Jyske Bank A/S Ord

Hi, everyone. Thank you for joining us on Jyske Bank's conference call for the financial results for the first quarter of 2024. This is Simon Haubart from Investor Relations speaking. With me, I have Jyske Bank CEO Lars Merck and CFO Bjørn Nielsen. Lars and Bjørn will walk you through our prepared remarks. Afterwards, we will open up for Q&A. I will now hand over to Lars.

Thank you, Simon, and thank you all for joining here. We've had a solid start to the year. The net profit of approximately 1.3 billion in the first quarter of 2024 is on par with our highest Q1 net profit so far and is a full 51% above the level seen just two years ago. This is, of course, underpinned by higher level of interest rates and the integration of Hans Banken and the Hans Banken Danish activities. However, the strong result still underlines the resilience of Jyske Bank's business model, as activity levels have been remarkably low in the Danish housing market in Q1, with sector lending and remortgaging offers at an all-time low for this time of the year. At the same time, we managed to keep the underlying cost inflation under control, despite a period of high inflation. We believe there are further synergies to be reaped in the coming years following the acquisition of Hans Bank in Denmark and PFA Bank as we continue to implement efficiency measures. Our customers continue to navigate well in a somewhat subdued economic environment with high ongoing uncertainty. This has helped in keeping a low level of loan losses the one basis point booked in Q1 can be attributed to a 100 million postmodel adjustment for potential CO2 tax on the Danish agriculture. Our postmodel adjustments are then approximately 2 billion, equivalent to more than four times the total amount of loan impairment charges booked since 2015. Lastly, Having rebuilt our capital position following the acquisition of Hans Bank in Denmark, we are very pleased to announce that we are resuming share buybacks with a new program of up to one and a half billion Danish. If we move forward and take a look at some of the figures, we are keen at looking at our results in terms of earnings per share, and earnings per share in the first quarter was 19, 19.5 the same quarter last year, which is also a flattish development. It's approximately one fourth of the highest level in our projections for this year. And obviously you cannot take Q1 times four and get the result, but it's certainly within our expectations. On the right hand side, you see the volumes and generally a strong development in the AOM. due to a combination of the development of current AUM and new inflow, partly due to PFA Bank. If you then look at the deposits, our deposit volumes are flat when it comes to retail deposits, and they show strong stickiness. due to season and due to some larger deposits from large deposit holders. There's a decline during the quarter, but the key deposits from retail customers has again proven to be very sticky. In the left-hand side of this one, if you look at the bridge on return on equity year-on-year, there are two major pluses, that is, the net interest income is up compared to last year, and there's a plus, maybe not a major plus, but a plus also on the loan losses. On the negative side, predominantly related to tax and the AT1 issuance, and also lower net fee income, we take it from 13.2% to 11.4% this year. Turning to our expectations. We've communicated that we are targeting a net profit of between 4.3 billion and 5.1 billion this year for the entire year. That is lower. in 2024 than in 2023. And that also goes for the core income, where we expect that would be lower, mainly due to value adjustments. The core expenses will be largely unchanged, which is still our expectation. Loan impairment charges can be a bit higher in 2024, but as you've seen from the report today, asset quality is still under good control. There's a post-model adjustment related to the CO2 tax on agriculture. And with that one, we stand with above of 2 billion. The earnings per share is expected to be in between 64 and 76. And as you've seen, the first quarter was 19. So we are well within that range. Capital 15 to 17 CET1 ratio and 20 to 22% capital ratio. And as we communicated earlier this year, we expect to be moving into a situation where we on an annual basis pay out 30% of the previous year's results in cash dividend. and use share buyback as the tool on top of this, but then obviously still securing a safe and good capital base.

