DNB Bank ASA

Hello, and welcome to the DNB Q4 conference call. My name is François, and I'll be your coordinator for today's event. Please note this conference is being recorded, and for the duration of the call, your line will be on listen only. However, you'll have the opportunity to ask questions. This can be done by pressing star 1 on your telephone keypad to register your question. If you require assistance at any point, please press star zero, and you'll be connected to an operator. I will now hand you over to your host, Rony Helland, to begin today's conference. Thank you.

Thank you very much, and hello, everyone, and welcome to the Indy's fourth quarter analyst call. The whole management team of D&B is here, eager to answer all the questions, including Kerstin Ida, of course, and then head of corporate, Harald Sarkhansson, head of personal, Inge Ives Blektesviten, and the CRO, Svein Krog, and head of wealth, Håkon, and also the head of market, Alex. So before we start, Ida will give a short introduction of the highlights for the quarter. Ida? Thank you.

Thank you so much, and thank you all for taking the time to participate in this call. The Norwegian economy is robust, and there are clear signs of a soft landing in sight. BNP continued to decline in the second half of 2023 and mainland GDP growth is expected to end up at 1% for the year. Our economists expect a growth in 2024 of 0.6% and 1.4% in 2025. Mainland corporate investment is expected to have decreased by 2.1% in 2023 and to see a further decrease by 1.7% in 2024 and then start to see an increase again at more normalized levels from 2025 and onwards. Hustle consumption declined in 2023 as expected, but is expected to start to increase again in 2024 when real wages are up and are expected to start to increase again following two years of decline. Unemployment remains low at 1.9%, and even though it's expected to move up towards 2.8% in 2025, this is still at historically low levels. Wage growth was around 5.4% in 2023, and it's expected to be around 5.1% in 2024. The key policy rate is now at 4.5% following the latest hike in December, and it's expected to remain at this level until September, when our economists expect the first cut, followed by a gradual decrease to 3.25% at the end of 2025. Now, moving on to the strong quarterly results from D&B. There is a strong underlying result with a return on equity of 14.6% in the quarter and 15.9% for the year. This was driven by increase in NII of 1.8% from the third quarter and strong performance across product areas within commission and fees, up 8.1% from the corresponding quarter last year, as well as FICC income, where we continue to see strong results even this quarter. The loan volumes were affected by general lower market activity and are down by 0.5% in both customer segments. Deposits was also down in the quarter, but up in the corporate customer segment. The credit portfolio remains robust and well diversified. This quarter, we have impairment provisions of $920 million, primarily driven by customer-specific events in large corporate and small to medium-sized enterprises within sectors that are more exposed to higher interest rates, lower construction activity, and lower overall consumption. The capital position of the bank is strong at 18.2%, 140 basis points above the regulatory expectation, which is now at 16.8%. With a sound profitability and strong capital position, we were happy to announce that the Board has proposed a nominal cash dividend of 16 kroner per share to the Annual General Assembly. A clear signal that we continue to deliver on our dividend policy also now. And with that, we open up for questions.

Thank you. Thank you. As a reminder, if you would like to ask a question or make a contribution on today's call, please press star 1 on your telephone keypad. If you change your mind and want to withdraw your question, Please press star 2. Please ensure your lines are unmuted locally, as you'll be prompted when you ask, when to ask your question. The first question comes from a line of Sophie Petersens from JP Morgan. Please go ahead.

Yeah, thank you. Hi, this is Sophie from JP Morgan. So my first question would be on the dividend. In the past, you always said that you wanted to have a progressively higher year-on-year dividend. Given that you increased the dividend quite a bit to 16 kroner, should we think that this still holds, that the dividend will grow every year, or will it be more a function of your net income, and how should we think about the progressive growth in dividend? Then my second question would be, given that expectations or that interest rates are trending down, in the past, you used to say that history suggests that at 25 basis points, cost in rates could potentially reduce your NII by a billion. If you don't need guidance, maybe if you could just talk about the different moving parts, how we should think about kind of your sensitivity to deliver interest rates. And then my final question would be, your Stage 3 coverage is only 22% overall, but I noticed that in the theory book, for example, the Stage 3 coverage is only 13%. Why is it so low and why are you comfortable with stage three coverage at these levels? Thank you.

