Earnings Call: Q4 2015

Feb 2, 2016

Summary

2015 adjusted net profit rose 36% to DKK 17.7bn and ROE reached 11.6%, excluding goodwill impairments. Guidance called for 2016 profit in line with 2015, with costs lower and credit losses low.

Good day, and welcome to the Danske Bank Annual Report 2015 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Thomas F. Borgen, CEO. Please go ahead, sir. Thank you, operator. With me in the room today, I have our CFO, Henrik Ramlau-Hansen, and head of IR, Claus Ingar Jensen. Slide 2, please. In today's call, I have the pleasure of presenting Danske Bank's financial result for 2015. We aim to keep this presentation to around 50 minutes. After the presentation, we will open up for Q&A as usual. Afterwards, feel free to contact our IR department if you have any more questions. Slide 3, please. 2015 was a year of satisfactory progress for Danske Bank from both a financial and a strategic perspective. We made steady progress on our strategy of becoming a more customer-centric, simple, and efficient bank, and we saw good development in our underlying business. Despite the challenging environment caused by very low interest rates, we delivered strong financial results as we benefited from our diversified business model and high customer activity. The year 2015 was also the final year of the target period we announced in 2012. We are very pleased to report a return on equity of 11.6%, excluding goodwill impairments, which exceeded our target of 9.5%. This performance makes us confident that we are on the right track to meet our financial ambitions for 2018. The net profit for the period was DKK 17.7 billion, excluding the goodwill impairments. This is 36% higher than the year before. The increase was based on solid underlying customer activity, particularly in the beginning of the year. However, it also stems from improved customer offerings that raise non-interest income, thus mitigating the severe effect of very low interest rates. Our capital base remained very strong, with a Common Equity Tier 1 capital ratio of 16.1% and a total capital ratio of 21% at the end of the year. On that basis, the board of directors is proposing a dividend of DKK 8 per share, which represent a payout ratio of 46%. The board of directors has also decided to carry out a buyback program for DKK 9 billion. For 2016, we expect net profit to be in line with the level in 2015. Slide 4, please. Let me take you through the main items in our financial results. Net interest income came in at DKK 21.5 billion. This is 4% lower than in the year before, as negative short-term interest rates put pressure on margins and deposit margins in particular. On the other hand, the item benefited from somewhat higher lending volume on portfolio income and lower funding costs. Net fee income totaled DKK 12.1 billion, 9% higher than in 2014, as a result of stronger customer activity at all bank units, including positive developments at Danske Capital. Fee income also benefited from high mortgage refinancing activity in the first part of the year. Net trading income rose 4% to DKK 6.9 billion. Excluding one-off gain of DKK 1 billion from the sale of Nets in 2014, trading income was up 22%. In comparison with 2014, the item benefited particularly from higher customer activity at C&I markets. Net income from Danica's insurance business amounted to DKK 1.9 billion, which was 24% lower than in 2014. The underlying result of the insurance business was up 6%, however. It was possible to book the risk allowance for all four interest rate groups and an additional DKK 248 million from the shadow account. Despite higher customer activity, operating expenses were down 4% to DKK 21.8 billion as a result of our continued focus on cost efficiency. The cost-income ratio improved more than 2 percentage points to 49.4%. We took an impairment charge of DKK 4.6 billion of goodwill related to our activities in Finland and Northern Ireland. The charge was based on changes in the assumptions about lower interest rates over the long term, and it does not reflect our short-term expectations for the two business units. Loan impairment charges for our core activities showed a small charge of DKK 56 million, a substantial decline from DKK 2.7 billion the year before. Credit quality improved at all business units. Slide 5, please. All three banking units made strong contributions to the full year results. The underlying business remained robust with increased customer activity at all units. Pressure on net interest margins was an important issue, especially for Personal Banking Denmark. All three units benefited from mitigating actions, improved customer offerings, and a good inflow of new business, particularly at our operations in Norway and Sweden. All three units also continued to implement cost efficiency measures in 2015 and reduced their expenses. They also benefited from a sustained improvement in credit quality as impairment charges continued to decline during the year. In Personal Banking, it was delivered a good result on the basis of increased customer activity with profit before tax up 11% to DKK 5.1 billion. Total income came in 5% lower than the year before as a result of heavy pressure on NII in Denmark in particular. This was partly offset by an increase in fee income, driven income by high customer activity. Expenses were down 2% as a result of tight cost control. Impairments dropped 76% from the level the year before as collateral values continued to improve. Overall, lending volume was up 2%, although the underlying trends were mixed. In