Danske Bank A/S (OTCPK:DNSKF) Q3 2022 Earnings Conference Call October 28, 2022 2:30 AM ET
Company Participants
Carsten Egeriis – Chief Executive Officer
Stephan Engels – Chief Financial Officer
Claus Ingar Jensen – Head of Investor Relations
Conference Call Participants
Jakob Brink – Nordea
Sofie Peterzens – JPMorgan
Martin Birk – SEB
Riccardo Rovere – Mediobanca
Jan Erik Gjerland – ABG Sundal Collier
Johannes Thormann – HSBC
Maria Semikhatova – Citigroup
Claus Ingar Jensen
Welcome to the conference call for Danske Bank’s financial results for the first nine months of 2022. Please be aware that due to the company announcement number 15 from this morning, this call replaces the conference call plan for Friday morning. My name is Claus Ingar Jensen and I am head of Danske Bank’s Investor Relations. With me today, I have our CEO, Carsten Egeriis; and our CFO, Stephan Engels.
In today’s call, we will present Danske Bank’s financial results for the first nine months of 2022. We aim to keep this presentation to around 30 minutes. After the presentation, we will open up for a Q&A session, as usual. Afterwards, feel free to contact the Investor Relations department if you have any more questions.
I will now hand over to Carsten.
Carsten Egeriis
Thank you, Claus. I would also like to welcome all of you to our quarterly conference call, which we hosted a day before scheduled due to the sizable provisions related to primarily the Estonia matter, which we have booked with effect in the third quarter. And I will address this a little bit later in this presentation but I wanted to start with comments related to our operating environment and our financial performance.
Back in July, when I had the opportunity to address the bank’s performance for the first half of 2022, the background was a high degree of geopolitical and macroeconomic uncertainty. Unfortunately, we have not seen any changes to the better during the last quarter as inflation has continued upwards. Despite prices for some energy sources starting to come down, they fall from historically very high levels and we only have very little visibility for the future not only for prices, but also from other disruptions, as the recent and unfortunately ongoing geopolitical tensions clearly show.
However, overall activity in the Nordic societies remains relatively high, despite very low consumer confidence. Employment levels are holding up well despite signs of slowdown in specific sectors and a negative economic outlook. This translates into a continuation of strong credit quality and low impairment charges, which we will comment on in more detail later in this call.
Despite the turbulent environment, we have seen good commercial progress as evidenced by continually robust lending growth of 7% compared to last year, and a derived positive impact on our core banking income driven by NII up 8% compared to last year. We’ve been focusing on a stringent execution of strategic pricing initiatives and higher central bank rates have supported our efforts to partly reestablish deposit margins.
The lending growth is also reflected in our market shares as we continue to see relative improvements within different segments. Our business activities within trading and insurance that are closely linked to the developments in the financial markets have been impacted by very difficult market conditions due to a significant repricing of almost all assets.
This repricing has happened over a relatively short period of time, and with a magnitude we usually only know from stress test scenarios. We took corrective actions for our risk appetite in our rates and credit business over the summer. And despite this, we’re happy to see an improvement in performance to an expected level in the third quarter. However, our insurance business in particular continues to be impacted from negative valuation effects despite good development for the underlying business.
We’ve also invested a lot of efforts in making progress on our sustainability agenda, and with special focus on maintaining our position as a market leader within issuance of green bonds. Another proof point has been the recognition we have received from Position Green as being outstanding in terms of sustainability reporting. We were one of only seven listed companies in Denmark.
In respect to expenses, we continue to make progress on lowering underlying costs, driven by continued efficiency and digitalization. Compared to the level two years ago, the numbers of FTEs is down 8% when excluding a non-compliance. For the third quarter in isolation, our total expenses include one-offs reflecting good progress towards final solutions to the bank’s legacy cases.
Firstly, at the end of August, we communicated an accelerated solution to the debt collections case, where we’ve set the debt of 90,000 customers to zero and the solution entailed a one-off cost of DKK 600 million and a one-off impairment charge of DKK 650 million. Secondly, as it appears from the company announcement published earlier today, we have made progress in our discussions with the authorities in relation to their Estonia matter, and I’ll now comment on that in more detail.
On the 27th of April, we announced that we were in initial discussions with US and Danish authorities on a resolution of the Estonia matter. Today, we’re now at a stage in our discussions, where we reliably can estimate the total financial impact of a potential resolution. The estimate amounts to DKK 15.5 billion and includes the provision of DKK 1.5 billion recognized in 2018. Hence, the additional provision amounts to DKK 14 billion which is fully recognized in the financial results for Q3.
On that basis, the Board of Directors have decided to cancel the remaining dividend from 2021 and retain accrued dividend for 2022. Hence, no dividend for 2022 will be paid in 2023. The isolated effect on the CET1 capital ratio from the additional Estonia related provision is 1.7%. And the CET1 ratio now stands at 16.9%.
