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Edited Transcript of DNB.OL earnings conference call or presentation 7-Feb-20 9:15am GMT

Q4 2019 DNB ASA Earnings Presentation in London

London Feb 12, 2020 (Thomson StreetEvents) -- Edited Transcript of DNB ASA earnings conference call or presentation Friday, February 7, 2020 at 9:15:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kjerstin R. Braathen

DNB ASA - Group Chief Executive

* Ottar Ertzeid

DNB ASA - CFO & Group Executive VP of Finance

* Thomas Midteide

DNB ASA - Group EVP of Media & Marketing

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Conference Call Participants

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* Joakim Svingen

Arctic Securities AS, Research Division - Analyst

* Johan Ström

Carnegie Investment Bank AB, Research Division - Analyst of Financials

* Thomas Svendsen

Nordea Markets, Research Division - Director of Financials

* Truls Langmo Roysland

SEB, Research Division - Analyst

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Presentation

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Thomas Midteide, DNB ASA - Group EVP of Media & Marketing [1]

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DNB, both you in the audience who are in Bjørvika and the ones following us on the webcast. We are looking forward to telling you more about the quarterly results and our customer activities the last quarter and the last year. As usual, Kjerstin Braathen will take you through the highlights, and Ottar will take you more through the details in the last quarter.

And as usual, we'll open up for questions in about 15 or 20 minutes. So first of all, welcome to you, Kjerstin.

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Kjerstin R. Braathen, DNB ASA - Group Chief Executive [2]

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Thank you, Thomas. And a very good morning to all of you. 2019 in brief is a year with a very strong economic situation in Norway and a very strong performance across the organization and businesses in DNB. I would like to make some comments on the macroeconomic situation and talk a little bit about the year as a whole in 2019, and then Ottar will walk you more through the details of the fourth quarter.

Given that more than 80% of our revenue stems from Norway, the economy in Norway is very important to DNB. 2.5% growth in GDP is what we saw last year. We saw a substantial pick up investments -- in investments from the petroleum-related sector alongside a more broader uptick in investment across the whole corporate sector. We expect the level of investments not to grow as quickly in 2020 in the petroleum sector, somewhat down. And this will lead to a somewhat lower GDP growth.

However, it is important to say that while 2019 was above trend, in '20, we are expected more to come back to what is seen as a normal level of growth for Norway, so-called "trend growth." And this is important because this matters for other factors, such as the unemployment rate, now at a level of 3.8%, 3.9%. And this level is expected to stay relatively stable in the coming 2- to 3-year period.

Looking at a few other indications, our projections and estimates is very much in line with those of the central bank. Wage growth is expected to continue to be again, relatively modest, slightly above 3%, while inflation is expected to stay around 2%. This matters to the Norwegian people as this means that most of us will have a growth in our disposable income also in 2020.

Credit growth for household has been coming down from around 6% yearly to the area of 5% in 2019. We do not expect the declining trend to continue, and a level around 5% is what is expected for the coming 3-year period. Our Central Bank has raised rates 4 times in the past 18 months. We do see that the Central Bank continues to keep a slight upward bias in their projections, but our most likely scenario is for the rates to stay at the level they are today. This has provided a strong backdrop for our results in 2019. But furthermore, we believe it's also a strong economic situation for the performance and the activity we will see in 2020.

The organization and the businesses across all of our segments has been performing very well in 2019. And here, you see the brief development on an aggregate level for all the customer segments. Operating profit slightly down in the personal customer segment. But in a year where we have the lag effect from implementing several repricings and we have increased cost from the resolution fund fee, this demonstrates a strong performance. To see that we're able through active customer activity, to grow our loan book by 3%, and our deposit book slightly more, while at the same time implementing the several changes in the pricing, is a strong performance in our view.

We continue also to invest in strategic customer channels, and we speak more to our customers than ever before. Two important interfaces for us are the new mobile banking app that was launched in the beginning of the year. In a mere year, we now have 1 million users in the app, close to 30% more users than we had in the previous banking app that we have had for more than 10 years. Our savings app, we continue to see more users using it and they use it more frequently, and we see sales records from the savings app every month. An aggregate of NOK 2 billion of funds were sold in 2019. Only in January, we've seen NOK 500 million worth of funds. So that's a very exciting development to see.

