DNB Bank ASA (DNB) Earnings Call Transcript

Hello, welcome to the DNB Quarter 3 Conference Call. My name is Caroline, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand over the call to your host, Rune Helland, to begin today's conference. Thank you.

Thank you very much, and hello, everyone, and welcome to DNB's third quarter analyst call. With us in also to answer all your questions are, of course, CEO, Kjerstin Braathen; CFO, Ida Lerner. We also have Head of DNB Markets, Alex Opstad; Head of Wealth Management, Hakon Hansen; and Head of Personal Banking, Maria Lovold; and Head of Business Customer Norway, Rasmus Figenschou; and, of course, also Head of Large Corporate, Harald Serck-Hanssen. Before we open up for questions, Ida will give you a short summary of the quarter, please. Thank you.

Absolutely. And hi, everyone, and thanks for dialing in. The Norwegian economy continues to be robust and is showing clear time of a soft landing. Norwegian mainland GDP rose by 0.1% in the second quarter, and the full year projected mainland GDP growth is expected to be at 0.6% before picking up slightly to a more moderate growth rate around 1.1% in 2025. Overall household consumption has increased in the second quarter. And moving on to the third quarter from our numbers, you can also see that it's expected to continue to increase in the second half of 2024. Prospects for higher real wages and continued low unemployment are expected to drive an increase in household real disposable income throughout 2024. Unemployment remains low at 2% and inflation levels have come down gradually, but are still at higher levels than what Norwegian Central Bank's long-term targets set [indiscernible]. Wage growth is expected to come in at 5.2% this year and then gradually come down over the following years to 3.3% in 2027. Due to the strong Norwegian economy and the low unemployment levels, as well as how well the households as well as corporates are upholding, the key policy rate remains unchanged at 4.5% and is expected to remain at this level until March 2025, after which rates are expected to gradually move downwards to 2.75% at year-end 2027. This quarter, there is a strong performance across the board in the bank. We see strong developments and activity levels in all customer segments. Return on equity at 18.9% in the quarter with a strong activity around the bank. 18% adjusted for a one-off gain from Fremtind, Eika merger, but still then at very high levels. Net interest income, up 2% from the last quarter, driven by lending growth and increased activity. And we see a strong momentum in the personal customer segment during the quarter. Loan growth in all customer segments, personal customers, up 0.8%; corporate banking, Norway, up 0.3%; and a strong growth in large corporate of 4.7%. Deposit volumes were reduced by 4.1%. There are seasonal effects in the personal customer segment, which is always natural in -- moving into the third quarter from the second quarter. And in the corporate banking Norway segment, we also see more seasonal effects coming from the public sector. In addition to that, there was a decrease in deposit volumes in large corporates, but that's more related to low-margin deposits that are short term of nature. So you can see that and when you're looking at the margins, the deposit margins in the combined margins and in the corporate segment that they have actually improved. Net commission and fees are up 11.1% from the corresponding quarter last year. We see an all-time high third quarter, resulting in a strong performance from assets under management as well as investment banking, which continues to deliver strong results. Solid asset quality and impairment provisions totaling NOK 170 million in the quarter, a strong core Tier 1 capital ratio of 19% and earnings per share up 22.5% from the third quarter 2023. And with that, we are opening up for Q&A.

[Operator Instructions] We will take the first question from Gulnara Saitkulova from Morgan Stanley.

This is Gulnara from Morgan Stanley. One question on the capital distribution. Maybe can you elaborate a bit more how should we think about the capital distribution going forward? In April you got the authorization to repurchase 3.5% of the share capital, and you have completed the buyback of 1% in September, and specifically, how should we think about the remaining 2.5%? Do you think you will hold off from doing the buyback for now until we get the clarity on the decision regarding the potential increase in the risk-weight floors? Or do you think now onwards, you will focus more on the dividends also considering their sizable acquisition that you just announced? And maybe one follow-up on M&A. You have now successfully acquired an integrated bank and now Carnegie. How should we think about your M&A strategy going forward? Are there other areas of your business where you may potentially consider further inorganic growth opportunities?

Thank you. I'll do the latter and then I'll hand the first one over to Ida. With regards to M&A versus organic growth, I think our strategy has been very consistent over the years. Our primary priority is to reinvest part of our profits back into the business to grow organically. And we will consider structural initiatives, the more bolt-on acquisitions, if they either add scale to something we're already doing. I guess, banking is an example, or if it builds a strategic position and capability and in particular, we've been targeting to grow the fee-based part of our business. So Plan A, organic growth, but nothing new to announce in terms of M&A. It's the same type of thinking where smaller bolt-on acquisitions is what we were always open to consider if they are in strategically important areas for us.

