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

Conference call

First quarter 2021

28 April 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

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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 quarter 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 new CEO Carsten Egeriis and our CFO Stephan Engels.

Slide 1, please.

In today's call, we will present Danske Bank's financial results for the first quarter of 2021. 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.

Carsten Rasch Egeriis - CEO

Thanks Claus.

Hello everyone and thank you all for joining our presentation of the results for the first quarter. My name is Carsten Egeriis and as you know, I have been the new chief executive officer of Danske Bank since the beginning of last week, when I took over from Chris Vogelzang.

Even though this is a very new assignment for me, and today is only my ninth day in the job, I am not unfamiliar with meeting investors and analysts, and some of you may recall my participation in some of these calls in my previous role as chief risk officer, so good to meet you all again in today's call.

I am of course not new to the bank and I am not new to the plans that set our direction for the period towards 2023. No doubt we have already set sail on a journey that will enable us to become a better and more efficient bank to the benefit of all our stakeholders. The captain is new, but the course is clear, and the team around me and my fellow members of the Executive Leadership Team are ready to continue to execute on the agenda that we have set forth.

And then I would like to comment on our financial results.

With a net profit of 3.1 billion kroner, the first quarter of 2021 was a good start to the year, despite our societies continuing to be impacted by the corona pandemic. Compared to the same period last year, lockdowns have been more widespread, however, different from country to country.

We are now a full year into the pandemic and have better insight into the dynamics that characterise the economies. Some sectors are

performing quite well, benefiting from a change in consumer behaviour, including a strong housing market, whereas sectors directly affected by travel and gathering restrictions continue to be challenged. However, government support packages still provide support.

Our financial performance in the period benefited, among other things, from good customer activity in the capital markets where we continued to utilise our scale and expertise to fully embrace and seize the business opportunities. Our performance, based on an increase of 17 per cent in total income, has not only recovered from a weak first quarter last year, it has also shown satisfactory traction relative to the preceding quarter.

Lending growth was up 3 per cent in the first quarter from the level in the same period last year. This increase was driven by almost all Personal & Business Customers segments, whereas our customers at Large Corporates & Institutions have been drawing less on credit facilities as the economic outlook has improved. The decline in credit demand and continued margin pressure led to a negative impact on NII. This effect was, however offset by the repricing initiatives that took effect in Q1. Furthermore, the additional adjustments we have just announced for deposits earlier this week are expected to support margins going forward.

The improved economic outlook is also evidenced by relatively low impairment charges for the quarter, based on continually strong credit quality. Loan impairment charges of 0.5 billion were recognised for the first quarter, significantly less than for the same period last year, when model-driven charges and charges against exposures to the oil and gas industry dominated the picture.

We also continue to see steady progress with our efforts to reduce operating expenses, which contributed to a lower cost/income ratio than in Q1 last year and the preceding quarter. Excluding one-offs, expenses came down 6 per cent from Q1 2020, driven by lower costs for the Estonia case and cost management initiatives.

So all in all, a satisfactory start to the year, including the launch of the new organisation - which plays a key role for our increased focus on the commercial agenda. We have progressed on key elements of our plan and we will continue to make progress in order to meet our ambitions for all stakeholders in 2023.

And now over to Stephan for a more in-depth review of our first-quarter financials.

Slide 3, please.

Stephan Engels - CFO

Thank you, Carsten.

I will now go through our Group income statement before I present the performance of our two new major business units in more detail.

Please note that this is our first financial report following the re-design of our organisational setup announced last year. Danica Pension is now reported separately as "net income from insurance business". The financial numbers are restated accordingly and available in the Fact book.

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As Carsten just mentioned, it was a good start to the year. Overall, the result was founded on good progress for all key reporting lines, including total income, expenses and loan impairment charges.

Total income benefited from a rebound in net fee and trading income driven by stronger customer activity, and came in 17 per cent higher than the year before. Relative to the preceding quarter, total income was at the same level, despite Q4 being a seasonally strong quarter for fee income. NII was on par with the level in Q4, as the positive effects of deposit repricing and growth outweighed continued negative lending effects.

Against this background, and with the aim of improving profitability for our deposit business, we have announced further adjustments to retail as well as business deposits in Denmark. With effect from 1st July, the threshold for the charging of negative interest rates on retail deposits will be lowered to DKK 100,000 and the interest rate for business deposits in general will change from minus 0.60 per cent to between minus 0.75 to minus 1 per cent. We expect the combined effect of these initiatives to amount to approximately 0.5 billion on a full-year basis, all else being equal.

Insurance activities also contributed to the improvement in total income, due mainly to a better result in the life insurance business.

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. We are happy to see that our cost/income ratio continued the downward trend through an improvement for both income and costs.