I can do the first two and then Sveta can do the last. With regards to the dividend payments, we reiterated from stage today that our dividend policy remains intact. This is the second year in a row with a high nominal increase of three and a half kroner compared to the previous year. But we remain connected to our dividend policy with a cash element above 50% of the results. And also, as you mentioned, aim to pay a higher nominal dividend per share per year in addition to continuing to look at share barbacks as a tool to pay out excess capital over time. Interest rates, yes, policy rate topping out. We still point to a tailwind related to previously announced but not fully implemented repricings in our customer portfolio. Market expectations is for rates to start moving downwards towards the end of the year, either September or December, in aggregate five decreases of 25 basis points in total by our economists, and then remain at 325 for the foreseeable future. Now, as it is on the way up, also on the way down, the impact of this would depend on our actual repricings towards customers. So we can't really sort of give you any more detail. But of course, I mean, we've lived through now 14 rate hikes on the way up. So I think you have a meaningful reference base to think about what kind of effects we could be seeing also on the way down.

In terms of stage three, apart from the part of the portfolio that is below 50 million Norwegian kroners, which is model-based, every stage three exposure is individual customer assessments where we assess both capital and potential impairments. As such, we are pretty confident that the stage three exposure is a correct representation as it is.

And I just, on commercial real estate, I think it's important to highlight also that 74% of the exposure in commercial real estate remains to be in low risk, and that is always fairly, very strongly scrutinized on a quarterly basis as well and followed up. So that is, of course, important when looking at the State 3 impairment. Thank you.

The next question comes from the line of Johan Ekblom. From UBS, please go ahead.

Thank you very much. Maybe to continue a bit on the asset quality side. So a couple of things. First of all, on the commercial real estate, there's a sharp increase in stage three. And I think if we read the press, we can all have some idea what that's related to. But there's also an increase in stage three ECL. Given the transaction that was announced in January, should we expect some of that increase seen in Q4 to reverse in Q1? So that's the first question. I guess the second one is, if I look at your stage two exposure, the retail industry is up again sharply, and it's now a quarter of the total retail exposure. How worried should we be about that going ahead? And then finally, just on the personal customer side, it looks like there was around a 20% reduction in the stage two exposure, which is kind of reversing almost all of the increase in stage two we've seen over the last 12 to 18 months. So can you maybe comment on why the personal customer exposure looks so much better in December than it did in September, please?

Should I start? And then, Sveta, you can also follow up on the other parts. In terms, you know, Johan, that we can't comment on customer-specific situations, and I believe that you've read the press just as everyone else has, so you have to draw your conclusions based on that. But what I can say is that everything that is in our numbers as of end year was also what was in our books as of year end. What has happened since then, that means in January and moving into February, is not accounted for and will therefore be seen in the numbers when we move into or when we provide our first quarterly results. So that, I think, is the only thing I can comment on that apart from some other threats.

And when it comes to retail exposure, yes, there's an increase in stage two. Part of that is migration. And it is one of the sectors that we are watching, but we still see no cause for systemic concern there. There's also a seasonal frustration with more drawing of limits. But overall, we are still comfortable with our retail exposure. Could you please repeat the last question on personal customers?

Just on personal customers, it looks like the stage two exposure fell quite substantially in the quarter, right? So it went from 65 billion to 56 billion. And that's kind of the level we were at, you know, when rates were 200, 250 basis points lower than we are today. So I'm just trying to understand, is it a model update or why is the stage two exposure 20% lower today? than it was three months ago. It doesn't seem to tally with a rate hike that was a surprise to many. And, you know, your expectation of fairly slow rate cuts from here, et cetera, I would have expected it to be kind of stable to increasing over time, and 20% reduction seems rather a lot in a quarter.

Yeah. First of all, it's, you know, I think the first thing is that the majority of our personal customers' portfolio is in stage one. I think it's 1,192 billion in stage one versus 56 in stage two. There will be fluctuations from quarter to quarter. You see the saturation that comes down from Q3 to Q4 is about equal to the saturation from Q2 to Q3. So there will be saturation from quarter to quarter. We don't see any systemic increases. There is nothing which gives us concern about personal custom portfolio. There are some but not systemic increases in amortization reliefs or overdues. Well, both of those parameters are still below 2019 levels, so at a low level. So nothing that gives us cause for concern or indicates any systemic change there.

