Danske Bank A/S (OTCPK:DNSKF) Q2 2022 Earnings Conference Call July 22, 2022 2:30 AM ET
Company Participants
Claus Ingar Jensen – Head of Investor Relations
Carsten Egeriis – Chief Executive Officer
Stephan Engels – Chief Financial Officer
Conference Call Participants
Johan Ekblom – UBS
Sofie Peterzens – JPMorgan
Namita Samtani – Barclays
Jakob Brink – Nordea
Omar Keenan – Credit Suisse
Robin Rane – Kepler Cheuvreux
Johannes Thormann – HSBC
Jan Erik Gjerland – ABG
Operator
Good morning, 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 our call today. My name is Claus Ingar Jensen and I’m 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 and we aim to keep this presentation to around 30 minutes. After the presentation, we will open up for a Q&A session as usual. And afterwards, feel free to contact our Investor Relations department if you have any more questions.
I will now hand over to Carsten.
Carsten Egeriis
Thanks, Claus, and good morning, everybody. 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 of energy supply, accelerated inflation and firm tightening of monetary policies in the U.S. as well as in Europe.
In these, even by historic standards, very volatile times, we focused and we are focusing 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’ve 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 the pace of interest rate changes, which have had a negative impact on trading income from primarily our rates business and our net income from insurance business in the form of negative valuation adjustments.
And on that basis, on the 10th of 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, and we now expect net profit for 2022 to be between EUR 10 billion and DKK 12 billion, based on lower-than-expected trading and insurance business income, as well as slightly higher costs due to sustained elevated remediation costs.
The second quarter marked a period during which the growth outlook for the economies in which we operate was revised down to, among other things, to expectations for a change in consumer confidence and a persistent 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 favorable 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 the business, and we’re happy to see our market share within some customer segments increased 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 Lake City [ph] Denmark, lending was up 4% from the same period last year, due primarily to demand from our corporate customers.
The good progress we’ve seen with our sustainability offerings continued. We have improved our green offerings to personal customers, and we’ve 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 previously mentioned, 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’ll 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, he will comment on the financial in more details later in this call, and we’ll 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’s business unit, we generally see good activity across the Nordic region, and we see momentum towards regaining our Danish retail position.
We’re working diligently on improving customer flows, and we’ve continued to see improvement. In terms of market position, we’ve improved our market share for bank lending to 19%, as bank lending was up 4% year-over-year. And the strong development in bank lending is partly as a result of recent remortgaging activity. And our customers’ preference for a dense 40 [ph] free 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-plus percent, which naturally reduces the average LTV ratio and, therefore, result 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’ll highlight later in this presentation.
We continue our challenger strategy in personal customer Nordic with positive trend in lending volumes, which were up 3% year-over-year in local currencies in both Sweden and Norway. And the traction we’re experiencing with home finance meetings and approval of our 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’ve maintained our strong relations with our customers as they navigate the current uncertainties at a time when supply chain challenges and commodity prices have a rapidly changing landscape. We’ve seen credit demand, and we have helped our customers with increased financing, along with more ancillary offerings, particularly 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 personal and business customers, we continue to enhance our allocation of resources through the investments we make in our digital solutions. And coupled with good traction and further innovative digital offerings targeted to our segments, I’m excited about the opportunities that lie ahead. And we now also have the organization set up fully up and running, and we welcome Christian Bornfeld and Johanna Norberg, to the ELT as a new heads of our new personal customers and business customers units.
Slide 3, please. Let’s 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 both the limited appetite for capital markets, but also our strategic ambition to grow in Sweden and also high activity across the piece.
In relative terms, lending volumes at LC&I increased 24% compared to the level of the year before. And the increase in lending volumes was especially high in Denmark and Sweden, where we’ve grown lending volumes by more than 30% year-over-year.
The strong lending volume, as well as higher deposit margins made a good contribution to NII, which increased 9% year-over-year. However, despite the increase in NII, the total income in the first half of 2022 was down 25% 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% from a high level the year before and 6% 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 we’ve 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 and 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 the prevailing market volatility. And Stephan will talk more in detail about the financial markets and also 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. And demonstrating our leading capital markets platform, we were selected as jointly manager for a next-generation $6 billion 20-year green bond issue and continue to be ranked number one among Nordic Banks according to the Bloomberg’s League tables for sustainability linked loans and sustainable bonds.
Our asset management activities were affected by financial market conditions, as assets under management decreased. However, fee income and asset management increased slightly compared to the first half of 2021, driven by higher performance-related fees.
Let’s focus on our insurance activities in Danica. At Danica, the result for the first half of this year was significantly lower than 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 also 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 results in the Health and Accident business. Please note that the gain from the sale of Danica Norway of DKK 0.4 billion is included in the results for the first half ’22.
The underlying business in Danica continues to develop positively. We saw continued growth in premiums from the level in the same period last year, as well as also an improved underlying Health and Accident business for which we saw 25% fewer claims and improved recovery rates driven by preventive efforts.
