Danske Bank A/S (DANSKE) Earnings Call Transcript

Good morning, everyone. Welcome to the conference call for Danske Bank's financial results for the first half of 2026. My name is Claus Jensen. I'm Head of Danske Bank's Investor Relations. With me today, I have our CEO, Carsten Egeriis; and our CFO, Cecile Hillary. We aim to keep this presentation at around 25 minutes. And after the presentation, we will open up for a Q&A session as usual. Afterwards, feel free to contact the Investor Relations department if you have any more questions. I will now hand over to Carsten. Slide 2, please.

Thanks, Claus. And I would also like to welcome you to our Q2 conference call where I'm pleased to share the highlights of Danske Bank's financial results for the first 6 months of the year. Q2 was another strong quarter for Danske Bank. We delivered solid earnings. We continue to build commercial momentum, and we executed with discipline against our strategic priorities. Commercial momentum is broad-based and encouraging as customer activity remained healthy across the Nordic franchise. Corporate lending grew 6% year-on-year, which is especially encouraging because it is translating into market share gains across the Nordics. And that tells us that our relationship-led model and sector expertise are resonating with corporate clients. We also continue to see positive momentum in Asset Management with an increase of 24% since last year, supported by net inflows of almost DKK 15 billion in Q2. Our financial performance is strong and high quality with core income up 7% year-on-year with a Q2 net profit of DKK 6.2 billion, corresponding to a return on equity of 14.8%. This is above our 2026 target level and also consequently is the strongest quarterly result for Danske Bank in 20 years from an ROE perspective. Our Q2 cost-income ratio was 43%, reflecting strong operating leverage, continued cost discipline and progress versus the 45% target for 2026, which we now expect to be below 45%. An important message today is that our growth is broad-based and high quality. Customer activity, volume growth across business units and resilient margins are all contributing while credit quality remains strong. And this gives us confidence in the sustainability of earnings. The CET1 ratio of 17% remains strong. Our capital generation remains a clear strength, as we continue to generate capital while growing the balance sheet and accruing for the new dividend policy announced in Q1. Given the stronger income outlook from higher commercial activity and policy rates, we have raised our '26 net profit outlook from DKK 22 billion to DKK 24 billion, to DKK 23 billion to DKK 25 billion. And we remain focused on profitable growth, disciplined cost management, strong credit quality and attractive shareholder returns. So in short, Q2 demonstrates a stronger franchise, profitability that's ahead of target levels, and a continued capital flexibility, and we're really well positioned for the remainder of the year. I'll now give a few comments on the business units performance, and then I'll hand over to Cecile for the financials. Please turn to Slide 3. So, moving from the group overview to our business units. The main message is that momentum is broad-based. Across the 3 business units, we're seeing high customer activity. We're seeing good volume development, and we're seeing resilient income generation. In Personal Customers, the trend remains constructive. Customer activity is healthy, and we continue to see growth in lending, and deposits and also in retail investments. And that tells us we're maintaining relevance with households in their everyday banking needs as well as in larger financial decisions. Income has continued to move in the right direction, supported by customer engagement and a strong deposit base. And importantly, profitability remains very robust, and credit quality continues to be a clear strength. Business customers is also showing good commercial traction and strong growth. The underlying trend is one of deeper relationships. So customers are using more of our solutions, including everyday banking, cash management and broader financing products. Lending and deposits both point to continued activity in the SME and corporate client base. Fee income is also developing well, which reflects the value of our platforms and advisory capabilities. Overall, this is a business where relationship depth is increasingly translating into earnings momentum. In LC&I, activity remains solid, particularly in lending and advisory-related areas. We continue to support large clients across the Nordics with financing, capital markets access and strategic advice. Deposits in this segment can be more seasonal and more sensitive to client liquidity management. So quarter-to-quarter movements should be interpreted in that context. Overall, client demand and activity levels remain supportive and returns are tracking well against our ambitions. So the takeaway is that the franchise is performing consistently across segments. We're seeing customers engage with us across products and channels, and that is supporting volumes, income and returns. This breadth of momentum gives us confidence in the growth agenda and in our ability to continue delivering against our 2026 targets. And importantly, the execution of our Forward '28 strategy continues to deliver strong results, and we're able to invest in the technology and AI platform that position us well for the future, as we also detailed at our strategy update in April. In particular, AI investments and their expected outcomes are progressing as planned. And then please go to Slide 4, and then I'll hand over to Cecile.

