DNB ASA (OTC:DNBBY) (DNB), Norway's largest financial services group, reported a strong third quarter, highlighting a resilient Norwegian economy and strategic growth initiatives during its recent earnings call. CEO Kjerstin Braathen and CFO Ida Lerner presented the bank's financial results and future outlook, noting a robust return on equity and a focus on digitalization and cost efficiency.
The bank's net interest income saw an increase despite a decline in deposit volumes, and loan growth was evident across customer segments. The bank is also executing a share buyback program and remains open to strategic acquisitions, as seen with the recent purchase of Carnegie, which is expected to generate revenue synergies.
Key Takeaways
- DNB reported a return on equity of 18.9% for the quarter.
- Loan growth was positive, with personal banking loans up 0.8% and large corporate banking loans up 4.7%.
- Net commission and fees increased by 11.1% year-over-year.
- The bank's core Tier 1 capital ratio stood at 19%.
- DNB is planning to reduce its workforce by 500 full-time employees by Q1 2024.
- A 1% share buyback has been completed out of an authorized 3.5% for the year.
- The acquisition of Carnegie is expected to consume about 120 basis points of capital.
- The Norwegian economy is expected to grow, with Mainland GDP projected at 0.6% for 2024 and 1.1% for 2025.
Company Outlook
- DNB aims for organic growth with potential for smaller acquisitions that enhance strategic capabilities.
- The bank expects a stable interest rate environment in Norway, with a potential rate cut in March 2024.
- A focus on income synergies from the Carnegie acquisition, with less emphasis on cost synergies.
Bearish Highlights
- Deposit volumes decreased by 4.1%, with a significant quarter-on-quarter decline in large corporates.
- The bank is facing capital headwinds, including an annual review of its IRB models and potential risk weight floor regulations.
Bullish Highlights
- Strong asset quality with impairment provisions of NOK 170 million.
- Net interest income grew by 7%, indicating resilience to lower-margin deposit impacts.
- Ongoing stability in margins and net interest income is expected, supported by a resilient economic outlook for Norway.
Misses
- The company's interest expenses on subordinated debt increased by 150%, from NOK 380 million to NOK 840 million, with no clear explanation provided during the call.
Q&A Highlights
- No significant weakening in the bank's portfolio, with overall quality slightly improved.
- Customer behavior regarding deposits has stabilized, with less migration to term deposits or mortgage renegotiations.
- Fluctuations in the core Tier 1 capital ratio were attributed to foreign exchange changes, with no underlying concerns.
- The bank is optimistic about future regulatory developments that could facilitate synthetic securitization in Norway.
DNB's earnings call reflected a company that is navigating economic challenges with strategic focus and efficiency. The bank's growth in net interest income and commission fees, coupled with a robust return on equity, demonstrates its strong market position. While facing capital headwinds and a decrease in deposit volumes, DNB's forward-looking strategy, including workforce optimization and potential acquisitions, aims to maintain its leadership in the Norwegian financial sector. The bank's commitment to cost efficiency and digital transformation, along with a stable macroeconomic environment, positions it well for future performance.
InvestingPro Insights
DNB ASA's strong third-quarter performance is further supported by data from InvestingPro. The bank's market capitalization stands at $31.52 billion, reflecting its position as a major player in the Norwegian financial sector. This aligns with the InvestingPro Tip highlighting DNB as a "Prominent player in the Banks industry."
The company's financial health is evident in its attractive valuation metrics. DNB's P/E ratio of 9.26 and Price to Book ratio of 1.2 suggest that the stock may be undervalued relative to its earnings and book value. This could be particularly interesting for value investors, especially considering that the stock is "Trading near 52-week high," as noted by another InvestingPro Tip.
DNB's commitment to shareholder returns is underscored by its dividend policy. The bank boasts a significant dividend yield of 5.85%, with an impressive dividend growth of 24.07% over the last twelve months. This is consistent with the InvestingPro Tip that DNB "Pays a significant dividend to shareholders" and "Has raised its dividend for 4 consecutive years." Such a strong dividend profile aligns well with the bank's reported robust return on equity of 18.9% mentioned in the earnings call.
The bank's profitability is further emphasized by its operating income margin of 63.65%, which is particularly strong for the banking sector. This high margin supports the InvestingPro Tip that "Analysts predict the company will be profitable this year," a forecast that seems well-founded given the bank's current performance.
For investors seeking more comprehensive analysis, InvestingPro offers additional tips and insights beyond those mentioned here. The platform provides a total of 9 tips for DNB ASA, offering a deeper dive into the company's financial health and market position.
