Earnings Call: Q4 2018

Feb 1, 2019

Summary

2018 net profit fell to DKK 15bn and ROE to 9.8%, with Estonia-related costs and weak trading weighing on results. For 2019, net profit is guided at DKK 14bn–DKK 16bn, while AML investment, higher funding costs and margin pressure remain key considerations.

Hello, and welcome to the presentation of Danske Bank's financial result for 2018. Thank you all for taking the time to listen in on this call today. My name is Jesper Nielsen. I am interim CEO, and with me I have our CFO, Christian Baltzer, and our Head of Investor Relations, Claus Ingar Jensen. Slide one, please. In today's call, we will present Danske Bank's financial results for 2018. We aim to keep this presentation to around 20 minutes. After the presentation, we will open up for a Q&A session as usual. Afterwards, feel free to contact our Investor Relations department if you have any more questions. Slide two, please. 2018 was a challenging year for Danske Bank, primarily due to the very serious issues arising from the activities of the previous non-resident customers at the Estonia branch, but also due to the financial results which did not meet our own expectations as they were at the beginning of the year. Net profit for the year came in at DKK 15 billion, which was in line with our latest outlook announcement against DKK 20.9 billion the year before. The result was affected by our decision to donate the estimated gross income from the terminated non-resident portfolio in Estonia and by difficult conditions for trading income-related activities, in particular, throughout the year. The result represents a return on shareholders' equity of 9.8% against 13.6% the year before. In 2018, the Nordic economies were generally characterized by stability and good activity levels. The positive business momentum led to an increase in lending of 3% from the year before, based on good customer activity in most markets. However, currency effects and margin pressure had a negative effect on income and net interest income in particular. Lending at Banking DK, which represents around half of total lending, grew 1% year-on-year, driven by our commercial activities. Lending at Banking Nordic, which represents one third of total lending, grew 5% year-on-year or 7% in local currency, with growth in most segments. As expected, the impact of the Estonia case on our retail business in Denmark, seen in the third quarter, continued for the rest of the year, whereas the number of commercial customers remained flat. On a net basis, approximately 11,000 core retail customers, the so-called NemKonto customers, left Danske Bank in 2018. Through a large number of dialogue meetings, we have taken every opportunity to engage in dialogue with our customers. The outflow of retail customers is very much concentrated in the Danish part of the business, whereas we saw stable trends and increasing business volumes in the other Nordic countries. The impact of the Estonian case also affected customer satisfaction, however, with some variation. In Norway and Finland, we remain on target, ranking in the top two for both commercial and retail customers. Whereas in Sweden we saw a negative effect predominantly among retail customers. In Denmark, customer satisfaction declined one notch in both segments and in Denmark as well as in Sweden, we are below our target of being in the top two. The significant decline in income from trading activities in the financial markets can be attributed to uncertainty related to future interest rate developments and challenging conditions in the rates markets. The uncertainty in the financial markets also had an impact on our Wealth Management business, where fee and trading income were negatively affected. Expenses came in significantly higher than the year before as a result of the donation of the estimated gross income of DKK 1.5 billion from the non-resident portfolio in Estonia in particular. Expenses were also affected by the inclusion of SEB Pension Danmark in the cost base, increased costs for regulatory compliance as well as the costs of the Estonia investigations. Our credit quality benefited from benign macroeconomic conditions and remained strong. A continuation of loan impairment reversals through most of the year had a positive impact on the financial result. Our capital position remains strong. The Common Equity Tier 1 capital ratio of 17% is well above the minimum regulatory requirement and also above the target level of around 16%. in October, we announced that we had decided to discontinue the share buyback program. The program therefore ended after our having bought back shares for a total of DKK 6.9 billion. Our funding activities in non-preferred senior format resumed in January, when we issued a total of $3 billion. The transaction met with very solid interest from investors with order books totaling more than $10 billion across the U.S., Europe, and Asia, and was strong evidence that we retain good market access. However, we fully acknowledge that the funding spread largely reflects the negative impact of the Estonian case. On the basis of our result, the board of directors is proposing a dividend of DKK 8.5 per share, representing a payout ratio of 51%. Finally, for 2019, we expect a net profit in the range of DKK 14 billion-DKK 16 billion, excluding any potential gain on the sale of Danica Pension Sweden. Christian Baltzer will make comments that are more detailed on the outlook for 2019 later in this presentation. Slide 3, please. Before we go into details about the financial results, let me just say a few words about the Estonian case, which gave rise to considerable attention in the media and turbulence in the financial markets during 2018, especially after we published the findings of the internal investigations in September. We have included a comprehensive description of the course of events in our annual report, and so I will not go into detail in this call. We're still working tirelessly on the remaining part of the portfolio investigation in order to identify suspicious activity. However, as stated previously, the timing of the completion is uncertain and subject to dialogue with the authorities. It is also not yet possible to estimate the timing or amount of any potential settlement of fines. We are being investigated by Danish, Estonian, and U.S. authorities. In Denmark, the Danish FSA and the Danish State Prosecutor for serious economic and international crime are investigating us. In Estonia, the FSA