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Edited Transcript of DNB.OL earnings conference call or presentation 24-Oct-19 11:30am GMT

Q3 2019 DNB ASA Earnings Call

Oslo Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of DNB ASA earnings conference call or presentation Thursday, October 24, 2019 at 11:30:00am 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

* Rune Helland

DNB ASA - Head of IR

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Conference Call Participants

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* Jan Erik Gjerland

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

* Joakim Svingen

Arctic Securities AS, Research Division - Analyst

* Riccardo Rovere

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst

* Sofie Caroline Elisabet Peterzens

JP Morgan Chase & Co, Research Division - Analyst

* Truls Langmo Roysland

SEB, Research Division - Analyst

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Presentation

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Rune Helland, DNB ASA - Head of IR [1]

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Thank you very much, and hello, everyone, and thank you for calling in, in this third quarter conference call. Around the table here in Oslo we are the CEO, Kjerstin Braathen; CFO, Ottar Ertzeid; CRO, Ida Lerner; Head of Markets,

Alexander Opstad; Head of Personal Customers, Ingjerd Hafsteen Spiten; and Head of Corporate Banking, Harald Serck-Hanssen; and also the Head of DNB Liv, Anders Skjævestad. Kjerstin will start with the highlights, and then we will open up for questions. Kjerstin?

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

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Thank you, Rune, and hello, everyone. Thanks for calling in. Just a couple of words that we started with also this morning as a backdrop on a quarter, which, in our view, is reflecting strong performance across all of our business areas. And that is related to the Norwegian macroeconomy, which is very important for us. And this has been a quarter where a very strong and improving trend has been confirmed. We expect GDP growth of 2.4% for the year, and even baking in increasing uncertainty in the global economy, a strong growth next year of more than 2% (inaudible) trends of [1.6%] in '21. Lowest unemployment in 6 years, and overall, a situation that was confirmed in terms of trend when the Central Banks raised the central reference rate for the fourth time in September. This impacts the activity in our business. It impacts loan growth in the market and also, of course, the quality and robustness in our portfolio.

12-month trailing return on equity is now at 12.3%, confirming that we are on track to deliver on our most important targets as communicated. For the quarter, 10.9% and several strong performances buildup under such a delivery. Net interest income is up by more than 9% compared to a year ago, almost triple the growth of the group in the same period, clearly demonstrating the importance of repricing and increasing interest rates. Even more, maybe we would like to highlight a growth in capital-light income of more than 11% with the strongest contribution from investment banking, which is usually a slower quarter in the third quarter. Here, the performance has been strong in all areas. Also in financial income, we see a very strong quarter when it comes to quality revenue related to interest rates hedging activity of customers. Quality is robust. We have announced previously the loss related to a single name. Beyond that, losses are very low across the portfolio in total. And we continue to build earnings per share for the quarter, up by 6%. And if we look at earnings per share year-to-date, we have a growth of 15% compared to the same period last year. This, in addition to a strong capital build, ensures delivery on our dividend strategy and policy going forward and also supported then our decision today to announce a new buyback program of 0.5%, which has been deducted in the capital ratios that we are showing.

So on that note, I think we'll just open up for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) So our first question comes from the line of Riccardo Rovere from Mediobanca.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [2]

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Couple, if I may. The first one is on the medium and long-term funding. How should we think about the current level of rates in Norway and Europe having an impact on your cost of medium-, long-term funding, namely the issuance of covered bonds and senior and senior nonpreferred? This is the first question.

The second question is on regulatory headwinds. We have the countercyclical buffers going up from time to time. Now your strap requirement is about -- is almost 18%. Do you think we have come to an end to the increase of the capital requirement there? Or should we expect some more tightening on the topic? And getting back 1 second on the first question. If you had to issue today senior nonpreferred, do you think you would pay less than the maturing senior preferred -- normal senior preferred?

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

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We think that it would be approximately the same as the back-book price. After we received our AA rating from both rating agency, our loans at [funding] terms have improved and the back-book is now more expensive than the front-book would be. But sort of [thinking] senior nonpreferred, it would be -- first of all, they're the same. With regard to the countercyclical buffer, we are now at the end of the year with an announced increase included in the 7.9%. We have reached a maximum current level what countercyclical buffer could be. So don't expect any further capital -- raises in capital requirements from the regulators. Both the Ministry of Finance and Norwegian FSA said that they would like us to maintain that present level of capital.

