Danske Bank A/S : Speech from conference call - first half 2021

Conference call

first half 2021

23 July 2021

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 IR

S P E E C H

Claus I. Jensen - Head of IR

Thank you, Operator, and hello, everyone. Welcome to the conference call for Danske Bank's financial results for the first half of 2021. 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.

Slide one, please.

In today's call, we will present Danske Bank's financial results for the first half of 2021. We aim to keep this presentation to around 30 minutes, and after the presentation, we will open up for a Q&A session, as usual. Afterwards, feel free to contact our Investor Relations department if you have any more questions.

I will now hand over to Carsten.

Carsten Rasch Egeriis - CEO

Thanks, Claus. In many ways, the first half of 2021 was a period with a lot of changes, not only for the societies, but also for Danske Bank.

The year started with a more or less complete lockdown in many countries, whereas the status at the end of the first half year was an almost complete reopening of the societies in which we operate, thanks to a successful roll-out of vaccines programmes. This reopening also allowed for a solid recovery of the economies, led by improved consumer spending which is now at levels higher than the levels before the corona crisis.

In Denmark, the housing market has remained surprisingly strong throughout the pandemic, and together with other macroeconomic indicators, it serves as a strong evidence of an economy in good shape. For us, at Danske Bank, this continuing rebound has translated into higher customer activity, in particular driven by customer activity in the capital markets, where we benefit from strong value propositions, not least within the fast-growing area of sustainable finance.

Despite some uncertainty still existing with regard to the impact of the phasing out of government support facilities, the outlook for the remaining part of the year is promising. And on that basis, on 8 July, we announced a revised net profit outlook for the full year. We now expect net profit for 2021 to be more than DKK 12 billion, based on lower- than-expected loan impairment charges as well as higher customer activity.

Financially, we had a good first half of the year. Our profit before tax came in at DKK 7.8 billion, up from DKK 1.5 billion in the same period the year before, driven by stronger income, lower operating expenses, and a significant decline in loan impairment charges. The result is equivalent to a return on shareholders' equity of 7%. It is clearly a step in the right direction, however, it is not at the desired level, and we still have a lot of work ahead of us to ensure we can meet our financial ambitions.

We have continued execution of cost management initiatives, as evidenced by lower expenses in the first half of the year. Expenses were down 7% from the same period last year, when excluding primarily tax- related one-offs in the first half of this year.

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One of my key priorities after taking up the CEO role has been to assess our progress on the ambitious targets we set for our stakeholders in Q3 2019, and our focus areas for 2020 and 2021, to ensure that we focus our attention on the right things. We have clearly stated that in the short term, we would get compliance and costs under control, while at the same time gaining commercial momentum. We continue to deliver on these targets, especially with regard to compliance, but also on the cost side, where we can see that our cost initiatives are yielding results, as underlying costs are gradually coming down.

It is also clear that we had areas of the bank in which we are top ranked by our customers and performance is thriving from a commercial perspective. This is especially true at LC&I, where our capital market offerings perform extremely well, and over the course of several quarters now, our efforts within sustainable finance are becoming an even more important part of the value proposition to our customers.

However, parts of our retail banking division are not seeing momentum at the desired level, due not only to increased competition in the Nordic countries and the interest rate environment, but also to reputational issues in Denmark. Further, our operating platform outside Denmark is not yet at a sufficient scale, and therefore we still need to become a simpler and a more efficient bank. We do, however, have tremendous potential to leverage in these markets with our top-tier offerings across the Nordic region and our extensive customer base in Denmark.

The decision to sell our business activities in Luxembourg also reflects our efforts to simplify our footprint and allow us to focus on the Nordic customers. Moreover, during the second quarter, the Commercial Leadership Team has further accelerated its effort to identify areas of weak performance and profitability potential, which will be in scope for targeted business initiatives. Moreover, we are now approaching the midpoint of our Better Bank Plan, and a lot has happened both in terms of execution but also in terms of the operating environment and the macroeconomic conditions that have changed since 2019. We are therefore in the process of sharpening already planned initiatives and recalibrating our assumptions for the remaining period towards 2023, in order to illustrate how we deliver on our financial ambitions, and we expect to update the market on this at the presentation of our Q3 results.