Yes, thank you very much, Lars. And I'll just give a few insights into some of the relevant and interesting topics in the first quarter, looking at NII and the bridge from Q4 to Q1. Volumes were in Q1, as Lars said, stable. in a market with stable volumes, i.e. stable market shares, and the 4% drop we see in NII is driven by a few dominant factors. One is the change in pricing. We changed transaction accounts and savings accounts pricing on the 27th of November, and we have seen an ongoing as expected clear and visible migration into the savings products during the last few quarters, and it's also eminent here in the first quarter of this year. And secondly, we have lifted our interest expenses due to two issuances, one in November, an NPS, and one on the 1st of February, a Tier 2 instrument of 500 million euros each. And on top of that, looking at the right end of the slide, you can see that there is a green box showing the higher income from our bond portfolio as a mitigating factor against the development in interest rates. Moving on to the next slide, we have given you a split in deposits, which is more or less even between corporate and private clients' deposits, 50 more or less each. and if you look at the left hand side you can see that approximately two-thirds of the corporate deposits relates to money market reference rate deposits or time deposits and is up significantly from two years ago it's a relatively steady uh situation as of now when it comes to corporates moving to the right hand side you see private clients deposits And if you take the deposits with savings and time deposits and transaction accounts, it is sorry, savings and time deposits. It's now consuming around 60 percent of the bucket coming from around one third. two years ago, so you see this gradual shift into savings and time deposits, which is expected and which we to some extent also expect will continue in the coming quarters. The fee income is at the same level as it was around in Q3 of last year, around 600 million, but slightly down from Q1 of last year, 8%. and it's driven mainly by two factors. One is a very low activity in the sector for mortgage lending, all time low level here in Q1. And the second is one of the expenses related to a covered bonds issuance in Jyske Realkredit. And please be aware that PFA Bank and the fee income is included in this fee income development in Q1. But also be aware that the administration and management of PFA Invest funds will be transferred to Bank Invest here in the second quarter of this year. So going forward, the return from this activity will be income from our Bank Invest shares and not fee income going forward. Yes, looking at the cost management of the group, it's still under control. We've said all in, we expect relatively stable development in 2024 versus 2023, and that still applies. If you see the development in retrospect versus Q1 last year, we are up 3% exclusive of one-offs. And this lift in 3% relates to the inclusion of PFA Bank, salary increases of 4.5%, and the removal of Great Prayer Day, which cost us closely to half a percentage point. Looking at the one-offs, Handelsbank and PFA Bank covers 22 million in Q1, and there are other elements to it as well. One is VAT adjustment, due to the different development in income between Jyske Finans, where there is an income of VAT and Jyske Bank, where there is an expense of VAT. And that leads to a lift in cost of a little bit more than 30 million this quarter. The credit quality is still very high. We see small portfolio movements in Q1, a few single name changes, which is natural. But average wise, since 2014, where we merged with BRF Credit, now Jyske Realkredit, we have seen an average impairment charge of only eight basis points. And in the same period, we have built up the 2 billion in post-model adjustments, which is around 40% of the total balance. In Q1, we took and booked a cushion against the proposed carbon tax on agriculture of 100 million, and it actually more than explains the net expense of 82 million in the quarter. So a very stable credit quality is still here in Q1. And then finally, looking at the capital We will initiate a buyback program of 1.5 billion starting here in Q2. And we will keep the capital levels still in the upper half of 15 to 17, as we announced by year end. And as you can see here in Q1, the CT1 ratio dropped a bit from 16.9 to 16.6. And the explanation is on top of the profit, a reservation of capital for both expected dividend as well as expected share buybacks, the latter part being a consequence of an EPA answering guidance, which was given in January of this year. Looking at the risk exposure, the total risk is lifted by 2.5% in the quarter, driven by three factors. The main one is that operational risk due to higher income in the group uh it's listed 3.5 billion that's a yearly chart change market risk and credit risk as another billion each summing that to 5.5 or two point billion or 2.5 percent and so if you exclude the reservation of capital for buybacks we are almost even at 16.8 percent and then going forward we will of course manage the buyback program properly We will build or stabilize the capital levels after the inclusion of the full 1.5 billion in the capital reservation in Q2, when we start the program of buying back shares. And of course, we will try to manage the CRE buffer and the inclusion of Basel IV also properly. The effect will show up in Q2 of this year, respectively Q1 of next year. The expectations are unchanged, approximately two percentage points, and we hope for uh no double counting of buffers from the regulators there are some hope in the market that this will happen and and it will also of course be a positive for us looking into 25. thank you last thank you viewer we'll now open up the questions if you would like to ask a question please raise your hand and unmute your device

I believe the first question in line comes from Esbjorn Mark from Danske Bank. Please go ahead.

