cut and the suspension of lending regulations. Investment banking fees were up 3.3%. Equity capital markets 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 listing 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 the 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 287,000,000 or 4.7 percent from the previous quarter. Pension expenses were approximately SEK 80,000,000 higher than normal in the 2nd quarter and in the 3rd quarter Approximately NOK 60,000,000 lower than normal due to low return on the compensation scheme related to the close defined benefit scheme. This return has been hedged and a corresponding lower gain of NOK 58,000,000 is recognized in gains on financial instruments. IT expenses decreased by NOK 120,000,000 due to capitalization of IT development, of which approximately 2 thirds is related to the 1st and second quarter. Variable Salaries declined by SEK 38,000,000 due to the lower commission and fee income. Expenses in the 3rd quarter is also reflected by the seasonally lower activity. And now on to asset quality. In the Q3, we had NOK 200,000,000 in net reversals of impairment provisions due to NOK 314,000,000 in reversals on performing loans in status 12, reflecting improved credit quality and slightly improved macro. For personal customers, impairment provisions totaled a modest NOK 26,000,000 reflecting the high quality portfolio. The decrease in nonperforming consumer finance loans continued this Quarter. For corporate customers, we saw net reversals of NOK 227,000,000 due to SEK 289,000,000 in reversals in Stages 12. The reversals were mainly related to Customers in the shipping and oil and gas segments. Impairment provisions within offshore increased by NOK 32,000,000 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% 15.9%, respectively. The Norwegian countercyclical buffer I meant 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 An 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 percent provides ample headroom for the cash offer for Espanken, which initially is expected to reduce the capital ratio by approximately 120 basis points. The Norwegian FSA kept the Pillar 2 requirement and Pillar 2 guidance from 2019 unchanged last year due to the pandemic. During the Q4, we expect an updated Pillar 2 requirement and guidance from FSA with 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 2nd 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 Q2 as normal, return on equity would have been 12.1%. The costincome ratio was 40.1% or 41.3% excluding mark to market effects from additional Tier 1 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 6 additional rate hikes from the Central Bank And the cash offer for Espanken are expected to be accretive for return on equity, Cost income earnings per share. And 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 1 week from today, October 28. 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 Nainox for 2020. Thank you. Thank you, Kjellsson and Ottar. We have obviously room for questions as well. We have 2 runners with microphones. So if you could wait for Getting the microphone up, all right. Jalan, and without mentioning any names, Jan Erik, we'll limit ourselves to 2 questions per round, please. Okay. I will set 3 decades for Otto Aker Kristian since I worked with him in the '90s as well. But thank you for your hard work, Ottar. It's been a pleasure for you serving the shareholders in DNB. So congratulation 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 SEK 1,500,000,000 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. And on the same question, is any Lending margin contraction, including in that SEK 1,500,000,000 guiding? I think that was Three questions, Jan Erik. But 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, but it's also well known that the area that the competition authorities 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 kind of processes are run. The SEK 1,500,000,000 is related to the repricing that has been done and our estimates of the impact of this. And 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 Actually, when and if we actually reprice the contracts with our customers. And I'm sure that you Listen 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 1st rate hike. Then we have Vegar Toverer. 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 we the majority of the reserves taken last year was offshore, not oil and gas in general. And 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 have taken. There can always the customer specific situations. This is the 3rd quarter that we are booking reversals, but In other sectors than offshore and smaller numbers more due to the broader portfolio quality and Stage 2, as we've seen the strongest index in Clarkson C for shipping in a very long time as an example. And the macro outlook is strong, but we are very careful in indicating that there will 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. And on your outlook for further loan growth, you stick to your 3% to 4 Present guarding. 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 6% 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. And 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. But 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, but we're also very clear that we prioritize profitability over growth. So 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, but the guiding 3% to 4% must be understood on a group level, and this depends on the market development. Excellent. Thank you. Okay. Next one up is Thomas Svensson, SAB, 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 1. And question number 2, when looking at your on your loan book, we see that the cyclical parts of the loan book is continuing down, Including shipping, pure shipping. So should we expect shipping to continue down in absolute terms in lending? Or Prepare to grow in shipping. We have you're quite right. I mean, 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 individual decisions. And we do not have a target to Continue to reduce exposure in these areas. As you all well know, we have set targets towards 2,030 to reduce the Print of our exposure in this area, but not the exposure as such. So here, we selectively do business that is in accordance with our strategy, and we will continue to do so. But 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 I mean, we've talked about achieving this Towards the end of 2023, we are not making sort of today any amendments to the outset financial targets that we Have communicated, but maintain what we've said previously that there is not one factor that will take us What's the target? This is dependent on, of course, 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. So the target stands towards 2023, We will, of course, do our utmost to deliver the best possible results in the markets we're operating. Thank you. So Anders, 3rd row, next question is from Johan Strem, Carnegie. Thank you. So 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 Sbanking. Do you feel that you sit on excess capital? Or is this sort of the level where you strive to be in a year or so? For the time being, we are focusing on the paying the 2020 dividend we announced Today, furthermore, on the acquisition of Espenkirchen, which will initially consume up to 120 basis points. And then we and further discussions will depend on that outcome. But 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. And then continuing on loan growth, I guess, asking what Vegar 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. I mean, 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 Q3 last year. But there you need to keep in mind that Q3 last It was really boosted by a temporary relief under the restrictions that banks are under on mortgages. And you can also see the impact of that on the real estate brokerage that the activity in the housing market as such has is lower this Q3 than last year. But our read on that is that, that is due to an exceptionally high activity level last year. And 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, and good luck, Otay. Thank you. So we have Megal from Pareto Securities. One more question on loan losses and what we should expect going forward. If you 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 guided on non losses, Wennhard. We've only put out there what our historical average is. But as you well know, having been Following the sector for so long, I mean, you're never you're hardly ever on average. But 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, It 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. But 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 25,000,000 losses in the mortgage book of NOK 1,000,000,000 on mortgages. I mean it's extremely robust, and we have a very diversified portfolio. And beyond that, I'm sure you have to make your estimates, sorry. Thank you. And then just 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. And this is an element that Can go up and down. And usually, we would have had that answer by now, but it's coming later in the Q4. Thank you. So Anders, we have a question again from Jan Erik. Thank you. Just a couple of follow ups up. And we have a very good question on loan losses. What is left on your pandemic provisions, so to speak, rather than put it in 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. And obviously, there is this impact as for every quarter we move, we are Placing a poor quarter with a good quarter. And given where we are, there is still some sort of call it potential in that effect. Beyond that, there is 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? Or 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 SEK 71,000,000 in increased SEK 21,000,000 is from redeemed loan, loans being repaid and SEK 47,000,000 from commitment fees On new business. So the level of activity on the new business side was good in the Q3 in line and this is the corporate segment. Okay, perfect. The other income, it seems to be a little bit softer this time around. It's sort of mixed between associates, On the non specified income and other areas. You want to talk about, I think, I heard, but what about Vipps? When would you like to list it? And what kind of income has come from Vipps this quarter? Vipps is 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. So 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. So for now, that's the priority. Okay. Final for me then. On the cost side, you had IT capitalization in this quarter and some of it stems from As well, 1st on the second quarter, if I understood it correctly. How should you read that going forward? Is that a new trend that will capitalize on the balance sheet? Or is it something just vary between quarters and projects? Year to date, I would say are back to sort of a normal level. In the first half, we actually had a significant reduction in capitalized IT. Okay. I think that concludes the Q and A session. We remind you that we have an investor Later this afternoon, if you have any more questions, which I guess you have. Justin 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.