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Kjerstin R. Braathen, DNB ASA - Group Chief Executive [4]

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And just to develop a few more comments on capital. It's important to take note of the fact that we are now moving from a regime where we have the floor, implementing them CRR CRD4 expected by the end of the year. And in this regime, if the proposal is approved as it stands, that would indicate a core equity 1 requirement of 17.9%. This is not fully an increase compared to the ratio you are used to seeing under there, under the traditional regime. It's an increase of 30 basis points, and we have not yet calculated in the effect from the SME rebate in that number. So all in all, it's in line, we believe, with what we have communicated and what has been the intention for the capital levels to stay at the same level. And then there's always the element, as Ottar is correctly stating, now the countercyclical buffer should be at its max. And then beyond that, it is the element of the Pillar 2 requirement, which is qualitatively assessed on an annual basis. And in the current evaluation this year, there was no change. Beyond that, we need to wait to see clarity when it comes to the proposal of Ministry of Finance. But we're already at the level if they confirm the current proposal.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [5]

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Okay. Okay. But just to clarify, not clear to me whether you're saying that the capital requirements, the 17.9% or 18%, more or less, is you expecting it to remain more or less at this level in the foreseeable future. Is that what you're saying? This is what I got from your comment. But I would just...

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

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Yes. And this is -- this is what we are saying as this is what is being communicated, clearly, both by the FSA and by the Ministry of Finance that they are satisfied with the current capital level of Norwegian banks and including us.

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Operator [7]

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Our next question comes from the line of Sofie Peterzens from JPMorgan.

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [8]

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Yes. It's Sofie from JPMorgan. I was just wondering if you could remind us your rate sensitivity, 200 basis points lower interest rates and how we should think about this. We did have a similar impact from an additional 25 basis -- or 100 basis point hike. Or is it more bigger impact when rates are got -- than if you have additional rate hikes? So if you can just remind us of your rate sensitivity.

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Kjerstin R. Braathen, DNB ASA - Group Chief Executive [9]

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Yes. We can talk about the impact that we have seen and have talked about. We have not given rate sensitivity as such. We are aware that some other banks have given to it -- given that. But again, that only depends on the assumptions that you put into the calculation. I think, again, the important information from us is that 90% of our loan book in personal customers can be repriced and -- which is what we have done on every rate increase from the Central Bank and 30% of the SME-related portfolio can also be repriced and (inaudible) is across both of the segments. So what triggers the impact on our net interest income is an actual repricing towards customers for all material parts of it. And we have now gone through 4 -- a series of 4 repricings, where we have indicated the aggregate effect of these repricings starting out at NOK 1.2 billion effect estimates for the first repricing and a little less than NOK 1 billion now for the latter that was communicated in September. Again, important to say that the effect of this (inaudible) will only start -- will only come into effect as from November. So we will see part of it in the fourth quarter and part of it in the first quarter.

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [10]

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But you didn't give -- or is it then fair to assume that at least we would have a 25 basis point cut in interest rates, the impact would be around NOK 1 billion?

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

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I think it's hard for us to give estimates. As I'm saying, the impact stems from our concrete actions in terms of repricing towards customers. Having said that, obviously, we would always try to optimize our margin level across the various business segments and across products. And beyond that, I think it's impossible for us to communicate anything with regard to future repricings, other than saying that if the rate is decreased and we do nothing, then there is close to 0 effect, but obviously, it's natural to expect that when rates move, there is a change in the competitive situation. And we always need to make sure that we are competitive and able to grow profitably.

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [12]

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Okay. That's very clear. And I would have another question as well. And that would be on IT amortization. One of your Nordic peers have announced quite big IT amortization upfront costs. How should we think about your IT amortization going forward? And do you think there is any risk that DNB also needs to do more IT amortization going forward?

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Kjerstin R. Braathen, DNB ASA - Group Chief Executive [13]

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I think the name you are referring to is also a name that we have been very clear communicating very different strategies. When it comes to IT, that's one element to put out there. Additionally, I think we would like to add that we have -- and we have communicated around this previously, we have a conservative approach when it comes to capitalizing investments on our balance sheet and that we have a thorough process of assessing these values on a continuous basis, as it's reflected also this quarter in our cost base where we have a one-off cost related to a leasing contract on technical equipment, and this is related to a shift in a partnership on the IT side. And then we do an assessment of the value. So we have -- we are conservative when it comes to capitalizing. We have capitalized less of our investments this year compared to last year. We take a lot overrunning costs, and then we review the values on our balance sheet on a continuous basis.