and the Estonian Office of the Prosecutor General are looking into the case. In the U.S., we've had an information request from the U.S. Department of Justice in connection with a criminal investigation in relation to our Estonian branch. In addition, a class action lawsuit has been filed in the U.S. related to our ADR program. In January, we received a letter from a French court in Paris summoning Danske Bank to an interview relating to the ongoing French investigation of organized money laundering. The letter states that the judge envisages changing Danske Bank's status from that of an assisted witness to being placed under formal investigation. It is very important for us to stress that we cooperate fully with all the authorities. The internal work on the remaining part of the internal investigation is a key priority for us. We have established a separate governance structure in order to optimize both internal and external resources and to strengthen our dialogue with all relevant authorities. The day-to-day work is now anchored with two members of the executive board. Slide 4, please. Now, I would like to talk about our efforts within AML. As you know, since 2014, we have significantly improved our setup, capabilities, and competencies through substantial IT investments and allocation of resources to combat financial crime. However, as financial crime continues to evolve, we will continue to invest substantially. Our upscaling of efforts within AML has added around 600 FTEs to this area in 2018. This creates both a cost overhang in 2019 and a high dependency on manual processes. Further, a management review has concluded that more resources are needed in 2019 as a continuation of our efforts to improve and strengthen our work within AML. This creates further expense pressure from additional resource allocation in 2019. In light of the rapidly increasing resource allocation we've seen over the last year, it is a key priority for us to launch measures to improve the efficiency and the quality of our AML work. The purpose is twofold. Firstly, it is paramount for us that we become best in class among our peers, especially on the back of the Estonia case. Secondly, improved efficiency for AML procedures is essential for our ambition to offer the best customer experience. Therefore, we have decided to accelerate our digitalization efforts in order to avoid manual processes and future cost increases in this area. Detailed identification and scoping of specific areas are ongoing, and we expect to provide an update regarding our initiatives within AML digitalization efforts during 2019. The total planned investments amount to up to DKK 2 billion over the next three years, earmarked for AML digitalization efforts. The impact on expenses in 2019 is estimated to be around DKK 0.3 billion. Christian, please proceed. Thank you. Slide 5, please. Thank you, Jesper. Let's take a look at the main items of our financial results. Net interest income for the year came in at DKK 23.6 billion. This was slightly down from the level the year before. Excluding currency effects, NII was up 1%, driven mainly by lending growth of 3%. In addition to the currency effect, lower margins and transfer of the Baltic business to the non-core unit had a negative effect on NII. Issuance of AT1 in the second quarter also had a negative effect. Net fees came in at DKK 15.4 billion, down 2% from the year before. Fee income was adversely affected by lower customer activity in the capital markets, mitigated, however, by the inclusion of SEB Pension Danmark in the Wealth Management with full effect from the third quarter. Net trading income came in at DKK 4.7 billion, down 34% from the year before, when income was high. The year income was increasingly affected by challenging market condition in FICC in particular. in Q4, we had a positive one-off impact of DKK 0.2 billion from the sales of assets. Other income came in at DKK 0.7 billion, down 55% from the year before owing to the sales of Krogsveen and weaker risk results in the health and accident business at Wealth Management. Operating expenses came in at DKK 25 billion, up 10% affected in particular by the donation of the estimated gross income from the non-resident portfolio in Estonia of DKK 1.5 billion. Finally, we saw net loan impairment reversals of DKK 0.7 billion as credit quality continued to be strong. Slide six, please. During 2018, we continued to see strong business momentum in our banking units based on an increase in lending in almost all segments because of higher customer activity than last year and a good inflow of new business. In Banking Denmark, we continue to see good customer activity and stable lending growth of around 1%, driven by commercial lending, which was up 3%. Profit before loan impairment charges was down 2% due to an increase in cost of regulatory compliance. Overall, credit quality remains strong, and we saw a high level of net impairment reversals, although the level was lower than the year before. At Banking Nordic, we continue the progress in all markets based on a good inflow of business from both retail and commercial customers. Measured in local currency, lending volume was up in almost all markets. Most notably is Sweden, where volumes within retail and commercial rose 12% and 10% respectively. In Norway, growth in lending was led by retail lending, which was up 6%. In Finland, lending to commercial customers were up 12% from the year before. Total income was slightly down, despite NII being up 5% from the level the year before, as the sales of Krogsveen the first quarter lowered other income. The sales also affect the expenses, which were down 3%. Overall, credit quality remained strong, and we saw net reversals in 2018 against net charges the year before. This trend was driven by a couple of cases in Norway. In Northern Ireland, the business in 2018 was characterized by a good underlying performance and good customer activity, despite continued uncertainty around Brexit. Measured in local currency, lending and deposits were up 8% and 7% respectively. Profit before loan impairment charges was down 23% as the result in 2017 included a positive one-off of DKK 0.3 billion related to staff pension agreements. Slide seven, please. Let's take a look at the units that are more dependent on the financial market. At C&I, profit before impairment declined 33% from the level last year when income was very high. The main reason for decline was significantly lower income from FICC. As a