And when it comes to distribution, our dividend policy stands and we have been quite clear on saying that our primary focus is on focusing on a nominal increase cash dividend year-on-year. In addition to that, we will continue to use share buybacks as a optimizing tool to optimize the capital position. When looking at our capital position today, we have a core Tier 1 capital ratio of 19%, 220 basis points above the regulatory expectation. Within that, there is a Pillar 2 guidance of 125 basis points as well in addition to the requirement. Carnegie transaction is expected to consume approximately 120 basis points. And in addition to that, there is still some uncertainty in relation to the risk-weight floors that have been proposed by the NFSA. We still haven't seen a decision from the Ministry of Finance in relation to that. And even though the market seems to expect that these will not be approved, that's, of course, not something that we can count on, and therefore have built that into our investment as well in terms of future outlook. We have the Annual General Assembly have given an authority to the Board for up to 3.5% of buybacks this year. We've utilized 1%. And I think we can only say that we will continue to monitor this situation and use share buybacks as the optimizing tool.

We will take the next question from line Shrey Srivastava from Citi.

Two for me, please. Firstly, the one area where you missed consensus expectations were on costs. I can see there's been a little bit of momentum here with the year-on-year reduction in IT consultant spend, for example. Could you provide a brief summary of your plans here, particularly, will the employee reduction program be more broad-based than the 500 staff you're going to cut in staff and support functions? And what sort of costs can we see associated with that and when? And secondly, you very helpfully in the call earlier provided a split of the 2024 net income to 2025 from Carnegie. When you then bridge from 2025 to your target ROIC, which implies a NOK 1.8 billion net income. Could you provide any numbers around how much comes from revenue synergies and how much comes from industry wallet expansion? For example, if I look at 2021 IB and securities income, it was about NOK 2.5 billion higher than in '23. So how much of the normalization do you assume versus revenue synergies?

Yes. If I'll start with the -- with your question in relation to costs. I think what we have -- we are continuously focusing on effectiveness in the bank. We're running a highly effective bank at the moment, but we continue to focus on cost efficiency also going forward, bearing in mind that we still see that the wage growth is quite significant from a Norwegian perspective and also inflationary pressure hasn't come down to the levels that we expect long-term. And that's also why we are focusing on continued automization, digitalization and are also taking out those effects by reducing the number of full-time employees. We have announced a downsizing of 500 full-time employees that we expect to be finalized before the end of first quarter next year. And we still haven't provided you with information in terms of the one-off cost relation to that, but we expect to be able to provide you with details on that in relation to the Capital Markets Day. And then we will continuously -- continue to focus on cost efficiency also in the times ahead. As we also see that wage growth continues to be high and IT expenses is also an area where we want to continue to ensure that we don't underinvest, but invest sufficiently to also make sure that we service our customers in the best possible way, but also take out automation and digitalization efficiencies going forward. When it comes to Carnegie and the annualization, we provided you with a split, and I hope all of you heard that, but I'll just repeat it to make sure that you all have the same information. If we start with looking at the bridge up to NOK 1 billion. If you annualize the NOK 535 million year-to-date, that means that you end up at NOK 730 million. In addition to that, the newly acquired businesses, of which [indiscernible] and [indiscernible] accounts for the largest part, it's assumed to account another NOK 100 million. In addition to that, there have been some nonrecurring costs in Carnegie related to restructuring as well as IT costs that is expected to be amounting to NOK 125 million. On top of that, we are expecting increased volumes and income stemming from wealth management. The more recurring type of income stream, as well as somewhat of a normalization on the investment banking side that is expected to add further NOK 75 million. When moving beyond that, I think I'll just repeat what we said yesterday in terms of providing you with a bit more details on the platform that we expect we will be able to generate further income synergies on the Capital Markets Day. But again, I just want to reiterate the case that we built and the strategic rationale behind the acquisition of Carnegie is primarily built around income synergies. There are, of course, also some cost synergies, but in particular, it's income synergies, both on the more recurring part of wealth management, but also on a normalization of the investment back.

We will take the next question from the line Sofie Peterzens from JPMorgan.