The minimum regulatory capital requirement reflects the release of the Pillar 2 add-on of DKK 7.5 billion as a result of the provision made and on the basis of a dialogue with the Danish FSA. Our dialogue with the authorities on the final resolution continues. And while there is still uncertainty around timing and whether a resolution will be reached, we are working towards a resolution before the end of the year. At this stage, we’re not able to comment further on, on details for a potential final resolution.
Based on the additional provision for the Estonia matter, and a goodwill impairment charge in Danica, we revised our net profit outlook for this year from DKK 10 billion to DKK 12 billion to a net loss better than DKK 5.5 billion, which I will comment on in more detail at the end of this presentation.
Slide 3, please. At our Personal Customer business unit, we continue to see positive traction towards strengthening our Danish retail position. Progress on our legacy cases should support our efforts even further. But we’re already seeing improving customer flows. And for some of our key segments, we have seen a net inflow of customers.
In terms of market shares in Realkredit Danmark, we see the upward momentum in front-book shares continuing tracking 2.6% points higher than a year ago with a clear positive trend through the past quarters. Our bank lending market share has increased to 19.5%, which is more than one percentage point higher than a year ago.
Together with a benefit from improved deposit margins, this led to a 22% increase in NII in this quarter alone at PC DK, which is supporting the significant uplift in profit before impairments.
Within PC Nordics, we continue our focus on profitable growth through utilizing our partnership agreements. This will further support our strategy of enhancing profitability across the region and our cross-selling efforts are already becoming evident in the 10% year-on-year uplift we’re seeing for fee and trading income.
For our Business Customers, we have continued to develop the close dialogue with our customers as they navigate the current uncertainties. And we’re pleased to see solid volume gains materializing across the Nordic region. Our ability to support our customers with transition financing and credit facilities, along with more ancillary offerings underpin our position as a focused relationship bank that can leverage our expert advisory services in times of turmoil.
And at the same time, the broad mix of services are contributing to our resilient business model. Where, in particular, cash management and FX products have shown a strong development this year underpinning a 9% year-on-year uplift in ancillary income, which is also a result of our fee pricing initiatives.
So while the operating environment is certainly changing, and our customers within both Personal and Business Customers require a whole new aspect to their financing needs, our universal banking offerings and prioritized digital solutions have further supported our value proposition. By leveraging these further in the period ahead, I’m confident that we will continue to capture market share based on profitable growth and provide an additional uplift to our efficiency and financial performance.
Slide 4, please. Let’s take a look at LC&I. It’s been a busy year for LC&I with high customer activity. We experienced strong demand for our lending, our advisory, and our risk management solutions, as we supported our costs summers in managing this uncertain environment. Our strong position within advisory and expertise, coupled with the significant demand for credit, enabled us to support customers with more than DKK 60 billion in additional lending.
Measured in relative terms, lending volumes at LC&I increased 33% compared to the level, the year before. And overall, our customers have drawn on new and existing facilities on the backdrop of a challenging operating environment, given for instance, the rapid increase in energy prices and challenging access to capital markets. We’ve seen growth across Nordic – across our Nordic franchise and in Denmark and Sweden, in particular.
The strong growth in lending volume as well as higher deposit margins were key drivers for NII, which increase 13% year-over-year. And notwithstanding the increase in NII, total income in the first nine months of 2022, was down 16% from the same period last year, as a result of lower fee income and significantly lower net trading income.
That decline in fee income of 9% from last year stemmed from lower capital markets related activity, primarily reduced ECM activity. The slowdown in activity was less pronounced within Nordic sustainable bonds issuance and loans, where we maintained our leading League table positions in the Nordics.
Higher net fee income from M&A advisory and also corporate everyday banking services such as cash management mitigated lower income from capital markets. The turmoil in the financial markets had a significant impact on our trading activities. As a leading Nordic fixed income house, we supported our customers through the volatile periods.
In the third quarter trading income recovered based on robust customer activity, and came in at a more normalized level as market conditions improved, and despite initiatives taken in the second quarter to lower risk utilization. Our asset management activities saw impact from adverse financial market conditions, which led to a decline in assets under management. However, increased fee income from improved margins and asset management mitigated the negative effect.
Next, I’ll focus briefly on our insurance activities. While the persistently turbulent financial markets have negatively impacted the performance in Danica Pension, in general, the underlying business continues to be sound. We know that as part of our continued focus on ensuring profitability after a period of high growth, we’ve seen a decrease in premiums recently abate from a high level.
Moreover, we continue to see a more positive development in the health and accident business than we expected, with fewer claims and people returning faster to work. In 2022, claims have remained at a stable and lower level compared to previous years. The result for the first nine months of this year and the result for the third quarter came in significantly lower than the results of the same period last year, and for the preceding quarter, respectively, in Danica.