combination of difficult factors in the financial market had a negative impact on our ability to generate income for facilitating customer transaction for most of the year. Total income declined 22% from the level the year before, mainly because of lower trading and fee income. Income was adversely affected by the transfer of the Baltic exposure to non-core. However, this effect was offset by one-off income from the sales of assets. Expenses were down 7% due to lower performance-related costs and transfer of majority of the Baltic exposure to non-core. Impairment showed a charge of DKK 0.3 billion as credit quality of the oil-related exposure continued to stabilize in 2018. In the fourth quarter, however, we saw charges against few single name exposures. At Wealth Management, profit before tax was down 30% from the level the year before. The negative development was caused in particular by the health and accident business. The acquisition of SEB Pension Danmark was approved in the second quarter and included in the number as of June. Fee income was up 1% from the level the year before, due mainly to the acquisition of SEB Pension Danmark. At Asset Management, performance fee in the fourth quarter amounted to DKK 154 million against DKK 368 million the same quarter the year before. Trading income and other income came in lower than last year, adversely affected by lower investment and risk result in the health and accident business. Expenses were up 18%, due mainly to the increased regulatory cost and the effect of the acquisition and integration of SEB Pension Danmark. Asset under management were up 3%, owing mainly to the acquisition of SEB Pension Danmark. In 2018, net sales at Asset Management amounted to a negative DKK 18.4 billion, mainly because of the outflow of a few large customers. Premiums in Danica Pension amount to DKK 44.1 billion against DKK 39.7 billion the year before, and included premiums from SEB Pension Danmark of DKK 5.6 billion. In December 2018, Danica Pension announced the sale of the Swedish part of the business. As the deal is subject to approval by the authorities, the financial impact is expected in 2019. Slide eight, please. Moving to expenses. Total expenses for the year amounted to DKK 25 billion, up DKK 2.3 billion or 10% from the level last year. Excluding the donation of DKK 1.5 billion, expenses were up DKK 0.8 billion or 3%. In 2017, expenses included a positive one-off of DKK 0.3 billion related to a staff pension scheme in Northern Ireland. The increase in staff and consultancy cost includes higher expenses for compliance, the investigation of the Estonian branch, and expenses related to the acquisition of SEB Pension Danmark. Lower performance-related expenses had a mitigating effect. In 2019, expenses are expected to be at around the level of last year, including the donation of DKK 1.5 billion. The increase is underlying cost is caused by AML-related cost, which include both an overhang from upscaling in 2018 and an estimated cost of DKK 0.3 billion in 2019 for our dedicated efforts to improve the quality and efficiency of AML processes. Higher VAT cost and the full year effect of the acquisition of SEB Pension Danmark will also affect expenses in 2019, as will the expected higher activity rate cost. Slide nine, please. Credit quality remains strong. In fourth quarter, loan impairment charges for our core activities showed a small reversal, excluding a positive one-off of DKK 0.1 billion, we had a small charge in Q4. The loan losses ratio for the quarter, excluding non-core activity, was -1 basis point. All Nordic banking units showed net reversals in the fourth quarter. At Banking Nordic, the impairment figures benefited from a sale of debt claims of around DKK 0.1 billion. At C&I, impairment charges amounted to DKK 0.2 billion in the fourth quarter, driven by single name exposure within oil-related exposure. At Banking DK, the impairments were lower than the previous quarter due to lower charges against exposure in the agricultural segment. Slide 10, please. Our capital position remains strong with the reported CET1 ratio of 17% at the end of the third quarter. In October, our CET1 target was increased to around 16%, following the increase in Pillar 2. The total capital ratio of 21.3% reflects the increase in CET1 of 0.4 percentage point from the preceding quarters. The total capital target is above 20%. The development in CET1 ratio benefited from the effect of the discontinued share buyback program. However, this effect was partly offset by the move of Swedish mortgage risk weight floor from Pillar 2 to Pillar 1, which partly explained the increase in the risk credit REA. The leverage ratio of 4.6%, accounting to transitional rules, ends 5.5% in the basis of fully phased-in rules. Slide 11, please. Then finally, the outlook for 2019. We expect net interest income to be around the level of 2018, as volume growth will offset higher funding cost and margin pressure. This is subject to changes in funding spreads. Net fee income is expected to be higher, due mainly to the effect of the acquisition of SEB Pension Danmark and subject to customer activity. Expenses are expected to be around the level in 2018, including the donation of DKK 1.5 billion, due to higher costs related to AML, SEB Pension Danmark, VAT, and activity. The outlook includes a cost of DKK 0.3 billion earmarked to AML digitalization efforts. Loan impairment charges are expected to be higher. Finally, we expect net profit for 2019 to be in the range of DKK 14 billion-DKK 16 billion. Slide 12, please, and over to you, Jesper. Thanks, Christian. Those were our initial comments and messages. We are now ready for your questions. Please limit yourself to two questions. If you are listening to the conference call from our website, you are welcome to ask questions by email. Operator, we are ready for the Q&A session. Thank you. Ladies and gentlemen, if you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. Please stand by while we compile a Q&A queue. This will only take a few moments, and if you wish to cancel your request, please press the hash key. Once again, please press star and one if you wish to ask a question. Once again, that is star and one if you wish to ask a question. We will now take our first question. The line comes from Robin Rane. Your line is open. Please go ahead. Thank you, and thank you for taking the question. You are guiding for flat expenses, basically 2019 versus 2020, including the donation. How much