Full transcript - DNB Bank ASA (DNBBY) Q3 2024:
Operator: Hello, and welcome to the DNB Quarter Three Conference Call. My name is Caroline and I will be your coordinator for today's event. Please note, this call is being recorded and for the duration of the call, your lines will be on listen-only mode. However, you'll have an opportunity to ask questions at the end of the call. [Operator Instructions] I will now hand over the call to your host Rune Helland to begin today's conference. Thank you.
Rune Helland: Thank you very much and hello, everyone and welcome to this third quarter analyst call. We us in also to answer all your questions are our CEO, Kjerstin Braathen; CFO, Ida Lerner. We also have Head of DNB Markets, Alex Opstad; Head of Wealth Management Hakon Hansen; and Head of Personal Banking, Maria Løvold; and Head of Business Customer Norway, Rasmus Figenschou; and of course also Head of Large Corporate, Harald Serck-Hanssen. Before we open up for questions, Ida will give you a short summary of the quarter please. Thank you.
Ida Lerner: Absolutely. And hi, everyone and thanks for dialing in. The Norwegian economy continues to be robust and is showing clear time of a soft landing. Norwegian Mainland GDP rose by 0.1% in the second quarter and the full year projected Mainland GDP growth is expected to be at 0.6% before ticking up slightly to a more moderate growth rate around 1.1% in 2025. Overall household consumption has increased in the second quarter. And moving on to the third quarter from our numbers you can also see that it's expected to continue to increase in the second half of 2024. Prospects for higher real wages and continued low unemployment are expected to drive an increase in household real disposable income throughout 2024. Unemployment remains low at 2% and inflation levels have come down gradually, but are still at higher levels than what Norwegian Central Bank's long-term targets expect. Wage growth is expected to come in at 5.2% this year and then gradually come down over the following years to 3.3% in 2027. Due to the strong Norwegian economy and the low unemployment levels as well as how well the households as well as corporates are upholding the key policy rate remains unchanged at 4.5% and is expected to remain at this level until March 2025 after which rates are expected to gradually move downwards to 2.75% at year end 2027. This quarter there is a strong performance across the board in the bank. We see strong developments and activity levels in all customer segments. Return on equity at 18.9% in the quarter with a strong activity around the back. 18% adjusted for a one-off gain from Fremtind-Eika merger but still then at very high levels. Net interest income up 2% from the last quarter driven by lending growth and increased activity and we see a strong momentum in the personal customer segment during the quarter. Loan growth in all customer segments personal customers up 0.8%; corporate banking Norway up 0.3%; and a strong growth in large corporate of 4.7%. Deposit volumes were reduced by 4.1%. There are seasonal effects in the personal customer segment which is always natural in -- moving into the third quarter from the second quarter. And in the corporate banking Norway segment we also see more seasonal effects coming from the public sector. In addition to that, there was a decrease in deposit volumes in large corporate, but that's more related to low-margin deposits that are short term of nature. So you can see that, when you're looking at the margins, the deposit margins in the combined margins and in the corporate segment, that they have actually improved. Net commission and fees are up 11.1% from the corresponding quarter last year. We see an all-time high third quarter, resulting in a strong performance from assets under management as well as investment banking, which continues to deliver strong results. Solid asset quality and impairment provisions totaling NOK170 million in the quarter, a strong core Tier 1 capital ratio of 19%, and earnings per share up 22.5% from the third quarter 2023. And with that, we are opening up for Q&A.
Operator: Thank you. [Operator Instructions] We will take the first question from Gulnara Saitkulova from Morgan Stanley. The line is open now. Please go ahead.
Q – Gulnara Saitkulova: Hi. Good morning. This is Gulnara from Morgan Stanley. Thank you for taking my questions. One question on the capital distribution. Maybe can you elaborate, a bit more, how should we think about the capital distribution going forward? Maybe you go to the authorization to repurchase 3.5% of the share capital and you have completed the buyback of 1% in September and specifically, how should we think about the remaining 2.5%? Do you think you will hold off from doing the buyback for now until we get the clarity on the decision, regarding the potential increase in the risk weight floors? Or do you think, now onwards, you will focus more on the dividends also considering their sizable acquisition that you just announced? And maybe one follow-up on M&A. You have now successfully acquired, an integrated bank and now Carnegie. How should we think about your M&A strategy going forward? Are there other areas of your business, where you may potentially consider further inorganic growth opportunities? Thank you
Kjerstin Braathen: Thank you. I'll do the latter and then I'll hand the first one, over to Ida. With regards to M&A versus organic growth, I think our strategy has been very consistent over the years. Our primary priority is to reinvest part of our profits, back into the business to grow organically. And we will consider structural initiatives, the more bolt-on acquisitions if they either add scale to something we're already doing, I guess banking is an example or if it builds a strategic position and capability and in particular, we've been targeting to grow the fee-based part of our business. So plan A, organic growth but nothing new to announce in terms of M&A. It's the same type of thinking where smaller bolt-on acquisitions is what we were always open to consider, if they are in strategically important areas for us.