Slide 4, please, and then I’ll hand over to you, Stephan.
Stephan Engels
Yeah. Thank you, Carsten, and good morning from my side. As Carsten just mentioned, we saw 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 volumes and resilient income streams from our diversified business model.
Income from core banking activities performed well and was in line with expectations. NII was up 4% 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% from the preceding quarter, as a result of yet another quarter with an increase in lending, a positive impact on deposits from recent repricing actions and higher short-term rates. The improvements we’ve seen in lending margin continued in Q2, which I will comment on in more detail 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 activity and seasonally higher refinancing activity in Q1.
Net trading income came in significantly lower than the same period last year due to mainly very challenging market conditions for our rates business, whereas underlying income from our customers held up well despite the turbulent financial markets. Relative to Q1, income was lower as market conditions for our rate 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 higher premiums and fewer claims. However, net income from insurance business came in significantly lower to negative investment results mainly on life insurance products where Danica has the investment risk. The results for Q2 includes the gain from the sale of Danica Norway of EUR 0.4 billion.
Other income amounted to DKK 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 costs for AML, sustained elevated remediation cost and the Swedish bank tax counterbalanced the one-off we booked last year. Overall, we continue with good progress with reducing underlying costs compared to last year, as well as the preceding quarter.
Loan impairment charges about a DKK 2.2 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 DKK 4.5 billion, down from DKK 5.9 for the same period last year.
Slide 5, please. Now let us turn to the underlying development and net interest income for the group. Overall, NII saw a healthy improvement of 4% 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 – base rate increases and the associated implementation of price adjustments.
Compared to the preceding quarter, NII was up 3%, 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 in year in order to meet our funding need primarily by issuing covered bonds and Nordic [ph] currencies, given the heightened level of uncertainty in the financial markets and the 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. First, for the first half year of 2022, we were pleased to note that fee income maintains 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 market-related activities.
This was especially visible in terms of lending fees, which were up 8% and activity-driven fees, which were up 20% 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 market fees in the first half of ’22 were largely in line with the same period last year.
Relative to the preceding quarter, total fee income was around 7% 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 characterized by an extraordinary market situation across our main fixed income markets in DKK, Euros and SEKs. As you know, the change in inflation led Central Banks to tighten more and sooner than expected. The large subsequent requires [ph] a repricing of rates and credit spreads led to extraordinarily high volatility and low liquidity in the Nordic fixed income markets.
In these challenging environment, we continue to support our customers. Against this backdrop, we today report negative trading income for the second quarter, primarily related to losses in our LC&I rates and credit fixed income operations.
Group trading income for the first half of the year came in at DKK 0.2 billion and was significantly – significantly impacted by a negative result of DKK 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 DKK 740 million. Income from our currency businesses and from customer activity in 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 the slightly higher cost guidance for the full year. We communicated in our company announcement on July 10.
Additionally, our cost base this year is also affected by the new Swedish banking tax, partly normalization of traveling, adjustment to amortization of projects and a onetime IT expense related to re-contracting Overall, all of these have been absorbed by our ongoing effects to simplify operations and improve efficiency.
In that regard, we continue to see an improvement in underlying costs in form of lower staff costs, as a result of a decline in total numbers of FTEs. Adjusted for the planned FCP Financial Crime Plan ramp-up, we have seen a 7% decrease in FTEs since the peak in 2020. Lower cost for our transformation, which is progressing according to plan also contributed to the progress compared to the same period last year.
While the reason – with the reasoning I just outlined, we remain confident that our cost trajectory is on track as we look towards 2023. The elevated levels we experienced in this year in many cases, characterized by cost items of a one-off nature. And as such, the cost taker we expect to see from here on and through 2023, continue to be in line with our targets.
Slide 9, please. Now let’s turn to credit quality and impairments. Actual single-name credit deterioration and individual impairment charges remain very modest. And we saw additional single-name reversals, which this quarter were primarily related to the oil and gas segment.
Given the uncertain macroeconomic outlook, we have minor changes from our model adjustments this quarter, which coupled with additional post-model adjustments to further account for potential unforeseen implication that could impact our loan book. This means that we ended the quarter with an annualized loss level of 4 bps for the group.
The model adjustments to our macro scenarios I just mentioned has been done to reflect the increasing inflationary pressures and implications with the potential for more prompt policy actions in terms of interest rates, which drove additional impairments of DKK 0.2 billion in Q2. This came in addition to the DKK 0.4 billion we had already taken in each of the two preceding quarters.
While we remain comfortable with the quality of our well-diversified loan book, some sectors will undoubtedly be impacted by the rapidly changing operating environment. And as such, additional DKK 0.45 billion of post-model adjustments were implemented to cover this uncertainty, taking our total PMAs to DKK 6 billion. This now includes an adjustment in personal customers of DKK 250 million relating to potential lower recovery rates for customers subject to debt collection.
