Danske Bank A/S : Speech from conference call Q2 2022

Conference call

Q2 2022

22 July 2022

Investor Relations

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C O R P O R A T E P A R T I C I P A N T S

Carsten Rasch Egeriis

Danske Bank - CEO

Stephan Engels

Danske Bank - CFO

Claus I. Jensen

Danske Bank - Head of Investor Relations

S P E E C H

Claus Ingar Jensen - Head of Investor Relations

Thank you, operator and hello everyone. Welcome to the conference call for Danske Bank's financial results for the first half of 2022.Thank you all for taking the time to listen in on this call today . My name is Claus Ingar Jensen and I am head of Danske Bank's Investor Relations. With me today, I have our CEO Carsten Egeriis and our CFO Stephan Engels.

In today's call, we will present Danske Bank's financial results for the first half of 2022. We aim to keep this presentation to around 30 minutes. 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 1, please.

Carsten Egeriis - CEO

Thanks Claus.

No doubt, the first six months of 2022 was in almost all aspects a very turbulent period. The world has moved from one extraordinary situation caused by the pandemic to another dominated by the Russian invasion of Ukraine and the accompanying effects on energy supply, accelerated inflation and firm tightening of monetary policies in the US as well as in Europe.

In these, even by historic standards, very volatile times, we have focused - and we are - focussing on helping our customers navigate in a very uncertain environment. At the same time we continue to execute on our strategic agenda with strong commercial and customer focus, whilst maintaining a strong commitment to our role in the green transition in the society.

As I also mentioned during our conference call in April and during the first half of the year, we have continued on a positive trajectory, with improved commercial progress in our core banking activities evidenced by strong growth for corporate lending in particular and an overall good level of economic activity to the benefit of our core income lines.

That said, our activities in the financial markets have been severely impacted by the magnitude and pace of interest rate changes, which have had a negative impact on trading income from primarily our rates business and on net income from insurance business in the form of negative valuation adjustments.

On that basis, on 10th July, we announced a revised net profit outlook for the full year. We maintain our view of higher full year income from core banking activities however, we now expect net profit for 2022 to be between 10 and 12 billion, based on lower-than-expected trading and insurance business income as well as slightly higher costs due to sustained elevated remediation costs.

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The second quarter marked a period during which the growth outlook for the economies in which we operate was revised down due - among other things - to expectations for a change in consumer confidence and a persistently higher level of inflation. However, consumer spending remained healthy in the first half of the year, supported by strong household finances as well as very low unemployment, and we continue to see good corporate sector activity. Against this favourable background, credit quality continues to be strong, with our PMAs and adjusted macro models being the drivers of impairment charges for the second quarter.

The good commercial progress was driven not only by strong customer activity in general, but also by our own initiatives in many areas of our business and we are happy to see our market share within some customer segments increase during the quarter. Despite a slowdown in our capital markets-related business from a very high level last year, overall transactional activity including remortgaging was high. Adjusted for fair value effect of loans at Realkredit Danmark, lending was up 4 per cent from the same period last year, due primarily to demand from our corporate customers.

The good progress we have seen within our sustainability offerings continued. We have improved our green offering to personal customers and we have maintained our position as a top-ranked arranger of sustainability-linked finance.

Financially, we saw good progress in our net interest income due to positive effects from higher volumes and pricing initiatives, whereas fee income maintained the strong level from last year, benefiting from a diversified business mix.

As mentioned previously, the transition into a completely different interest rate environment has been challenging and had an adverse impact on net trading income, primarily within mortgage bond markets in Denmark and Sweden whereas our currency franchise benefited from good customer activity.

The insurance business saw a positive development in the underlying business which we will comment on later. However, income came in significantly lower, including the gain from the sale of our Norwegian insurance business.

In terms of operating expenses, we continue to make structural progress by reducing underlying costs however sustained elevated costs from remediation and AML continues to strain our cost line.

Stephan will comment on the financial results in more details later in this call and will also comment on our revised outlook for the full year.

But first, let's go through how we continue to make commercial progress within our business units.

Slide 2, please.

At our Personal Customer business unit, we generally see good activity across the Nordic region and we see momentum towards regaining our

Danish retail position. We are working diligently on improving customer flows and have continued to see improvement . In terms of market position we have improved our market share for bank lending to 19 per cent as bank lending was up 4 per cent year over year. The strong development in bank lending is partly a result of recent remortgaging activity and our customers preference for our Danske Bolig Fri loan where the margin is higher than on conventional fixed-rate RD loan.

However, the call feature for Danish mortgage bonds also meant that some customers have been able to reduce their loans by 20+ percent which naturally reduces the average LTV ratio and therefore results in lower margins for us as a bank. On the other hand this made a good contribution to our fee income and also entails reduced credit risk which we will highlight later in this presentation.