Okay. And maybe just to follow up, Ida, on what you said in the beginning. I mean, I recognize we can't talk individual customers, but hypothetically, what was in the public domain in December was that the you know, collateral was significantly larger than exposure. And in a hypothetical situation where you would take over collateral, would there be a reason to book a provision if you feel you're 100% covered? Like, are there provisions booked for costs or things like that? Just to try and think of how the mechanics work or why there would be a provision for something that's got 100% collateral coverage.

Hypothetically, and in an ideal world, you will take provisions for all exposures that are in states three. Having pointed to, these are individually They assessed and also worked on for quite some time. Thereby, we look at both the cash flow, we look at also the security position. And there is an opportunity, a viable opportunity, that you aren't taking large impairments related to exposures where you have a well-secured position. Perfect, thank you.

Does that answer your question? Yeah, more or less. I might follow up with Rune later.

Yeah, and what I can point to, what you would have then is that you have a capital add-on in terms of that. It's risk exposure amount increases, which you are also seeing when looking at the numbers in the fact book.

And I'm not sure if this is going to be helpful, Johan, but... But when we do the assessment, several scenarios are outlined where you value them differently. So regardless of the value of the asset today, I mean, you consider several different outcomes, which is why you would still end up with one, even though today the estimate is that you're in full coverage.

Perfect. Thank you.

The next question comes from a line of Ricardo Rovere from Mediobank. Please go ahead.

Thanks. Good afternoon, everybody. Thanks for taking my questions. Two or three, if I may. The first one is to get back on NIA and sort of follow up on Sophie's question. The Nordic Bank hiked 25.30 in August. A new reprise took place. The existing assets and liabilities, not the new business, the existing assets and liabilities on the 25th of October. So it means that this quarter includes two months, so 66%, more or less, of that repricing, whatever the repricing was. And then the Norgesman hike again in September, 25 days, the repricing was effective at since the 26th of November. So let's say one month. So it's like saying that in this quarter, you have the effect of a 25 basis point hike, two thirds of the first one, one third of the second one. And in your slide, you show that the spread effect is kind of, if I remember correctly, kind of 400 million for a quarter, which if I multiply that by four, I would end up again, at 1.5 billion, which was correct, if I'm wrong. You know, the guidance that you provided, I don't know, six months ago, a year ago, or whatever it was, I don't exactly remember. Is there anything wrong in what I'm saying? Because that would, this is what your slide would suggest. This is the first question. The second question I have is, again, on NIR, given the rates are at four and a half, and even at the beginning, you know or let's say a month one year ago or one year ago your guidance was 1.5 1.6 billion when rates were moving up now they wait and then all of a sudden the sensitivity the guidance you provided on sensitivity were getting smaller a little bit smaller and smaller uh now it would make sense correct me if i'm wrong it would make sense when rates do go down to work exactly the other way around. So you eliminate most of sensitivity at the beginning, forget the rest at the beginning, and then less at the end of the rate cycle. That's fair to say. And then another question, I really don't understand how the NII component from the commercial paper bonds can collapse by almost a billion, a quarter. When the book is going up significantly, looking at the , the book is up $165 billion or something like that. Commercial paper and bonds at fair value from 416 to almost 570. And the NII component on interest income is down almost a billion. How can this be possible? Thanks.