So halfway through the year, we take comfort in our well provision position and the additional PMAs we have in place to account for the current uncertainties. Given our strong credit quality, we continue to expect that impairments in 2022 will be below the around 8 basis point loan loss level we consider to be our normalized level. But to further address some of the higher risk sectors, let’s go to Slide 10, please.
Now let me provide some additional context to some of the portfolios that are typically exposed to changes in the macroeconomic picture. Firstly, our commercial real estate book is well diversified and characterized by very modest exposure to property developers.
In general, credit growth relating to commercial real estate has been balanced up until now due to our credit risk management practices, which have included overall and sub-segment caps as well as concentration limits.
In addition, our underwriting standards focus on cash flow and debt service capabilities, which include interest rate sensitivity in addition to prudent LTVs at origination.
Our agriculture portfolio has a high proportion of secured lending via RD and has been significantly derisked when comparing historically. Furthermore, the exposure is well diversified across sub-segments, which mitigate potential risk when commodity prices move rapidly or when market dynamics are changing in general.
Also for this portfolio, we have a specialized unit managing the exposures and the rigorous underwriting standards have also resulted in a high degree of collateralization.
Finally, property exposure related to our retail customers is supported by the strong household finances and continually very low unemployment across the Nordic region. So while inflation does affect the disposable income to a certain extent, households’ ability to service the debt obligations remains intact.
In addition, the home equity is very high and our RD – end of our R&D book 85% is fixed for 5 years or more. And though some customers are facing higher rates on their variable products, the original credit approval depends amongst other things, on prudent debt to income assessment and the ability to serve a mortgage loan during stress.
For all three portfolios outlined here, we have substantial PMAs in place to cover any tail risks that could emerge, and this further supports our solid balance sheet. And hence, we are reassured by our strong asset quality.
Slide 11, please. Now let’s take a look at our capital position. Our reported CET1 capital ratio came in at 17.1%, mainly as a result of higher REA as a consequence of higher market volatility and deductions related to Danica. REA increased slightly in the second quarter, as the increases in market risk following higher volatility in the financial markets in Q2 was partly mitigated by lower credit risks.
In our capital planning, we remain mindful of the regulatory landscape, including the announcement in Sweden that the counter cyclical buffer will be raised to its normalized level of 2% by the end of the first half 2023. Danske Bank’s leverage ratio was 4.7% according to transitional rules and also under fully phased-in rules.
Slide 12, please. And then some comments on the revised financial outlook for 2022 that we announced on the 10th of July based on challenging financial market conditions, and made despite the positive development in our core banking activities that we have presented in this call. We, therefore, adjusted the net profit guidance for 2022 from DKK 13 million to DKK 15 million to now DKK 10 billion to DKK 12 billion, including the gains from MobilePay, Danske Bank International and Danica Norway.
As it appears from the main financial report we presented today, we see good traction for our income from core banking activities. And on this basis, we continue to expect this income to be higher for the full year.
Higher net interest income driven by good economic activity will more than offset lower capital markets and investment related fee income. The announcement from yesterday’s Central Bank rate hikes will provide further tailwind to our net interest income.
Net income from insurance business and trading activities are expected to be below normalized levels based on the significantly lower income observed in the first half of the year and expectations for a modest income recovery in the second half of this year. This is, of course, subject to market conditions and with a degree of uncertainty that is higher than usual.
For operating expenses, we now expect costs in 2022 to increase from around DKK 25 billion to around DKK 25.5 billion, driven continually elevate – driven by continually elevated remediation cost. We will maintain a strong focus on cost management initiatives in order to continue the structural decline in underlying cost we consistently have delivered during the last couple of quarters.
Finally, we maintain our expectation for loan impairment charges to be below normalized level, given overall strong credit quality for the remainder of the year.
Slide 13, please. And back to Carsten.
Carsten Egeriis
Yeah. Thank you, Stephan. Before we go to Q&A, I would like to wrap up by taking a step back and shortly reflect on the substantial progress we made since we launched our 2023 Better Bank agenda.
The journey that Danske Bank has been on since 2019 makes me confident that we have the platform and the advisory services to fulfill our potential, as we operate with a more robust and a more efficient organization and improved commercial momentum, including our competitive edge within sustainable finance.
After I took over as CEO, we decided to adjust our plan for 2023 to reflect mainly the extended scope of our compliance and financial crime prevention agenda. And while the first half of this year has been characterized by rapidly changing economic landscape, where we have seen significant financial market volatility impacting trading and insurance income, the strength of our diversified business model and the traction we’re gaining on our core banking operations makes me confident that we will deliver on our financial ambitions going forward.
Furthermore, having optimized the organization and as we build on our solid foundation we are approaching a more normalized state of business operation, which will undoubtedly enable us to sharpen our commercial execution even further.
So going forward, we will focus on continuity and sharp execution of our commercial priorities to enhance our value proposition to customers and to continue to play a key role in the society we operate and to the benefit of all our stakeholders. All these factors enable strong underlying traction, as we position ourselves to deliver on our 2023 ambitions.
And with that, I will hand it back to you, Claus.