Ida Lerner: And when it comes to distribution, our dividend policy stands and we have been quite clear on saying that, our primary focus is on focusing on a nominal increase, cash dividend year-on-year. In addition to that, we will continue to use share buybacks as optimizing -- to optimize the capital position. When looking at our capital position today, we have a core Tier 1 capital ratio of 19%, 220 basis points above the regulatory expectation. Within that, there is a pillar two guidance of 125 basis points as well in addition to the prior [ph]. Carnegie transaction is expected to consume approximately 120 basis points. And in addition to that, there is still some uncertainty in relation to the risk weight floors that have been proposed by the NFSA. We still haven't seen a decision from the Ministry of Finance in relation to that. And even though the market seems to expect that these will not be approved, that's, of course, not something that we can count on and therefore, have built that into our assessment as well in terms of new targets. We have -- the Annual General Assembly have given an authority to the Board for up to 3.5% of buybacks this year. We utilized 1%. And I think we can only say that we will continue to monitor this situation and use share buybacks as the optimizing tool.
Q – Gulnara Saitkulova: Thank you.
Operator: Thank you. We will take the next question from line Shrey Srivastava from Citi. The line is open now. Please go ahead.
Shrey Srivastava: Hi, and thanks very much for taking my questions. Two for me please. Firstly, the one area where you missed consensus expectations, were on costs. I can see there's been a little bit of momentum here with the year-on-year reduction in IT consultant spend, for example. Could you provide a brief summary of your plans here, particularly, will the employee reduction program be more broad-based than the 500 staff, you're going to half on staff and support functions? And what sort of costs can be associated with that and when? And secondly, you very helpfully in the call earlier provided a split of the 2024 net income to 2025 from Carnegie. When you then bridge from 2025 to your target ROIC, which implies a NOK1.8 billion net income. Could you provide any numbers around how much comes from revenue synergies and how much comes from industry wallet expansion? For example, if I look at 2021 IB and securities income, it was about NOK2.5 billion higher than in 2023. So, how much of the normalization do you assume versus revenue synergies? Thanks.
Ida Lerner: Yes. If I'll start with your question in relation to costs. I think what we have we are continuously focusing on effectiveness in the bank. We are running a highly effective bank at the moment but we continue to focus on cost efficiency, also going forward, bearing in mind that we still see that the wage growth is quite significant from a Norwegian perspective, and also inflationary pressure hasn't come down to the levels that we expect long-term. And that's also why we are focusing on continued automization, digitalization and are also taking out those effects by reducing the number of full kind of fleets. We have announced a downsizing of 500 full-time employees that we expect to be finalized before the end of first quarter next year. And we still haven't provided you with information in terms of the one-off cost relation to that but we expect to be to provide you with details on that in relation to the Capital Markets Day. And then we will continuously -- continue to focus on cost efficiency also in the times ahead as we also see that wage growth continues to be high and IT expenses is also an area where we want to continue to ensure that we don't under-invest but invest sufficiently to also make sure that we service our customers in the best possible way but also take out automation and digital efficient efficiencies going forward. When it comes to Carnegie and the annualization, we provided you with a split and I hope all of you heard that but I'll just repeat it to make sure that you all have the same information. If we start with looking at the bridge up to NOK1 billion, if you annualize the NOK 535 million year-to-date, that means that you end up at NOK 730 million. In addition to that, the newly acquired businesses of which [indiscernible] accounts for the largest part is due to account another NOK 100 million. In addition to that there have been some non-recurring costs in Carnegie related to restructuring as well as IT costs that is expected to be amounting to NOK 125 million. On top of that we are expecting increased volumes and income stemming from wealth management, the more recurring type of income in countries as well as somewhat of normalization on the investment banking side that is expected to add further NOK 75 million. When moving beyond that, I think I would repeat what we said yesterday in terms of providing you with a bit more detail on the platform that we expect we will be able to generate further income synergies on the Capital Markets Day. But again I just want to reiterate the case that we built and the strategic rationale behind the acquisition of Carnegie primarily built around income synergies. There are of course also some cost synergies, but in particular its income synergies both on the more recurring part of wealth management but also on a normalization of the investment banking side.
Shrey Srivastava: Thank you very much.
Operator: We will take the next question from the line Sofie Peterzens from JPMorgan. The line is now. Please go ahead.