Lots of very interesting and highly relevant questions, Ricardo. I'll try to answer as accurately as I can, but you know that part of your question is also something that is impossible for me to answer in terms of future outlook and what potential repricings will come. But if I start with your analysis or your assessment in terms of what we are seeing this quarter, you are right in saying that we have seen partial effects of the repricings that had That was implemented in end of October and end of November. Those two repricings, we haven't provided an indication of what the effects will be. We were just saying that there would be a positive tailwind effect relating to that. When looking at the effects that you're seeing today, you also need to bear in mind the, as we've always said when we talked about and communicated the effects of the previous repricing, is that that's based on the portfolio composition as of that moment. What we talked about in the third quarter was that we saw somewhat of a movement within the composition in between types of savings accounts and in between transaction accounts and savings accounts as well. which we continue to see in the fourth quarter. In addition to that, you're also seeing decreased volumes in personal customers in deposits, increase in currency-adjusted deposits in corporate customers, but also there, there is a difference between what type of deposits these actually are. On the loan side, you've also seen a decrease in loan volumes in the last two quarters, which is, of course, also impacting the annual effect of the repricings. So I don't think I can give you more than that in saying that, yes, you are right in terms of the implementation and when the repricings have been implemented, and that we also have a positive tailwind effect moving into 2024 from these two repricings. In addition to the repricing that was announced following the Norwegian Central Bank's change of key policy rating in December, that will be implemented end of February. When it comes to future outlook, you know that I'm unable to talk about that. That is a consequence of the repricing going forward. Again, we also want to point to the competitive environment that we see in Norway. Competition continues to be fierce. We continue to see strong competition both on the personal customer side as well as on corporate customers. But again, we point to the rational behavior of the banks operating in Norway, which continues to be an important factor. I must say I'm quite impressed by the fact that you found this because we haven't focused as much on the interest on commercial papers and bonds as we probably should have in terms of showing you what that was. This is actually a fault in the elimination in the third quarter of 2023, which means that we had too high income as well as costs in that quarter. It's neutral on an NII perspective, but the volatility that you see in these numbers aren't accurate. It's more of a restatement of what was wrong in the third quarter. So that is simply what has happened. There's no underlying change or anything like that. We should probably have highlighted that in a footnote.

Thanks. Thank you.

The next question comes from a line of Namita Santani from Barclays. Please go ahead.

Hi. Thanks for taking my questions. Firstly, The group sprinted like a 15% ROE in 2022, around 60 in 2023. So I'm just wondering, why hasn't the ROE target been revised upwards from the current above 13, given you expect rates to only fall by 125 bps in the next few years? And secondly, Just on the lending spreads and the corporate segment, they look a bit weak to me over the past year. Have you been able to pass on pricing to corporates, particularly in the ocean industries and future in tech industries? Thanks very much.

Thank you for your questions. I think it's an important element to our target on return on equity that we reiterate is our most important financial target that we are saying minimum price. And we have longer-term trending targets, and this was set at our capital market day at the end of 2020. So we have decided not to change that even though markets have moved a bit differently than anticipated. But I think from our numbers, you can see that we do optimize and certainly aim to deliver above the 13% when that is possible. With regards to the lending spreads, the corporate side, it's fair to say that these loans are priced on a margin basis. They are priced with a reference rate and a margin, so there is no impact of increasing policy rates in that. This is transferred immediately to the client in full, and typically they have three, four, five-year loans with a fixed margin. So it's not as easy to read the monetary policy into the margin picture on the corporate side. The title, would you like to add?

Yeah. I'm not sure what you're referring to in terms of the weakening because if you look at page 18 in the fact book, the lending spread is up from 222 to 226 in the corporate segment during the year. And if you look at some of the industries specifically, we've also had, like you mentioned, shipping, shipping offshore, you know, energy. We've had improvement in portfolio quality as well. So both the increase in average margin and improvement in portfolio quality has led to a strong increase in return on equity.

Thanks very much.

The next question comes from the line of Jakob Kruse from Autonomous. Please go ahead.

Thank you. So just on the next interesting concern, could you just talk a little bit about the volumes that you're seeing on the deposit side of the corporate and retail side, just in terms of what the strategies are now on savings accounts and current deposits? And am I right that you're pricing quite aggressively on the savings account side, especially for the larger clients? Is that driven by competition in the market, or are you leading the charge there? Thank you.

Yes, if I start with your first question, we aren't specifying the composition or the split between transactional accounts and savings accounts on the corporate customer side. On the personal customer side, we previously said a 25-75 split. We are now seeing that that is affected by the fact that people are behaving rationally and are moving some of their funds from transactional accounts into savings accounts. So I would say that that has shifted slightly to now be more in the region of 23, 77%.

And pricing for larger clients on the deposit side, yes, that is competition. It's a very different market than typical retail SME. So that is priced on the margin. But anything we take on our books is accretive to us and benefits us from the funding side. We would typically compare that to the senior debt lending we can raise in the markets.

I'm sorry, just on that, just to be clear, I'm talking about the retail client base. I think it's half a million or more. Who are the main active clients?