Slide 3, please.

I am confident that improving our market position in Denmark and the momentum across our Nordic platform is achievable. What we have accomplished with regard to various parts of the Better Bank Plan clearly demonstrates a strong foundation and the ability to execute on our priorities, and I want to highlight the three pillars that demonstrate this.

The first pillar is how we have managed to upgrade the compliance function over the past years. The compliance function has been completely rebuilt based on best practice and with strong profiles in leading roles, who have both extensive and international experience. Moreover, we have launched and seen good progress on our Financial Crime Plan, which covers all regulatory requirements and best practice recommendations.

And finally, our compliance related to IT systems and processes has been significantly upgraded. We have successfully developed and launched an important first solution that will allow customers to submit their personal information digitally. In addition, we successfully embedded an automated review capability to support the assessment of customer information and customers' use of our product and services.

The second pillar is how we have completely transformed our development organisation, which comprises around 4,000 employees. Just changing the governance structure, the incentives, resource allocations, and so on, is an achievement when the number of employees and scope are of this size. However, we are now roughly seven months into after the launch, and we have managed to do the change while staying on schedule in respect of planned deliverables and new solutions and infrastructure.

Building even further on this momentum within digitalisation will be crucial in order to regain our commercial momentum in Denmark, in Sweden, and in Norway by delivering better and more efficient digital solutions to our customers. Just by way of examples, I want to highlight the progress made on the Swedish mortgage processes, as 95% of all mortgage applications now run through a digital flow, and also the recent improvements to our 'click-to- remortgage' process for personal customers in Denmark, which now offers more efficient processes and additional calculation options. Similarly, also in Norway, we reduced the time to 'yes' from 14 days to just under 3 hours for our digital car loan solution, something which has already improved customer satisfaction and increased volumes.

I believe it is safe to say that these first results are important elements in supporting our commercial momentum. However, as digital transformation is more of a constant, we are far from done. For the second half of the year, we plan further digitalisation initiatives to ensure we capture the before-mentioned potential, but also to ensure that we establish a foundation to build on in the years to come. For instance, we are further expanding the toolbox available to our customers to self-service their remortgaging needs. We will also make it far easier for them to ensure an ongoing inflow of deposits into investment funds through the Mobile Banking app.

Finally, we will further expand the functionality of our District platform for business customers and pilot a new fully-digital sales channel for low and medium-complexity products to our corporate customers which will be a stepping stone towards increasing the rate of digital sales. And in addition to these initiatives, we will of course continue to allocate a sizeable amount of our development capacity to fulfilling regulatory requirements and supporting our compliance and AML agenda. However, importantly, both are to a large extent also important enablers of our general digitalisation efforts.

The optimisation of our customer journeys feeds directly into the third pillar; namely, how we are on the forefront of supporting customers' commercial and sustainability ambitions. The importance of sustainability transitioning is growing rapidly, and we do our utmost constantly to adapt our capabilities in this field to support our customers' goals. As late as last week, we tripled our 2023 target for volumes within sustainable financing from well above DKK 100 billion to DKK 300 billion, a level we consider quite ambitious.

We continue to make sustainable financing and investments accessible for our customers through new products, such as the two new mutual

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funds, Global Sustainable Future and Danica Green Balance, and also by supporting issuers and investors in a substantial amount of transactions, which confirms our position as a leading bank and our top ten ranking globally as arranger of green bonds. Moreover, our position within sustainable financing also supports the continuously strong momentum we have when it comes to corporate and institutional customers in general.

We continue to see the fruits of our investments in our capital markets platform, as our customer satisfaction ranking remains the highest among the pack, and we capture an increasing volume of opportunities within ECM and DCM. I believe that this underpins the value of our diversified business model, especially in the current environment with subdued demand for credit from businesses.

Finally, the offerings we have within asset management remain attractive, as evidenced also by net sales growing for several quarters now, and the majority of our investment funds perform above benchmark.

So - taking a step back after my first quarter as CEO, I am encouraged by the commercial priorities that we have set out. And from what I have also experienced first-hand from our frontline officers and my constructive dialogue with existing and with new customers and clients, I am confident that we have the foundation and the capabilities for navigating in the current operating environment and also playing a leading part in terms of the sustainability agenda, as our customers and society as a whole transition to meet the realities of tomorrow.