of cost in 2019 would you say is of a more temporary nature? Then secondly, given that we were not provided by new details from the investigated suspicious customers or the investigations, should we take that as good news that nothing of new substance has surfaced, or can't we read in something like that into the no news? Thank you. Okay. I will take your first questions, and thank you for that. You are asking which part of this cost increase we can regard as more temporary. I think it is important to comment that the VAT and the SEB are of a more permanent nature, of course. Then we have the overhang from our up-staffing in AML, which is basically what we are trying to offset as when we invest this amount in IT digitalization. Some of the increases that you are seeing from more manual labor, we are going to over time take back down, so that we can have a more efficient way of dealing with our AML activity and compliance activities. You should see the AML and IT investment as an upscaling for a period that will eventually come down again as we have digitalized most of our processes. And for the second question, in terms of the investigation, I think as we said in relation to Q3, the picture that stood from the publication of our internal investigation on the 19th of September still stands. We have no intention of updating the market on a continuous basis. We have that dialogue with the authorities, and that also means, of course, that the picture painted at that point in time seems to be the right one. Thank you. Thank you. Our next question comes from the line of Johan Ekblom. Your line is open. Please go ahead. Thank you. Just have two things. Just in terms of the customer flows, you sort of indicated there's been some acceleration in net decline of customers. How should we think about that going forward? Do you think we're at the peak in terms of negative customer flows? How long should we expect this to last? Maybe related, what kind of action are you taking to reduce the potential impact in terms of customer flows? The second thing is just really on the fees in Wealth Management. We've seen a very sharp increase in the underlying gross margin if we exclude the performance fees. To what extent is this related to the full SEB integration or any other things, or is this more of a technical accounting nature? Let me take the first question in regards to customer flows. I think if you look across the board in terms of customer movements, it's fair to say that the corporate side in general, and the business side, we have very stable customer numbers and no outflow. Actually, it seems that the book in general is increasing both, especially in terms of volumes. Then we have good customer traction in Norway, Sweden, especially on the personal side. If you add Finland, you have the same picture on the business side that we are moving forward also in terms of number of customers and volumes. I think we can isolate the undercurrent from the Estonia case in terms of customer outflow at this point in time to the 11,000 core retail clients that we have lost in Denmark. Now, I think it's important to note that even though we're obviously sad to lose any customer of the bank, this does not have a size that materially impacts the results of our Danish franchise. This seems to be manageable. But obviously, we're doing everything we can to stop the outflow more, and I think it's a simple formula we have in that regard. It's meeting as many customers as possible, telling them about where we are in terms of the Estonia case, that we take full responsibility, that we make sure that we do the cleanup on the portfolio in Estonia. Then for almost everybody, we agree to continue to do business. But I think it's basically just doing that, making sure that we make ourselves available and proving every day that we are a good bank for our customers. Then I'll take the second question. I think that the overall arching story of Wealth Management and the fee income is that we had SEB joining us in June, which actually was going to give us the uplift we expected. However, I think it's very clear for us that 2018, we had less fee than anticipated originally. But primarily because of the tough markets in Q4 as asset under management dropped due to the market conditions and not necessarily due to outflow. You're talking some about the margins. I think that Claus is seeming like he wants to take that offline with you if there is something specific on the accounting side you want to go through. But the overarching theme, and also what we're guiding into 2019, is that SEB is a great asset for us. It's going to definitely give us the extra income on the fee side, and it fits very nicely into our One Wealth strategy. Yeah. No, we can take it offline. It's just this kind of a 13% increase in management fees quarter-on-quarter, despite the fact that AUM is falling, which is trying to square, but we can take that offline. Yeah. But Johan, we can add to that question that there has been some accounting challenges when we have included SEB Pension. So the increase you have seen in management fees is to some extent mitigated by or explained by a lower risk allowance fees in the Danica Pension. That is something that will be corrected in the Q1. But we can take that after this call. Perfect. Thank you. Thank you. Our next question comes the line of Adrian Cighi. Your line is open. Please go ahead. Hi there. This is Adrian Cighi. Two questions, please. On the 2019 net interest income guidance. Can we try to unpack your flat guidance a little bit more, please? On funding costs, we know that we have some headwinds from the non-preferred senior issuance, but also tailwinds from the lower refinancing costs of covered bonds, and we should also have some benefits from the rate increase in Norway and Sweden. My question to you is, are you being too conservative with your guidance? Then maybe one follow-up question on the Estonia case. We know that the customer flows are probably imperfect metrics as customers sometimes change banks without actually closing their account, but instead they leave by becoming dormant and moving their business to a different bank. When I look to group deposits, they declined by DKK 45 billion or 5% from the beginning of the year, with half of this coming from the Wealth Management. Do you believe this deposit outflow is related to, at least in part, to your AML case? Do you see this sort of equally split across your client base or is it more targeted in