Furthermore, from wealthy individuals, that is also seen in this sector, a strong performance and a strong contribution to our continued strengthening position when it comes to retail funds and position in the retail market.

The SME sectors continues to grow profitably, both on the lending side related to interest income and also when it comes to other income and see a growth in operating profit of more than 13%. Increased activity, both from the FX and interest rate hedging as well as the pension area in addition to starting nonlife insurance are all elements that we are pleased to see and shows our ability to broaden our relationship with these clients and do more with the clients we have.

Large Corporates, slightly down if we look at pretax operating profit. Bear in mind that we had net reversals in 2018, and before impairments, it is a substantial growth in operating profit in Large Corporates. Return on capital in this area is more importantly back to the targeted level. Strong growth of more than 8% in noninterest-related income where debt capital markets and the other activities in the investment banking area was a very strong contributor to the year 2019.

A strong performance and, in particular, towards the end of the year in DNB markets. Again, hitting NOK 1 billion in pretax operating profit and life insurance with close to NOK 470 million for the quarter. And we have been pleased to see our position in investment banking being strengthened through, having very strong regard of our equity analysts as well as for the first time hitting the #1 position in corporate Finance in Norway.

The result of all these activities you've seen in the numbers. Our profits are up by 6%, close to 6%. We continue to see substantial positive draws with our revenues growing very close to 9%, whereas costs under 5% growth for the year. Return on equity, 11.7%, very close to our targeted level. While the level is the same as 2018, in our view, the performance is improved, as you need to keep in mind that we had a year with net reversals on the impairment side in 2018. And we have absorbed additional capital related to the countercyclical buffer.

Growth in earnings per share, up by 6.7%, clearly demonstrating how our activity related to buyback of shares add additional value to shareholders alongside the profits for the year. And this is an activity that we expect to continue during the course of 2020.

So these results, alongside a very strong capital position, we -- in addition to investing into the business, we deliver on our dividend policy and propose a dividend payout of NOK 9 per share. This both delivers on our commitment to pay more than 50% cash dividend, this is 57%. And it also delivers on our commitment to pay an increasing nominal cash dividend per share, with a growth of 9% compared to the level we saw last year.

We furthermore announced an increase in the share buyback program by an additional 50 basis points, and confirm our intention to, again, apply to the general assembly in April for a similar proxy in order to continue the share buyback activity in 2020. So with those remarks for the full year, I will leave the floor and the details of the quarter to our brilliant CFO, Ottar.

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Ottar Ertzeid, DNB ASA - CFO & Group Executive VP of Finance [3]

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Thank you, Kjerstin. Good morning. DNB reports a 10.4% return on equity in the fourth quarter. Excluding the negative NOK 1.1 billion mark-to-market effects from basis swaps and alternative Tier 1, the return on equity was exactly 12% and thus in line with our financial target. Net interest income increased 7.7% from the last quarter of '18 and 3.6% from the previous quarter, despite increased resolution fund fees. As recognized or communicated earlier, a NOK 169 million resolution fund fee was recognized in the fourth quarter, related to the full year 2019.

The positive development in net interest income reflects both growth in loans and deposits as well as repricing implemented following Norges Bank's rate hikes. Commission and fees were at the same high level as in the fourth quarter of '18. Fees were particularly strong among investment banking services, as Kjerstin mentioned, and for the full year 2019, commission and fees were up 4.4%, in line with the guiding we provided at the Capital Markets Day in November.

As Kjerstin mentioned, we are announcing the last 0.5 percentage point share buyback, totaling 2%, which has been approved by the NFSA. This has been reflected in the strong 18.6% common equity Tier 1 ratio report at end 2019.

Loan growth in 2019 was in line with the guiding we had provided of 3% to 4%. It ended at 3.4%. Deposits grew at a higher rate of a healthy 5.3%. Loans to personal customers are up 3% and deposits up 3.2%.

Loans to the SMEs customers increased almost 7% and deposits by more than 8%. The high loan growth in the Large Corporates segment in the first 3 quarters of the year, leveled off in the fourth quarter, as we have indicated earlier. The strengthening of the Norwegian krone towards the end of the year also reduced lending growth in the Large Corporates segment to 1.5% for the year.