Yes, hi, good afternoon. And I have two questions, basically. One, we could look at your top line to begin with, and the bridge you gave on slide number six. Maybe you can elaborate a little bit on the actual development in NII in the different months in Q1, because it seems to be quite a lot of impact from the funding side. And I guess some of the deposit headwind was basically spillover from the changes you did in late or in Q4. So how did you actually see the NII develop throughout Q1? Was it relatively stable or did it continue on gradual sort of decline from January to March?

Yeah, so, of course, looking at the development throughout the quarter, we are impacted by the number of days of interest, of course, as you know. But, I mean, March and January had the same number of days of interest, and they were approximately at the same level, albeit with some movements between what comes from lending and other NII and expense for deposits.

Okay, so March versus January was basically flat on an eye. What's what you said? Approximately, if anything, very, very slightly down. Okay, that's helpful. Thanks. And then on the buyback, just looking at the timing here, you're going to initiate the buyback in June. I guess with the limitations from the FSA, you're not going to be allowed to add to the buyback as long as the current buyback runs. So I guess Question one, this is what we should expect for the full year of 2024. Secondly, how should we look at this buyback in terms of does it relate to the 23 profits? Does it relate to the 24 profits? Should we expect, because it's basically one third of your guided profits for 24 if we just pay to one customer. Is that the way to look at it? Hence, we should add 30% dividend in addition to that. That's your new payout ratio, or should we rather see as 24% that you'll pay 30% in dividends, and then you'll do a somewhat larger buyback next year?

Thank you, Asbjorn, for the question. The buyback will start on the 3rd of June for practical reasons. We have historically made some uplifts in existing programmes. So we see that as a possibility if we look at it in a historic context, not mentioning anything related to this one, but that has been the case historically for Jyske Bank. The board will view this on a quarter-by-quarter basis. As I said, we will stabilise and, if needed, rebuild the capital levels in the coming few quarters. And of course, the board has a close attention to the level and the possibilities for further distribution. And talking about how you relate this buyback to a certain year, well, this is a 24 activity. And as well as we reserve dividend capital for dividend payout will also be related to the 24 earnings.

So basically, if you don't add to the buyback program, let's say this is one third of your 24 profits and you pay 30% dividend, so then 63% payout. is what we should expect for the full year 24. Is that how we should look at it?

Yeah, the 1.5 billion is related to the 24 earnings and the dividend as well.

Yeah, so it's basically 30% dividend payout, and then on top of that, 26% payout for buybacks. And that's based on the 1.5 billion that we've just announced, comparing that with the level of earnings last year.

But when you talk about relevance for the earnings that we can use for buybacks, it's related to the actual year. But you seem to be referring both to 24 and 23, that creates a little bit of confusion. Let me just clarify, Simon, and we are both right because the calculation 26% is actually 1.5 billion versus the 5.9 billion. of shareholders earnings in 23. But going into 24, we will, the 1.5 billion relates to this year's earnings.

Okay, so basically in your discussions with the FSA and looking at their 100% roof, this has been treated as a 24 distribution and will be basically compared to your 24 profits. Yeah, that's correct.

But yeah, the percentage is basically just set in dialogue with your Danish FSA. And that's based on some historical data. And as you mentioned, 2024 is what's the sort of foundation for the buyback.

So you're right. Okay. Okay. One of your peers was out the other day saying that they cannot lift or initiate a new buyback as long as the current buyback is still running, you seem to have a different view. So you would still see the opportunity to add to the buyback later in the year?

No, we are not discussing that, but I just refer to what we've done historically. And of course, we will make sure that what we do is fully within line of what the regulators accept.

So, Aspern, I think what you should view this as is that, as described earlier, we intend to, in the future, pay out a cash dividend of 30% of the previous year's result, and then on top of that, share buybacks to the extent possible within still a solid capital level. And this year is a little bit of a gap year because that's the first year where we can implement this. And this is obviously based on a historical situation where we come out from a little bit lower capital levels after the acquisition of the Hans Banken Danish Activities. So we're morphing into the structure that we informed about earlier this year.

