Dnb ASA

OTC:DNBBY

Q2-2025 Earnings Call

[Even Westerveld, executive]

Good morning, everyone, and welcome to the presentation of the second quarter results for DNB. And also welcome to everyone following us on the stream. It's 30 degrees outside, and I don't see very many with a tie inside. I think that's a good sign that we are approaching summer.

But first, let's dive into the numbers for DNB. Our CEO, Kjerstin Braathen; and CFO, Ida Lerner, will present the results. There will be time for questions after the presentation. And I do see a new -- some new faces from the press here today. Very welcome. And for your information, you will be able to ask questions to management outside in the lunch area after the presentation.

Kjerstin, please go ahead.

[Kjerstin Braathen, executive]

Thank you so much, Even, and a very warm welcome to all of you to this second quarter earnings release for DNB. In this quarter, where increased uncertainty is becoming the new normal, we still present yet another strong set of results, reflecting a high activity and high growth across the group overall.

It has indeed been an eventful quarter. This is the first quarter we are fully integrating the Carnegie numbers into our numbers. And we had, from the Central Bank, the first rate cut in more than 5 years, further boosting an already high activity level.

I wanted to start this quarter with a few examples of initiatives and events that are key driver for our results. The DNB Carnegie position combined further strengthens our position as a leading Norwegian -- not Norwegian, but Nordic investment bank that we have been targeting.

We have seen a high activity year-to-date, and we hold several #1 positions, more specifically in equity capital markets in terms of volume of capital raised, in M&A in terms of number of transactions completed and maybe for many of the most prestigious one being ranked the #1 Nordic broker by Extel, who surveys institutional investors.

For personal customers, we continue to scale and grow our activity across the country. With several initiatives being fulfilled, we have strengthened the pace and activity in our digital offering, with now 75% of mortgage applications coming in digitally. And we, in some locations, opened up local satellites to further boost local activity and growth.

We have launched the digital adviser in our savings app Spare, and we have been ranked -- our chatbot has been ranked the best chatbot in Norway.

In addition to this, we are further motivated by seeing that our customers across Private Banking and Large Corporate customers have rated the satisfaction at the highest level we've ever seen.

I wanted to show an appreciation to the organization who has worked relentlessly throughout this quarter as well in order to deliver to our customers and these results. But this quarter, I also would like to send one appreciation in particular to one of our employees who walked in the doors of DNB 43 years ago and who has her last day of working today. [ Sylvia ] has been material in developing the profitability measurement systems. She's one of the people who works very closely producing the numbers, analyzing the numbers. And [ Sylvia ] is the DNA of DNB and part of what DNB is all about. I would hope that you all would join me in showing an appreciation to [ Sylvia ] today.

Over to the key highlights of the numbers, indeed reflecting a high activity across all customer segments and product areas. Return equity for the quarter comes in at 15.4%, well above the minimum 14% that we have targeted.

NII is down compared to previous quarter by 1.6% and up compared to the same quarter prior year by 2.1%. The most important message to convey is that customer margins are roughly stable. We have seen growth in lending across all customer segments, accelerating throughout the quarter. And this is offset by some low-margin outflows in deposits and a lower contribution from noncustomer-related interest income elements such as funding and interest on equity.

In net commission and fees, we are seeing a sharp uptick naturally, with 7.1% with a full integration of Carnegie in the numbers. Many areas delivering particularly strong this quarter, and I would highlight equities, bond and asset management.

Our portfolio overall remains robust and well diversified. We see no material movements or negative migration in any area. We do book NOK 677 million of provisions this quarter, predominantly related to customer-specific situation.

Our capital position remains rock solid, 18.3%, still with a 180 basis points headroom to the required unexpected level by the FSA. As you know, we have a share buyback program ongoing, buying back 1% of the share and expect to complete this in September or early October. Earnings per share came in at NOK 6.79 for the quarter and are up by 3.9% year-to-date.

The Norwegian economy remains robust and the outlook is healthy. We continue to expect a GDP growth this year of 1.3% and 1.5% next year. Unemployment remains low, around 2%, and we continue to say that the fact that people have a job is the most important factor for both financial and social wealth.

We have seen the Central Bank over years acting decisively to bring down inflation, and while not being fully down to the desired level around 2%, we continue to see inflation decreasing and healthy wage growth contributing to the spending of consumers.

We did expect the first rate hike to happen this year, and we saw that materialize in the month of June. Ahead, DNB Carnegie expects another 2 rate decreases this year and rates to stabilize around 3.75%. While the level of uncertainty globally is higher than normal, we continue to see a robust and strong fundamentals in the Norwegian economy with a positive outlook.