Thank you, Carsten. Let me now turn to the income statement. Q2 was a strong quarter with good momentum in our core income lines, continued cost discipline and strong credit quality. For the first half, total income was supported by growth in net interest income and fee income, underpinned by customer activity and higher volumes. Trading income was affected by market volatility while other income benefited from the DKK 231 million one-off in Q2. Compared with Q1, NII remained resilient as volume growth offset lower equity base income and slightly higher funding costs. Fee income improved within almost all fee categories, and both trading and insurance recovered from a volatile first quarter. Costs remain in line with our guidance and reflect disciplined execution. Credit quality continues to be strong with a well-provisioned portfolio and sustained below-cycle cost of risk. Overall, the quarter shows resilient earnings quality and good operating control. I will now go through the key lines in more detail. Slide 5, please. Turning to net interest income. We delivered a solid result in the first half with NII up 3% year-over-year. The key message is that the trajectory remains resilient, supported by positive volume development, constructive margin trends and the stabilizing contribution from our structural hedge. Looking at the year-on-year bridge, the improvement reflects solid credit demand, while the structural hedge continued to provide an important offset, keeping in mind the 4 rate cuts we saw in the first half of last year. This is the balance we look to achieve, benefiting from underlying franchise momentum while maintaining stability through disciplined balance sheet management. Q2 again showed a solid NII trajectory. Volume contribution remained supportive, and the margin development was broadly consistent with our expectations. The other line includes treasury allocation effects while we also had a non-recurring correction, so I would not read that as a change in the underlying trend. Adjusting for this correction, NII was up 1% from Q1. Our structural hedge was impacted by higher short-term rates in Q2, and we also saw lower income from the shareholder equity base following the March and May payouts. The notional of the structural hedge including bonds and derivatives was kept broadly stable in Q2 at around DKK 190 billion. And as such, the structural hedge remains the key feature of our NII profile. Finally, our NII sensitivity is unchanged. For a 25 basis points upward move, the year on impact is approximately plus DKK 450 million with additional impact in years 2 and 3 of around plus DKK 300 million and plus DKK 100 million, respectively, all else equal. The actual effect will naturally differ depending, for example, on pricing decisions and customer behaviors. So, in summary, we see the NII trajectory as solid. Customer volumes are contributing positively. And with the recent rate hike in mind, this supports our raised income expectations for 2026 with a view to addressing questions about expectations for NII for the rest of the year. We now expect NII to be slightly above DKK 38 billion for full-year 2026 driven by continued volume growth and based on current market-implied rates. Slide 6, please. Turning to fee income. This was a strong quarter. Net fee income was up 13% year-on-year and 4% quarter-on-quarter, driven by customer activity and continued momentum in our investment offering. In daily banking, we continue to see good demand for our One-Corporate platform and cash management solutions. The continued growth in house bank mandates is an important indicator of the depth and relevance of our corporate relationships. Lending and guarantee fee income benefited year-on-year from higher customer activity and continued corporate credit demand. Quarter-on-quarter, the lower contribution was mainly linked to the timing of refinancing auctions of adjustable-rate mortgages rather than a change in the underlying customer trend. Capital markets fees also contributed positively, supported by good activity across businesses during the quarter. Investment fee income remained a strong driver, supported by growth in assets under management, positive net sales and rising asset prices both year-on-year and quarter-on-quarter. Overall, the fee income development demonstrates the breadth of customer activity across the franchise and the benefit of a diversified fee base. Slide 7, please. Turning to trading income. The quarter was affected by slightly lower customer activity in secondary markets and positive valuation effects in Group Treasury. In LC&I, the year-on-year development was primarily driven by lower customer activity in fixed income. Quarter-on-quarter, however, we saw an improvement in fixed income customer activity, but this was offset by lower activity in FX and equities. In group functions, the movements mainly reflect unrealized market value adjustments on cross-currency swaps and other balance sheet movements. These items create accounting volatility in Group Treasury and should be viewed separately from the underlying customer franchise. The key message is that the trading income line was impacted by market activity and valuation effects in the quarter. Our broader commercial momentum and customer activity remained visible in the core income lines. I will now move on to the expense developments. Slide 