The turbulent financial markets with rising interest rates and rising inflation, lead 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 also that the result for the first nine months included the gain from the sale of Danica Norway of DKK 0.4 billion and a product related one-off charge of DKK 150 million booked in the third quarter. Furthermore, a goodwill impairment charge and Danica of DKK 1.6 billion relating to a higher applied discount rate is booked as a separate line item in our income statement.
Slide 5, please. And then, I’ll hand it over to you, Stephen.
Stephan Engels
Yeah, thank you, Carsten. I will now go briefly through the reporting lines in the income statement, and reserve comments that are more detailed for the following slides. As Carsten just mentioned, we saw good progress for our core banking activity in the first nine months of the year, where strong commercial momentum led to an increase in lending volume primarily with our Corporate Customers, followed by execution of pricing initiatives.
Income from core banking activities performed well and was in line with expectations. NII was up 8% from the same period last year, as deposit repricing initiatives and higher volumes more than mitigated the margin pressure from lending activities. The improvements accelerated in the third quarter where NII was up 9% from the preceding quarter as higher central banks rates lead to further repricing of deposits.
Net fee income was in line with the level in the same period last year when fee income benefited from strong capital market activity and one significant ECM transaction in particular. The slowdown we have seen in the first nine month is primarily due to low activity in capital markets business. However, the effect is almost fully mitigated by higher activity related income from the reopening of the societies post the pandemic. When comparing Q3 with the preceding quarter, fee income came in lower primarily due to lower investment activity.
For net trading income, we have seen an impact from volatile and difficult financial markets on our rates business. Moreover, negative valuation effects added to the decline in income. In the third quarter, the development in our rates business reversed income into a more normalized level partly as a result of the recalibration of our risk appetite we implemented at the end of the previous quarter. However, due to higher interest rates, we continue to see negative valuation effects, also in the third quarter.
The difficult conditions in the financial markets had a significant impact on our insurance business. As Carsten mentioned earlier, the underlying business at Danica performed well with high premiums and modest level of claims. However, net income from insurance businesses came in significantly lower due to negative investments results on life insurance products where Danica has the investment risk.
The result for the first nine month includes one-off effects, as Carsten just explained. Other Income amounted to DKK 1.2 billion for the first nine month, including the gain of DKK 0.4 billion from the sale of our business activities in Luxembourg in Q1.
Operating expenses excluding the additional provision for the potential resolution of the Estonia matter came in 4% higher than the same period last year. The increase can mainly be attributed to the solution to the debt collection case, which entailed the one-off cost of DKK 0.6 billion recognized in Q3. Remediation costs remained elevated during the first nine months, however, we continue to improve our underlying costs quarter-by-quarter, which I will comment on in more detail later.
Loan impairment charges reflect the continued strong credit quality and amount of DKK 2.4 billion in Q3, slightly up from Q2. The charges for the third quarter include the one-off effect of DKK 0.7 billion from the debt collection case. Excluding this, we saw net reverses in the quarter driven by individual customer exposure and despite an increase related to macroeconomic adjustments. We continue to have sufficient post model adjustments in place, which I will also comment on later.
Finally, the tax line where the effective tax rate reflects primarily the non-deductible status of the goodwill impairment charge and the additional provision for the potential resolution of the Estonia matter. Net profit for the period, loss amounted to minus DKK 9.2 billion, down from DKK 9.3 billion for the same period last year.
Slide 6, please. Now, let us take a closer look at the development in net interest income for the group. Overall NII saw a healthy improvement of 8% in the first nine months of ‘22 from the same level in – from the same period last year and 9% quarter-on-quarter, driven by deposit margin as well as robust lending volumes, we highlighted earlier. The positive effect was partly countered by various lending margin effects.
On the deposit side, the uplift was driven by the pricing initiatives we did when navigating in the negative interest rate territory, as well as recent changes when the ECB and the Danish central bank moved into positive territory, which has allowed us to partly reestablish deposit margins.
On the contribution from lending, we continue to see positive effects from volumes particularly to due to strong demand from our Corporate Customers. This effect was however offset by various margin effects, including delay effects in our Nordic businesses, lower margins for Danish mortgage loans driven by lower LTVs and an impact from credit facilities that had been floored at zero.
And finally, the credit demand we have seen recently includes liquidity facilities to some of our larger and better rated corporate which is contributing positively but at the same time has lowered our average lending margin. Given the level of uncertainty in the financial markets and the associated elevated credit spreads as well as the status of the Estonia matter, we have largely refrained from issuing new funding outside covered bonds. We remain comfortable with our overall funding position, and we are confident in our ability to access the capital markets.
Finally, the decision we saw from the ECB a few hours ago to raise its policy rate by another 75 basis points will be an additional tailwind to NII, going forward. Our sensitivity to changes in the interest rates beyond what we have seen today is comparable to our previous guidance. We expect the positive impact of approximately DKK 800 million to DKK 900 million per 25 basis points based on a parallel shift of the yield curves across all currencies.