your Wealth Management clients? Thank you. So hi there. I will take the first one on the guidance, and I am assuming you are specifically talking to our NII part of the guidance. I think for us, we are definitely seeing we are going into a period of time where we are having elevated spreads on a lot of our issuance. It has been predominant to a non-preferred senior and not senior in covered bonds. I think the headwind is then offset by the growth in our lending that we are having in the different markets. Do also bear in mind that we are increasing our funding range. What we are saying is 70 billion to 90 billion DKK. That is also giving us a little bit of the headwind. Then lastly, as we are also communicating, there are some margin pressures that we need to be aware of. For us to guide in the range of where we landed NII this year, we feel very comfortable with it, and I do not feel that is overly conservative. Okay, and if I take the second question in terms of the effects of the Estonia case, as I understand, your question is, so when we say core retail clients, do we also see an outflow of other types of clients? I think it is fair to say that in terms of the 11,000, that would be what we consider household customers, if you like, or full-service customers. If you look at the total population of customers, the number is a bit bigger. It is 29,000, but that is the total movements in our customer portfolio. As you know, our customer portfolio is 1.4 million people. So that also contrives different kinds of movements, but also single name or single product customers. It usually also is partly cleanup activities, account numbers that have not been closed for a period of time, stuff like that. I think the right number to concentrate on here is the 11,000 core retail clients. In terms of our deposits, we do not see any structural change in our deposit book. Over the course of the year, we cannot identify this to certain types of clients. Usually, these numbers move a little bit also from month to month, but we do not see any structural changes. Very helpful. Thank you very much. Thank you. Our next question comes on the line of Mads Thinggaard. Your line is open. Please go ahead. Yeah, hi. This is Mads from ABG. Thank you for taking my questions. The first one is on your long-term ROE goal of being in Nordic top three. Looking at your net profit guidance for 2019, including the higher underlying costs in 2019, it looks a bit like you're stuck with a ROE below 10%, even with low loan loss provisions. When do you expect to actually be in top three in the Nordic space? Is that post AML digitalization 2022, or when do you see that happening? That's a very good question, Mads. I think obviously we are only guiding for 2019, but if I'm to put a few words on, we think if you look at our underlying business and you mentally, if you like, exclude for the Estonia case, we still think we have a lot to offer to the market. We think we're underlying actually becoming more and more efficient as well. So I think there's two things that determines when we're into normal territory where we can compete in the top three again. One is when will the repercussions of the Estonia case cease off? Because that also means that a lot of the extra costs will die away. A lot of the extra heavy burden, if you like, in terms of also keeping our customer base intact, that you can lift your eyes a little bit and look forward. I think that's one key thing. The second key thing is how fast are we able to make the right solutions for our customers on AML? How fast are we able to digitalize some of the customer journeys in this respect? I think whether that is one, two years, I'm not sure, but the ambition remains. But I think those are the two most important factors as to when will we see Danske Bank at a normal level in terms of competing with our peers. Okay, thanks. My second question, I was just wondering a bit about C&I here in Q4. It seems NII and lending is going in quite opposite direction with very high lending growth, but NII down. I don't know if you could put a bit of a flavor on what happened here. I can take that one. We pushed our non-core business. Sorry, our Baltic loan book has been pushed to the non-core, and that's actually affecting the numbers, which might be the confusion that you're meeting in the numbers. Okay. Again, in Q4 that is affecting. You are talking about the Q4 versus Q3 numbers in general? Yeah. Q4 versus Q. Yes. Yeah. Well, It is going up by 6%, right? NII down by 4%. Yeah. John. There is an effect coming from the Baltic transfer. There is no doubt about that. Okay. Some sort of effect there. Remember, it takes a bit of time to move all of the portfolio, in this case. So there is a prolonged effect over the year. Okay. Lending is something else that doesn't contribute to NII. No. Okay. Thanks for that. Thank you. Our next question comes from the line of Bruce Hamilton. Please go ahead. Your line is open. Hi. Afternoon, and thank you for taking my questions. Just on going back to NII and funding, just to check. What you've baked into your guidance is around, what, DKK 40 billion of non-preferred, just to check. And then I think you said DKK 70 billion to DKK 90 billion is your expectation in total. So it feels like you're sort of front-loading. Is there a specific reason for that? You're assuming, I guess that funding costs are unlikely to come down over the next two, three years, so you just get on with it. Just keen to understand that. And then secondly, and I know we're still relatively early stage on the AML stuff. But as you to get further along, I assume you'll seek to settle with all authorities in one go, or would you expect you end up doing it sequentially? Because I suspect if it's the latter, the risk is it ends up costing you more. Have you thought about how you approach that? Thanks. Yes, I will take your first question on the funding side. It is usually so that we tend to be front-loading our annual funding need in the first half of the year. We know that this is where the market is more receptive to funding. That is why if you go back, you would see that historically, we have normally completed more than 50% of our funding need when we approach the summer period. There is no unusual things about that. What do you expect? Can I just add to? DKK 40 billion? Yeah, just add to that. I think you are absolutely right. We are guiding the DKK 70 billion-DKK 90 billion in funding needs, and I think we have roughly said that around