Okay. On the retail side, there is no individual pricing. On the deposit side, it's different savings products with different prices. And as Ida indicated, there's a slight mixed change in our deposit space, which is natural because when there's more to gain from moving the fund from one product to the other, we see that people actually do so. But all of our deposit products are profitable, but they're different accounts with current accounts not yielding an interest rate and savings accounts yielding a different interest rate to clients. If you move up to the private wealth part of the business, private banking, you would find individual pricing for smaller segments.

uh of that uh but that's the smaller part of the volumes that is reported in the retail sector so sorry just to these savings accounts plus or star counter plus uh which i think is based on science after half a million of of funds um isn't that essentially a savings account for a slightly larger client which looks like a pretty high level of pricing compared to other Nordic banks for similar accounts?

It is a savings account for, you don't need to be sort of specifically, particularly wealthy or a large client to benefit from that product. It is a product that we launched towards the end of last year. And it is due to the competitive environment, and the competitive environment should not be seen across the Nordics in that sense. I mean, here you have local markets.

So is it, and who is driving that competition? Is it the savings banks, or is it ?

It's all of the above. I mean, it's the market in general.

Okay, thank you. Before proceeding to the next questions, as a reminder, if you would like to ask a question, please press star one on your telephone keypad. The next question comes from the line of Hugh Moorhead from Barenburg. Please go ahead.

Hi, good afternoon. Thank you for taking my questions. Another one on deposits. Have you seen... much of a change in the MIPS shift in the term products during the quarter or in early 2024, and how might you expect that to evolve during 2024? And then also on wholesale funding issuance, long-term wholesale funding, I think there's about $100 billion due to MIPS in 2024. Should we expect a similar level of issuance this year, or might it be a little bit higher? Thank you.

With the funding side, we expect to do this approximately the same level of funding as we did last year, $100 billion. That will be shifted towards covered bonds and senior preferred and not senior non-preferred as we saw last year. So that is the change. Your question in terms of the mix shift in term products, was that your question on the process?

Yeah, sorry, sort of the shift from transaction or sort of demand savings products into term accounts.

Yeah, and that was what I was referred to in terms of that we're seeing that there are two things that is happening in the personal customer segment that we point to. First of all, that our customers, to an increasing degree, as we mentioned, in terms of their rational behavior, is that they're using some excess liquidity to repay their debts, which is, of course, very natural where we are today. In addition to that, we're seeing some shifts from transaction accounts into savings accounts. And that's where I talked about the change in split where we previously had 25% on transaction accounts in personal customers, where we now have 23% on transactional accounts and 77% on one type of savings account. And we have many different savings accounts, so that's important to point to as well. But on the corporate banking side, we are not specifying that. I think it's also important to say that even though we see an increase in asset under management this time, we're not seeing big shifts in terms of deposit volumes flowing into money market funds or that that flow into other type of mutual funds either.

Okay, thank you. We have a follow-up question from Ricardo Rosselli from Mediobanca. Please go ahead.

Thanks. Thanks for taking my follow-up. I just wanted to be, to understand why off-risk went up so much in the quarter. Maybe if there's anything to do, I don't know, with Poland. And let's assume the Norges Bank is correct in saying that rates will stay more or less on this level for a good part of 2024. The market is different. Let's assume that we decide this way. Do you see any chance the results that you have released today that is not the current in case rates stay more or less, more or less where they are from most stocks in full?

Could you repeat that last one, Riccardo, please?

I'm not sure we've already got to it. The Norges Bank is saying that rates will stay more or less where they are for a good part of 2024. Let's assume that we decide the Norges Bank is right. The market thinks differently, but let's use... the indication of who decides where the rates will be. Is there anything in the results that you have released today that you consider not recurrent or not sustainable if rates stay where they are for a good part of 24?

Well, I understand where you're coming from. slightly challenging to be very precise about it. I mean, we have talked about moving bits and pieces in our portfolio that is related to customer behavior, and we believe that there will be customer-related activity also on the lending and the deposit side. also in a stable rate environment. Growth expected to be lower, but we do expect more clients to select us and our products. I would not be surprised if some customers continue to repay on their loans if they have excess liquidity, and there might be further clients paying even closer attention to how they manage their savings, to put it that way. But there are no bigger shifts that we see any indication of. I think it's been 14 rate hikes behind us. It's been fairly predictable and stable in the larger scheme of things so far. And I think that we have no reason to believe that there should be any larger shifts. But, of course, there is a dynamic picture with more than 2 million retail customers and 300,000 business customers that can impact in some ways or others. With regards to operating, I'll pass it on to Edith.