I am looking very much to providing you with more details later in the year and of course taking questions later on in this call. And then I will hand over to Stephan for the financial results in more detail.

Stephan Engels - CFO

Slide 4, please, and thank you, Carsten.

I will now go through our Group income statement before we provide more detailed insight into the performance of our business units. As Carsten just mentioned, we had good results for the first six months.

Overall, the results were founded on good progress for all key reporting lines, including total income, expenses, and loan impairment charges.

Total income benefited from a positive development in all income lines. NII was stable from last year, as well as the preceding quarter, as deposit repricing initiatives partly mitigated continued margin pressure. Net fee income benefited from stronger customer activity and came in 11% higher than the year before, not only on the basis of strong demand for capital market financing solutions among our customers, but also on the basis of a rebound in activity-rated fee income from personal and business customers. Compared with the preceding quarter, we saw a positive impact from a couple of large capital market transactions and mortgage bond refinancing. The strong momentum for customer activity, driven primarily by LC&I, continued, and fee income held up well.

Trading income benefited from improved market conditions. Compared with the same period last year, trading income was up 21%, however, stable against the preceding quarter when adjusted for the gain from the sale of our shares in VISA. Our insurance activities also contributed to the improvement in total income, as improved market conditions and

growth had a positive impact on the result in the life insurance business.

Other income, for which we usually do not have many comments, was up 48%, due mainly to higher income from our Danish real estate broker, home, driven by generally higher turnover in the housing market.

Operating expenses came in lower, as our initiatives to reduce costs continued to yield results, and we saw the expected decline in costs for transformation and remediation. Expenses in the first month included one-off items of DKK 0.6 billion, mainly against tax-related items. Excluding one-offs, operating expenses were down 7% from the level in the same period last year, and slightly up against the preceding quarter, due mainly to an increase in performance-based compensation. As a result, profit before loan impairment charges adjusted for one-offs for the first six months was 27% up from the same period last year, whereas it was 9% against the preceding quarter as a result of slightly lower income and higher costs.

The change in impairment charges was the most significant driver of the improvement in profit before tax in our core activities. The charges for the first six months amounted to DKK 0.7 billion, and DKK 0.2 billion for the second quarter, due to an overall improvement in credit quality. The result of our non-core activities improved as the first half of 2020 was impacted by losses related to the final exit from Estonia.

Slide 5, please.

At Personal and Business Customers (P&BC), we saw a significant uplift in profit before tax of 34% against the same period last year, due mainly to significantly lower impairment charges, which are now resuming a more normalised level following a positive revision of the macroeconomic outlook.

Total income was down 2%, as higher volumes could not compensate for margin pressure, which resulted in slightly lower net interest income. However, the repricing initiatives in Denmark that took effect in the first half of the year stabilised net interest income at Personal Customers Denmark.

The growth in lending at P&BC was driven by our Nordic retail business, for which lending was up 9% from the level in the same period last year, however, partly offset by a lack of growth and increased repayment of loans at Personal Customers Denmark.

Underlying fee income benefited from higher customer activity in general and was up 2%, adjusted for a value adjustment for our distribution agreement and the effect from structurally lower income from mortgage bond refinancing. However, to some extent, the effects of our cost management initiatives and lower transformation costs countered the decline in total income. Costs were down 4%, resulting in a decrease in the cost/income ratio of one percentage point. Although this is a positive trend, it is not at the desired level in view of where we want to be in the longer term, especially with the current margin environment and only fragmented commercial momentum.

There is no doubt that our efforts to improve cross-sale through investment offerings combined with the current environment have led to a significant increase in investment activities at both Personal

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Customers Denmark and especially at Personal Customers Sweden. Here we are succeeding in harvesting the fruits of our new investment centres, which allows us to provide more holistic advisory services to our customers. In fact, the number of investment advisory meetings in Sweden was up 13%, and AuM for managed accounts almost doubled for the period, together with an up-tick in cross-sales for existing as well as new customers. The latter was also a result of improvements to our onboarding process.

Slide 6, please.