A few highlights from the customer segments. First of all, personal customers delivers a very strong quarter. We see a very healthy growth of 0.8% in lending, 3.2% in the past 12-month period and a seasonally strong growth in deposits of 5.8%, even stronger than we usually see, and it might be boosted by the healthy levels of the wage settlement.

Rate cuts came and further boosted what was already a high activity, and we saw a sharp increase in number of customers showing an interest of moving their mortgages to DNB. As well as a significant number of requests for financial certificates, people continue to buy apartments and houses in the month of July, this summer, which provides a healthy pipeline going into the third quarter.

Net other income up by 29.9%, boosted by the Carnegie integration, but also a solid performance on what was the basis prior to Carnegie, amongst other, in real estate brokerage activity.

For both our corporate segment, pretax profit is slightly down compared to the previous quarter, but up compared to the same quarter prior year. The highlight for corporate customers in Norway, I would point to the growth of 1.8%, and this is before having seen a real uptick in the construction activity related to housing, which we do expect to pick up in the second half. And we see results of the systematically work to improve customer satisfaction amongst the smaller customers as well as an uptick in the market share of a number of start-ups who was choosing to start their working relationship with DNB. This is a tremendously valuable position for us across corporate customers in Norway overall, and return on allocated capital is 21.9% in the quarter.

Large corporates, growth of 3.3% in the quarter, accelerating towards the end of the quarter, showing healthy activity, growth driven by industrials and energy at our core markets, is a strong momentum in net other income and an increase by 17.6%, and the portfolio continues to remain very robust.

I'd like to end this quarter with a few comments related to our activities across investment banking and asset management. And we'll remember that we have talked about systematically working to strengthen these areas strategically many years. And here, we can clearly see how these 2 areas have become an increasingly important part of our business, now further strengthened also with the Carnegie acquisition.

The integration of DNB Carnegie and the merger is going in accordance with plan. And I would add also slightly better than expected. We see that the offering is very well received by our customers. We continue to see a confirmation of the strategic rationale and our ability to offer services and products that wins mandates we would not have been able to do separately on our own.

We remain committed to deliver on the synergies that we highlighted on the outset of announcing the acquisition. And there are several particularly strong areas this quarter, already mentioned, equities, bonds and asset management that shows an inflow of more than NOK 10 billion in the quarter.

And with those remarks, I will hand over to our CFO, Ida.

[Ida Lerner, executive]

Thank you, Kjerstin, and thank you, everyone, for listening in to this and also participating here today.

I would now like to turn to the second quarter in a bit more detail. We continue to see the good momentum that we saw already in first quarter in all customer segments, with profitable loan growth picking up with 1.7% in the quarter. We note the continued good growth, profitable growth in the personal customer segment, up 0.8%. Large corporate customers in Norway was up 1.8%, and large corporates, we noted a solid quarter with increasing lending volumes of 3.3%.

For large corporates, it's important to note that the lending growth came towards the end of the quarter and, therefore, does not fully impact NII in this quarter. We noted a large shift in our deposit portfolio this quarter, where low-margin deposits in large corporates were partially replaced by high-margin deposit personal customer segments. This meant that the deposit volumes were down by 1.8% in the quarter.

Personal customers up 5.9%, positively impacted by the annual holiday payment, which is made in June. Corporate customers in Norway was up 2%, with a continued positive contribution from the public sector. Volumes in LCI were down by 13.9%, reflecting outflow due to repricing of short-term low-margin deposits as well as one additional payment of the oil and petroleum tax this quarter. We continue to maintain a strong deposit to loan ratio in our customer segments of 73.4%.

The customer spreads are, as Kjerstin pointed to, stable, while the net interest margin is down by 5 basis points, now amounting to 185 basis points. The net interest margin is predominantly affected by the noncustomer-related other NII such as amortization effects, treasury as well as interest on equity, which is reducing this quarter, lending and deposit spreads, among others, impacted by the increase in average money market rates, where you see a positive effect of deposits as well as a negative effect on overall lending spreads.

In addition, we continue to see a fierce but rational competition in the Norwegian market also impacting our margins. The repricing announced following the Norwegian Central Bank's cut of key policy rate will have a full effect from the 25th of August.

NII was down by NOK 258 million in the quarter. This, we had a positive impact of an additional interest day by NOK 130 million. The lending margins are affected by the increased NOK money market rates and continued strong condition, as I mentioned earlier. This was partly offset by the increased spreads on deposit, but due to the fact that there was a shift in portfolio mix during the quarter, you will also see an impact of that. Since loan growth came in, in the later part of the quarter, average loan growth were lower, therefore, impacting NII volumes in NII.