Slide 7, please. Next, I will comment on our fee income development. We report slightly lower fee income, down 2% year-on-year, as the volatile conditions in the financial markets have continued to impact our capital markets related activities. However, please note that our income last year saw a positive contribution from a significant landmark deal. Excluding this deal, fee income is largely in line.
In this environment, we were pleased to note that our diversified business model enabled us to balance different trends for fee income during the year. The lower capital market related fee income and investment fees were to a high degree mitigated by activity driven fees, which were up 22% and lending fees which were up 9% year-over-year.
When compared to the previous quarter, the trends in Q3 for almost all fee categories were essentially the same as my previous description. In the third quarter, the activity driven fees were up 4% whereas fees related to lending and guarantees slipped slightly due to slowdown in housing market activity.
Slide 8, please. Next, let us turn to the development in trading income. As mentioned previously, the high volatility in the financial markets and the general repricing of almost all assets, we have seen for most of the year, had an adverse impact on trading income. The negative impact came primarily from our rates business with the effect being partly mitigated by FX business that continues to develop positively.
Initiatives taken in the second quarter to lower risk utilization had the desired positive effect in LC&I in Q3, where income recovered to a more normalized level. Income from strong customer activity and the banking activity was almost up 45% since last year, and maintained good momentum compared to the previous quarter.
The result from other activities was negatively impacted by value adjustments related to an interest rate hedge in Northern Ireland. However, this should be seen in the context of strong uplift in NII in Northern Ireland.
Slide 9, please. Now let’s take a look at our operating expenses. Total costs in the period were clearly affected by the additional Estonia related provision and the goodwill impairment charges in Danica. Outside of these effects, our operating expenses came in higher compared to last year, partly explained by expected elevated remediation costs that also led to our accelerated solution, we announced earlier in the quarter.
Increased Swedish resolution fund contribution, and IT cost driven by expenses of a one-off nature also drove costs higher compared to last year. Expenses in the third quarter were also impacted by the provision and the goodwill impairment charge and furthermore included the DKK 600 million one-off we took this quarter in relation to the debt collection compensation.
Looking at our underlying cost development in the third quarter, we continued our efforts to reduce complexity. And outside the aforementioned one-off’s our cost base was down 4%, despite an increase in IT cost, which was caused by higher energy prices for our data centers. The improvement was driven by continued progress in our underlying staff cost as a result of further FTE reductions.
The FTE count has been reduced by 8% since the peak in 2020, when you disregard the planned AML up staffing. We have however, started to see an impact from salary related inflation in parts of our business, as well as from indexation of supplier contracts. We continue to allocate significant resources to our AML compliance agenda in order to remain on track towards completion of our Financial Crime Plan by 2023. In the third quarter, we saw a decline in costs, from a high level in the second quarter.
Continuing our efforts to improve operational efficiency is increasingly a key focus area for us, given that we must foresee an increase in inflationary pressure that will be a headwind going forward. No doubt the level in 2022 has been higher than initially anticipated. But it has been driven by our deliberate decisions and it is in many cases characterized by items of a one-off nature that put legacy cases behind us and enhance the foundation to meet the cost/income targets we have outlined.
Slide 10, please. Now let’s have a look at our credit portfolio and impairment trends. While the deteriorating macro outlook and higher interest rates are expected to impact both corporates and household, the quality of our lending book remains strong. We have seen limited downward migration and exposures between Stages and the share of net exposure in Stage 3 continues to trend downward as single name deteriorations remain very modest.
As such net new impairments would have led to reversals for the quarter if it hadn’t been for the one-off charge of DKK 650 million we previously announced. And which we previously announced and booked in Q3. The total of DKK 368 million booked in Q3 equates to an annualized loan loss ratio of eight basis points, which also includes an additional macro model charges of DKK 150 million. These were driven by adjusted scenarios to reflect the lower growth expectations.
We are generally conservative in our application of macro estimates in our models, and this includes a severe recession scenario. Our post model adjustments were kept at DKK 6 billion despite the outcome of our debt collection case. And this provides an additional cushion equivalent to around four years of normalized loan losses.
So looking ahead, we remain comfortable with the composition of our balance sheet, including the sound household finances that was further supported by very low LTV levels. Headwinds in the corporate segment could naturally be expected, but the financial resilience of our corporate clients provides comfort at this point.
In addition, we can mitigate further uncertainties and tail risks not visible in our portfolio or captured through our models with the sizable provisions we have made through our post model adjustments.
Slide 11, please. On this slide, I want to focus on our capital position. Our reported core Tier 1 ratio was impacted by the additional Estonia related provision we have highlighted in the beginning of the presentation. The impact on capital was however mitigated by the decision to cancel the remaining portion of the dividend for 2021 as well as the retained accrued dividend for 2022.
Furthermore, the core Tier 1 ratio benefited from lower market risk REA in general, including recalibration of risk appetite and the associated capital consumption, while the credit risk REA was stable in the quarter as indicated in the previous slide. Finally, the deduction related to Danica improved after the volatility impact we saw in Q2, and it further benefited by the regulatory treatment of the goodwill impairment charge in the capital deduction.