Yes. And you're right in saying if you look at the core tier one chapter ratio, you can see that we have an effect of 30 basis products. points on the core tier one capital ratio related to increases in risk exposure amount related to operational risk. This is purely regulatory driven, and will most likely impact all of the banks being regulated in a similar way, where you have an average or the operational risk element, risk exposure amount element of operational risk, It's a pure equation of how much income you have, which means that you have an average of the last three years, and then the output means that you increase your operational risk element in the risk exposure amount. This is something that is looked at at the end of the year, which means that you have an impact at the end of the year when we restate the numbers. So if income continues to increase in 2024, there will be an operational risk element associated to this as well. If it decreases, it will then subsequently also move down, just purely as an effect of how you calculate risk exposure amounts associated with operational risk.

Very clear. Thanks.

And it has absolutely nothing to do with Poland. Just to emphasize that.

The next question comes from a line of Andrew Combs from City. Please go ahead.

Good afternoon. Thank you for taking my question. I think we've exhausted many interesting concepts. I could just turn to OPEX. If I look at the OPEX system, I guess a couple of points of clarification. Firstly, the $80 million non-recurring in the quarter, which line items are booked in? First simple question. Second question would then be the step up in the IT consultant cost, whether that's expected to continue or at this level, or whether you're expected to dip back. And then the third and final question, if you look at the increase year on year, it's up 12%, strip out the $80 million. strip out the pension, strip out the $200 million on activity-based expenses, I think you're still looking at a 5% kind of underlying increase. Should that be something we should be extrapolating in terms of cost inflation going into 2024? Thank you.

Yes, thank you. If I start with your question related to the non-recurring item, that is a discontinuation of an IT system, so that you will see an IT expense. When looking at the – in terms of looking forward in relation to IT expenses, as you know, we have converted external consultants into internal employees, which means that you will see that on – increases in salary expenses rather than consultancy fees. In the fourth quarter, we had a high activity related to IT that also drove the cost. In addition to that, we had higher license and supplier costs overall, which is also, of course, inflationary driven as we've seen that the renegotiation of those contracts. We try to do our best to smoothen out those costs over the year, but you will most likely always see a bit of a restatement effect in the fourth quarter where we sum up everything and see what is it that we've potentially underestimated in the year. We are quite clear on the fact that we don't want to underinvest in IT efficiency automation in the period where we are in today. And we will continue to do so also moving ahead. Again, working diligently on our cost base, working diligently on finding the best balance in terms of external consultants and having internal employees. When you point to the underlying growth, and I think if you look at the annual growth as well, I think you're right in saying if we end up around 5%, 6%, and the loan growth has been 5.4%, I think that's an acceptable level. I shouldn't really pat myself on the shoulder here. I realize that. But in terms of if you look at the underlying growth, Underlying growth of costs, I think that's acceptable. Looking ahead, I don't think we can give you any further guidance than saying that the wage inflation or wage growth is expected to be around 5.1% next year. And then we haven't seen the full effects of inflationary pressure related to third-party agreements. But there, we are focusing strongly on having the right partners and working also on our purchasing power when it comes to this, which I think is important for not only us, but all banks.

And just as an add-on, I mean, we highlighted several areas with initiatives that we are working on to increase our cost efficiency, and you've heard us mention these before, related to S-Banken with an aggregate of 300 million. Our distribution where the opportunities related to AI are and ability to reduce manual handling, if I should put it that way, in our call centers, as well as increasing efficiency in our KYC processes. These are all things that we're working on in order to offset as much as possible of the future inflationary pressure.

Thank you. We currently have no questions coming through. As a final reminder, if you would like to ask a question, please press star 1. There are no further questions, so I'll hand you back to your host to conclude today's conference.

Thank you very much, and thank you all for participating. And we here in D&D, we wish you a fantastic day. Thank you so much.

Bye-bye.

Bye-bye. Bye.