The combined effect from spreads and volumes were NOK 108 million in the quarter. Additional elements impacting NII this quarter was front-loading of funding activity, interest on equity as well as amortization and fees that were coming down from a high level in the first quarter.

We delivered a strong quarter results within net commission and fees, with a solid performance across the board and from a very diversified platform. Income from Carnegie is, as Kjerstin pointed to, now fully integrated in our quarterly numbers and represent a step change in terms of the fee platform from now.

Real estate broking was up 4% from the corresponding quarter last year, reflecting a higher activity overall in the market. Investment banking was up by 51% from the corresponding quarter last year, driven by a strong quarter within equities and bonds, and this was accelerating during the quarter, also following the 2nd of April.

Asset management and custodial services was up by 69% from the same quarter last year. Assets under management had an uptick in -- asset under management had an uptick of NOK 95 billion during the quarter with a positive net inflow of NOK 10.3 billion. We're happy to see that the majority of our retail customers stick to their savings agreements. This is also reflected by the strong positive net inflow of NOK 4.5 billion in the quarter from retail customers and net inflow from institutional customers of NOK 5.8 billion.

We note continued strong demand for trade finance products, and that's where you can see the increase in guarantee commissions up by 13%. Money transfer and banking services was down by 20%. There was a stable contribution from money transfers but reduced income from banking services. Sale of insurance product was up by 10%, with a continued positive development in the defined contribution pensions as well as nonlife insurance products.

Now moving on to costs, which this quarter was impacted by the full integration of Carnegie, some one-off effects as well as overall higher activity. Costs increased by NOK 818 million from a seasonally low quarter in the first quarter.

Q1 numbers only included 1 month of Carnegie. With Carnegie now being fully integrated in our numbers, we note increased costs related to fixed salaries, variable salaries and depreciation in addition to one-off costs linked to the integration process. As mentioned last quarter, we estimate a one-off cost this year of around NOK 250 million. That means that there should be approximately NOK 100 million more to be taken in the 2 next quarter in relation to one-off costs.

Pension expenses are up by NOK 212 million, related to higher return on the closed defined benefit scheme. The scheme is, as you know, partly hedged, and you can, therefore, find a corresponding gain under net gains on financial instruments.

Portfolio quality remains robust and well diversified with 99.3% of the portfolio in stage 1 and 2. The personal customer portfolio, which accounts for approximately 50% of our exposure default, remains strong, and we do not see any negative development in that portfolio.

For corporate customers Norway and large corporates, impairment provision totaled NOK 203 million and NOK 462 million, respectively. Stage 3 impairment provision relates to customer-specific situations, but we're not seeing any systematic change or negative migration in any segment or geography in those portfolios.

We remain comfortable with our credit quality in the portfolio, but please bear in mind that losses will vary from quarter-to-quarter.

Now over to capital. Our core equity Tier 1 ratio remained strong at 18.3%, 180 basis points above the regulatory expectation. The core equity Tier 1 was positively impacted by profit generation of 35 basis points in the quarter, which was somewhat offset by the share buyback program, which we announced in June, accounting for approximately 40 basis points on the core equity Tier 1.

The combined effects of CRR3 as well as the Sbanken moving over to our IRB models was, as mentioned last quarter, almost neutral. As indicated earlier, we estimate a negative effect of approximately 60 basis points related to the increased risk weight floors on residential mortgages coming into play in the third quarter.

The leverage ratio remains strong at 6.2%, well above the regulatory requirement of 3%. With a core Tier 1 equity ratio of 18.3%, a leverage ratio of 6.2%, our capital position remains strong. We are well positioned to meet announced regulatory changes while, at the same time, continue to deliver on our dividend policy as well as supporting our customers in the years ahead.

Thank you for your attention. And with that, we open up for questions.

[Even Westerveld, executive]

Thank you so much, Ida and Kjerstin, and we will open up for questions from the audience and also from the online viewers.

Any questions from the audience? Thomas from SEB. Just wait for a microphone.

[Thomas Svendsen, analyst]

I have 2 questions. First, on the NII, this amortization effects on fees was within NII was strong in Q4 and even higher in Q1, and now they are coming down. So do you think they have come down to a more normal level? Or should we expect a further decline next quarter?

And the second question on commission and fees, this banking services that you pointed to us due to the decline year-on-year decline, could you give some more flavor on that? And also, will that -- this decline impact your commission and fee growth targets?

[Kjerstin Braathen, executive]

I'll do the first, and Ida can answer the second one. On amortization and fee income element in NII, it's typically an element that will vary from quarter-to-quarter. Over time, usually the quarter with the higher activity are the fourth quarter and the second quarter, and it's been a bit atypical this quarter with the first quarter being so strong and a slightly lower level in the second quarter.