With the above in mind, our reported core Tier 1 ratio now stands at 16.9 at the end of Q3, the release part of the Pillar 2 capital and an add-on of DKK 7.5 billion was partly offset by the expected increase related to the counter cyclical buffer reactivation. We remain comfortable with Danske Bank’s solid foundation and healthy buffer to current and future regulatory requirements.
Slide 12, please. And then I would like to comment on our outlook for the remaining part of the year. We are revising the outlook due to the booking of the additional provision for the Estonia matter and the goodwill impairment charge.
As you will see from our financial result, which we have presented today, our performance is according to plan and reflects good activity and continued progress for our business despite the adverse development in the financial markets we have seen this year.
The effect from the provisions entail a decline in the expected net profit from between DKK 10 billion to DKK 12 billion to a net loss better than minus DKK 5.5 billion, of course subject to uncertainty from macroeconomic conditions and from financial markets in particular.
The revised outlook includes the gains from MobilePay, Danske Bank International and Danica Norway. For 2023, we remain our ambition on shareholder – on the return on shareholder’s equity as well as cost income ratio. As usual, we expect to provide more details and our financial outlook for next year in connection with our full year report in the beginning of February.
Slide 13, please. And back to Claus.
Claus Ingar Jensen
Thank you, Stephen. Those were our initial comments and messages and we are now ready for your questions. Please limit yourself to two questions. If you are listening to the conference call from our website, you’re welcome to ask questions by e-mail. A 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] We will now take our first question. Please standby. And your first question is from the line of Jakob Brink from Nordea. Please go ahead, your line is open.
Jakob Brink
Thanks a lot, and good afternoon. Just on cost, if I may start there, just to give a bit of sense where you are in relation to efficiency measures also going into next year? So now I guess the target for this year it is around DKK 26.1 billion, DKK 600 million is related to the debt collection case. And also, if I look at your initial guidance early this year, it was DKK 1.5 billion reduction you expect from ‘22 to ‘23. Is that still the case? And if so, we would be down to around an underlying level of DKK 24 billion. How much inflation should we be adding to that 4%, 5%, 6% or what are you – what are we looking for in 2023, please? That was my first question.
Stephan Engels
Yeah, maybe if I can pick up directly on that, our original assumption on how to – how costs would look in 2023, included an inflation assumption of roughly 500 million DKK. Again, we need to look at this stuff in more detail and we are still trying all to get to grips with the matters going on. But I think there is obviously some clear signals already now both on indexed supply agreements, wages and other thing that will likely lead to some more pressure on that matter. Whether we can fully mitigate these with additional cost measures, is something that we are currently in discussion. But I think that basically puts it where we are right now.
Jakob Brink
Okay, so but the under sort of the – let’s say, okay, so at least your starting point efficiency measures still stand and they might be larger. That’s what you’re saying. And then what we need to do is, you’re putting around 2% cost inflation, it sounds like. So if I believe, in 5%, then that would be the difference, is that how to look at it or has anything else changed?
Stephan Engels
I would think that given that our main cost driver obviously is staff cost and let’s call it 60%. I would more think that we are – if you net for FTE development more looking like a 4% to 5% inflation assumption in our original bridge that we gave to you. And that is something that we need to look at now. Again, the aim has to be to mitigate as much as we can. Again, it needs further detailed analysis. But let’s be honest, I think we all understand that there is a bit of a inflationary pressure that is at least partly out of control and it remains to be seen how quick we can react to these things.
Jakob Brink
Okay. Thank you. On net interest income –
Stephan Engels
If I may add, I think our cost income ratio ambition, and that is I think maybe also important in this context. Our cost income ratio ambition clearly remains completely the same as before.
Jakob Brink
And net interest income and loan growth, especially in LC&I. Could you maybe give us a bit more detail about the sustainability of the growth? How long is the lending you’ve got on the books? It also looks like if I just try to calculate the margin on the new lending, it seems to be somewhat lower than the back book. Is that correct? And is it a mixed change? Or is it just that it’s lower risk lending that has come on to the books? And then maybe, lastly, if you can give some indication on what sectors the growth has come from?
Stephan Engels
It is mainly a reflection of, call it better credit quality and lower duration drawing on revolving facilities. Some of it is obviously a reflection of, call it, relatively unattractive bond markets, at least for some of our customers. If that would move out, once capital markets are either opening again or the customers decide to go there, then basically that part of the income line would probably move from NII into capital market related fees. So in that sense, we are looking at this with quite a level of comfort. The other one, sorry, was? The second question you had, sorry?
Jakob Brink
Just so what sector, I guess, partly did explain that that it was due to bond markets not function, but can you say anything more, the energy [indiscernible] or what, real estate?
Stephan Engels
Well, what I would say the usual suspects, energy is definitely one of them. But it goes well across our corporate books, so we see that as being something that is still a reflection of good activity and good economic, underlying, yeah, activity in the customer base.