half of that will be in non-preferred senior instruments. So that is still the expectations that we are aiming for. I can take your second question in terms of how we proceed and what would be our strategy in terms of settling the case. Obviously, this is very early days. We have only started the dialogues, and the investigations have only been started by authorities. So obviously this is early days. Now, if we could choose a combined settlement covering all countries in one go would obviously be nice, and we would like to work towards that. Unfortunately, it is not us who calls the shots in this regard. It is the authorities and how they want to approach this. I think it is way too early to say how exactly that will play out across the different countries where we are under investigations. But obviously if we can do what we can do to move things in that direction, that would obviously be a good thing for us. Great. Thank you. Thank you. Our next question comes from the line of Martin Brooke. Your line is open, please go. Thank you so much. I have two questions. The first one relates to your corporate lending in Norway and Sweden. It seems like there is a bit of a step change here. Could you maybe elaborate a little bit about the dynamics? Then finally, it seems like you have front-loaded a lot of funding, and this is maybe back to what Claus said, but there's also a deadline coming up. It seems like the, or I expect that the Danish FSA are going to come out with a report on your MREL need here in the beginning of February. What do you guys expect from that? Those are my two questions. Okay. Should I start just on the lending side? It's true that we see very solid growth in both Norway and Sweden. It stems mainly from what you could call mid-corp business in both countries, where we've had very good traction lately. So we're very pleased with that development. On the funding side, you're absolutely right that here on the 1st of July, we'll be needing to meet the Danish FSA's MREL requirements. So most of our non-preferred senior is something that we'll be working on the first half of the year. Okay. Just back to my first question. If I look at it on slide 15, it looks actually like your commercial lending in Norway and Sweden is, when I say step change, I mean in the negative direction. So I do not really understand that it seems like your retail lending continues to perform whether your commercial lending is coming down quite a bit. Then onto the MREL requirement, I'm aware that this is going to be met by July. But as far as I understand, there is also questions to whether your final MREL need will need to be met based on your Q4 2017 numbers or your Q4 2018 numbers and capital requirements for you, they have gone up over the year, which would mean that you guys would need to issue extra NPS in order to meet the MREL requirement, right? Martin, I'll just take the last one first. You are absolutely right that we need to figure out from the Danish authority what is their basis from the MREL requirement. We are planning on them being the hardest to us. So actually taking the Q4 2018 numbers or the Q4 plus our Pillar 2 add-on. That is what we are planning for. And we'll get to the information from the FSA during the next couple of months of what they expect us to meet. Once we have that information, we'll plan accordingly. But currently, we are planning for the toughest amount. Sorry, I can just revert to the other thing. Sorry. I thought you meant year-on-year. If you look at the quarter, it is true that we have an easing off, especially in Norway. We don't think that is anything structural. Yeah, and if I may add on that, the decline you saw in Norway is due to a capital market transaction where we took a single exposure off the balance sheet for the customer and did a capital market issue instead. Okay. Thank you so much. Thank you. Our next question comes on the line of Riccardo Rovere. Your line is open. Please go ahead. Yes, good morning. Good afternoon to everybody. A couple of questions if I may. The first one is, do you expect the Danish FSA to add extra buffers, extra add-ons on anything on your capital requirement over the foreseeable future? The second question I have is, do you see any headwind on your capital from tightening regulation like IFRS 16 or maybe TRIM? Thanks. I will take the first one. Currently, we have no knowledge of the Danish FSA wanting to add additional capital add-ons to Danske Bank. They asked us last time that we were to reassess the level of capital, and as the executive board, then reassessing the capital needs for Danske Bank and getting it approved by the Danish FSA, which we have agreed with. But currently, we have no knowledge of any further commands from the FSA. Claus, you want to take the last? Yeah, and on your question on IFRS 16, I think we can say that it is only having a very, very limited impact on our capital position. Okay, thanks. On TRIM, do you have any idea, or is it too early to say? Can you repeat the question? On TRIM, the review of internal models by the ECB. Is it too early to say? Do you think this packed any headwind on that? I think it's too early to say, but we are also having the Danish FSA reviewing our models. No, I think we are normally very cautious in making any outlook for the development on risk exposure amount during the coming year. But I can say that we expect an impact coming from growth, and then it's subject to activity. Any other impact coming from model changes are something that is not material as we can see it for the time being. All right. Thanks. Thank you. Thank you. Our next question comes from line of Per Grönberg. Your line is open. Please go ahead. Yes, thank you. A couple of questions from my side. First of all, your profit warning in December was on trading. I think the explanations of what has went wrong has been quite vague. Can you be a bit more precise how much of this is loss of business momentum, and why should we expect that to come back in 2019? And how much of this is a spread movement? You see a number of your peers addressing the profit warnings they have come out with the widening of the spreads on Danish mortgage bonds. That was my first question. Okay. I can take that, Per. I can say that we have seen a deterioration of the market conditions for our FICC business. It's our FICC business, and it's especially the Danish part of the FICC business that has suffered during 2018. This doesn't only go for Danske Bank. I think we have