Turning to LC&I, profit before tax was also significantly up, as a result of a 12% increase in total income and significantly lower impairment charges, especially fee income as a contributing factor to our strong income development, following the extraordinarily positive development we have seen within the capital markets business, which compensates for slightly lower NII that was due to lower credit demand. In fact, the combination of our strong offerings and the constructive market conditions in the past quarters has resulted in higher income from capital markets offerings and serves as a strong proof-point for our strategic focus on customer-driven and less capital-consuming income.

Income from our activities within investment banking and securities ended at a record-high level of more than DKK 1 billion for the first half of 2021, translating into a 63% increase from the same period last year. The strong momentum further underpins our position as the leading Nordic bank in terms of volumes.

Similarly, within sustainable financing, we continue to see a high level of demand, allowing us to continuously support our customers with their needs for financing. In the first half of the year, we arranged sustainable bond issues in the amount of $8 billion for our customers - more than we have ever arranged even in a full year.

Our asset management activities are also developing favourably. AuM increased 16%, both in the institutional and in the retail segment, and net sales in the retail segment have now been positive for three consecutive quarters.

Slide 7, please.

Now, let us have a look at Danica Pension and our activities in Northern Ireland. Danica delivered a strong financial performance in the first half of the year. Net income amounted to DKK 1 billion, up 14% from the level in the first half of 2020. The result saw a positive effect from an improved result in life insurance and benign developments in the financial markets. Solid growth in premiums and assets under management, up 22% and 12%, respectively, also added to the positive development.

Quarter-on-quarter, net income at Danica was up 6%, due mainly to an improved result in the health and accident (H&A) business, which was impacted by a tax-related provision in the first quarter. Premiums as well as assets under management continued to grow in the second quarter.

Our business in Northern Ireland is showing good progress, despite constraints in the operating environment from subdued activity in the

UK economy following Brexit and the pandemic. The improvement in profit before tax from the same period last year was mainly due to significantly lower impairment charges but also to ongoing cost- management initiatives. Lending and deposit volumes increased, however, the sharp decline in UK interest rates had an adverse effect on net interest income.

Against the preceding quarter, we saw further progress in Q2, as profit before tax benefited from higher income and reversal of loan impairment charges. Lending was up 3% on a reported basis, and in combination with an improved outlook for the economy, we remain optimistic for the coming quarters.

Slight 8, please.

NII came in slightly lower than in the same period last year. The first half of 2020 deposit margins benefited to a large degree from elevated xIBOR levels, whereas lower xIBOR levels this year had the opposite effect and reduced deposit compensation to the business units. Approximately half of the impact on deposit margins came from the lower value of surplus deposits at LC&I, whereas the other half was evenly split between P&BC and Northern Ireland, with a decline in value in Northern Ireland being due to a sharp decline in UK interest rates. Obviously, this movement between our business units and the internal bank had no impact on Group net interest income.

When we look at Q2 against Q1, NII was up slightly, due mainly to the day effect and a positive effect on lending margins from lower NIBOR rates. The negative effect on deposit margins was due to lower deposit compensation from FTP, comparable to the development I just described.

As we communicated in connection with the announcement of our results for Q1, further action in the form of lower thresholds and pricing initiatives has been taken with regard to deposits in order to improve profitability. These initiatives took effect on 1 July, and we expect an effect of approximately DKK 250 million, all else equal, for 2021.

Year-over-year lending volumes were up at P&BC, due mainly to growth for Personal Customers in Norway and Sweden and for Business Customers. Deposit volumes were up at Personal Customers Nordic and Business Customers, whereas deposits were flat at Personal Customers Denmark, and down from Q1 to Q2, partly reflecting a positive development in AuM, where net sales for retail customers grew.

Slide 9, please.

Let us have a look at fee income. As we have discussed on some of our previous slides, fee income, which was up 11% from the same period last year, made a valuable contribution to the good result for the period. The increase was due mainly to a much stronger income from capital markets-related activities, which was up 63% for the first half of last year, and only slightly down from the preceding quarter, as the high level of activity continued into the second quarter.

Fees generated by investment activities benefited from higher customer activity and a positive development in assets under management, whereas there was a slight decline in fees from the

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