Originate and distribute activities in the Large Corporates segment caused larger fluctuations in loan volumes in that segment compared to personal customers and SMEs. We maintained our previous guiding on annual growth in loans and deposits of around 3% to 4%.

Let's move on to margin development. Net interest margin continued to trend upwards. Net interest margin increased to 1.61% in the fourth quarter, despite the mentioned NOK 169 million in increased resolution fund fee booked in that quarter related to the full year 2019. NIM is positively affected by the interest rate hikes with a full or remaining effect of the August repricing and partial effect of the November repricing. Volume-weighted spreads were up 2 basis points, reflecting increased deposit spreads, driven by the higher maybe -- as you all know money market rates in the fourth quarter. As mentioned before, full effect from all repricings will be seen from the first quarter of 2020.

Net interest income is up 3.6% or NOK 363 million from the previous quarter. Adjusted for the NOK 127 million in increased resolution fees related to the 3 first quarters, the NII was up 5.4%, almost NOK 500 million. Key contributing factors are volume growth and positive effects from the previously mentioned repricing; secondly, increased interest on equity; and thirdly, increased amortization fees, reflecting the healthy activity in the quarter. Please bear in mind that the first quarter of 2020 will reflect one less interest rate day and also the annual resolution fee in Poland.

Commission and fees show seasonal fluctuations. Compared to the record high fourth quarter of '18, commission and fees are stable. Asset management performance fees are down NOK 127 million compared to the fourth quarter of '18. Ordinary asset management fees are up NOK 73 million or as much as 22%. Money transfer and banking services are lower due to the sale of the AMEX portfolio and a sign-on fee in the fourth quarter of '18. Guaranteed commissions, on the other hand, are up solid 5%. And nonlife insurance and defined contribution pensions, up more than 10%. Investment banking services, as Kjerstin mentioned, delivered the best fourth quarter ever. With strong contributions from equity capital markets and particularly debt capital markets and M&A.

Compared to the third quarter, total commission and fees are up almost 14%, with solid increases from most categories and again, particularly investment banking services.

Moving on to costs. Operating expenses are up NOK 478 million compared to the previous quarter. More than 50% of this stems from several nonrecurring and -- items and write-downs. Firstly, pension expenses include NOK 121 million related to previous quarters, mostly the third. Personnel expenses include NOK 57 million in sufficient provisions in the first quarter, relating to the new HR system introduced at that time. Other expenses include NOK 91 million in impairment of assets, both IT systems and real estate brokerage premises. This is part of the cost initiatives I talked about at the Capital Markets Day in November, which will give positive effects going forward.

Restructuring expenses include NOK 52 million related to the group reorganization announced in September and also costs related to converting our Shanghai branch into a rep office. Again, these are part of the cost initiatives I mentioned at the Capital Markets Day in November.

Properties include a NOK 74 million positive one-off, which has reduced other operating income with the same amount. The remaining increase include higher than normal pension expenses due to high return for the compensation scheme related to the closed defined benefit plan. This has been hedged from January of 2020. The hedge will appear in net gains on financial instruments. And finally, travel and IT expenses are seasonally high in this quarter.

Moving on to impairments. Impairments in the fourth quarter reflect a healthy asset quality. Net impairments amounted to NOK 178 million. The decrease from the third quarter is largely explained by a large impairment related to a single exposure in that quarter.

Within oil, gas and offshore segment, net impairments totaled NOK 360 million, primarily with customers in Stage 3 in the offshore segment, which is still challenging. Shipping experienced net reversals of NOK 171 million, and overall, more than 94% of our portfolio is now in Stage 1. Stage 3 exposures reduced further to only 0.8%. We see no new industry trends that are of concern. The overall credit portfolio remains strong. But as I mentioned before, please bear in mind that losses will vary from quarter-to-quarter.

Moving on to capital. The announced 50 basis point increase in the countercyclical buffer took effect in December. And this buffer is now at a 2.5% maximum level. From year-end 2019, DNB's common equity Tier 1 requirement is thus 17.1%. This includes Pillar 2 guidance of 100 basis points.