over the last couple of weeks seen enough evidence that other European and U.S. banks which are involved in FICC business also have suffered, especially in Q4. What we have seen in Q4 is a further lowering of the volatility in the market, and that is having an adverse effect on our FICC business. That is creating tighter bid-offer spreads, and that's why we have communicated in our report that it has become increasingly difficult to make a profit on our customer flow. Of course, there are also other elements that have contributed to the development in the FICC business. We have very flat yield curves, and we have very tight risk premiums on Danish mortgages, which is, of course, an important part of the business that we have in FICC. Then we can say when it comes to market share, no, we maintain our strong market share in the Danish business, and it's also our perception that other banks have suffered for the same reasons as I've just explained. If I can just add to that, Claus. I think when we came out with the profit warning, we went out at that point knowing whether or not the sales of the assets that has also affected trading was going to come through or not. It did, which gave us the additional 200, roughly, million in our trading uplift. So that was an offsetting where trading didn't look as bad when we ended the year compared to when we were issuing the profit warning there on the 20th. What you're saying here is that there's basically no value adjustments hitting this one like we're seeing in most other Danish banks. The key question, Mark, is why should we expect your FICC revenues to be above DKK 0.5 billion per quarter as one way of going into 2019? The bigger picture here is. I think the bigger picture here is that we have had a very strong performance in 2016 and 2017, and that was driven by a significant interest and inflow into Danish kroner products. 2018 was unusually low. I guess the truth probably lies somewhere in between. I would definitely say that the 2018 was unusually low. Okay. You are not giving us any reasoning why it is low. You might not be guiding, but our job is still to guess on a number on 2019. Basically, it is a bit difficult not to guess on a very low number on the FICC business. Then adding on top that you will probably not make DKK 500 million on own shares again next year. I think there are a number of factors that are having an influence on the FICC business, and that is yield curve volatility and the absolute level of yields. Also, credit spreads and the development within our DCM secondary business also had an adverse effect. I think it is a combination of those factors that you should look for when you are trying to estimate the market conditions for FICC. Okay. I have two very short questions besides that. On your cost for 2019, you put the beta out into the future. You are addressing DKK 2 billion in investments to be taken over the next three years. The expense impact of DKK 300 million in 2019, I assume that is the amortization of those activated costs and something that will also be there after 2019. Is that correctly understood? If I should put a little bit of color on that, Per, you are right that the 2 billion, not something that is going to get burned off in 2019, and the DKK 0.3 billion effect is the kind of amortization, and the burn rate that you would see for impacting our P&L in 2019. I think when we go out into the other years, we have been talking about having a similar run rate on the amortization of the cost going for a period of time as we start seeing benefits from the investment taking place and actually reducing the impact on the P&L from the amortization. I would expect maybe a little lift up before it actually starts coming down, so it is not going to be a complete flat line. But again, the 2 billion is something that we are not going to put it up on the balance sheet in 2019. It will be pushed over the three years, and then the amortization will probably be over a six, seven-year period until that is all taken off as intangible assets. Okay, perfect. My final question, just a clarification. If during your investigation on the Estonian scandal, you come across any material breaches of U.S. sanctions, I assume it is fair that the market would have been informed about that. Is that a fair perception? I think the perception that if anything material changes in the picture we have put up on the 19th of September, I think it would be natural to inform the market. Okay, perfect. Thank you. Thank you. Our next in comes online, Otto Christensen. Your line is open. Please go ahead. Yes. Hi. Thanks for taking my questions. I have two questions as well. The first one is quite general regarding the return on equity target, the long-term one. Just to be clear, are you dependent on a lower Common Equity Tier 1 target to achieve that, or do you see that as possible also with the current Common Equity Tier 1 target? The second question is related to the outflow of customers. I was just curious because, in my view, you are quite aggressive on retail pricing in Norway. Are these discussions with clients on the retail and corporate side met with price reductions in Denmark, or is it purely dialogue? Thanks. Good. Let me just take the ROE question first. I think if you look long-term, it will be a combination of factors. I think, obviously, we will also, at some point, run at more normal capital levels. I think that is natural. Given the circumstances, it is important for us to send the signal that we are rock solid all in all, in terms of withstanding sanctions or any material effects on our business from the Estonia case. I think a normalized capital level would also be part of meeting the long-term target, as I see it right now. Obviously, that is to be shown into the future. If you look at the outflow, I think we have a very competitive offering in Denmark, and I have no intention of changing the structure on that at this point in time. So if you look at the strategy in Denmark as compared to Norway, obviously, we are the incumbent in Denmark. We have many customers, we still have many customers. We have succeeded in retaining most and have not had outflow that sort of impacts our financials. So this is definitely not the time for any sort of draconian actions in Denmark concerning price. So we are still focused on having a good and competitive offering. That is the license to play, and if you look at the business in Denmark, I am sure we have that as we speak now. That is very