Sofie Peterzens: Yeah. Thanks for taking my question. So I know it was discussed on the press conference but could we just go back to the cost of deposits. If I look in your fact book, I can see that the deposit or interest on deposits as you goals as an expense it declined by around NOK 700 million, quarter-on-quarter. It went from NOK 16.2 billion to NOK 15.5 billion. So it's quite sizable. How should we think about the kind of interest on the -- both from customers? Is this the new run rate kind of the NOK 700 million lower per quarter? Or should we expect it to remain quite volatile. So if you could just talk about lease and also the deposit decline as we saw both on a group level, but also especially in the large corporate division. How should we think about deposit -- or how should we think about the deposits how they are going to evolve going forward? And then my second question would be on the net interest income outlook. Could you just maybe discuss what your view is on interest rate in Norway and also kind of how do you think about the moving forward in your rate sensitivity? And clearly if you disclose rate sensitivity it would be even better if you could dig a number but if you don't, then if you could just talk about them moving parts. Thank you.
Kjerstin Braathen: Thank you, Sofie. First sort of briefly on deposits, so I think it's important to look at not only volumes but also revenues and margins. And the largest for the decrease is in large corporates, but you also see a 7% growth in NII versus the 4.7% growth in lending which clearly illustrates that the more volatile part of the deposits they are low margin and contributing marginally to the revenue. The more valuable positions we have in the process are in current accounts with our SME customers. They are in transaction accounts with our personal customers. And even though there has been some changes in asset mix gradually also because part of the money being spent in the SME and also during the third quarter in personal customers there haven't been structural movements to speak on. So 25% transactional accounts and 75% savings account in personal customers. So there is no shift in our way of thinking in deposits but the fact that we are attractive, we are viewed as a flight to quality that will both win as a public sector company who are which deposit customers for us here in Norway that have the volatility element in this quarter only and it will bring us also substantial volumes from large corporates both in Norway and outside of Norway that yes,they are more volatile but it doesn't mean as much related to our revenues. So the overall picture is growth and stable margins and an NII that grows compared to the last quarter and to the previous quarter and the same quarter last year. I think that is the main picture to hang on to. Secondly, interest rates. We still haven't seen the first rate cut in Norway. Expectations are for the first one to come in March. What matters for the rate setting of the Central Bank is still how inflation develop, how the economy is developing and how the currency is doing. Even though inflation came in slightly lower than expected it seems as though Central Bank is relatively robust in terms of shifting around their plan as they also see that there are some longer-term inflationary effects working in the economy. And most people believe it will be more difficult to get from where we are today on inflation not fully down to the 2% level and we're still somewhat robust. So the most likely scenario is believed to be the first rate cut in March next year. And over an 18 month to 24 month period an aggregate of five rate cuts bringing down to 325, which is expected to be the new sort of normalized level substantially above where we were prior to the pandemic which was 175. In terms of rate sensitivity we can't really be very specific. As you well know we have a floating rate book and our rates with the repricing that we do towards our customers. We'll just say it has had a positive impact on the way up. It needs to be expected that we're in great slowdown and that will have a negative impact on the NII and we will manage and optimize within that across the account.
Sofie Peterzens: Thank you.
Operator: Thank you. We will take the next question from line Martin Ekstedt from Handelsbanken HSB. Your line is open. Please go ahead.
Martin Ekstedt: Hi. Martin from Handelsbanken here. Thank you for taking my questions. So two if I may. So you mentioned on the call this morning in relation to potential capital headwinds your IRB model really is?. So could you share some more detail on this please – these processes. Is it several portfolios? Are they taking separately? What about timing for these? And do you have a sense of the direction of risk rate going forward? Overall it seems risk weights came down quarter-on-quarter which continues the trend from half quarters I believe. And then my second question if I may. So you're eliminating 500 positions. So -- but staff increased by around 100, full-time employees quarter-on-quarter. I just wanted to check from what basis will you eliminate 500 jobs. Is it from this quarter or last quarter? Thank you.
Ida Lerner: Yes. So I think, first of all, if I start with capital headwinds. What I tried to convey this morning, was all the -- all elements that impact our capital position, on a yearly basis. That was including the SREP process, which is an annual process. The IRB models and the follow-up from the NFSA is also an annual process, whereby we have an NFSA scrutiny of all our IRB models on an annual basis. So that's not -- that was not an indication of anything apart from the fact that that's kind of part of the yearly -- everything that happens on a yearly basis. So I wouldn't say that, there is any indication of either way. On -- when we talked about the staff reductions, what we've said is that a net number. We're talking about a gross number of reduction of 500 full-time employees. We're looking at it from the Q2 numbers. On the other hand, what we have increased the staff in the third quarter, is in relation to IT and technology, which are important areas for us to continue to invest in. And we have also seen some added staff in relation to KYC.
Martin Ekstedt: Okay. Okay. Understood. Thank you.
Operator: Thank you. We will take the next question from line Tarik El Mejjad from Bank of America. The line is open now. Please go ahead.