Claus Ingar Jensen
Thank you, Carsten. Those were our initial comments and messages. We are now ready for your questions, and please limit yourself to two questions. If you are listening to the conference call from our website, you are welcome to ask questions by e-mail. And the transcript of this conference call will be added to our website within the next few days. Operator, we are ready for the Q&A session.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Johan Ekblom from UBS. Please go ahead.
Johan Ekblom
Thank you very much. Maybe just starting on net interest income. So after the hike we saw yesterday and the pricing action you took, I guess, we’re getting back to zero rate quicker than we had expected. Can you talk a bit about how we should think about the rate sensitivity for the 50 basis points we had yesterday where there is a full pass-through on deposits and how that changes for subsequent hikes that are expected later in the year?
And the second question will be on the cost side. I think in the bridge that you’ve helpfully provided, there’s a net DKK 0.1 billion savings from inflation and kind of underlying savings. What’s your thinking around inflation for next year in terms of what are you seeing on wage negotiations and kind of general expenses? Just to get a sense for what your baseline is on the kind of gross basis there? Thank you.
Carsten Egeriis
Yes. Thanks, Johan. I’ll just make a couple of comments, and then I’ll also pass on to Stephan on some of the inflation thinking and assumptions. On NII, our expectation is that for the rest of 2022, the 50 [ph] rates changed yesterday by ECB and also by the Danish Central Bank is between DKK 330 million and DKK 340 million in 2022 and then around a full year impact of around DKK 800 million.
And then if we sort of look at the group level, our expectation is that 25 bps higher from here on is around DKK 800 million to DKK 900 million on average for the next 1%. So there will be some convexity, if you will, a little bit lower for the first 25 and then it will be slightly increasing from there. And that’s why I gave the range around DKK 800 million to DKK 900 million per 25 bps over the next 100. But again, for the rates hike yesterday, 330 to 340 in 2022 and DKK 800 million full year.
Then on cost, just a couple of points. I mean we have this 0.1 as you say. You’ll have seen that in the first half and also quarter-on-quarter, we’ve solely been able to in line with automation and digitization and improvements we’re making underlying to take down underlying costs. And the assumption is that, that will continue.
So if you sort of look at the first half of underlying cost savings, which I think you can see in one of the bridges, you can sort of assume that, that will be other then slightly higher rate going into 2023. And then, of course, inflation will offset that.
It’s too early to say exactly how much pressure there is from wage negotiations. There will be some, but Stephan, perhaps you can just talk about the inflation assumptions and how we think about it.
Stephan Engels
Yeah. Johan, we have obviously taken, call it, split inflation assumptions, both by, call it, cost line. So the assumptions around mainly wage inflation, which is basically 60%, 65% of our total cost line. We expect somewhat lower inflation numbers in Denmark or rate – or wage inflation numbers in Denmark, I don’t want to give the number here because I don’t want to disturb ongoing negotiations.
And clearly, higher numbers in Lithuania and also in India, given that we do see quite some attrition typically for these, call it, near shoring or outsourcing places. We already see some inflation this year because whenever you replace an existing position by somebody new you are seeing more kind of a two-digit inflations on loans and wages already.
So I would – if I would give you summary assumption on what is the underlying number, some, I would say, somewhere between 4% and 5% already in. We – it remains to be seen how things pan out going forward. And in that sense, some of the, call it, net NII inflow will probably be partly countered over specifically 23 by somewhat higher inflations, for example.
Johan Ekblom
But the 23.5% around stance, right?
Stephan Engels
Yeah.
Johan Ekblom
Okay, thank you…
Stephan Engels
But so far 23 – but so far, just to be explicit on that as well, so far, 23.5% clearly is the holding point. And again, that entails some inflation assumptions. If that inflation come in higher, we need to revisit our possibilities. But 23.5% is clear the goal and then let’s see how inflation pans out.
Johan Ekblom
Thank you.
Operator
The next question comes from the line of Sofie Peterzens from JPMorgan. Please go ahead.
Sofie Peterzens
Yeah, hi. Here is Sofie from JPMorgan. So on the capital slide, you have DKK 200 million deduction – sorry, 200 basis points deduction from Danica, can you just clarify what this Danica deduction is and how it actually works?
And then my second question would be on your capital return policy, [indiscernible] the second quarter interim dividend as well. How should we think about the potential fine from the U.S.? How close are we and kind of once the fine is behind us will the capital return policy normalize? Thank you.
Carsten Egeriis
Thanks, Sofie. I’ll let Stephan talk to the Danica deduction. Just on the question on – on the ongoing discussions with U.S. and Danish authorities. I mean we can’t say anything at this stage. There’s nothing new to say. And therefore, we can’t say anything at this stage around timing or outcome.