Jakob Brink
Okay, very clear. Thanks a lot.
Operator
Thank you. We will now go to our next question. One moment, please. And your next question comes from Sofie Peterzens from JP Morgan. Please go ahead. Your line is open.
Sofie Peterzens
Yeah, hi. Here is the Sofie from JP Morgan. So my first question would be on your rates, sensitivity guidance. On the three goal that you had a few weeks ago, you guided that NII would be at around DKK 330 million to DKK 340 million in 2022. And it would have two months impact in the third quarter from this, so now, net interest income is up around DKK 500 million quarter-on-quarter. I know maintain your sensitivity guidance unchanged going forward. But I’m just wondering, why is such a big delta? Or how should I think about the big difference, because if I take two months from DKK 340 million is roughly DKK 135 million. But your NII which is mostly – is helped by better profit margins was up DKK 500 million, quarter-on-quarter. So that would be my first question.
And then my second question would be, you show in one of your slides that you have 3600 employees working with AML. But could you just remind us how large your AML and all those kind of related growth percent through the Estonia case have been so far, year-to-date? Thank you.
Carsten Egeriis
Thanks, Sofie, Carsten here. I’m not sure I understood the entire question on AML. But let me give it a shot. I mean, we’ve invested, of course, significantly in AML and compliance. And we have said that AML related costs would flatten out this year and into next year at around DKK 2.2 [million], DKK 2.3 million. And then that they would normalize at somewhere between DKK 1.5 million, DKK 1.6 million as we go out in 2025. And we continue to feel comfortable about that plan. And a significant amount of that cost reduction will of course come from FTE reductions in line with sort of the process improvements, digitization and transaction monitoring improvements that we’re making. And then Claus, I’ll maybe ask you just to comment on the rate sensitivity point.
Claus Ingar Jensen
Yes, I’d be happy to do so. Hi, Sofie, the amount you were referring to from the pre-close call, where a comment we made in respect to the isolated effect we saw from the rate hike in ECB and the Danish central bank. But there has also been further effects during the quarter from some of the other countries, from the Bank of England hikes and also higher rates in the other Nordic countries. So that’s your – that’s something that that one should add to what we have guided for in respect to euros and Danish kroner. And then of course, also, because we are getting into positive territory, there is a couple of effects here where I would say, we have been maybe slightly surprised to see that the deposit volumes has actually kept up very well during the quarter. And that’s of course also something that adds a little bit of uncertainty to the exact NII development in the quarter.
Sofie Peterzens
Okay, thank you. Just a quick follow up on AML costs. So did I understand it correct that currently that the amount of – are somewhere – should be somewhere around DKK 2.2 billion to DKK 2.3 billion and that will go down to DKK 1.5 billion, DKK 1.6 billion. So basically you were talking about the DKK 700 million or DKK 700 million roughly lower costs by 2025, all else being equal?
Carsten Egeriis
That’s correct.
Sofie Peterzens
Okay, thank you.
Operator
Thank you. We’ll now go to our next question. Please stand by. And your next question comes from the line of Martin Birk from SEB. Please go ahead, your line is open.
Martin Birk
Thank you. My first question goes on capital, where I note that you guys have got a relief on 75% of the Danish FSA’s Pillar 2 profit requirement. And my thinking is that, why is your capital target still 16%? Shouldn’t that also be reduced correspondingly to 15%? That would be my first question. And then sort of just on timing, I mean, it’s – now you guys are approaching Q4. And with the settlement, almost done and dusted, what should we expect in terms of communication around future strategies, etc.?
Stephan Engels
Hi, Martin, thanks for the question. Can you just repeat the future strategy? In short, you mean, in general, the strategy of the bank?
Martin Birk
Yeah. I mean, basically, right. Now you have a strategy where it’s all about working on this case, right?
Stephan Engels
Yes, yeah. No, I just wanted to clarify, that’s fine. Martin. Thank you. I think if I just take the strategy question, first and foremost, we are very focused on ensuring that we, of course, deliver our 2023 targets, which we continue to be comfortable with. And that those 2023 goals is very much continuing, of course, to execute, on the strategy that we have in place. We will, during 2023, of course, come out with an updated strategy that will look forward beyond 2023. And so you can expect that from us during a next year and probably before summer.
Then on your second question around capital, I think we’ve said that we would aim towards an above 16% CET1 target, post resolution and considering the release of the relevant part of the Pillar 2. Currently we standard 16.9%, I think it’s too early to talk at this stage around sort of the forward looking capital targets in more detail, given the continued uncertainty. So again, we’ll update you on that as part of the of the year end results early next year. And there we’ll also update you on 2023 and talk a little bit more about the forward looking strategy and more details on timing with that.
Martin Birk
Okay, and then just maybe to say a follow up on your comments on uncertainty is, the big amount that I can sum up in your contingent liabilities, is that a part of the uncertainties you talked to or does that have any relevance at all?