Q – Tarik El Mejjad: Hi. Good afternoon, everyone. Just a couple of questions, please. First one follow-up on Gulnara's question about the capital return in conjunction with Carnegie and the risk weight floor for serial mortgages. So I understand, that you reiterate the guidance and the dividend policy with the payout and the better use of the share buyback to manage the capital. But if we think of the close period for -- the closing period for the deal plus the -- as you hear from the NFSA, should we expect that there will be a hold on the division form of a buyback in the time being and not putting anything in our numbers? Or it's -- there's no necessarily any relation, with that? And second question is on Slide 10, with your bridge for NII quarter-on-quarter. Can you please give us an indication, what's the other moving part relate to? And -- because it's quite sizable just to understand what's behind that. Thank you very much.
Kjerstin Braathen: I'll do for a change a quick response to the capital return and then Ida on the NII bridge. I think -- I mean, what we can try to guide you as much as we can. But what you actually put in your numbers, you need to evaluate yourself. I think the clear element is that we've announced an acquisition for 420 basis points. There is a proposal from the NFSA of a risk weight floor of 80 basis points. We know that the market doesn't believe, it's very likely to go through, but all the same, it's natural for us to await that in order to consider any further share buybacks. We know that the messaging is related to our dividend policy, which is consistent as we've already communicated and reiterated by Ida earlier on the call.
Ida Lerner: In other NII, there is a number -- there are a number of different items, but it's among other things, NII related to risk management, which is a smaller part of our business but still a somewhat in addition to NII related to long-term funding, and also reduce guarantee fund levy are the main products in that.
Q – Tarik El Mejjad: Okay. Thank you for your answers.
Ida Lerner: Thank you.
Operator: Thank you. We will take the next question from line Patrik Nilsson from Goldman Sachs. The line is open now. Please go ahead.
Patrik Nilsson: Yes. Hi. Good afternoon, and thanks for taking my question. I just had a question on NII, because interest rates are expected to remain higher in Norway compared to many other European countries, which should all else equal be a relative benefit to NII. But do you see any risks that are prolonged higher rate environment will trigger an increase the amount of deposit migration or increase mortgage negotiation requests? And also in conjunction to that, what would be the optimal interest rate level for DNB to operate in? Thank you.
Kjerstin Braathen: Thank you, Patrik. As for the Norwegian economy, you're quite right pointing out that this is a relatively -- relative positive that rates are staying higher for longer unless we see risks, for example, related to a weakening of the economic growth if rates need to stay higher for any reason at all. And we do not see that type of risk. On the contrary, I think the reason why it's taking longer in Norway to see the first rate cut is that the economy has developed a stronger than expected and anticipated at the outset of the year. So we are not seeing any weakening in our portfolio. We are not seeing more customers looking for installment relief. We are not seeing signs of weakness. On the contrary, this quarter we have seen a slight improvement in our portfolio quality overall. Important always to point out when we talk about that, that we're talking broadly and systemically and that we can never sort of talk to the potential customer specifically that could impact our numbers in the future. But the fact of the matter is that the Norwegian economy is very resilient and has been so, and this is why also we are remaining at a higher interest rate level than our neighboring countries. Second question, I don't recall. Can you repeat that the second one?
Patrik Nilsson: Yes. It was also -- so appreciate the response on the strength of the economy, but I was just wondering if just seeing the interest rate level being higher for longer in Norway, could that potentially trigger customers to migrate deposits from transaction accounts into term deposits or maybe increase the incentive for customers to call in and start negotiating mortgages?
Kjerstin Braathen: Well, I think this is -- so, I commented on the risk to the economy overall. With regards to customer-specific negotiation and behavior, we have seen less of -- less changes in the mix effect than we have seen previously. But we would like for our customers to manage their deposits in a rational way. So we continue to work proactively with them to manage their deposits and placements in an accountable way and see some movements within accounts, but nothing that materially impacts the number and it at a lesser pace in the third quarter than we've seen during the first half. With regards to rate renegotiations that was also very active in the first quarter less so in the second quarter and even less this quarter. As you can see from our report this quarter the margin pressure is marginal also in personal customers. And overall the message is that margins are stable. So we're not seeing that. No.
Patrik Nilsson: Thanks a lot. That's very clear. Appreciate it.
Operator: We will take the next question from line Riccardo Rovere from Mediobanca (OTC:MDIBY). The line is open now. Please go ahead.