Yes. So I know it was discussed on the press conference, but could we just go back to the cost of deposits. If I look in your fact book, I can see that the deposit or interest on deposits as you call it as an expense, it declined by around NOK 700 million quarter-on-quarter. It went from NOK 16.2 billion to NOK 15.5 billion. So it's quite sizable. How should we think about the kind of interest on deposit from customers? Will it -- is this the new run rate kind of the NOK 700 million lower per quarter? Or should we expect it to remain quite volatile. So if you could just talk about lease and also the deposit decline as we saw both on a group level, but also especially in the large corporate division. How should we think about deposit kind of -- or how should we think about the deposits, how they are going to evolve going forward? And then my second question would be on the net interest income outlook. Could you just maybe discuss what your view is on interest rate in Norway and also kind of how do you think about the moving forward in your rate sensitivity? And clearly, if you disclose rate sensitivity, it would be even better if you could give a number. But if you don't, then if you could just talk about them moving parts.

Thank you, Sofie. First sort of briefly on deposits. So I think it's important to look at not only volumes, but also revenues and margins. And the largest for the decrease is in large corporates, but you also see a 7% growth in NII versus the 4.7% growth in lending, which clearly illustrates that the more volatile parts of the deposits. They are low margin and contributing marginally to the revenue. The more valuable positions we have in the process are in current accounts with our SME customers. They are in transaction accounts with our personal customers. And even though there has been some changes in asset mix gradually, also because part of the money is being spent in the SME and also during the third quarter in personal customers, there haven't been structural movements to speak on, still 25% transactional accounts and 75% savings account in personal customers. So there is no shift in our way of thinking in deposits, but the fact that we are attractive. We are viewed as a flight to quality, that will both win as a public sector company who are rich deposit customers for us here in Norway that has a volatility element in this quarter only, and it will bring us also substantial volumes from large corporates, both in Norway and outside of Norway that, yes, they are more volatile, but it doesn't mean as much related to our revenues. So the overall picture is growth and stable margins and an NII that grows both compared to the last quarter and to the previous quarter and the same quarter last year. I think that is the main picture to hang on to. Secondly, interest rates. We still haven't seen the first rate cut in Norway. Expectations are for the first one to come in March. What matters for the rate setting of the Central Bank is still how inflation develop, how the economy is developing and how the currency is doing. Even though inflation came in slightly lower than expected, it seems as though the Central Bank is relatively robust in terms of shifting around their plan as they also see that there are some longer-term inflationary effects working in the economy. And most people believe it will be more difficult to get from where we are today on inflation has fully down to the 2% level, and we're still somewhat above. So the most likely scenario is believed to be the first rate cut in March next year. And over an 18- to 24-month period, an aggregate of 5 rate cuts bringing us down to 3.25%, which is expected to be the new sort of normalized level, substantially above where we were prior to the pandemic which was 1.75%. In terms of rate sensitivity, we can't really be very specific. As you well know, we have a floating rate book, and our rates move with the repricing that we do towards our customers. I'll just say it has had a positive impact on the way up. It needs to be expected that when rate go down, that will have a negative impact on the NII, and we will manage and optimize within that as best we can.

We will take the next question from line Martin Ekstedt from SHB.

Martin from Handelsbanken here. So two, if I may. So you mentioned on the call this morning in relation to potential capital headwinds, your IRB model reviews. So could you share some more detail on this, please, these processes. Is it several portfolios? Are they taken separately? What about timings of these? And do you have a sense of the direction of risk rate going forward? Overall, it seems risk weights came down quarter-on-quarter, which continues the trend from past quarters, I believe. And then my second question, if I may. So you're eliminating 500 positions. So -- but staff increased by around 100 full-time employees' quarter-on-quarter. I just wanted to check from what basis will you eliminate 500 jobs. Is it from this quarter or last quarter?

Yes. So I think, first of all, if I start with the capital headwinds. What I tried to convey this morning was all -- the all elements that impact our capital position on a yearly basis. That was including the SREP process, which is an annual process. The IRB models and the follow-up from the NFSA is also an annual process, whereby we have an NFSA scrutiny of all our IRB models on an annual basis. So that's not -- that was not an indication of anything apart from the fact that that's kind of part of the yearly -- all -- everything that happens on a yearly basis. So I wouldn't say that there is any indication of either way. On -- when we talked about the staff reductions, what we've said is that it's a net number. We're talking about a gross number of reduction of 500 full-time employees. We're looking at it from the Q2 numbers. On the other hand, what we have increased the staff in the third quarter is in relation to IT and technology, which are important areas for us to continue to invest in. And we have also seen some added staff in relation to KYC.