Effective year-end 2020, the Ministry of Finance has announced an increase in the systemic risk buffer from 3% to 4.5%, but this buffer rate will then only apply for exposures in Norway. The effect increase for DNB will thus be only 10 basis points. DNB's actual capital level at year-end 2019 was 18.6%, after deducting the announced share buybacks totaling 2%.

The second part of the Fremtind insurance transaction and the planned increased ownership in Fremtind to 40% will reduce the common equity Tier 1 ratio by approximately 20 basis points in the first quarter of 2020. There will be (inaudible) which we see these days will have today have approximately a similar effect. And as Kjerstin mentioned, we intend to ask the AGM in April for an authorization to buy back further shares of up to 3.5% of issued shares.

At the Capital Markets Day in November, represented a core equity Tier 1 ambition of 17.9%. Before making further updates on this level, we will gain some experience in operating in this new CRD IV world with the new rules. And we will also wait the outcome of the Norwegian FSA review of the different requirements of Pillar 1 and Pillar 2 capital, which the Ministry of Finance have asked for by March of this year.

With regard to the leverage ratio, this increased to 7.4%, and DNB is thus still among the best capitalized banks in Europe. To sum up, and as the CEO mentioned, we are pleased to deliver continued positive development in 2019 with profitable top line growth and strong asset quality. The return on equity and cost income ratio are both approaching our ambitions. And the growth in earnings per share supports the 9.1% in dividend per share. We just delivered on our dividend policy of more than 50% payout in cash dividends, the ambitional annual increase in dividend per share while using share buybacks on top of that.

With those words, I conclude my session. Thank you for your attention.

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Questions and Answers

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Thomas Midteide, DNB ASA - Group EVP of Media & Marketing [1]

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Thank you, Kjerstin and Ottar. We'll open up for questions and take any questions you might have after this presentation, at least -- as long as this has some relevance to DNB.

Johan Ström, we'll start with you, in the middle here. Thank you for waiting for the microphone, Johan.

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Johan Ström, Carnegie Investment Bank AB, Research Division - Analyst of Financials [2]

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I got a question on the life insurance business, trying to find a number, but I think I read 169% solvency ratio without transitional rules in Q4. Super solid capital as well as for the bank. But how should we think about the allocation of this capital? I think the target level is quite below the 169%.

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Kjerstin R. Braathen, DNB ASA - Group Chief Executive [3]

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It's been a strong year in the life insurance business, profits is NOK 1.8 billion. And you're quite right saying that the solvency ratio is 202% with transitional rules and 168% without transitional rules. Our long-term ambition is to keep the solvency ratio around 140%, so we haven't fully concluded our discussions on the distribution. But we see no reason why this should be materially below the full profit for the year.

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Thomas Midteide, DNB ASA - Group EVP of Media & Marketing [4]

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Yes. We have Joakim.

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Joakim Svingen, Arctic Securities AS, Research Division - Analyst [5]

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Yes, two questions, if I may. Have you noticed any changes in the competitive environment between -- following the changes in capital requirements from year-end? So i.e., especially retail and commercial real estate, perhaps Nordic competitors behaving a bit differently and between the Norwegian banks?

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Kjerstin R. Braathen, DNB ASA - Group Chief Executive [6]

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I think it's a little bit too soon to see material differences. I think there are certain variations where we see some of the Nordic players communicating a stronger focus on profitability versus growth. That is to be noted. But across the Norwegian market for mortgage, it is a very competitive market. And yes, we expect that to continue. Over time, we do expect to see a different behavior on the commercial real estate side because we've clearly seen that there has been a situation where the capital cost has differed amongst the various banks. This is now clearly a different situation, and we expect to see this more throughout the course of the year.

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Joakim Svingen, Arctic Securities AS, Research Division - Analyst [7]

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Okay. And then the final one was just -- or perhaps, I should know this as well, but do you use your competitive edge as similar across the country? Or do you see a different pricing strategy across the different geographies? For example, some banks up north report that you're very aggressive whilst the feedback from others are perhaps differ somewhat.

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Kjerstin R. Braathen, DNB ASA - Group Chief Executive [8]

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We have a consistent strategy when it comes to how we run the business, we're focused on profitable growth, and that's the case regardless of geography?