Riccardo Rovere: Thank you. Thank you for taking my question. I have a couple, if I may. The first one is again on NII, just to be sure. I'm having a look at the press release that you put out right at the end of December after the Norges Bank increased rates for the last time. And the tax we were using at that time was DNB has decided to increase the interest rate on all saving accounts by 0.25 percentage points or more. The interest rate on mortgages will increase by up to 0.25 percentage points as said in their blacklist blah, blah, blah. Now it's fair to say that in the very last part of the tightening cycle, I don't know why but you decided to pay out deposits and of that because this is what the press release is saying. And would it be start to assume that if you as the rest of the banking industry behaving a rational way as you keep stating, it would have been natural, at least at the beginning of a recent cycle to again be rationale and whatever has been given on top to depositors will be taken away? This is the first question. The second question is on the risk-weighted assets. Take off by NOK 20 billion. But when you look at the loan book, so personal banking last large corporate plus business banking this -- the growth quarter-on-quarter is something like NOK 13 billion or NOK 15 billion while risk assets go up by NOK 20 billion and the increase is completely driven by credit risk. There is nothing on the op risk. There is not much on the market risk. And the risk rate seems to be kind of flattish quarter-over-quarter. So I was wondering, how can credit lease go up by NOK 20 billion when the loan book has gone up by NOK 13 billion, is there any funny thing maybe relates to repos or whatever it is? Thanks.
Kjerstin Braathen: Thank you, Riccardo. You are reading the press release from December quite right. And it does reflect the fact that there was a slightly increasing deposit beta and cash throughout the rate cycle which I think is quite natural for a market where you have a floating rate structure. With regards to what will happen when it moves downwards again and the qualification of rationality and the behavior in the market I think rationality needs to be seen overtime. It is a competitive market. And what we or any of our competitors will or will not do at the initial rate hike, I think, it would be too hypothetical for me to comment on. But it withstands that we view this market as rational and the fact that we now have several of the larger saving bank players working on mergers will rather strengthen than weaken the rationalities as we see it.
Ida Lerner: On risk-weighted assets, I think profit generates 35 basis points this quarter. Counteracting that is as you rightly point to volumes and the effects of the volume growth. But in addition to that, you also have the FX effect and you also have counterparty risk which increases, which is also to some extent related to counterparty risk in other areas. But these are minor, but there's a lot of different small elements here that adds up.
Riccardo Rovere: But the FX effect should be visible also on the book side on the loans, so on the restricted assets and on the loans. But the loan growth is two-thirds of that the risk-weighted asset credit risk. So I was wondering, if you look at the divisions, okay, not the overall group, overall group is growth is definitely higher than that. But when you look at personal banking plus business [indiscernible].
Ida Lerner: If you add the market risk element to that which you wouldn't see on the corporate customer or the personal customer segment.
Riccardo Rovere: Okay. Okay. Okay. So there are no fun thing...
Ida Lerner: It's not a large part. As you know market risk is a fairly small part of our risk.
Riccardo Rovere: And there are no fun -- in the restricted assets, no one-offs or anything?
Ida Lerner: There are no funny parts in this, no.
Riccardo Rovere: Okay. Okay. That’s it. Thanks.
Operator: Thank you. We will take the next question from line of Jacob Kruse from Autonomous Research. Your line is open now. Please go ahead.
Jacob Kruse: Thank you. So two questions. The first is just on the Carnegie acquisition. You're getting a meaningful Swedish corporate banking and private banking presence, which I guess for your bank in Norway would be -- would normally be combined with the lending business which Carnegie doesn't really have. So, my question is just, are you with this acquisition becoming a bit more active in the lending market as well either on the mortgage side or on the corporate side? And my second question is just, I guess related is, should we view this as any way as DNB moving away from the kind of more regional business to a more a pan-Nordic business? Thank you.
Kjerstin Braathen: Thank you, Jacob. I would highlight that it has been an ambition for quite some time to strengthen our presence across the Nordics and we have been growing that activity faster than any other activity in our business also for the past five years. Now with the Carnegie acquisition, we're strengthening investment banking, private banking and asset management, not corporate banking as such, because they do not have a balance sheet on an existing lending activity. That being said, we have a meaningful corporate lending activity in Sweden. And of course, we work very closely with investment banking and wealth management on that and certainly this is part of the potential we see going forward, how we can build on that in order to develop and help more customers and generate even better results. So our appetite is there to grow more in the Nordics, also outside of Norway, but this is on the corporate side. We have no ambition to grow or take any position on the mortgage side. It's not the timing that DNB is moving away from Norway. We still have approximately 77%, 78% of our revenue from the Norwegian market. And even though this is a transaction that is transformational for our investment banking and asset management and private banking business it's a relatively small transaction if you consider DNB scale overall. So we're well-anchored in Norway and the Norwegian economy, but this is an attractive opportunity to expand and build a stronger and even more diversified fee base.
Jacob Kruse: Okay. Thank you. And just a follow-up. I guess most private banks would also mortgages to their clients. Would that not be part of your Swedish, sort of, strategy?
Hakon Hansen: Thank you. Yes, it's Hakon Hansen, Head of Wealth Management. We will -- when we have all the licenses in place we will look into how to deploy mortgages also in the Swedish market for private banking clients.
Jacob Kruse: Okay. Thank you very much.