8, please. Turning to expenses. Our cost trajectory remains in line with the full-year guidance, and the Q2 cost-to-income ratio was 43%. This reflects continued cost discipline while we keep investing in the capabilities needed for growth. Year-on-year, expenses were higher, mainly due to staff costs, including performance-based compensation. This was partly offset by lower FCRP and remediation costs, showing continued progress in reducing legacy cost items. Quarter-on-quarter, the increase was primarily driven by higher resolution fund fees, reflecting the higher deposit base. Even including that effect, the underlying cost development remains well controlled. We continue to make targeted Forward '28 investments in our digital and technology platform. These investments support AI, future growth and efficiency. At the same time, group FTEs were down by around 250 compared with Q1. For the first half, the cost-to-income ratio was 44.4%, and we reaffirm our full-year 2026 cost outlook of DKK 26 billion to DKK 26.5 billion. Based on the performance so far, the cost-to-income ratio is now expected to be below 45%. Overall, the message is disciplined cost execution, continued investment in strategic priorities, including tech and AI, and improving operating efficiency. I will now move on to asset quality. Slide 9, please. Turning to asset quality. The picture remains strong. Our diversified and low-risk credit portfolio continues to underpin credit performance, and we remain prudently provisioned given the macro and geopolitical backdrop. In Q2, impairment charges were below-cycle at DKK 0.3 billion. We maintain our full-year impairment guidance of around DKK 1 billion, corresponding to approximately 5 basis points cost of risk. This reflects both the quality of the portfolio and our disciplined approach to risk management. Macroeconomic charges remain modest. At the same time, our scenarios continue to reflect elevated uncertainty including geopolitical risks, tariffs and trade tensions so that we capture the potential impact of a more severe and prolonged adverse environment. Post-model adjustments stood at DKK 5.2 billion, including model-related releases of DKK 160 million in Q2. We continue to take a prudent approach in light of potential disruptions and uncertainty. The total overlay of around 30 basis points is equivalent to almost 4 years of normalized cost of risk. Overall, asset quality continues to support the earnings profile and capital generation of the bank. I will now move on to capital. Slide 10, please. Our capital generation remains very strong, underpinning the CET1 ratio of 17% at the end of Q2. That 17% level should be seen in the context of the DKK 5 billion payout at the beginning of the quarter and the additional accrual we have taken following the revised ordinary dividend policy announced in April. Risk exposure amounts increased by DKK 11 billion quarter-on-quarter to DKK 848 billion. The increase was mainly driven by higher lending-related credit risk, REA, reflecting continued commercial activity and balance sheet growth. This was partly offset by lower market risk REA, as the interest rate volatility we saw in Q1 moderated during the quarter. With respect to the CET1 requirements, we saw a slight reduction in Q2, primarily due to the reduction in the systemic risk buffer related to commercial real estate exposures. As a result, our CET1 headroom stands at around 240 basis points which gives us a comfortable management buffer in excess of our target of 150 to 200 basis points. As a reminder, we expect DKK 3.5 billion of Pillar 2 relief, equivalent to around 40 basis points that relates to our solved legacy cases. This is expected prior to year-end 2026, subject to annual supervisory processes. Looking ahead, our trajectory remains consistent with the glide path we have communicated. We aim to be at around 17% by the end of 2026. And at our stated CET1 target of around 16% by 2028. This keeps us positioned to support growth and execute our capital distribution plan. So in summary, the quarter demonstrates strong capital generation, disciplined balance sheet management and continued ability to deliver on both growth and distribution. Slide 11, please. Finally, turning to the financial outlook for 2026. We are raising our expectations and now expect net profit in the range of DKK 23 billion to DKK 25 billion, corresponding to a return on equity of around 14%. The upgrade is solely driven by stronger income expectations. We now expect total income to be somewhat above DKK 59 billion, supported by higher core banking income from stronger customer activity, growing volumes and the effects of recent and expected policy rate hikes. At the same time, we continue to see good commercial momentum across the franchise, and our priorities remain consistent with our financial ambitions. We continue to expect operating expenses to be in the range of DKK 26 billion to DKK 26.5 billion. This reflects our continued growth ambitions and investment spend and the same sustained focus on cost management. Overall, we now expect the cost-to-income ratio to be below 45% for full year 2026. We also continue to expect loan impairment charges to be around DKK 1 billion. This reflects the continued strength of the credit portfolio and disciplined underwriting across the bank. Slide 12, please, and back to Claus.