Keeping also that activity grew towards the end of the quarter in large corporates, these fees are typically generated once we do and complete syndications as well as refinancing. So it's a bit hard to guide you specifically in coming quarters, but we can repeat that the activity level across large corporates is high and that we continue to focus on originate to distribute that typically provides a good contribution over time also in the amortization and fee part.

[Ida Lerner, executive]

And on the banking services, the reason why we're seeing a decrease in net income from banking services is because we have an increased cost associated with insurance, which is highly linked to originate and distribute as well, where it's more kind of capital optimization in the large corporate area, where we're also using insurance as being an important part of that. So that comes in on banking services, which means that there's a net reduction, but underlying income hasn't really changed to the same degree as you're seeing on the net numbers.

So I wouldn't change anything in terms of the overall picture and the contribution overall from commission and fees based on that.

[Even Westerveld, executive]

Yes. Next question is on the guy with the tie in the audience, Herman Zahl from Pareto.

[Herman Zahl, analyst]

You mentioned high activity following the rate cut in June. So I was wondering how you see the competitive environment in PC lending currently? And if you have seen any changes in behavior from the smaller banks in Norway following CRR3 being implemented in the quarter?

[Kjerstin Braathen, executive]

The competitive environment is fierce. And we are seeing signs that the smaller banks have input their competitiveness after the implementation of CRR3, but it's always high in Norway but intensifying slightly this first half where there is a lot of liquidity in the market. Even so, we already had a high activity in particular for financing certificates also prior to the rate cut, and the rate in particular, stimulated activity related to bank switching, and we saw a sharp uptick in a number of customers who showed an interest in taking their mortgage over to DNB.

So a very active market, a very fierce competition, but still a rational market overall. I think that's the most important message that the rationality in general in the Norwegian market persists and continues.

[Herman Zahl, analyst]

And then just since it's a bit more than a year since technical merger with Sbanken. And just thinking that -- are you -- and you mentioned, I think, some -- what you referred to as child diseases last year. How has the development there been since integration? And are you able to sort of leverage that brand when there's increased customer in the markets such as now?

[Kjerstin Braathen, executive]

A lot of the so-called child diseases have certainly been fixed and the liking has improved. And we are benefiting from a broader sector of offering, where we typically see Sbanken more attractive as a bank swapping offering and the DNB brand more competitive on buying new housing even. So we also now see the DNB brand being seen very attractive for people who are looking to move their mortgage. But definitely, there continues to be broader optionality and a broader competitive position across the 2 brands, and we will continue to work to differentiate among the 2 and improve the offering across both brands as we move ahead.

[Herman Zahl, analyst]

And one more, if I...

[Even Westerveld, executive]

Yes, please.

[Herman Zahl, analyst]

And then on your ROE target, above 14% until '27. Just given the interest rate expectations you showed here and sort of you are still very well capitalized, do you think the earnings part of that or the capital base, what levers are the most important to reach 14%, do you think? Or do you think it's -- are you able to reach 14% at your current capitalization, so to speak?

[Kjerstin Braathen, executive]

We maintain a clear ambition to deliver higher than 14% return on equity. Currently, we are delivering well above that. And even with an outlook that indicates 2 more rate cuts, we are comfortable maintaining our ambition to deliver above 14% return.

[Even Westerveld, executive]

The second question from Thomas.

[Thomas Svendsen, analyst]

Final question from my side on lending growth and capitalization. So have you considered speeding up the lending growth, for instance, outside Norway as a supplement to buying back shares as you're buying back these shares at a higher, higher price or currency these days?

[Kjerstin Braathen, executive]

I think our ambitions and guiding on lending remains intact. We still say 3% to 4% annually across the customer segments. But we have also shown that in selective years, we may grow a little bit faster. But it is a key element in our large corporate operations that we focus on a rapid turnover of capital and combine this with an increasingly attractive offering across our investment bank. That is the key provide a return on a very, very robust capital base, and we will continue to push for that.

So we are not being limited in terms of how much growth we can take. And indeed, we have specializations and competence in sectors also outside of Norway and the Nordics that are growing on the back of global trends at the moment, but we focus equally much on distributing that capital and raising capital in the market for these customers in addition to using our own balance sheet.

[Thomas Svendsen, analyst]

So on share buybacks, have you considered other...

[Kjerstin Braathen, executive]

We maintain our previously communicated strategy on share buyback and are not at a level where we have where we have considered to make any changes to that at the moment.

[Even Westerveld, executive]

Thank you so much. Thank you for your questions. I don't see any more questions. So I think we will wrap it up, and have a good summer, everyone. Thank you so much.

[Kjerstin Braathen, executive]

Thank you.