Operator: Thank you. We will take the next question from line Namita Samtani from Barclays. The line is open now. Please go ahead.
Namita Samtani: Hi and thanks for taking my questions. Just a couple of questions on net interest income. So the trade contributed NOK 81 million to the net interest income both quarter-on-quarter. I'm just wondering what determines whether this is positive or negative in the quarter. I would have thought it had something to do with the steepness of the curve. But when I look at the one year versus five-year Norwegian bond yield spread it got more negative in the third quarter versus the second quarter. So we've actually expected a negative treasury impact but here it's positive. So any color there would be helpful. And secondly on net interest income, how come long-term funding was positive NOK 21 million quarter-on-quarter? If you issued a lot more senior preferred versus what matured in the quarter and I would imagine there's even the negative rollover impact from the AT1 issued in May. So is that sort of wholesale funding advantage going forward? And lastly just on your CMD are you going to give new business targets for the years ahead? It's just been very new heavy from DNB in terms of the 500 FTE cuts the Carnegie deal. So I was just wondering what you have left to say. Thank you.
Kjerstin Braathen: Let me start by the latter and I'll leave the treasury question to Ida. Our Capital Markets Day is primarily an opportunity to give you more depth and more color on our business and to see a broader representation of management. It's not like we try to manage the business in a direction where we have a lot of surprises to deliver. So I would like just to manage expectations in that sense. So we are planning for that and hope and believe it will be worthwhile your time. But we haven't lined up a series of new acquisitions that we will share on CMD. But one of the things that we will consider and we'll try to highlight is the outlook and the target for our business in the years to come.
Ida Lerner: On treasury NII I think, first of all, what we're trying to do when presenting the bridge in a way that we do in the quarterly presentation is to try to capture what of the treasury income is related to the customer activity and also in terms of repricing effect, portfolio development and also a change in product mix. And of course there we're trying to show you what are the actions or the developments that we're seeing in the treasury-related income that is connected with customer activity. This quarter we see that there are some funding activities, including effects from long-term funding that has a positive effect in the quarter, which is a link to our customer activity. Therefore, it's presented in the way that it is. Historically, over the past few years during the interest rate hike, we have seen an increase in treasury-related income, which is also natural bearing in mind that we take -- we utilize the opportunities that it gives in terms of the deposits we get in the personal customer segment and utilize that also for lending opportunities, which again and also position ourselves in a rate increase environment as on treasury income in addition to that. Equally on the way, if we are going down on the interest rate cycle, we would then try to position ourselves in order to also optimize and earn some money on that. But I think that's pretty much what I can say. And your last part of the question in relation to wholesale funding, I don't think that we are seeing what you're -- are you pointing at.
Namita Samtani: Thanks very much.
Operator: Thank you. We will take the next question from line Roy Tilley from Arctic Securities. The line is open now. Please go ahead.
Roy Tilley: Thank you very much. I have two questions. The first one, a follow-up probably this morning. I was -- I asked about the interest expense on subordinated debt. I was just wondering, if you had any update to that one. What's the reason for the decline in the quarter? And the second question was on CET1. So last quarter, you said in the presentation that the expectation from the FSA was 16.9%, now it's 16.8%. So I was just wondering, what's the movement there? And secondly, is there any update on Luminor or potentially when you'll get the IRB relief from Sbanken, just to see if there are any positive events on CET1 here that's not in the estimates yet?
Ida Lerner: Yes. First of all, I'm sorry, Roy, for not being able to answer your question this morning. But yes, we have the answer now and well spotted, I would say. Interest on subordinated loan capital is changing quite significantly from the last quarter to now to this quarter. But that needs to be seen together with other interest expenses, which is two lines further down. And the reason for that is actually purely technical, whereby we have made a technical upgrade, which had an impact this quarter in terms of the shift of the booking of this from -- between those two lines. I wouldn't expect that to remain the same for the future quarters. It could very well be that it's moved back to the interest on subordinated loan capital in the next few quarters. But those two needs to be seen in combination. And then as you can see, there is not a big change. On the core Tier 1 capital ratio, the reason why it moved from 16.9% to 16.8%, these are related to FX fluctuations. And it's really related to countercyclical buffers and how it's distributed between the purely Norwegian kroner lending we have and the lending that we have in US dollars and other currencies, which means that the expectation changes in line with that. So therefore, you see fluctuations between 16.9% and 16.8% in between quarters, but there is no underlying change there to that -- apart from that. On the Sbanken approval, we still haven't had an approval from the NFSA in relation to Sbanken. So there are no news there apart from the fact that we've sent an application to get that approved.
Roy Tilley: Okay. Thank you. And Luminor still no comments on the news there, yes?
Ida Lerner: Luminor, we don't have any comments on that. No.