And clearly, when we do finalize, then we will come out and talk to our updated capital situation. But I mean, the dividend policy of 40% to 60% has not been changed. Stephan…
Stephan Engels
On Danica, so Danica’s deduction is calculated as the difference between Danica’s capital base and Danske Banks Holdings. Danica holding of Danske Banks shares [ph] and so on and so on. So the main drivers at the Danica level is primarily due to an increase in market risk and to changes in interest rate scenarios. And also to a certain extent by the decrease in Danica’s own funds, which is basically driven by the present value of future profits. So it’s an extremely technical matter and – but that are the main drivers.
Sofie Peterzens
Okay. Thank you. And maybe just to clarify on Danica. So if I want to forecast this by going forward, like what ratios in Danica should I look at, is it the solvency ratio for Danica that fall from to 184? Or what’s kind of a good proxy for this? Or is it allocated capital that increased or how should I think about?
Stephan Engels
I would, in general say, again, it depends on how markets will develop going forward. If we are in a somewhat more, call it, stable to more within expectation type of environment, I would think these deductions should be pretty stable.
So the movements which we saw mainly in Q2 are obviously driven what has impacted also the trading line mainly. Again, it’s a very technical matter. And has a number of assumptions, but in general, I would think stable is the best I can offer for now.
Carsten Egeriis
If I may add just a little technicality, Sofie, this has nothing to do with the allocated capital that we have for Danica because there has been an increase during the quarter, but that is for other reasons. So you should not look at allocated capital when you were looking at the deduction in our capital ratio.
Sofie Peterzens
Okay. Yeah, maybe we can have a call offline, I’m still not 100% sure about this. But thank you.
Carsten Egeriis
Yeah.
Operator
The next question comes from the line of Namita Samtani from Barclays. Please go ahead.
Namita Samtani
Hi. And thanks for the question. My first one, back to the chart explaining how Danica is going to reach the DKK 23.5 billion cost target. But I don’t see a similar slide to revenues. So does that revenue guidance of DKK 43.5 billion for 2023 still stand?
And then secondly, just on the cost. Why should we believe 2023 is the year remediation and legal costs will go down for Danske Bank. I think you were previously guiding to DKK 24 billion [ph] decline in 2023 versus 2022 and now it’s an even bigger decline expected at DKK 1.2 billion if we include both remediation and legal. And also what type of gross cost savings are you assuming to get to the 2023 cost target? I think you previously said around DKK 1 billion. Is it still the same? Thanks.
Carsten Egeriis
Thanks for that. I think on revenue, yes, we continue to feel comfortable about the revenue plans for 2023 and again, feel that we see good momentum across all the business lines.
On cost, the question around why we should believe that the remediation and legal cost go out. Obviously, this is an assumption that we are making as management. And that’s because one, we have made a strong commitment to our customers to get a solution for the debt collections case, which, of course, is a big part of the cost out here, the DKK 800 million and then the legal costs are largely related to the ongoing Estonia matter. And again, it is an assumption that that can be done this year. But again, that’s an assumption because we cannot say with – of course, with conviction anything on timing at this stage.
But as you know, we announced that the discussions had started end of April. And therefore, we thought it was a fair assumption to think that could be done this year. And then there was a question around the cost saving assumption of DKK 1 billion, Stephan, did you pick that up? Or do you need that to clarify the question, do you want to just repeat the last question around the DKK 1 billion.
Namita Samtani
Yeah, sure. Yeah, I think in the last quarter or maybe the quarter before that, you guys were talking about DKK 1 billion cost savings in 2023 compared to 2022. I just want to know if that still stands?
Stephan Engels
No. I think what we said before, and that’s what we still have as part of the net underlying service, including inflation part that we expect underlying costs to meet our target, which means process optimization, digitalization, workforce footprint, non-personal costs and all the other stuff of roughly DKK 0.6 billion as a takeout in ’23, if you only look at that.
Namita Samtani
Perfect. Thanks very much.
Stephan Engels
And then on the – and then just to be complete, then you need to add MobilePay and Lux, which will be not on the cost line anymore in 2023, assuming that all that gets finished, Lux is already finished. We expect MobilePay to finish in the second half of the year. So these two together add another DKK 0.2 billion. So that is, if you want, so underlying cost takeout of 0.8 already between these two lines. And then there are some other moving parts, including transformation cost of 0.4, which you can also see on the slide on Page 8.
Namita Samtani
Thanks very much.
Carsten Egeriis
Thank you.
Operator
And the next question comes from the line of Jakob Brink from Nordea. Please go ahead.
Jakob Brink
Thanks a lot. And good morning. And the first question is regarding market shares and you’re working in the initial part of your presentation about you now having posted 15% to 20% or so lower outflow than last year in personal customers matters, but looking at your own market share graphs, it actually looks like the market share deterioration in Denmark has accelerated in the second quarter. Maybe that’s due to business customers, but [indiscernible] basically right the same that you’re taking market share. So can you explain that?
And then secondly, on the ROE target next year. Just trying to take your assumption implicit or residual in assumptions of the second half of 2022, given your full year guidance. It looks like you have a run rate ROE assumption of around 7% for the second half, and obviously, cost will be lower next year, according to your plan, but also the gains from MobilePay will not be there next year? And I guess, losses could be higher. So could you maybe just again fill in the gaps, how to get from let’s say, maybe 7.5 to 8.5 next year, please?