Okay, that's very helpful. Thank you.

Thank you Esbjorn. Next question in lines come from Martin Bjerg from SAP.

Please go ahead.

Yeah, just following along the lines of NII, what kind of, we've talked about your hold to maturity portfolio before and now that we are looking into a rate cut environment, what kind of sort of longer duration sensitivities do you have on NII?

Yeah, so we haven't provided exact guidance, but we have provided quite clear NII sensitivities. So I think I would refer to those being 500 million in the first year of the one percentage point change and that rising to 0.7 billion in year three. And that dynamics should also expected on the way down.

Okay. All right. Okay. Very clear. And then coming back to what one of your peers said the other day, that particular peer also talked a lot about pinned up demand in terms of loan growth. Is that anything you see materializing within the foreseeable future in your books?

I think very short term, we are looking into a stable environment with relatively stable volumes as we saw in Q1, both for Jyske Bank and for the market as a whole. Of course, there is hope that we can see a slight uplift. And some experts have been out in the markets stating that the economic environment sentiment in general may be better than what is expected so far. But we are a little bit cautious here because we want to see that the credit quality in the book will perform well. And that's the best benchmark we can have looking into the performance of the general economy.

So basically you don't sit with the pipeline that suggests that you should see any changes in the later part of 2024?

So it's always difficult in a bank like ours with not that many very large new exposures, but a solid development on existing clients and a number of smaller clients that does not individually move the volumes to an extent that you would be able to see them. We think there's a little bit, having said that, I think we see a little bit of further activity now in our business banking segments. But let's see, because other clients are paying back their loans. So it's always difficult to see with any great detail what is happening here. But if anything, there's a little bit of a positive sentiment On the other hand, I think it's worth also listening to some of the people from the transportation business, and the CEO of Maersk was out just the other day saying he did not understand, at least that was how I understood him, that there's a lot of positive positivity in the market at the moment, because in terms of transportation and shipping, there's not that many goods being shipped around, and we also see that from some of the other transportation companies. So the gut feeling is, if anything, maybe the economy is moving a little bit up in terms of speed, but I think it's too early, too close a call to be very precise on this.

Very clear. And then moving on to the share buyback, now we talked about whether it's technically possible to top up your existing share buyback program. But sort of from all practical purposes, given that you're looking to acquire roughly shares worth of 8 million per day, and I think that you have a constraint around 10, maybe 11 million per day, given that you probably only want to be 15% of the daily traded volume. Isn't that a fair calculation?

I think it's a fair calculation that we'll have a decent buffer against the maximum, of course. And when we do a third party agreement, they also find it suitable that we manage the programme the way that you just referred to. What do you see as a maximum? Well, of course, you have the maximum threshold of 25%, but 10% to 15% is the normal guidance, I think, when you talk about vendors. We talk with vendors, sorry. Okay.

Very clear. And then final question from my side. I guess this one goes to you, Lars. You've been fairly vocal in Danish media today in regards to the total credit agreement. Could you please enlighten me what kind of tools do you have left in your toolbox to change this into your favor?

I believe that no decision has been made on that agreement from the competition authorities so far. They've been looking at this for a couple of years plus, and Nucadid has put forward their suggested solution. One has to remember that this discussion is not due to Jyske Bank. This is the competition authorities having concerns about competition. We've had one theme that we brought up and asked about. And that theme is potentially part of what they're aiming at solving here. We don't know how this is going to pile out. There are different opportunities. The model that is on the table now does not change a lot. And does not change at any meaningful level at all. Then there's a possibility of them, competition authorities, going a little bit further than what is on the table at the moment. Or there's a possibility of the competition authorities taking what is on the table now off the table. and our visibility in to see what they'll do is not better than yours, because we're not part of this. But our expectation is, and given also the view that I notice around from people who doesn't know the industry, I think people would be surprised if it ends where it stands at the moment. How big the changes will be to what is on the table, I don't know. But we will monitor this closely. We believe that we have opportunities, no matter how this piles out. And that is basically what we are focused on. That is to have the best possible outcome for Jyske, given the decision that the competition authorities will reach. And I believe there are potential attractive solutions, no matter which of these three models that we will end up with. And I guess that's our job to make sure that it ends the best possible way.

