Speech from conference call Q3

Conference call

First nine months 2021

29 October 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

Hello everyone. Welcome to the conference call for Danske Bank's financial results for the first nine months of 2021. Thank you all for taking the time to listen in to this call today.

My name is Claus Ingar Jensen and I am Head of Danske Bank's Investor Relations. With me today, I have 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 nine months of 2021 and provide an update on our 2023 ambitions. 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, please 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. Let me start by saying that in today's presentation of our financial results, I will start with a summary of developments in the past period, then Stephan will follow up with more detailed comments on the financial numbers, before I present the update of our plan towards 2023.

In many ways, the first nine months of 2021 was a period of steady progress, not only for the Nordic societies, which have returned to normal after a successful rollout of vaccine programmes, but also progress for us at Danske Bank. In all of our markets, the reopening of society has been followed by a strong recovery in almost all sectors of the economies. This has led to high customer activity, including demand for financial advice and solutions, and we have clearly benefited from that.

Growth in new lending, however, continued to be at low levels, due not only to government support facilities and elevated deposit levels for both personal and corporate customers, but also to a shift in preference among corporates from traditional bank lending to finance solutions in the capital markets. That led to higher activity and strong growth for sustainable finance solutions in particular, an area where we continue to capitalise on our strong platform and unique advisory competencies.

There was also clear progress in relation to our personal customers. In this segment, our increased focus on investment advisory services is paying off, and this clearly underpinned our financial performance. Furthermore, in the personal customer segment in Denmark, the repricing initiatives for deposits initiated with effect in 2021 had a stabilising effect on net interest income. In the third quarter,

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improvements in deposit margins more than offset the pressure from negative lending effects.

From a digital perspective, we are also making progress on becoming a more efficient bank. We have come a long way with our transformation, as evidenced by simplification of internal processes and improvement of customer journeys, where we have seen high adoption rates of 95% on our District platform for business customers and also positive feedback from both advisers and customers after having increased e- meetings to more than 60%.

Financially, the first nine months showed good progress, with Q3 representing another quarter of sustained improvement. Profit before tax came in at DKK 12 billion, up from DKK 4.7 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 shareholder equity of 7.3% - clearly a step in the right direction. However, not at the desired level and, as I will explain later, we have updated our plan to ensure that we can meet our updated financial ambitions.

We continued the execution of planned cost management initiatives, as evidenced by lower expenses in the first nine months of the year. Credit quality remained strong, supported not only by the strong macroeconomic conditions we have seen in connection with the reopening of societies, but also by the fact that financially, our customers have fared well during the pandemic.

So, all in all, a result for the first nine months characterised by good progress in many areas and thus a solid starting point for our dedicated work on further improvements in the coming period.

And then over to Stephan for more details on the financial results.

Stephan Engels - CFO

Slide 3 please. Thank you, Carsten. Overall, the results were founded on good progress for all key reporting lines. Based on reported net profit, our result almost tripled from the same period last year, and the result for the third quarter was up 19%. Total income came in 4% higher than in the same period the year before, based on a positive development in all income lines. Net interest income stabilised because of the repricing initiatives we have taken for deposits. However, the effect was offset by overall margin pressure, lower lending volume and a change in the loan product mix.

Looking at the third quarter in isolation, the repricing effect was clearly visible and more than offsets the effects of primarily lower volumes, as well as the lower effect from the TLTRO funding.

Our fee income was up 13% and was the most significant driver of the increase in income compared to the same period last year. As Carsten just mentioned, two drivers are behind this positive development.

Firstly, strong business momentum in our capital markets-related

business following increased demand for sustainable finance solutions, and secondly, an increase in investment activity among retail customers. The increase in overall economic activity following the reopening of the societies also made a positive contribution to fee income.

In the third quarter, fee income was slightly down, despite increased momentum in income from investment activities. Income from capital markets-related activities, which was extraordinarily high in Q2, was also impacted by summer holiday seasonality.

Income from trading activities was lower compared to last year, which benefited from high customer activity following the rebound in the financial markets after the outbreak of the pandemic. In the third quarter, trading income came in lower due to more difficult market conditions for LC&I and seasonality. However, we continued to see a positive development for trading income at P&BC as a result of higher customer activity.

Our insurance activities at Danica Pension saw a positive development, and the result was up 19% from the year-earlier period. The improved result came from strong business momentum and a positive investment result, but also from a better result in health and accident business. The strong business momentum was driven by a good inflow of new customers, resulting in an increase of 39% in premiums.

In the third quarter, we continued to see a strong development, including further improvement in health and accident business. Net income was up 21% from the level in Q2, despite the effect of an accounting correction of DKK 250 million. Other income was up 25%, due mainly to higher income from our real estate broker in Denmark, 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 cost of transformation and remediation. Excluding one-offs, mainly against tax- related items, expenses were down 6%. In the third quarter, costs were down 6% compared to the preceding quarter, as we continued to see steady progress according to plan. However, higher costs for remediation of legacy issues impacted the result. Profit before loan impairment charges for the first nine months was thus up 15% from the same period last year, and was up 3% against the preceding quarter, mainly due to lower expenses.