As a result, profit before loan impairment charges for the first quarter was up 59 per cent from the same period last year, which to a large extent was disrupted by difficult conditions in the financial markets in particular. Against the preceding quarter, the increase was 57 per cent, due primarily to elevated expenses and impairment charges on intangibles in Q4.

Impairment charges amounted to 0.5 billion in the first quarter, now at a more normalised level. However, we will have to await the development in coming quarters to establish evidence for a more sustainable trend. By far most of the charges were against pandemic- sensitive exposure at PB&C. Lower charges for the oil-related exposure also had a positive impact in the first quarter.

Slide 4, please.

Now let us take a closer look at the new business units, starting with Personal & Business Customers.

P&BC is basically a merger of our previous Banking Denmark and Banking Nordic units and serves personal customers and SMEs across all of the Nordic markets. As part of the reorganisation, large corporate customers with a total lending volume of approximately 60 billion were transferred to LC&I.

Despite the significant impact on societies of the pandemic, business activity overall held up well. The way we interact with our customers has changed to a much more virtual format, and that increased

customer demand for digital banking solutions. This fits well with the new Better Ways of Working organisation, which we launched in January, where accelerated efficiency and digitalisation are key business enablers.

We continue to see a good inflow of new customers driving lending growth in Personal Customers Nordic and in the Norwegian franchise in particular. In Personal Customers Denmark, the high activity in the Danish housing market led to a 21 per cent increase in gross new lending at Realkredit Denmark from the level in the preceding quarter. However, net new lending was almost unchanged, as strong collateral values and elevated deposit positions led to increased repayment of loans.

Within our Business Customers segment, lending was stable, whereas deposits increased significantly as a result of customers' liquidity management and government support packages.

Also in the first quarter, ESG-related activities were high on the agenda. We launched several green products, including an expansion of the product offering within sustainable financing. In Denmark, Norway and Sweden, we have significantly lowered the threshold for green loans to business customers.

Slide 5, please

Now let us have a look at the financial performance at P&BC, where profit before tax was up significantly, driven by lower impairment charges.

Relative to the first quarter of 2020, total income was slightly down. Although we saw a solid performance for fee income driven by good investment activity, and a positive effect as a result of a lower deposit threshold, NII was slightly down due to a combination of continued pressure on margins and lower volumes.

Total income was up 6 per cent from the level in the preceding quarter. The increase was driven by higher fee income due to a negative one-off effect in Q4. NII was almost flat as the effect from the lower deposit threshold mitigated the continued pressure on margins.

Operating expenses was up 3 per cent compared to last year as costs for compliance remediation remained high.

A decrease in loan impairment charges was, as I mentioned, the most significant factor for the result at P&BC. The charges for the first quarter related mainly to segments impacted by the pandemic, whereas the level of last year to a large extent was impacted by model-driven charges due to a worsened economic outlook. Charges were higher than in the preceding quarter, however, as Q4 2020 saw net reversals driven by a positive change in the macroeconomic outlook.

Slide 6, please.

Now let us turn to LC&I, which in our new organisational setup also includes our asset management business besides covering large corporates and institutional customers across all of the Nordic markets.

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LC&I had a strong start to the year, with good performances in all segments of the business. In general, benign market conditions in the first quarter were supportive for the level of customer activity.

Our capital markets business sustained the positive trend seen in the later part of 2020, and we executed a high number of transactions across loan, debt and equity capital markets, including the largest ever ECM capital raising transaction in the Nordic countries as joint coordinator and bookrunner for TRYG's rights issue.

The high activity level also applied to the area of sustainable financing, which continues to be in high demand. In Q1, we supported our customers in a record-high number of transactions and affirmed our position as the leading Nordic bank, not only within sustainable financing but also for Nordic ECM deals in general.

The asset management business performed well, with assets under management up 22 per cent from Q1 last year, due primarily to positive financial markets. The turnaround for net sales that we saw in late Q4 gained momentum and added to the increase in assets under management.

Customer activity was also good in Markets, where supportive financial market conditions formed a good background for trading income, and in General Banking, the solid performance from the preceding quarter continued into the first quarter of this year.

Slide 7, please.

Now let us have a look at the financial performance at LC&I.

The strong performance in Q1 had a positive impact on total income, which came in 68 per cent above the low level of Q1 2020. Relative to Q4, total income was down 7 per cent. However, adjusted for the yearly booking of performance fees in Q4, total income was up 9 per cent. Both fee income and trading income benefited from solid customer activity. NII came in higher, as transaction-related net interest income and income from still undrawn facilities mitigated the effect of lower lending volumes. However, lower value of surplus deposits had a negative impact on NII.

Operating expenses were up slightly year-on-year, as our strong cost focus was able to mitigate most of the increase resulting from higher costs for AML and compliance.