But assuming that the competition authorities is going to stick with the hearing letter that they sent out in April, I mean, this is the second hearing letter they sent out, I guess, sort of their suggestions must resonate in their ears otherwise they wouldn't send it out. Are there any sort of higher instances of court that you can take this to or will that just be the verdict and that's sort of it and then you have basically no other tools in your toolbox?

Yeah, first of all, I'm uncertain if the assumption is right that they agree to this one. There was an article during the weekend where they said, you know, this is basically what NYCredit has written, and this is now sent out in a hearing, and one could not take for granted that they agreed on this. I've not seen the article myself, but I was told that that was the case. And technically, it can be that they agree to this. It can also be that that is as far as they can come with a negotiation. And then they want to put as far as they can come out in the market for comments. And I believe that they are now reading through the comments from the individual banks. I think we will look at our possibilities when we know how they're going to land this one.

Okay. But I still don't think you sort of completely answered my question. If it turns out to be, if it goes against you, what other sort of, do you have any legal tools? Are there any tools in the EU?

Yeah, we might have that, but we expect this to come to an outcome that is better, or we hope that it will come to an outcome that is better than what has been described in the media so far. Then we have alternative tools and we are aware of what we can do if it is a not very acceptable solution that will be put on the table.

Okay, very clear.

Thanks. Thank you, Martin. At the moment, there are no further questions in line. If there are any further questions, please feel free to raise your hand.

Yeah, perhaps I can go again then. Yeah, of course, Martin. Just a quick question on asset quality. I see your comments on on asset quality and I also see this extra PMA that you're taking in the quarter, but underlying there's nothing really that is pointing to any sort of, any deterioration at all. And I guess my question goes on sort of these PMAs, if everything continues as it is right now, how do you view them? Has this been, effectively turned into the ct1 capital or should we actually expect these pmas to be deployed in some kind in some form of way within a foreseeable future thanks

Yeah, Martin, I think that the PMA build-up is a consequence of a cushion against uncertainty, dialogue with the FSA and the industry, etc. The outbreak of the coronavirus back in 2020. That being said, I can't foresee that we'll come back to levels where we were pre-COVID, i.e., in our case, 500, 600 million from the 2 billion. But I can see that we will use this tool more actively than what we have done over the last two to three years, because in the last three years, we built it up. But any deterioration in any subsegment in the portfolio will be assessed against this PMA before we we use them and book them and rebuild them as an extra expense. So expect us to be active in the next quarters using this tool, as long as it's not a systematic deterioration of trend, which is more all income passing than just a single name deterioration here and there.

Okay.

But I completely agree with your view that it's not going to go back to five, six hundred million. But do you think going back to a billion or a billion and a half is realistic?

Well, that is a difficult question because it all boils down to the uncertainty that we see in the market in the next one, two, three years. And as of now, you can see the split in the quarterly report. And that split will gradually shift from time to time, from quarter to quarter. Inflation has filled up and booked some billions. And now we may shift away from inflationary risk to other sources of risk. Quarter by quarter, this is a dynamic instrument and expect us to use it, as I said, more actively also when it comes to deteriorating single names, as opposed to what we saw in the last three years, where we build it up on uncertainty that hasn't yet spelled out in any expenses, real expenses and losses.

When do we think we reached a point where auditors, they start to complain about this?

Well, I think the FSA has over the last years shifted a bit in their attitude towards this and they fully find it suitable that we have a large proportion of the balance in PMAs. as opposed to what we saw if you go back five, six, seven, eight years. So there's been a shift in the attitude with the authorities. And I think the auditors need to rely on that and adhere to that view.

All right. Thanks. Thanks again, Martin.

There are no further questions in line. I assume there are. No one else wanting to ask a question, so I'd like to thank you for participating in today's conference call. A recording of the call will be made available on our IR website in the coming days. Please do not hesitate to contact us if you have any further questions. We appreciate your interest in Jyske Bank and wish you a nice day.