We will take the next question from line Tarik El Mejjad from Bank of America.

Just a couple of questions, please. First one, follow-up on Gulnara's question about the capital return in conjunction with Carnegie and the risk-weight floor for CRE and mortgages. So I understand that you reiterate the guidance and the dividend policy with the payout and the better use of the share buyback to manage the capital. But if we think of the close period for -- the closing period for the deal, plus the -- as you hear from the NFSA, should we expect that there will be a halt on the distribution -- on the division form of a buyback in the time being and not putting anything in our numbers? Or it's -- there's no necessarily any relation with that? And second question is on Slide 10 with your bridge for NII quarter-on-quarter. Can you please give us an indication what's the other moving part relate to? And -- because it's quite sizable, just to understand what's behind that.

I'll do for a change, a quick response to the capital return and then Ida can do the NII bridge. I think -- I mean what we can try to guide you as much as we can. But what you actually put in your numbers; you need to evaluate yourself. I think the clear element is that we've announced an acquisition for 120 basis points. There is a proposal from the NFSA of a risk-weight floor of 80 basis points. We know that the market doesn't believe it's very likely to go through, but all the same, it's natural for us to await that in order to consider any further share buybacks. Beyond that, the messaging is related to our dividend policy, which is consistent as we've already communicated and reiterated by Ida earlier on the call.

Yes. In other NII, there is a number of -- there are a number of different items, but it's, among other things, NII related to risk management, which is a smaller part of our business, but still adds somewhat in addition to NII related to long-term funding and also reduce guarantee fund levy are the main parts in that.

We will take the next question from line Patrik Nilsson from Goldman Sachs.

I just had a question on NII because interest rates are expected to remain higher in Norway compared to many other European countries, which should all else equal, be a relative benefit to NII. But do you see any risks that are prolonged higher rate environment will trigger an increase the amount of deposit migration or increase mortgage negotiation requests? And also in conjunction to that, what would be the optimal interest rate level for DNB to operate in?

Thank you, Patrik. As for the Norwegian economy, you're quite right pointing out that this is a relatively -- relative positive that rates are staying higher for longer, unless we see risks, for example, related to a weakening of the economic growth if rates need to stay higher for any reason at all. And we do not see that type of risk. On the contrary, I think the reason why it's taking longer in Norway to see the first-rate cut is that the economy has developed a stronger than expected and anticipated at the outset of the year. So we are not seeing any weakening in our portfolio. We are not seeing more customers looking for installment relief. We are not seeing signs of weakness. On the contrary, this quarter, we have seen a slight improvement in our portfolio quality overall. Important always to point out when we talk about that, that we're talking broadly and systemically and that we can never sort of talk to the potential customer specifically that could impact our numbers in the future. But the fact of the matter is that the Norwegian economy is very resilient and has been so, and this is why also we are remaining at a higher interest rate level than our neighboring countries. Second question, I don't recall. Can you repeat that?

Yes, it was also -- so I appreciate the response on the strength of the economy. But I was just wondering if just seeing the interest rate level being higher for longer in Norway, could that potentially trigger customers to migrate deposits from transaction accounts into term deposits or maybe increase the incentive for customers to call in and start negotiating mortgages?

Well, I think this is -- so I've commented on the risk to the economy overall. With regards to more customer-specific negotiation and behavior, we have seen less of -- less changes in the mix effect than we have seen previously. But we would like for our customers to manage their deposits in a rational way. So we continue to work proactively with them to manage their deposits and placements in a sensible way and see some movements within accounts, but nothing that materially impacts the number, and it's at a lesser pace in the third quarter than we've seen during the first half. With regards to rate renegotiations, that was also very active in the first quarter, less so in the second quarter and even less this quarter. As you can see from our report this quarter, the margin pressure is marginal also in personal customers. And overall, the message is that margins are stable. So we're not seeing that, no.

We will take the next question from line Riccardo Rovere from Mediobanca.