Carsten Egeriis
Yeah, hi. Let me just answer on the market share piece. And these are obviously numbers that are also available from the Danish Central Bank. If you break down the market share into bank lending versus mortgage lending. Then if you take it end of the year last year to year-to-date this year, Danske Bank has gained market share in private bank lending and has gained market share in corporate bank lending. And we’re proud of that. And that shows, I think, the ongoing focus on regaining share and momentum.
We’ve also lost significantly lower amount of customers in Denmark. And in fact, if you look at sort of our focus segments, which are the advisory heavy segments of our customer base, we have not seen customers leave us year-on-year for the first time in a long time.
The overall market share is heavily impacted by ongoing stock loss in market share and mortgages. But if you look at Q2, and again, these numbers are available. If you look at Q2, net new loan market share for Lake City [ph] Denmark, we’re at 15.2% in Q2 versus, for example, 9.6% last year. So we’ve actually seen now five, six quarters straight of relative improvement in that new loan market share in RD.
But it is clear, of course, that given that the net flows are so much lower than the stock flows, the overall market share is impacted by that mortgage piece. And therefore, we, of course, focus on progression, progress and seeing that new net loan market shares are improving. And again, we’re happy to see that trend. So that is what we relate those comments back to Jakob.
On the ROE run rate, I wasn’t entirely sure on the different pieces, but Stephan, maybe you can – I think the key question is how do we get from the second half run rate ROE to 8.5% to 9%?
Stephan Engels
Yeah. And Jakob, I think if you bridge from 22% to 23% on the ROE level, I think it’s fair to assume that we cannot sell MobilePay as well as Lux and Danica again, Danica Norway again next year. But we also, in all honestly, do not expect to see the same kind of valuation losses and trading results that has impacted Q1 so heavily. So I think that is part of the starting point discussion on where do you think you end up in ’22 in a kind of run rate model.
The second part of the equation is then obviously, 2023. As Carsten just said, we remain comfortable with our DKK 43.5 billion assumption. And in that sense, the latest rate hikes provide some tailwind to that, obviously. We have just reconfirmed our DKK 23.5 on the cost side. And then the third part of the equation that you need to keep in mind that we have guided for, I call it, normalized capital ratio in 2023 around 16%, then that obviously will help the equation in a way also.
Jakob Brink
Okay. Thanks for that. Just on the first question, Carsten, you said that the stock impact is the key negative. Do you have any overview of how much of that sort of potential continued negative, you will see, i.e., the clients, I guess, that has moved their bank loans already or banking from Danske, but still have the mortgage loans. Did you have any sort of picture of how much more to come?
Carsten Egeriis
No, I think the key thing here, again, is that during ’19 and ’20, the net new loan market shares have been significantly below the stock market share, right? And that’s – those are the improvements that we’re making now. But even with 15.2% net new market share in Q2. And you may know this changes through the year because of the different refinancing amounts.
So I always compare quarter-on-quarter, so you compare apples-to-apples, and that’s where I’m saying for five, six quarters straight now, we have improved our net new market comparing like-for-like. But clearly, even with those market shares of, again, 15% this quarter, you still reduce stock market share.
But that does not mean that we’re losing, as I said before, we’re losing significantly less customers. And again, in our advisory heavy segments, we actually are not losing customers year-on-year.
So when you see the trajectory in terms of customers coming in and customers going out, as well as the improvements that we’re seeing in bank loans and RD, we feel it’s going in the right direction. But the overall stock market share will continue to fall for a bit, right, because the net new market shares on mortgages are just lower than the stock.
Stephan Engels
But we are working on it, as you can see.
Jakob Brink
Yeah, okay. I get it. Thanks a lot. Thanks.
Operator
And the next question comes from the line of Omar Keenan from Credit Suisse. Please go ahead.
Omar Keenan
Good morning, everybody. Thank you for taking the question. I understand you’re targeting the 16% common equity Tier 1. And I just wanted to ask a follow on from Sofie’s question. Can you discuss your views on the look-through CET1 hurdle and what do you see further on the regulatory front from RWAs maybe in Basel IV. And the reason I’m asking the question is, I want to understand the available capital resources to meet a fine net of any other two add-ons that might be there already for fine as well? Thank you.
Stephan Engels
Let me try to offer at least some answers to your question. With respect to Basel IV, I think we have said already over the last quarters that the implementation of the EBA guidelines that we have been doing and that have led to quite some real inflation over the last couple of quarters.
From our point of view, covers at least the first stage of the Basel IV implementation. So in that sense, we do not expect, at least as per now any further effect on our, call it, capital base from that matter.
Secondly, the – if we look at ll23 and similar to what we have said earlier on legal cost, assuming that the Estonia matter has put to rest, that also is reflecting in a way the 16% assumption, which means that whatever the fine may look like. And again, we can say anything, we don’t know anything or we don’t have anything to offer on that matter right now.