clear. Thanks. Thank you. Our next question comes from the line of Jakob Brink. Your line is open, please go ahead. Hey, it is Jakob from Nordea. Two questions as well. On the lending margin from your fact book for the past two quarters as well as in this quarter, the lending margin has been coming down somewhat around DKK 50 million. But in the past two quarters, it has been driven by changes to the FTP model, and we have had opposite or sort of the same impact on the deposit margin, thus with being positive. This quarter, there is no change of the deposit margin, so it looks like it is just a squeeze to the lending margin. And also there are some strange movements in Sweden on the margin. Could you maybe elaborate a bit on what is going on with the lending margin and how much is FTP, et cetera? Thank you. Yes. We haven't seen any significant FTP impacts on the lending margin. We have seen a trend over the latter part of last year where there has been an increased pressure on margins in general. Of course, also on lending margins. That is, of course, also the background why we have mentioned that in our outlook for this year. Then just coming back to your net interest income guidance, because if you're going to issue the amounts of funding you said before, and you're going to front-load it to get around the same spreads as last time, and you're seeing margins basically offsetting lending, why should net interest income be flat? Because there is a growth element in it as well. This quarter, the margin squeeze was exactly the same size as the volume growth. So zero impact. Yeah. We have also seen a lower growth rate in the last quarter than we have seen before. We tend to have a full-year view when we are making our outlook, and that is why the development that we have seen only in Q4 is not totally applicable to our outlook for the full year. According to your fact book, the volume support in Q4 was the biggest in the past three quarters. My second question was on the illness and accident result. It has been weak, basically Q2, 3, and 4. In Q4, even more weak. We heard from one of your competitors in Denmark that it is due to the new law on how to account for illness and accident. Could you give us some guidance for what we should expect in 2019? Is this the same low level, or are you going to raise prices on illness and accident? I will take that, Jacob. I think there was a push through a good amount of price increases in the beginning of 2018. That has not gained its full effect. We did see some increase in accidents over the year. However, we are also working on other ramifications of procurement and making sure to get cost control around this accident health book. Do bear in mind that some of this is also impacted by the investment in the accident health book, so there is a risk side and there is the investment side. The investment side is also impacting the trading. Guiding into 2019, the activities that I have seen Danica working on to get this under control seems to be at the right level. There can always be volatility around this, as you know. But feel that there has been put the right actions in motion to get back on track on that book that is currently not performing as we would like it to. Okay. Thank you. Thank you. Our next question comes from line of Jacob Kruse. Your line is open, please go ahead. Hi. Thank you. Just two questions. Could I just clarify, we had a discussion a little while ago, just on the trading side. Are you effectively saying there are no mark-to-market effect in terms of liquidity portfolios or similar things or XVAs that are impacting the Q4 trading numbers, apart from the valuation gain that you talk about the sale of collateral? My second question was just, in terms of your international banking activities, has the AML crisis had any impact on non-Estonian correspondent banking relationships and your ability to do that kind of global business? Thank you. No, we can confirm that we don't have any mark-to-market effect on the C&I trading income from any portfolio. The bank's liquidity portfolio is now managed by Group Treasury. That's another activity item. The positions we see in C&I are very small positions that are specifically related to servicing our customers. We don't take any positions on our own, so no prop trading, and as such, no mark-to-market effect from that on the trading income. If I can just elaborate a little bit on that, Claus. I think we have to take a couple of steps back and remember that Danske Bank has been through a transition in its FICC business, where if you look at before 2016, there was prop trading, there was other activities. Right now, we are facilitating customer transaction and carry very little risk on our own books during this. That means that we are subject to customer activities. I think there's no doubt in 2017 and 2016 we saw a lot of customer activities coming from a very high level, and it's been subdued in 2018, the customer activities. That is a different level that we've been, and we have had some tailwind in 2016 and 2017, and had headwinds in 2018. You can do your averaging maybe on those to figure out what we might be looking for, but we are very much affected by customer activities on this. Okay, and I take the second question regarding our access to international banking facilities, and I guess that's in terms of correspondent banks, payments access, et cetera. We see unhindered access, if you like, to payments around the world and to our correspondent banks. I think on top of that, it's fair to say that obviously the case around Estonia attracts a lot of attention. So in terms of answering questions as to where is Danske Bank in terms of performance, in terms of where are we on the case, there's much more international dialogue with our counterparts in different parts of the financial world, if you like, around the world. But I think that's natural. So far, we don't see any access problems across the space of correspondent banks. Okay. Thank you very much. I think that was the last question. Thank you all for your interest in Danske Bank and for your questions. As always, you are all welcome to contact our investor relations department if you have more questions after you have had time to look at the financial results in more detail and maybe also have extra questions on top of the ones you have asked here. A transcript of this conference call will be added to our website and the investor relations app within the next few days. Thank you very much.