I have a couple, if I may. The first one is again on NII. Just to be sure, I'm having a look at the press release that you put out right at the end of December after the Norges Bank increased rates for the last time. And the tax we were using at that time was DNB has decided to increase the interest rate on all saving accounts by 0.25 percentage points or more period. The interest rate on mortgages will increase by up to 0.25 percentage points as said in their blacklist, detain, blah, blah, blah. Now it's fair to say that in the very last part of the tightening cycle. I don't know why, but you decided to pay up deposits. And if that -- because this is what the press release is saying. And would it be fair to assume that if you as the rest of the banking industry behaving a rational way, as you keep stating, it will be natural at least at the beginning of an easing cycle to again, be rationale and whatever has been given on top to depositors will be taken away? This is the first question. The second question is on the risk-weighted assets. They go up by NOK 20 billion. But when you look at the loan book, so personal banking, last large corporate, plus business banking, this -- the growth quarter-on-quarter is something like NOK 13 billion or NOK 15 billion, while risk assets go up by NOK 20 billion and the increase is completely driven by credit risk. There is nothing on the op risk. There is not -- no much on the market risk. And risk weight seems to be kind of flattish quarter-over-quarter. So I was wondering, how can credit risk go up by NOK 20 billion when the loan book has going up by NOK 13 billion. Is there any -- [ funny thing ] maybe relates to repos or whatever it is?

Thank you, Riccardo. You are reading the press release from December quite right. And it does reflect the fact that there was a slightly increasing deposit beta and cash throughout the rate cycle, which I think is quite natural for a market where you have a floating rate structure. With regards to what will happen when it moves downwards again and the qualification of rationality and the behavior in the market. I think rationality needs to be seen over time. It is a competitive market and what we or any of our competitors will or will not do at the initial rate hike, I think it would be too hypothetical for me to comment on. But it withstands that we view this market as rational and the fact that we now have several of the larger saving bank players working on mergers will rather strengthen than weaken the rationalities as we see it.

On risk-weighted assets, I think profit generates 35 basis points this quarter. Counteracting that is that you rightly point to volumes and the effects of the volume growth. But in addition to that, you also have the FX effect, and you also have counterparty risk, which increases -- which is also, to some extent, related to counterparty risk in other areas. But these are minor, but there's a lot of different small elements here that adds up.

Yes. Okay. But the FX effect should be visible also on the book side on the loans. So on the risk-weighted assets and on the loans, but the loan growth is 2/3 of that of the risk-weighted assets credit risk. So I was wondering, if you look at the divisions, okay, not the overall group. Overall group is -- growth is definitely higher than that. But when you look at personal banking plus business banking plus [indiscernible] quarter...

Yes. But if you add the market risk -- if you add the market risk element to that, which you wouldn't see on the corporate customer or the personal customer segment.

Okay. All right. Okay. Okay. So there are no [ funding ]...

It's not a large part. As you know, market risk is a fairly small part of our risk.

And there are no fund, is basically in the risk-weighted assets. No one-offs or anything?

There are no funding parts in this, no.

We will take the next question from line Jacob Kruse from Autonomous Research.

So two questions. The first is just on the Carnegie acquisition. You're getting a meaningful Swedish corporate banking and private banking presence, which I guess for your bank in Norway would be -- would normally be combined with the lending business, which Carnegie doesn't really have. So my question is just, are you, with this acquisition, becoming a bit more active in the lending market as well, either on the mortgage side or on the corporate side? And my second question, which is, I guess, related is, should we view this in any way as DNB moving away from the kind of Norwegian focused business to a more a pan-Nordic business?

Thank you, Jacob. I would highlight that it has been an ambition for quite some time to strengthen our presence across the Nordics and we have been growing that activity faster than any other activity in our business also for the past 5 years. Now with the Carnegie acquisition, we're strengthening investment banking, private banking and asset management, not corporate banking as such because they do not have a balance sheet and an existing lending activity. That being said, we have a meaningful corporate lending activity in Sweden. And of course, we work very closely with investment banking and wealth management on that. And certainly, this is part of the potential we see going forward, how we can build on that in order to develop and help more customers and generate even better results. So our appetite is there to grow more in the Nordics also outside of Norway, but this is on the corporate side. We have no ambition to grow or take any position on the mortgage side. It's not a sign that DNB is moving away from Norway. We still have approximately 77%, 78% of our revenue from the Norwegian market. And even though this is a transaction that is transformational for our investment banking and asset management and private banking business. It's a relatively small transaction, if you consider DNB scale overall. So we're well anchored in Norway and the Norwegian economy, but this is an attractive opportunity to expand and build a stronger and even more diversified fee base.