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Thomas Midteide, DNB ASA - Group EVP of Media & Marketing [9]

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So any more takers for questions? Thomas Svendsen, Nordea Markets?

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Thomas Svendsen, Nordea Markets, Research Division - Director of Financials [10]

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A question to lending and deposit margins on the personal banking side. Now that we're entering a phase where the 3-month LIBOR is stabilizing, at least that's what consensus is saying. Do you expect to see any change in competition? That competition will increase because there will be more visibility for your clients? Or what do you expect?

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Kjerstin R. Braathen, DNB ASA - Group Chief Executive [11]

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It's always -- when it comes to specific margin developments and expectations, it's a bit hard to comment. I think what we can say is that we find that we are competitive at the current level. We expect the growth rate in credit to households will remain at the same level as it is today. And we continue to see a rational behavior from banks. And if anything, that is just continuing to be more and more consistent. The banks are focused on the profitability alongside the growth they are targeting. So I think this relates to our comments to the competitive situation. That is fierce, and we expect it to continue to be fierce.

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Thomas Midteide, DNB ASA - Group EVP of Media & Marketing [12]

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So the list is still open. If you have any more questions in here? Yes?

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Truls Langmo Roysland, SEB, Research Division - Analyst [13]

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Truls Roysland, SEB. The margins here are kind of -- they're very strong compared to kind of what we saw in Q3. I was at least somewhat surprised about it. Is there anything special you can comment on that or...

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Kjerstin R. Braathen, DNB ASA - Group Chief Executive [14]

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Do you want to comment?

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Ottar Ertzeid, DNB ASA - CFO & Group Executive VP of Finance [15]

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I think it's -- we have stated that you will see gradually throughout the year, the cumulative effect of all the repricings we have announced. And I think that is what we are seeing in the fourth quarter as we try to guide for throughout the year. It has been lag effects. And when the rate increases come to an end, we will see these effects as we saw in the fourth quarter. So very much in line with what we expected and have guided for.

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Truls Langmo Roysland, SEB, Research Division - Analyst [16]

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And how is it on the kind of the front book versus the back book margin pressure? Is that still there? Or has that disappeared now? What's the status there?

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Kjerstin R. Braathen, DNB ASA - Group Chief Executive [17]

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We are relatively neutral. There's no meaningful back book pressure in the personal customer segment, where we've talked about this. We are still seeing some reduced volumes in unsecured credit, which has higher margins, but that is expected to level out, and we really see interesting opportunities to, again, start increasing our activity and gaining share in that market. Other than that, I think it's important to look at the asset mix that come also from time to time, impact the margin. But the underlying development that you see on the NIM is indeed related to the several repricings during the year, and this provides a tailwind for the net interest income into 2020.

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Truls Langmo Roysland, SEB, Research Division - Analyst [18]

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And then last one from me. On capital, the leverage ratio increase, is that kind of end of the year impact? Will it reverse? Or is it underlying? And further on that, I mean, we know that the regulators focus a lot on the leverage ratio, and now yours is very strong.

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Ottar Ertzeid, DNB ASA - CFO & Group Executive VP of Finance [19]

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It is 7.4%. It would have been 7.5% with the old Basel rules. We actually had a negative effect of 10 basis points from CRD IV and higher conversion ratios when converting of balance sheet items into the leverage ratio. With the same amount of Central Bank deposits as we had one a year earlier, we would add another 37 basis points on top of that. So this is an even stronger underlying leverage ratio than we have ever reported before.

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Truls Langmo Roysland, SEB, Research Division - Analyst [20]

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And then we expect, even though you managed to be more capital-efficient on CET1 ratio, the regulators will kind of let that slide with this strong leverage ratio?

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Ottar Ertzeid, DNB ASA - CFO & Group Executive VP of Finance [21]

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The stronger leverage ratio is also reflected in the high capital level of 18.6%, so I think they're fairly consistent.

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Thomas Midteide, DNB ASA - Group EVP of Media & Marketing [22]

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So I think that one was the last one on my list. So if we have no further questions, we wish you all a great day. And thank you for coming.

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Kjerstin R. Braathen, DNB ASA - Group Chief Executive [23]

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Thank you.