Thank you, Cecile. Those were our initial comments and messages. We are now ready for your questions. Please limit yourself to 2 questions. If you are listening to the conference call from our website, you are welcome to ask questions by e-mail. A transcript of this conference call will be added to our website within the next few days. Operator, we are now ready for the Q&A session.

[Operator Instructions] We will now go ahead with our first question. This is from Shrey Srivastava from Citi.

I guess I'm just focused around the sustainability of some of this improved income going forward into '27 and '28. If I look at current consensus expectations, they're around DKK 59 billion in income for '26. And if we were to assume that this reflected what you previously were thinking, it looks like consensus for net interest income is pretty much in line with what you've said, which leads me to believe that the upgrade is more fee-driven. So just looking at the breakdown of the guidance upgrades, between the various lines. Is that the case? Is it mainly fee-driven? And if not, how come the increase in higher market rates has not translated into a greater increase in your net interest income expectations?

Yes. So, let me take your questions. So I'll take -- I'll start with indeed the total income, right? The revised guidance to somewhat above DKK 59 billion. And I can confirm that really that revised guidance is driven by the core banking income, right? So that's NII, and that's fee income. So where -- let me take both separately. Firstly, starting from NII. So you've seen the half year that we've had. And obviously, I can confirm that the correction quarter-on-quarter doesn't affect the half year, right? So we start obviously with a strong quarter, which was defined in particular, by slightly higher volumes that we expect, in particular, in corporate lending. So that's what we looked at for H1. And of course, we had at the end of the half year, the rate hike. And then looking forward, 3 items specifically will impact NII in the second quarter. I mean one is obviously the recent rate hike that we've had and also the September one that is embedded in market-implied rates. The second aspect is the continued volume growth. So here are our assumptions on the volume growth. We obviously start with where we are at the end of June, which clearly -- were clearly, as I mentioned, we saw slightly higher volume growth than our assumptions, so obviously a good thing, all the profitable growth. And what we apply is our assumptions of 3% to 4% lending growth and 1% to 2% deposit growth going forward for the rest of the year, probably at the higher end of these ranges. So that's on growth. And then thirdly, obviously, don't forget that we've got 3 extra days in H2. Separately, there are a few other effects, but I would say they're less material on the NII. For instance, on the deposit margin, we've had a slightly lower pass-through than we're necessarily assuming at the outset. But let's see, obviously, how this continues, particularly with competitive dynamics and the like. But obviously, that is also a slight effect. So that's effectively what drives our NII guidance to slightly above DKK 38 billion. Then on the fee income, we see our fee income as a very resilient, driven by all 3 businesses. And really all categories of fee lines, if you look at it year-on-year, have actually grown. So very resilient, very solid fee income line. And obviously, Carsten commented on the growth in AUM that you've that is very, very significant. And on that, I would say, we absolutely see this as very sustainable going forward. And of course, don't forget that we've got also an element of seasonality when it comes to performance fees in the fourth quarter, though obviously, I wouldn't use Q4 of last year as necessarily the right template. It was exceptionally strong. So I think you should look at it in a normalized fashion. So I think I've given you some of the elements on the NII and fee income. As far as the guidance for other income lines, I would say this is not changing versus where we were when we gave the full year guidance.

So can I just -- is the right way to read that this is basically just taking into account a higher base effect from the first half. All the other assumptions are unchanged and you're also expecting some deposit margin compression to offset the higher rates.

Obviously, clearly, we'll have to see what volume growth does, right, both on the lending and deposit side. As I've mentioned, I've mentioned the assumptions that I'm using right now. Of course, we'll have to see how this develops in the second half, given the strength we've seen in the first half. But yes, and then, of course, the 3 extra days and then the slightly additional effects from pass-throughs, et cetera.

We'll now take our next question. This is from Namita Samtani from Barclays.

The first question I have is, it doesn't look like you're experiencing a lot of lending margin pressure just based on the NII bridge that you present, and it looks like some of your peers really are. So I just wondered what you're seeing in the market. And why is it that it seems that you're experiencing a lot less lending margin pressure than your peers? And my second question is the hedge was negative this quarter, but do you expect that for the rest of the year, the hedge income will offset this negative headwind. I just noticed you didn't call out the hedge as being one of the growth drivers of NII this year, but mainly volumes and rate hikes.

Thanks a lot, Namita, I'll take the first one, and then I'll hand over the hedge question to Cecile. I think just on the competitive situation, more generally, I mean, we continue to see a competitive environment in the Nordics across all markets. So that's the first thing I would say. But I would not say that there is anything in particular in this quarter and not in the last quarters that is sort of markedly different in terms of the competitive environment. And therefore, as you can also see on our NII bridge and page margins, frankly, are relatively stable, and there is, of course, a little bit of moving parts between deposit and lending margins. And obviously, we also look at the overall NIM. But yes, we see margins as pretty stable, reflecting what is a competitive environment, and frankly, has been for a longer period of time. That's how I would characterize what we see.