Roy Tilley: Thank you very much.
Ida Lerner: Thank you.
Operator: Thank you. We will take the next question from line of Sofie Peterzens from JPMorgan. The line is open now. Please go ahead.
Sofie Peterzens: Yes. Thanks for taking my follow-up question. Just a very brief one. In terms -- or you mentioned this morning that the Pillar 2 R and G are up for review with your SREP in November. Should we expect any changes to your Pillar 2, R or G? And also, will the Carnegie transaction have any impact on your minimum capital requirements? Thank you.
Ida Lerner: On the latter part of the question, I can't see that, that would have any implication on our Pillar 2 requirements or Pillar 2 guidance that set on an overall level related to the bank. And as you -- as we've also communicated, the Carnegie transaction should not change our risk profile or our risk appetite, and therefore, that shouldn't really have an impact. But again, that is something that we will need to have a dialogue with the regulators on. I don't -- I can't comment on the SREP process, apart from the fact that you know that this is an annual process where we get a decision from the DNB College, the NFSA and it's expected to come in the beginning of November.
Sofie Peterzens: Okay. Thank you. And the Carnegie transaction is also not going to have any impact on your countercyclical buffers, or any of the other capital buffers that you have?
Ida Lerner: No.
Sofie Peterzens: Okay. Perfect. Thank you.
Ida Lerner: Thank you.
Operator: Thank you. We will take the next question from Johan Ekblom from UBS. The line is open now. Please go ahead.
Johan Ekblom: Thank you. Sorry to come back to the question on the subordinated loan capital, but I'm not quite sure I follow, because when I look at the interest on subordinated loan capital fell by NOK 285 million. The contribution from other interest expenses improved by NOK 178 million. So it doesn't square that there's a move from one line to the other because they're both moving in the same direction. So, quarter-on-quarter, those two effects of NOK 460 million positive. So I'm -- maybe if you can clarify.
Ida Lerner: Yes. But there are underlying movements within those areas as well. So what I'm saying is that there are -- there need to be seen in connection in terms of the change that we've seen on interest of subordinated loan capital hasn't changed this quarter to the extent that you're seeing there. But that -- it should really have been more stable quarter-on-quarter. And therefore, you will see the movement in terms of what you're seeing on other interest expenses. So if interest on subordinated loan capital would have remained at the same level, then you have to deduct that from other interest expenses.
Johan Ekblom: Okay. But so if we do that, then other interest expenses went from NOK 380 million to NOK 840 million. So then I guess, the question is what drove that 150% increase or benefit that you have on the other interest expense? But it's a big number, right? It's NOK 0.5 billion...?
Ida Lerner: Yes. Yes. Yes. No, I truly agree with you.
Johan Ekblom: So what is it?
Ida Lerner: I don't have the answer for you there.
Johan Ekblom: Okay. Maybe we can follow-up after.
Ida Lerner: Yes absolutely.
Johan Ekblom: Thank you.
Operator: Thank you. We will take the next follow-up question from line Riccardo Rovere from Mediobanca. The line is open now. Please go ahead.
Riccardo Rovere: Yes, thanks for taking my question. Just curiosity, the European commission has put out a consultation paper about synthetic securitization to try to make them easier to use, or maybe even an effective anything on this area would you have room to use synthetic securitization to say optimizing your capital allocation and capital absorption?
Kjerstin Braathen: Thank you, Riccardo. The framework around synthetic securitization has been slower to come in our way, so we're a little bit behind Europe in that area. We are fully aware that there are further discussions in Europe now to expand on it and make it easier. And that aligns with more ambition to implement EU regulations more rapidly they've done in the past. So this is certainly something that we will be looking into to use as a tool to optimizing our capital filing. There's nothing that we have ongoing concretely at the moment.
Riccardo Rovere: Yeah, it's like saying very correctly your word is like saying that at the moment you are not in the position to use any of these instruments basically kind of?
Kjerstin Braathen: Yes. We are waiting for that framework, but currently we are not there. But we're hoping in not too long that we will have a larger toolbox for that in Norway as well.
Riccardo Rovere: And if you could, if you were allowed to use this kind of instrument these toolbox, do you see room for market capital absorption optimization on the back of that or between minimum [ph]?
Kjerstin Braathen: I'm sure there would be opportunities that we would look into without being specific after volumes and time, but this would definitely be something we would look into.
Riccardo Rovere: Okay. Thank you.
Operator: Thank you. There's no further question at this time. I'll hand it back over to your host for closing remarks.
Rune Helland: All right. Thank you so much for your valuable questions. And we would like to wish you all of best for the rest of the day. Thank you so much.
Kjerstin Braathen: Thank you.
Hakon Hansen: Thank you.
Ida Lerner: Thank you.
Operator: Thank you for joining today's call. You may now disconnect.
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