We continue our challenger strategy in Personal Customer Nordic, with a positive trend in lending volumes, which were up 3 per cent year-over year in local currencies in both Sweden and Norway, and the traction we are experiencing with home finance meetings and approval of mortgage applications, further supported the trend in lending. Also, in Norway, we recently extended our partnership agreement with Akademikerne which underpins our focus to enhance profitability across the region.

For Business Customers, we have maintained our strong relations with our customers as they navigate the current uncertainties at a time when supply chain challenges and commodity prices have rapidly changing the landscape. We have seen credit demand and we have helped our customers with increased financing along with more ancillary offerings, particular cash management and FX product categories showed a strong development from the same period last year.

As part of our new service model in both PC & BC, we continue to enhance our allocation of resources through the investments we make in our digital solutions.

Coupled with good traction and further innovative digital offerings targeted to our segments, I am excited about the opportunities that lie ahead. We now have the organisation setup fully up and running as we have welcomed Christian Bornfeld and Johanna Norberg to the ELT as new heads of our new Personal Customers and Business Customers units.

Slide 3, please.

Let us then turn to LC&I.

Overall, LC&I had a busy period. The high level of economic activity drove a continually positive trajectory for our activities in General Banking.

In the first half of 2022, we experienced significant credit demand from our customers and we supported customers with some DKK 40 billion in new lending. Broadly speaking, credit demand reflects the limited

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appetite to capital markets, our strategic ambition to grow in Sweden and high activity.

In relative terms, lending volumes at LC&I increased 24 per cent compared to the level the year before. The increase in lending volumes was especially high in Denmark and Sweden, where we have grown lending volumes by more than 30 per cent year over year. The strong lending volume as well as higher deposit margins, made a good contribution to NII, which increased 9 per cent year over year. However despite the increase in NII, total income in the first half 2022 was down 25 per cent from the same period last year, as a result of significantly lower net trading income and lower fee income.

The decline in fee income from capital markets related activity was caused in particular by a slowdown in ECM activity. Fee income in the first half of 2022 was down 9 per cent from a high level the year before and 6 per cent quarter-on-quarter. Our strong position in everyday banking services helped to counter some of this decline as fee income from everyday banking products sustained the positive trend seen in recent quarters.

Trading activities were affected by high volatility and low liquidity in the Nordic fixed income markets. This had an adverse impact and caused challenging conditions for our business in especially the second quarter. During the period we were pleased that as a leading Nordic fixed income house, we were able to continue to support our customers through a volatile period. In addition, while we remain committed to continue to run a leading Nordic fixed income house, we have applied a cautious approach for the rest of the year and calibrate our risk appetite to prevailing market volatility.

Stephan will talk in more detail about the financial markets and the impact on our trading income later in the presentation.

We continue to build on our market-leading position within sustainability and to apply the power of finance to drive sustainable progress. Demonstrating our leading capital markets platform, we were selected as Joint Lead Manager for a NextGenerationEU EUR 6 billion 20-year green bond issue and continue to be ranked number one among Nordic banks according to the Bloomberg League tables for sustainability-linked loans and sustainable bonds.

Our asset management activities were affected by financial market conditions as assets under management decrease. However, fee income in Asset Management increased slightly compared to the first half of 2021, driven by higher performance-related fees.

Let us now focus on our insurance activities.

At Danica, the result for the first half of this year was significantly lower than the result for the same period last year and also lower than the result for the preceding quarter. The turbulent financial markets with rising interest rates and rising inflation led to negative valuation adjustments and therefore had a negative impact on the investment results on life insurance products where Danica holds the investment risk, as well as on the investment result in the Health & Accident

business. Please note, that the gain from the sale of Danica Norway of 0.4 billion is included in the result for the first half of 2022 .

The underlying business continues to develop positively. We saw continued growth in premiums from the level in the same period last year as well as improved underlying health and accident business for which we saw 25 per cent fewer claims and improved recovery rates driven by preventive efforts.

Slide 4, please and over to Stephan.

Stephan Engels - CFO

Thank you, Carsten.

As Carsten just mentioned, we saw a good progress for our core banking activities in the first half of the year where strong commercial momentum for primarily our corporate customers led to an increase in lending volume and resilient income streams from diversified business model.

Income from core banking activities performed well and was in line with expectations. NII was up 4 per cent from the same period last year, as deposit-repricing initiatives and higher volumes more than mitigated the temporary margin pressure caused primarily by rising funding rates in Norway and Sweden. NII was up 3 per cent from the preceding quarter as a result of yet another quarter with an increase in lending and a positive impact on deposits from recent repricing actions and higher short-term rates. The improvements we have seen in lending margins continued in Q2 which I will comment on in more details later.