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Ottar Ertzeid, DNB ASA - CFO & Group Executive VP of Finance [14]

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And if I may add, if you look up total capitalized amount in the balance sheet, you will see that it's a very low amount compared to peers.

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Sofie Caroline Elisabet Peterzens, JP Morgan Chase & Co, Research Division - Analyst [15]

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Okay. That's clear. And just a clarification on the domestic exposure provision that you did this quarter, did that relate only to the international operations of domestic or also to the Nordic operations?

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Kjerstin R. Braathen, DNB ASA - Group Chief Executive [16]

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I think we can only say that this is related to our total commitment on the name. And as we've said, it wasn't the first time we reserved against the name. This was already a stage 3 customer going into the third quarter. And we've said that there is limited, if any, further downside potential related to the same name.

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Operator [17]

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(Operator Instructions) Our next question comes from the line of Truls Roysland from SEB.

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

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Yes. Sorry. Okay. Yes. I just had a question on lending margins on the personal customers because in Q3, you had the effect of the May repricing and August repricing. So combined, that was roughly a full quarter effect. And NIBOR was up 16 bps, whereas lending margins was down 9%. So when I calculate that backwards, I get that you raised your rates by 6 bps, which sounds very low. Am I missing something here?

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Kjerstin R. Braathen, DNB ASA - Group Chief Executive [19]

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I think it's hard to decouple because you get a lot of the effect from the repricing in other areas such as interest on equity and in the deposit. When it comes to the lending margins, there is a -- both a lag effect when it comes to when the repricing hits versus the NIBOR, and there are some other effects impacting. For example, a reducing profile in consumer lending where that exposure also has a higher rates compared to the rest of the book. So it's hard to do the analysis, just looking at the lending margins in personal customers as such. If you look at the quarter overall for the third quarter and look for the repricing effect, you need to [read] the profit effect from lending and deposits and also the effect from the equity across the various sectors. And you would find an amount closer to NOK 150 million, which is in the ballpark of the effects that we've indicated. So from our side, overall, we see the effects of the repricing as we have expected.

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

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Okay. And then you mentioned the deposit guarantee impact of NOK 140 million in Q4. Firstly, what is this? And is that a quarterly payment? Or is it NOK 140 million per quarter or for the full year?

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

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No. We have recently received the final bill for 2019 for a combined deposit guarantee fund and resolution fund, and the total annual amount will be NOK 170 million higher for the year -- for the full year than we previously assumed. So it's -- and that NOK 170 million will be booked in the fourth quarter, but it's related to an [offsetted] estimate for the total year. Our best estimate going forward will be the same accumulated annual amount of slightly above NOK 1 billion as we have booked this year.

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Truls Langmo Roysland, SEB, Research Division - Analyst [22]

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Perfect. And then just one last, a bit nitty-gritty question, but just to kind of understand the dynamics. If I look at total provisions to the oil and gas segment, it increased by some NOK 200 million in the quarter. But yet, in the P&L, you booked a write-back of some NOK 80 million. What's the dynamic here? How does it add up?

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

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P&L wise, I'm not sure I've seen the increase in the aggregate on the portfolio. But P&L wise, it's related to more IFRS-related smaller movements, for example, on the actual amount drawn on specific names that can create movements in both directions. When it comes to the total amount reserved, I thought that, that was more stable.

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Truls Langmo Roysland, SEB, Research Division - Analyst [24]

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Yes. I mean, it's just...

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Kjerstin R. Braathen, DNB ASA - Group Chief Executive [25]

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I think -- yes. I think on the latter, we'd have to come back to you because I haven't seen the amount. But in general, movements -- smaller movements back and forth, it's related to drawn amounts in the specific client's portfolio.

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Operator [26]

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Our next question comes from the line of Joakim Svingen from Arctic.

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Joakim Svingen, Arctic Securities AS, Research Division - Analyst [27]

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Yes. Congratulations on very good results. I have two questions. The first is regarding the buybacks because my understanding was that you were going to wait until the final capital requirements were finalized by the Ministry of Finance before you started any additional buybacks. So my question is, what's changed your previous communication around that?