Besides the improvement in income, the change in impairment charges was a significant driver of the improvement in profit before tax, as charges for the first nine months amounted to only DKK 0.6 billion, against DKK6.3 billion for the same period last year. The corona-relatedpost-model adjustments we recognised during 2020, however, largely have been kept to mitigate any pandemic-related tail risk. In the third quarter, impairment charges were further down, with a net reversal of DKK 0.2 billion, driven mainly by models.

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The result of our Non-core activities improved as the first nine months of 2020 were impacted by losses related to the final exit from Estonia.

Finally, let me touch on our capital position, which remains strong, with a core tier one ratio (CET1 capital ratio) of 18.1% by the end of the third quarter. The risk exposure amount increased only slightly, as the increase related to the implementation of EBA guidelines of DKK 22 billion in the third quarter was partly mitigated by other changes. The total EBA-related increase for the full year is now expected to be around DKK 90 billion compared to our previous guidance of DKK 50 billion to DKK 70 billion. In a joint decision with the FSA, the Pillar II add-ons to be fulfilled by CET1 will be reduced by around 0.5 percentage points in Q4 to 2.5%, as a result of agreed REA increases associated with EBA guidelines.

Slide 4 please. And finally, from our side, we would like to comment on the revised financial outlook for 2021, where we maintain our expectation of a net profit of more than DKK 12 billion. However, changes have been made to some of the individual lines. We still expect total income in 2021 to be higher than the level last year. In our previous guidance we included the sale of our business activities in Luxembourg. However, the closing of the transaction will not take place until the first quarter next year. Total income will, however, include the gain from the sale of Aiia of approximately DKK 150 million.

We have revised the outlook for total expenses, and we now expect total expenses to be slightly more than DKK 25 billion, as a result of higher costs for compliance and remediation of legacy issues. The total expenses include tax-relatedone-offs of DKK 0.7 billion, of which DKK 0.2 billion will be recognised in Q4.

Underlying expenses are still expected to be lower than DKK 24.5 billion.

In addition, in Q4 we expect higher charges for pension yield tax at Danica Pension, which will be recognised in net income from insurance business.

Impairment charges are now expected to be no more than DKK 750 million, due primarily to lower model-driven impairment charges, as a result of a better-than-expected macroeconomic recovery and overall improved credit quality.

Slide 6 please and back to Carsten.

Carsten Rasch Egeriis - CEO

Thank you, Stephan. Now, let us have a look at our 2023 ambitions.

In 2019, we showed this slide when we announced our plan towards 2023. Today, we provide you with an update on where we are in this journey and how we have gradually enhanced our foundation and operational set-up, making us well-positioned to deliver sustainable

value creation. We recognise that there are still a number of challenges that need to be addressed, including completing our compliance remediation process, as well as fully regaining our fair share of the retail business in Denmark. We have, however, already seen tangible progress and our operational efficiency and profitability is moving in the right direction towards a return on shareholders' equity of 8.5%-9% by 2023, with line of sight to sustainably delivering a return on shareholders' equity of 9%-10%.

As CEO of Danske Bank, my objectives extend beyond reaching a point- in-time profitability target in 2023. Doing what is right for the bank in the long run is the over-arching principle according to which I steer. This has also been the principle underlying our review of our current plans. Over the past month, it has been extremely important for me to ensure that we had a thorough process with all relevant stakeholders in the organisation, and also that we sufficiently scrutinised all aspects of our business model to properly leverage our strengths and address our challenges. With this increased level of transparency regarding our assumptions and business model, we're confident that our Nordic franchise allows for an RoE level of 9%-10% in a normalised state.

As a result of our dedication to our transformation agenda, we will, despite headwinds, deliver 8.5%-9% in 2023 in a sustainable way, with a line of sight to a further uplift.

Next slide please. As we planned for two years ago, the key focus in 2020 and partly in 2021 was reversing the downward trend we saw at the time. The structural progress made since 2019 has been significant and has laid the tracks not only for 2023 but also for the years to come. We have accelerated our efforts to become a more efficient bank and have set up the required commercial organisation and governance while at the same time fundamentally revamping our development organisation of more than 4,000 people, taking us to the next level in terms of catalysing the digital journey.

These efforts, among other things, have enabled solid progress in more recent quarters, and we have seen the commercial momentum pick up across our segments and continued progress with our financial crime remediation plans, where we're now moving into a business-as-usual operating model for KYC work and see both increased efficiency and quality. This solid progress has only been possible through a stringent focus on prioritisation and execution and by continuously adapting to all the changes happening around us.