Stephan Engels
No, in terms of sort of, when we think about sort of ongoing capital target etc., I’m not referring to that. I’m just more referring to the general uncertainty, and also the many moving parts that are both in terms of interest rate movements, cost movements, risk movements. And therefore before we update more firmly on capital targets and strategy as we go forward, we would like to work through those things and update you beginning of next year as part of the year end results.
Martin Birk
Okay, very clear. Thanks.
Operator
Thank you. We’ll now take our next question. One moment, please. And your next question comes from the line of Riccardo Rovere from Mediobanca. Please go ahead, your line is open.
Riccardo Rovere
Thank you. Thank you very much for taking my questions. I have a couple, if I may? The first one relates to the DKK 14 billion. Once the whole thing is settled, could this have any impact on operational results, RWAs, maybe in 2023? Something then related to that, market risk RWA were down significantly this quarter, which is a bit counterintuitive, given the volatility in the market, generally it happens exactly the opposite. And the other question I wanted to ask you is your 2023 ambitions are unchanged. And those targets were set in one year ago, when inflation was not the one we’ve seen, [indiscernible] and now the one we’re seeing when the generalized macro outlook was not the one we see today. Is it fair to say that basically, we think that higher rates will compensate for costs, and eventually credit losses? And if that is the case, what kind of macro scenario do you have in mind when you are reconfirming 8.5% to 9% RoE target for ‘23 which is like a completely different macro environment? Thank you.
Carsten Egeriis
Yeah, thanks, Ricardo. If I take the last question, you’re right in saying that, that the confirmation of the targets next year. Today have different components than when we set the targets at Q3 last year and you are also right in saying that we believe that there will be a higher level of top line income driven by NII as we also see in the results, the last few quarters, and that would be offset somewhat by inflation and cost of risk. We are assuming a difficult macro environment within that very much in line with the uncertainties that we’re seeing today. So you could say that we are assuming that we would have a mild recession within those assumptions. Market risk REA is down because we have quite significantly decreased market risk over the summer and into to Q3, less positioning in our credit and rates business. So that’s what’s driving market risk REA down. The exact impact on operational risk RWA’s, I do not believe that that is material, but we’ll continue to look at that.
Riccardo Rovere
Okay, okay, very [well]. Thank you.
Stephan Engels
Definitely – I would definitely summarize that with the 16.9% capital ratio that we have right now, we have no restrictions in fully supporting our customer base where needed and where profitable.
Riccardo Rovere
Okay, thanks. Thanks.
Operator
Thank you. We will now go to our next question. One moment, please. And your next question comes from the line of Jan Erik Gjerland from ABGSC. Please go ahead, your line is open.
Jan Erik Gjerland
Thank you. I have two questions as well. Could you just elaborate a little more on their cost base, and initiatives are doing from ‘22 to ‘23? And actually, the remaining part of the DKK 700 million, which you mentioned, to Sofie’s questions regarding the decreasing costs, so how could they work more on cost to get down here and what is the details on the level of cost, you are actually getting down from ‘22 to ‘23? And what has been elevated in ‘22, if you can help me with that?
The second one is, you have this possible adjustment of DKK 6 billion, that’s typically what’s happened to Stage 1 and Stage 2, if I recall correctly. So what’s going to be happening when Stage 3 credits then is going more wrongly, so to speak, to draw upon this DKK 6 billion, if they are transferred from the Section 2 to Section 3? Or how it should be reviewed, this DKK 6 billion model into your provisioning bridge? Thank you.
Carsten Egeriis
Thanks for that. Erik. I’ll let Stephen comment on the cost bridge to ‘23 from ‘22. Let me just briefly comment on the post model adjustment. I mean, I think you should see the DKK 6 billion post model adjustments as ensuring that we’re robustly and prudently reserved and provisioned for a future macro uncertainty, e.g., we believe that, that there has been, let’s say, on a broad basis, credit events incurred that we cannot see in the models yet. And therefore, we have these PMAs. And essentially, you can think about it in the way that all of the COVID PMAs, that we had slightly in excess of DKK 2 billion, that that has all been repositioned to macro uncertainty. If you look at the actual Stage 1, Stage 2, Stage 3, you actually see some improvements in Stage 3 in line with having seen some larger single impairments, in fact, being released over this year. And that goes back to, in fact, that we have seen pretty robust activity and a pretty robust economy, and therefore that’s benefited some of those Stage 3 impairments. So that’s how I would look at it. Stephen?