And the second question is regarding the new regulation from next year where you can fully utilize your IRB models. Will this affect how you allocate capital between personal customers and SMEs?

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Ottar Ertzeid, DNB ASA - CFO & Group Executive VP of Finance [28]

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Yes. With regard to the first question, the buyback. We have received the final exact conclusion regarding capital requirement from the Norwegian FSA, confirming an unchanged level of the Pillar 2 requirement and as well as the management buffer. And based on that clarity and our current capital position at the end of the third quarter, which is quite strong with a capital build through the quarter, we have a capital level already 40 basis points above the suggested target from the Ministry of Finance. And as the CEO mentioned, we also have the SME supporting factor coming into account in the fourth quarter. So in total, we are very comfortable with the capital situation and in line with what we have said before that we will pay out excess capital and if I deduct the timing of right to start the buyback program with 0.5% this quarter.

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Kjerstin R. Braathen, DNB ASA - Group Chief Executive [29]

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With regards to allocation of capital, it won't change because we've actually been following up the business segments for several years on a fully IRB Basel III basis. So on the top level, we've been managing the 2 dimension, but directly into the customer areas and frontline. They have been followed up on Basel III, so this will not change.

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Operator [30]

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Our next question comes from the line of Jan Erik Gjerland from ABG.

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Jan Erik Gjerland, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [31]

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Two questions from myself. First, a follow-up upon Truls' question on mortgage margin increase. It was fixed on his calculation, and it looks like we have 3 basis points in the Boligkreditt, which is a mortgage institute Q-on-Q. So is the competition and what you give away to customers as harsh as it looks like? Or is it so that we should expect even better numbers I have?

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Kjerstin R. Braathen, DNB ASA - Group Chief Executive [32]

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I think our reply will be much in line with what it was to Truls and again to encourage you to look at this in a broader perspective. I would just say it's extremely hard because of the references to look at a single parameter. So you need to look across to see the full effect of the repricing, and that is in line with what we have communicated and what we have expected. I did mention that there is an effect from a reducing portfolio in the unsecured consumer finance area. That is also part of it. But overall, we are competitive. We grow profitably. And we have less pricing with deviation from reference prices out to customers than we had last year. So we are not giving away the effect of the repricing, but it's hitting more in the other areas and on the deposit rates than the lending.

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Jan Erik Gjerland, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [33]

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Okay. (inaudible) to the CET1 up to 18.3%. Is it so that you expect SME rebate on top of the 18.3%? Or is that included in that number, just so we understand the mechanism here?

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Ottar Ertzeid, DNB ASA - CFO & Group Executive VP of Finance [34]

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So in the 18.3%, we have deducted in the buyback program we announced today. But on top of that, those 18.3%, you will have the effect of the SME supporting factor.

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Jan Erik Gjerland, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [35]

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Okay. I see. So it's actually even stronger. Could you then elaborate a little more on the bridge between those numbers on the Basel III level, please?

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Ottar Ertzeid, DNB ASA - CFO & Group Executive VP of Finance [36]

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You mean the increase in the third quarter?

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Jan Erik Gjerland, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [37]

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Yes. The 18.3%.

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Ottar Ertzeid, DNB ASA - CFO & Group Executive VP of Finance [38]

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The biggest contribution in the increase in the third quarter is, of course, retained earnings and then, on top of that, effect from Luminor. The effect from Luminor is slightly higher on the Basel III than on the transitional rules. On top of that, we have somewhat high volumes under IRB in the third quarter than in the second quarter.

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Jan Erik Gjerland, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [39]

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Okay. So this is all then 100 basis points, and in total, is this now, to understand, if they retained earnings and 50, 40 [advancement]?

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Ottar Ertzeid, DNB ASA - CFO & Group Executive VP of Finance [40]

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The retained earnings on Luminor is the majority of the increase.

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Operator [41]

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The next question comes from the line of Riccardo Rovere from Mediobanca.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [42]

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If I may -- I have two or three more, if I may. The first one is over the past couple of years, the Nordics market increased rates by, let's say, 100 basis point or so. If you had to throw a ballpark, out of the 100 basis points, what part of that has been passed on to the customer base, on the cost of the -- especially cost of the deposits, if you had to throw a ballpark? This is my first question.