And let me take your hedge income question, Namita, and things haven't changed. So as I mentioned, when we gave the full year guidance and again at the end of Q1, the hedge income is a significant and important contribution to our NII. And it is a lift compared to last year, right? So 2026 structural hedge income provides a lift versus 2025. Now of course, as rates and market-implied rates increase, that lift is a little bit reduced all things being equal. However, it still provides a lift. So let me comment now on the development that we're seeing quarter-on-quarter. I wouldn't read too much into the development in quarter-on-quarter. One of the reasons is that clearly, you've got rollovers and maturities. So it's not -- structural hedge income is not necessarily linear from one quarter to another. Also, in this instance, right, you had the effect of obviously a slightly lower equity base from the distribution of the dividends. You had as well, slightly higher funding costs coming from the short-term rates. But overall, Namita, definitely a strong contribution from the structural hedge income again in '26 versus '25.

This is from Sofie Peterzens from Goldman Sachs.

This is Sofie from Goldman Sachs. So just going back to net interest income, it's very helpful that you've given the guidance that it's going to be slightly above DKK 38 billion in 2026. But could you maybe just discuss how we should think about like the quarter-on-quarter tailwinds and of the net interest income that we saw in Q2? Any of the items that will reverse next quarter that we should just be mindful of? And also your rate sensitivity guidance, like I know you give very detailed guidance. Should we expect that tailwind to kind of fully materialize in the second half of the year and then continue to materialize next year. So if you could maybe just discuss a little bit the quarter-on-quarter net interest income evolution and what we should be mindful of kind of items outside of volumes? And then the second question, there were some headlines a month ago or so about Danske wanting to make some acquisitions in Sweden. So maybe if you could just update us on your thinking around M&A and kind of the capital priorities. Do you prioritize bolt-ons over kind of share buybacks and special dividends?

Sure. Thanks, Sofie. Look, on the NII piece, I think we've given some pretty detailed guidance on expectations for the year. And I think quarter-on-quarter, in the second half, you should just expect sort of a gradual growth towards that NII, clearly, Q4 being slightly higher than Q3. And, no, you shouldn't think that there's any specific moving parts that you should be cognizant of, and the rate sensitivities, we've given no changes to those given in the presentation. On M&A, look, I think it's a consistent message from my side, and that is that we're fully focused on our inorganic strategy, and we prioritize growth and continue to see good growth momentum, but we're also looking to see if there are inorganic opportunities, and particularly, Sweden is an interesting market from our side. However, there is nothing concrete, and it's obviously subject to the right targets and strategic fit. So I hope that sort of answers the questions.

And maybe just if I can touch on one aspect that you mentioned. Again, there is nothing in the NII for the first half that we would call out as nonrecurring. The nonrecurring item is purely from Q1 to Q2, so it doesn't shift into the second half of the year.

Okay. That's very clear. And just maybe on M&A, would you consider any M&A outside of the Nordics?

No. I mean, we have a Nordic focus and a Nordic strategy. I see that highly unlikely.

We will now take our next question. This is from Mathias Nielsen from Nordea.

Most of my questions have been asked already, but I still have one on trading income. And I know it's a bit detailed, question maybe, but just a bit puzzled about the normalized trading income you have talked about being around DKK 3 billion. And then when you look over the past years, it's been -- for the last 4 quarters been around DKK 2 billion. And this quarter, we also see being like basically in line with expectations, consensus expectations, while all your peers have basically been beating expectations. So what is going on, on this trading income, like what are we missing on the other side? Or what are you missing internally? Is there anything that has changed from the DKK 3 billion to a lower run rate? Or how should we think about that?

No. I think -- thanks No, not -- obviously, as we've said before, Q1 was a soft quarter, and clearly, if you sort of annualize Q2, you're closer towards the DKK 3 billion, but still below the DKK 3 billion. I think right now and probably also since we did the strategy update, we have taken a little bit of risk off the table, but with better returns. And clearly, our sort of trading franchise very much focused on supporting client activity. So I wouldn't say that we're changing sort of the view that an annualized level of DKK 3 billion is directionally right, but it's probably slightly below that given what we've seen in the last couple of years since we did the strategy update.

Okay. And then on the trading income, maybe if you could say something like back in history, it used to be like quite sensitive to the mortgage spreads in Denmark. That seems like you have eliminated that so like what is actually driving the -- and the trading income, like if you can give a bit of a split of customer activities versus the market making? And what you have on the books? And how that plays out?

But I mean, that's exactly right. I mean, that's exactly what we have been doing is optimizing our trading inventory to support customer activity, not least also after the quite significant interest rate moves we saw back in the summer of '22 and the subsequent risk reward on the mortgage side of things. I mean, the business model is focused on supporting customer activity, customer flows with a predominant income drivers being the fixed income and the FX side of the business.

We will now take our next question. This is from Riccardo Rovere from Mediobanca.