Stephan Engels
On the cost bridge, very briefly, just to remind, what is it that we saw as the positive delta topics between ‘22 and ‘23? It’s mainly transformation costs, which we see a positive effect for ‘23 of roughly DKK 400 million, then the remediation costs around the legacy mainly, the debt collection case should be going down by about DKK 800 million. Then MobilePay, which we expect to close very soon, will reduce the cost base by a further DKK 200 million. And then we expect the cost around the Estonia matter, also to be lower by almost DKK 400 million. Against that is a slightly higher Swedish banking tax and resolution fund. And as we discussed earlier, inflation, so underlying cost savings to meet the target were about or are about DKK 600 million, and that includes roughly DKK 200 million from lower Financial Crime Plan cost, which we at least from today’s point of view, believe we will definitely see. And the DKK 600 million in total is basically a result of process optimization and digitalization workforce footprint, and also some of the more non-personal cost, which we still believe we can work on. And that are the many levers that we are now very closely looking at, trying to find out how we can mitigate as much of the inflation possible – inflation pressure as possible.
Jan Erik Gjerland
Okay, thank you. Just on the Stage 3 there, when you have booked customers back from Stage 2 and Stage 2, or 1 or whatever you’ve done, has that impacted your net interest income in any significant way this quarter?
Carsten Egeriis
No, I would not say so. No.
Jan Erik Gjerland
Thank you.
Operator
Thank you. We will take our next question. Please stand by. And your next question comes from a line of Johannes Thormann from HSBC. Please go ahead, your line is open.
Johannes Thormann
Good afternoon, Johannes from HSBC. First of all, a question on your dividend policy, you talk about a buffer of 440 bps. And yeah, even if you would have paid a minor dividend of DKK 2 or whatever, it wouldn’t have changed investment case, but it wouldn’t have changed your capital base much either. Is the cancellation triggered by an agreement with the regulator or is this just due to extreme management caution?
And secondly, in this agreements with the regulators and so on, is there any limitation on M&A deals for the next quarters or years even where you’re limited or are you completely free to step out in the next weeks, if you say theoretically and do a deal? And secondly, on the Danica impairment, why did you do it now? Is the loss making – the quarterly loss making now to be expected to continue in the next quarters? When do you see a reversal there? And is this company still a strategic part of your group because it’s probably getting too small in a consolidating insurance industry. If we look at yields today also in other small Northwestern European market, wouldn’t this make sense for you as well? Thank you.
Stephan Engels
Hi, Johannes, thanks for the question. So on dividend, I think the very simple answer is, as we expect to end the year with a loss, it is a very unlikely assumption that there is anything that we can distribute, regardless of what our distribution policy would be. So I think that is the very simple and clear answer. With a loss, you don’t pay a dividend. Other than that, our dividend policy of distributing 40% to 60%, obviously, remains unchanged.
Your question with respect to details around the final settlement, I will unfortunately have to postpone until we have the final settlement, which as Carsten said, is still subject to uncertainty. But we expect to get it done before the end of the year. Danica remains an integral and strategic part of the group. There is huge business and customer connectivity. And it is a very important part on the, call it, savings proposition that we have towards our customers. So that view remains completely unchanged.
The technical answer to, why a goodwill impairment now, is relatively simple. Typically, you look at your goodwill impairment procedures at least once a year. And given the interest rate hikes, we have just looked at the discount rate for future cash flow and felt that we needed to increase them given the current rate environment that has driven and mainly that has driven the correction. It does not reflect any of the more recent quarterly performance that we that we have seen.
Johannes Thormann
Understood, thank you.
Claus Ingar Jensen
Operator, can we have the last question, please?
Operator
Thank you. We will now take your last question. Please stand by. And your last question comes from the line of Maria Semikhatova from Citi. Please go ahead.
Maria Semikhatova
Yes, thank you for the presentation. Just a follow up questions, first one on the cost outlook, I appreciate that you will provide more details when the fourth quarter is out. But could you tell us how much of the remediation costs you already booked in nine months? And what issues are still pending? I believe its debt collection outside of Denmark but if there’s any other cases? And as I understand, they’re small, but if you could confirm that?
And then just following up on the insurance business, I believe you previously guided that kind of a normalized return around DKK 1.5 billion, DKK 1.7 billion. I don’t know of your view change given the moving rate. And you highlight in the presentation that you expect some stabilization in the fourth quarter. Just want to confirm what’s your outlook for insurance and maybe trading income as well, which is included in your comments? Thank you.
Carsten Egeriis
Okay, thanks. Thanks, Maria. I think in terms of your question on remediation, you – we would still expect that there will be some tails left on the debt case, as you mentioned, because we actually are spending money to execute the actual compensation, but it will be lower than this year. I think that’s the major part of the remediation costs that’s relevant to highlight. In terms of the insurance business we can confirm that the underlying monthly income is around DKK 120 million and we continue to believe that that has not changed as such with this discussion.
And then in terms of trading, we continue to see a robust trading environment as with what we have seen in Q3, but no question that that of course remains uncertain given the environment.
Maria Semikhatova
Okay. Thank you.
Carsten Egeriis
Okay, well, then I would like to thank you all very much for your interest in Danske Bank and all your questions. And as always, please do reach out to Claus in our Investor Relations department if you have any questions. And thanks again for joining today on short notice and have a good afternoon. Thanks very much.
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