That will obviously be driving partly or totally or whatever, and I don’t, again, want to give any indication the excess capital. And then once that matter has been hopefully solved at some stage, I think then we can talk to more detailed action. But for now, I would think it’s far too early.
Omar Keenan
Okay. So the 16% hurdle is a look-through number, whatever happens with the fine?
Stephan Engels
That’s after the fine, yeah.
Omar Keenan
Yeah. Okay. Okay, understood. Thank you.
Operator
And the next question comes from the line of Robin Rane from Kepler Cheuvreux. Please go ahead.
Robin Rane
Yes, good morning. And thank you for taking the question. So with the increase from the Danish Central Bank comment yesterday, you increased the deposit rates for customers now paying negative deposit rates. Given that banks in Denmark have implemented this when negative rates have been negative, how do you think the banking systems ability to keep rates closer to zero when rates go beyond zero and in turn positive. So I mean, how do you see deposit rates is developing when rates are positive?
And then secondly, on corporate margins, I mean, we have seen corporate bond yield spreads widened during spring and keeping this will eventually maybe help corporate margins on new lending? Or have you seen the dynamic there? Thank you.
Carsten Egeriis
Thanks for that. I’ll start and then Stephan, you can add. So yesterday, we passed on the 50 bps, so – for personal customers in Denmark. If you have more than 100,000 in deposits, you still pay a minus 20 bps rate.
And then the question is how will pricing on deposits, I took that first question developed as we see rates go above zero. And look, obviously, we’re obviously very careful around not price signaling. But I think there is historical kind of views on how pass-through rates develop. And those are obviously the various different assumptions that we use in our NII sensitivities and we gave those NII sensitivities earlier in the call.
Corporate margins, clearly, a risk, higher-risk macro scenario will typically drive lending towards probably more shorter term, more higher loan-to-value on the mortgage and real estate side, probably also some rating migrations and all those things, I would expect to have some upward pressure on margins. Stephan, I don’t know if you wanted to add on any of those two.
Stephan Engels
Perfect.
Carsten Egeriis
Hopefully, that answers.
Robin Rane
Okay. Yes. Thank you very much.
Operator
The next question comes from the line of Martin [ph] from SEB. Please go ahead.
Unidentified Analyst
Thank you. A couple of questions from my side. The first one being on your thinking around deposit margins yesterday and why you chose to follow on one-to-one rather than maybe keeping some of your deposit margin. I guess the deposit margin has been sort of a sector issue many, many years and you still earn far less on deposits than compared to what you should, that will be my first question.
And second question goes on the trading and net insurance loss. When I look at the volatility in your earnings compared to peers, it seems to be quite a lot higher. Are there any thoughts going into this? And then my last question on funding, and specifically AT1 and T2 funding, what are the plans here?
Carsten Egeriis
Hi, Martin, thank you for those questions. Look, on the deposit margin, we have a – we set a margin to the actual rate, right? So now we’re charging 20 bps on above 100,000, which, of course, is a margin to the 10 bps that the Danish Central Bank has. So we’ve maintained the margins and just passed on the rates trade, and we believe that, that is appropriate.
On the trading and insurance side, I think on the insure investment loss actually when you look at – and it’s always hard to make comparables. But from the peers that have been out on the insurance side, we don’t believe that we’ve seen higher insurance investment losses at Danica.
On trading, clearly, we saw higher losses than peers on trading. And when you look back and you look at the positioning of our trading business, we have about a 50% market share in Denmark on [indiscernible] on state bonds as well. And in Sweden, it’s probably 30% to 40% market share.
So we are significantly larger than our peers in fixed income. But when we look ahead, wider spreads, higher rates and also steeper curves should be very supportive for our fixed income franchise. And despite the significant derisking that we did towards second half of June and into July, we feel very comfortable with the second half assumptions and also the 2023 assumptions on income also based on what we’ve seen month-to-date in July. But obviously, it’s early days still. And then, Stephan, perhaps you could comment on the funding question.
Stephan Engels
Yeah. As I stated earlier, we have been active in the funding markets during the last quarter. We have been very active in the preceding quarters, also expecting or preparing for probably a period where we want to be a bit sidelined also due to the Estonia matter.
On AT1 and Tier 2 in specific, there is nothing as per now, that I think we are announcing or having on our plans at all, given that the total capital position, as well as the core Tier 1 position are both comfortable.
Unidentified Analyst
Okay. But as far as I can see on the funding side, you do have some space in both the AT1 and T2 book, what also I’m referring to, Stephan, is that and I guess in previous conversations with you, I mean, I guess there’s been a clear hint that whatever excess capital may be Danske Bank would be look at post a settlement. And my thinking is, do you think that the Danish FSA is going to – going to dimension to fill up those two buckets before you’re able to pay out any excess capital? Would that be a fair assumption…
Stephan Engels
I do get your question. Jakob [ph] don’t get me wrong, but I think we are now somewhere on the border line between guessing and crystal ball. So I think we are all well advised to see what the future holds and then let’s see how we can deal with that.