Net fee income was in line with the level in the same period last year, when fee income benefited from strong customer activity and one significant ECM transaction in particular. The slowdown we have seen in primarily income from our capital markets business was almost fully mitigated by higher activity related income, including an increase coming from remortgaging activity in Denmark. When comparing Q2 with the preceding quarter, fee income came in lower primarily because of high remortgaging and seasonally high refinancing activity in Q1.

Net trading income came in significantly lower than in the same period last year, due mainly to very challenging market conditions for our rates business, whereas underlying income from customers held up well despite the turbulent financial markets. Relative to Q1, income was lower as market conditions for our rates business worsened in the second quarter. However, the contribution from other customers and Treasury had a somewhat mitigating effect.

As Carsten mentioned earlier, the underlying business at Danica performed well with high premiums and fewer claims. However, net income from insurance business came in significantly lower due to negative investment results on life insurance products where Danica has the investment risk. The result for Q2 includes the gain from the sale of Danica Norway of 0.4 billion.

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Other income amounted to 1 billion for the first half of the year, including the gain related to the sale of our business activities in Luxembourg in Q1.

Operating expenses came in on par with the same period last year as higher cost for AML, sustained elevated remediation costs and the Swedish bank tax counterbalanced the one-offs we booked last year. Overall, we continue the good progress with reducing underlying costs compared to last year as well as the preceding quarter.

Loan impairment charges amounted to 0.2 billion in Q2, slightly down from Q1. Continued strong credit quality led to further reversals of impairments however, countered by adjustments of macro models and additional PMAs. We continue to have sufficient buffers in place, which I will also comment on later.

Net profit for the period thus amounted to 4.5 billion, down from 5.9 billion for the same period last year.

Slide 5, please.

Now let us turn to the underlying development in net interest income for the Group.

Overall, NII saw a healthy improvement of 4 per cent in the first half of 2022 from the level in the same period last year driven by deposits as well as lending.

On the deposit side, this uplift was driven by higher short -term rates and the effects of our deposit repricing initiatives we took during 2021 and 2022.

On the lending side, we were pleased to see a positive effect on volume from strong demand from our corporate customers in particular. This was however, partly offset by margin pressure in our Nordic retail business, mainly stemming from timing effects that arise because of the time gap between base rate increases and the associated implementation of price adjustments.

Compared to the preceding quarter, NII was up 3 per cent driven by the before mentioned positive volume development for corporate customers but also by recent rate hikes and the day effect.

With respect to wholesale funding activities we have been active during the first half year in order to meet our funding need, primarily by issuing covered bonds in Nordic currencies. Given the heightened level of uncertainty in the financial markets and continued elevated credit spreads in Q2, as well as the status of the Estonia matter, we have decided to remain somewhat sidelined.

Slide 6, please.

And then comments to our fee income development.

For the first half year of 2022, we were pleased to note that fee income maintain the strong level from last year despite the turmoil in the financial markets. A testimony to the strength of our diversified business model, fee income from core banking activities came in strong for the first half of 2022, which helped mitigate the lower activity level in capital markets related activities.

This was especially visible in terms of lending fees, which were up 8 per cent and activity driven fees, which were up 20 per cent year-over-year, mitigating lower capital markets related fee income and investment fees. Moreover, when adjusting for the landmark ECM deal we did in the first half of 2021, capital markets fees in the first half of 2022 were largely in line with the same period last year.

Relative to the preceding quarter, total fee income was around 7 per cent lower due to continued subdued activity in capital markets and seasonality effects given high refinancing activity in the first quarter.

Fees generated by investment activities were slightly lower both for year-over-year and relative to the preceding quarter, as they were impacted by lower assets under management and reduced investment appetite among our customers.

Slide 7, please.

Turning to trading income, let me start by providing some background for the adverse development we saw in the first half of the year and during the second quarter in particular.

The first part of 2022 was characterised by an extraordinary market situation across our main fixed income markets in DKK, EUR and SEK. As you know, the change in inflation led central banks to tighten more and sooner than expected. The large subsequent repricing of rates and credit spreads, led to extraordinarily high volatility and low liquidity in the Nordic fixed income markets. In this challenging environment, we continued to support our customers.

Against this backdrop, we today report negative net trading income for the second quarter primarily related to losses in our LC&I Rates & Credit fixed income operations.

Group trading income for the first half of the year came in at 0.2 billion and was significantly impacted by a negative result of 0.4 billion for the second quarter. The development in the second quarter was due mainly to a negative contribution from LC&I of minus 740 million . Income from our Currency business and from customer activity in the other business units contributed positively.

Slide 8, please.

Now let's take a look at our operating expenses.

The headline number for H1 came in in line with the same period last year. While we had specific one-offs in 2021, this year has seen higher than initially expected remediation costs, which was the main driver to

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