The second question I have is getting back to capital once again. Pretty clear that the 18.3% you are reporting to, it does not include the SME supporting factor. And correct me if I'm wrong, in previous conference calls, you hinted at the possibility of some upstreaming of dividends from DNB Liv. There was nothing like that in this quarter. Correct me if I get it wrongly.

And another question I have is, I was a bit surprised of seeing this -- a little bit of the models moving from standardized to IRB. Is that over now? Or could we have something more on top of that?

And the very final question, I promise, is on MREL. When you're providing your fixed-income presentation, you have to issue, give or take, EUR 15 billion, EUR 16 billion in senior nonpreferred with the current rules in Norway. Those rules assume that the full MREL requirement should be achieved with subordinated debt. So you will have to replace all the vast majority of senior unsecured with senior nonpreferred. And this should be -- should also assume that there is no allowance on senior, is that correct to say?

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Kjerstin R. Braathen, DNB ASA - Group Chief Executive [43]

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I will address the first one, and then Ottar can comment on the 3 following questions. I think, and you are quite right, the Central Bank has an aggregate raise rates by 100 basis points, 25 basis points each time on 4 different occasions. We have repriced the bulk of our exposure, which is flexibly priced as a follow-on. And each time we have gone out and communicated on mortgages that we reprice various projects with up to 25 basis points. We have not indicated what the average level of repricing is. But obviously, when we say up to 25, means that there's no full transfer. Some categories are repriced less, but some of them are also repriced up to 25 basis points. When it comes to deposits, we stated on the first repricing that there was very limited repricing of deposits. I would say that is still the case, but it's limited. But gradually, over the various repricings, it's been somewhat more deposit repricings to ensure that we are competitive. I think the important message is related to the aggregate effect. And we've also then given the degree -- the level of the portfolio that has been repriced. But again, aggregate effect of NOK 1.2 billion on the first one and then a little bit less each time. And for the fourth, we're now saying below -- slightly below NOK 1 billion. So across that, you should be able to do the calculation. I think the Central Bank has also gone into the market and talked to what level the repricing has been taken out by banks. That wouldn't be us specifically. But I think their stats show that in the area of 20 basis points or so has been passed on to customer and then having the desired effect from raising rates.

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Ottar Ertzeid, DNB ASA - CFO & Group Executive VP of Finance [44]

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With regard to capital, you are correct that the SME supporting factor is not included, as I mentioned, nor is the dividend from DNB Liv. It will be expected in the first quarter of next year or possibly the second or beginning of the second quarter. At the same time, we will have a negative 10 basis points capital effect in the first quarter of next year as we conclude the second phase of the Fremtind insurance transaction.

With regard to Basel III and FX. FX, I think, historically, we have been very clear that cost efficiency is important for DNB. And going forward, the same will, of course, apply with regard to capital efficiency and capital discipline. So you can just comment that both cost efficiency and capital efficiency will be important contributors in order for us to deliver on the above 12% ROE target going forward.

With regard to MREL, we are waiting for the conclusion. And with regard to MREL, I expect that sometime in December of this year. As mentioned earlier, the current price levels for senior nonpreferred is around our back-book price for senior. But what the total effect will be remains to be seen. We -- for example, it depends on what will be the resolution entity, the bank or the holding company. And it just has to wait for the conclusion on that sometime in December.

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Riccardo Rovere, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Research Analyst [45]

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But just on this last one, when you show in your fixed-income presentation, you need to issue NOK 150 billion, NOK 160 billion of -- in senior nonpreferred, this takes into account the full subordination of the MREL requirement and no allowance granted with the senior or with senior unsecured, right? So this is a kind of...

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Ottar Ertzeid, DNB ASA - CFO & Group Executive VP of Finance [46]

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That is correct. So if the MREL requirement should become NOK 160 billion or EUR 60 million, then DNB will probably have no need for ordinary senior. The remaining part of the funding we can then do as collateral.

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Operator [47]

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We have no further questions. (Operator Instructions)

We have no questions coming through. So I hand back over to your hosts.

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Rune Helland, DNB ASA - Head of IR [48]

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No more questions. Thank you so much for participating. And I hope you all have a -- continue to have a nice day. Thank you.