Unidentified Analyst
All right, Stephan. Thank you.
Operator
The next question comes from the line of Johannes Thormann from HSBC. Please go ahead.
Johannes Thormann
Morning, everybody. Johannes Thormann, HSBC. One follow-up question, first of all, on the trading losses. You just talked about that, you have derisked the portfolio massively. How much have you reduced your inventory? So that’s my first question.
And secondly, on the costs, you gave some bridge in terms of where you think the cost savings will come from legacy cases, legacy legal cases. Can you probably help us understand how it will impact the different cost lines like personal IT costs and so on because IT costs for example, we only see rising over the last quarters. And – or will these falling or going away legacy legal costs mainly affect other costs? Thank you.
Carsten Egeriis
Yeah. Thanks for that. No, I think on the – I mean, we don’t report on the inventories in our trading books. But again, I can confirm that we have substantially derisked our positions on the back of this volatile environment and being cautious. But again, what I can say is that July month to date looks in line with sort of income expectations, taking all that into account and despite the derisking of the book.
Then I didn’t catch the whole question, but let me give it a stab and then Stephan, you can also come in. The remediation costs, the large part of the remediation costs are really associated with two cases, the debt collections case and then the AML case. And the cost around the AML case is legal costs and predominantly external legal costs, and that’s the DKK 400 million that we alluded to.
And then the cost around the debt collections cost the DKK 800 million that you see here is mostly related to external support to clean data, to help do calculations, to help look at how we compensate and so on and so forth.
So there is sort of limited, if you will, additional IT costs as such related to that. Then I think you had a cost on sort of IT costs more generally. And I believe you said increasing IT costs. And I don’t know, Stephan, if you want to just comment on that.
Stephan Engels
No, I happily comment on that. There’s two issues to mention here. One is we did a re-contracting of our – of, call it, a main component of our IT, which had a one-off costs in Q1, which is DKK 50 million roughly. And we expect that to coming back in a way by benefits from lower cost of that part of the outsourcing or the re-contracting going forward.
And then IT costs were also slightly affected by different dynamics in capitalization and amortization of some of the IT costs. You know that we have a relatively strict approach to capitalization, which then is also visible in the very small amount of intangible assets, which gets deducted from capital anywhere.
Johannes Thormann
Okay. Thank you. And one question on the legal cost or external legal costs. Is it fair to assume that they will mostly go out of other operating expenses or anywhere else?
Carsten Egeriis
No, they are allocated on the respective, call it, responsible ELT members. So in that sense, they are part of legal cost. And those are also allocated largely to the segments.
Johannes Thormann
Okay.
Claus Ingar Jensen
Operator, can we have the last question, please?
Operator
The last question comes from the line of Jan Erik Gjerland from ABG. Please go ahead.
Jan Erik Gjerland
Yes, good morning. And thank you for taking my questions as well. Just a follow-up on Omar’s question regarding the CET1. If you look at your Page 11, you say that 14.4% is your fully requirement look through. What’s the difference between the 14.4 and the 16 is my first question.
And secondly, the DKK 10 billion, you sort of say you have implemented into your a fine level into your 17.1%. Is it taking as added REA or is it a deduction in the capital level? Thank you.
Stephan Engels
Well, I think to answer your first question, the 16% is our capital target. The 14.4 you can see in the presentation is the regulatory fully phased-in CET1 requirement. And then I didn’t get your last question. Could you repeat?
Jan Erik Gjerland
You say in your report that you have some DKK 10 billion provision inside your say, 17.1% capital target or capital level. Could you elaborate where it is and how it is calculated?
Stephan Engels
Yes. If you look at – again, look at Slide 11, in the regulatory fully phased-in, the DKK 2.4 billion for the 2.4%, as you can see on top of the 12%, that’s the Pillar II add-on for Danske Bank. And in that add-on, the DKK 10 billion that you are referring to is included.
Jan Erik Gjerland
Okay. Thank you. Just one follow-up then on the 16%. Is that included and fully phased-in constantly [ph] buffers in the Nordics and also Denmark. And what kind of level are you – that expected to have, including in those levels?
Stephan Engels
Yeah, it’s taking the buffers as we know them today. They are included in that number.
Jan Erik Gjerland
Okay. So not any hikes from here?
Stephan Engels
No, I’m not sure what you mean about hikes because we know where the countercyclical buffer is and we know that they are almost fully utilized by the authorities. So there is no further buffers coming in, in our calculations here.
Jan Erik Gjerland
Okay. So the 60% is taken care of the fully phased-in, in the Norway and Sweden, to 2.5 and 2 percentage points each?
Stephan Engels
Correct.
Jan Erik Gjerland
Okay. Thank you.
Carsten Egeriis
Okay. Thank you very much, everybody, for listening in today and for your questions. And as always, you’re welcome, of course, to contact Claus and our Investor Relations department. Thanks very much.
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