Profit before tax came in at 2 billion, a strong turnaround from last year, when we saw significant loan impairment charges. The improvement in loan impairment charges mainly reflects lower charges against the oil- related exposure but also strong credit quality in general.

Slide 8, please.

Now let us have a look at Danica Pension and our activities in Northern Ireland.

Net income from insurance business amounted to 0.5 billion in Q1, against an almost flat result for the same period last year, which was significantly impacted by the turbulence in the financial markets caused

by the pandemic. The result in Q1 of this year was driven by our life insurance business.

Danica Pension saw a positive development in premiums and assets under management, which were up 6 per cent and 16 per cent, respectively.

In our Northern Ireland franchise, the effects of lockdown measures across the UK continued to affect the business in Q1. We are pleased to see that restrictions are currently being eased as a result of progress with vaccination programmes, which hopefully bodes well for coming quarters.

Overall, income came in lower in Q1, partly because of margin pressure from lower rates in the UK following Brexit. However, progress on cost reductions and significantly lower impairment charges led to an improvement in profit before tax, which came in at 0.1 billion.

Slide 9, please.

Now let us take a closer look at the underlying development in net interest income for the Group.

NII came in slightly lower than in the same period last year. The positive effects we saw in the quarter came from higher deposits, income from stronger demand for credit facilities and tailwind from FX. However, negative effects from lending and deposit margins more than offset the positive effects. Approximately half of the impact of deposits margins came from lower value of surplus deposits at LC&I, whereas a sharp decline in UK interest rates impacted margins in Northern Ireland and accounted for the other half.

When we look at Q1 against the Q4 2020, we saw the expected positive effects of the implementation of a lower deposit threshold and higher volumes. These effects were able to mitigate a continued, overall pressure on margins in the quarter.

Slide 10, please.

Let's have a look at fee income.

As we have discussed in some of our previous slides, fee income, which was up 5 per cent from the same period last year, made a valuable contribution to the good result for the quarter.

The increase can be explained mainly by stronger income from capital markets-related activities, but higher customer activity and the development in assets under management also added positively to investment fees. Investment fees were down against Q4 2020 due to the booking of performance fees in that quarter. Both year-over-year and relative to the preceding quarter, activity-related fees continued to be impacted by the effects of the lockdown of societies. We saw the same trend for lending-related income, however, Q1 of last year benefited from remortgaging activity. Relative to the preceding quarter, we saw an increase due to higher activity in the housing market.

Slide 11, please.

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Trading income saw a strong rebound from an unusually low level last year, which was heavily impacted by very difficult financial markets caused by the outbreak of the pandemic. At LC&I, which accounted for 80 per cent of the Group's trading income in Q1, benign market conditions and a good season for customer activity drove income up, led by Markets and Equities. Trading income in Q1 at Group Functions benefited from a gain of 0.2 billion related to the sale of shares in VISA.

Slide 12, please.

Now let us turn to operating expenses, which - in line with our expectations - came in lower. The main contributors were a decrease in costs for transformation - for which we booked significant amounts in 2020 - and lower costs for AML, including in particular the Estonia case. A reduction of non-personal costs also contributed to the decline in expenses, because of our continued, strict cost focus. The effects of the pandemic continued to have an impact in the form of lower travelling activity, among other things. Expenses were down 6 per cent from the level in Q1 2020 adjusted for items of a one-off nature in Q1 and down 2 per cent on a reported basis.

The one-off effects in the first quarter related to a provision for upcoming changes in the VAT setup following a ruling by the European Court of Justice and costs for a Group-wide initiative to enable our employees to work better from home. Based on the development we have seen in the first quarter, we re-confirm our outlook for the full year of operating expenses of no more than 24.5 billion.

Slide 13, please.

Overall, credit quality remains strong, as we continued to see a low level of actual credit deterioration, and impairment levels have started to normalise. As I mentioned earlier, we will have to await developments in coming quarters to establish evidence for a more sustainable trend.

Impairment charges for the first quarter came in at 0.5 billion, equivalent to a loan loss ratio of 10 basis points. The charges in Q1 were significantly lower than last year, when the outbreak of the pandemic led to an elevated level of impairments driven by model changes to the macroeconomic outlook and credit quality deterioration in our oil-related exposure.

From a business unit perspective, P&BC accounted for by far most of the impairments recognised in Q1. The charges at P&BC reflected a credit deterioration in relation to individual customer exposures relating to industries affected by the pandemic. These are mostly within the hotels, restaurants and leisure industries, to which we have limited exposure.

At LC&I, impairment charges were down owing to a decline in charges against the oil and gas industry, but also due to credit quality remaining strong.

Slide 14, please.

Our capital position remains strong, with a reported CET1 capital ratio of 18.1 per cent at the end of the first quarter.