Next slide please. As with any long-term plan, there comes a point when you have to review your assumptions and adjust accordingly, and it was clearly difficult to anticipate the extent of the changes that we have had to adapt to. Taking a closer look at what has changed, I think it is obvious that our compliance remediation is significant. As we have grown our capabilities in this area, our understanding of what needs to be done has also developed, and therefore, our scope had grown beyond what we initially anticipated. It is clear as we made progress that the need for further investment in our control environment has been substantial.

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Continuing to allocate resources is the right course of action in order to improve the resilience of Danske Bank for the benefit of all our stakeholders. This is a journey that requires thorough effort, and I want to emphasise that it is not an area in which we are willing to make compromises.

Similarly, reversing the negative effect the Estonia cases had on our brand also takes time. Although we continue to have a strong value proposition for all customer segments, our brand is particularly impacted in the personal customer segment in Denmark, and this has also negatively contributed to the growth assumptions of our original plan, as we have not seen the expected growth materialise.There is no quick fix for such a situation. It requires time and it requires dedication. This is something we have also included as part of our commercial priorities, and our enhanced brand and marketing efforts are closely interlinked. We see no other way than to walk the talk, by ensuring that it is clear to each individual customer, especially in the upper personal customer segment and for private banking and business customers, how strong our offerings are.

Lastly, the unresolved settlement of our legacy cases has also resulted in a need to carry additional capital buffers - something we had hoped would have been resolved by now, allowing us to better manage our capital position. As none of these factors will change overnight, we have gradually adjusted our plans to prudently compensate as much as possible, which is now enabling us to execute our commercial plans to continuously provide tangible financial uplift.

Next slide please. Our strengthened position and performance are particularly evident in corporate segments in which we are a leading Nordic wholesale bank and have seen increasing momentum being built up over the years. We have a strong value proposition in place, we are recognised for it, and the momentum is building. From here, we have to sustain the strong momentum for LC&I, building on the high level of capital raising activity in 2021 to date, when our capabilities have been cemented in the market, as evidenced also by our ranking among the top institutions in league tables for a long period.

We are ready to capture our customers' changing preferences for financing solutions, whether this be traditional balance-sheet lending or capital raising, also within green and sustainability-linked products. The strong offerings and expertise that LC&I also support our focus on building momentum in relation to our business customers. In this segment, we see ancillary business continuously increasing, for instance within investments, ECM, DCM and green products. We see tremendous growth potential in this segment, and we have a strong position to capitalise on. Being a leader within sustainable financing in both a Nordic and a global context serves as a good backdrop for supporting our business customers' green transition.

To fully capture these growing opportunities, we will implement an improved service model to cater to the growing demand for more complex solutions that require specialist advisory services, while expanding our self-service solutions for everyday banking and financing

needs through additional digital offerings on our District platform, ultimately enabling a more efficient use of resources.

LC&I and business customers have the right toolbox and platform in place to generate a sizeable part of our required income uplift in the period towards 2023.

Moving to our Danish retail business, we have a strong foundation. We have decades of experience and skilled employees, but given recent headwinds, we have struggled to capture our fair share of the growing market. Nevertheless, our offerings and broad value proposition provide a strong platform to build from, and we are very focused on regaining our position in the housing market and improving our trajectory. Knowing we have an immediate need to break the recent years' trend, we have launched a series of relatively simple actions to reduce churn and to leverage our large customer base.

Furthermore, in Denmark and our other Nordic markets, we will build on our growing momentum within investment sales to ensure they remain a key income driver.

Having increased our income from investment activities by 20% over the past year, especially within private banking and personal customers, we believe the foundation is there. However, we remain more ambitious. We will strengthen our investment offerings through specialised advisory services and digital solutions, as well as further embed our sustainability expertise into investment products.

Finally, specifically for our personal customer business in other Nordic countries, we will ensure our partnership agreements are sufficiently profitable and further leverage the additional growth potential these agreements provide through our digital solutions to service customers more efficiently and profitably. Sweden in particular is a market where we see profitability opportunities by further leveraging the steadily growing customer base, and this is something we are already seeing results on.

Later today, my fellow ELT colleagues will go through the initiatives in more detail. However, it should be clear that the sum of all of these initiatives and our recent progress sharpens our business model and provides the necessary uplift of our operational performance.

Next slide please. Accelerating our commercial momentum and enhancing our operational efficiency have been my key focuses taking over as CEO. With our enhanced business model, coupled with momentum in our corporate segments and already launched initiatives, we are on the right track to deliver around DKK 43.5 billion by 2023 on our top line. On the cost side, we will continue to bring down underlying costs in a sustainable way through our focus on digital tools that enable self-service and increase adoption to allow for a better customer experience with lower structural costs. The progress we have already made on digitising our processes serves as a strong enabler for further

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