Denmark, volume was down despite modest growth in mortgage loans as a result of higher activity in the housing market. In Norway, we saw a good inflow of new business. Customer satisfaction with Personal Banking improved in 2015. We are particularly happy with the improvements we saw in Denmark. In Sweden, we were named Bank of the Year by the largest Nordic financial magazine. Despite these positive developments, we continue to focus on further improvements. At Business Banking, we continue to see strong momentum in all markets. There was good growth in activities in Sweden and Norway, where lending volumes rose 12% and 20% respectively. In Denmark, lending rose 3.1%, and in Finland, we saw increased activity later in the year with lending up 8%. Overall, profit before tax rose 32%. Total income was up 2%, a result of improvements in all income lines and despite the effect of negative interest rates. Expenses fell 5% as a result of tight cost control. Impairments showed a net reversal of more than DKK 300 million owing to our ongoing efforts to improve credit quality, combined with better market conditions and rising collateral values. Finally, at C&I, profit before tax rose 30%. We saw increased client activity, especially in the first half of the year, with a strong inflow of business in both FICC and capital markets. With a pre-tax ROE of 14.8% for the full year, C&I almost met the target for return on capital we announced in 2014. The total income benefited from strong growth in trading income, which rose 17% owing to increased client activity in most business areas. The increase in fee and trading income more than compensated for the effect of negative short-term interest rates. Expenses were down 4%, despite increased client activity, and impairments, which by nature fluctuate in C&I, were significantly lower than in the year before. Slide six, please. Let's turn to our activities in asset management and insurance. Danske Capital and Danica Pension showed positive elements in 2015. Both business units collaborated extensively with Personal Banking and Business Banking. Danske Capital's profit before tax rose 70% owing to a favorable trend in assets under management and higher margins. Income from performance fees booked in Q4 amounted to DKK 400 million compared to DKK 300 million in 2014. Excluding the transfer of assets to Danica Pension, assets under management rose DKK 49 billion. The improvement reflects high net sales of DKK 38 billion, including 20% to clients outside Denmark, as Danske Capital continued to increase its share of international clients. At Danica, the result from the insurance business net income rose 6%. The investment result enabled us to book the full risk allowance in all four interest rate groups. Total premiums was up 11%, driven by a wider collaboration with Personal Banking and Business Banking in Sweden and Norway. Net profit was around 4% lower than the year before due to a decline in investment result and lower contribution from the shadow account. Finally, the net profit was influenced by an expense of around DKK 300 million, triggered by a dividend payment from Danica Pension to Danske Bank. Slide seven, please. Moving to expenses. Operating expenses amount to DKK 21.8 billion. This was 4% lower than in the year before, and in line with our guidance for 2015. The reduction was the result of our continued focus on cost efficiency initiatives. We reduced expenses despite an increase in customer activity and a contribution to the resolution fund, as we booked it in the second half of the year. In the fourth quarter, operating expenses rose 13%, partly because of higher severance payments, as we continue to implement cost measures that will reduce the cost base further. We are committed to maintain a strong focus on costs. Slide eight, please. The positive trend in credit quality we saw in 2014 became even stronger in 2015 as loan impairment charges declined significantly. We continued to see improvements in the macroeconomic environment, particularly in Denmark, and improvements from our ongoing efforts to raise credit quality. The charges for the group amount to a small net reversals of DKK 63 million. Impairment charges were very much lower at all business units. At both Personal Banking and Business Banking, they fell more than DKK 1 billion. The loan ratio, including non-core activities, declined from 20 basis points the year before, now at zero. Slide 9, please. The positive trend at the business unit had a strong support from rising collateral values, particularly in Denmark and also in Northern Bank. Credit quality measured by probability of default has been improving for a long time and is stabilized at a low level in the second half of 2015. The agriculture industry continued to be challenged, however, so we booked additional collective charges against this industry as we did in the third quarter. We also found it prudent to take additional collective charges against the possible effects of low oil prices in Norway. At year-end, the balance on the loans account was DKK 31 billion, down 23% over the year. Slide 10, please. Our capital position strengthened significantly in 2015. At the end of the year, the Common Equity Tier 1 capital ratio was 16.1%, an increase of one percentage point from the level the year before. The total capital ratio was 21%, up from 19.3% at the end of 2014. The leverage ratio was 4.7% according to the traditional rules and 4.2% when the new rules are fully phased in. The share buyback of DKK 9 billion in 2016 will affect the core tier one ratio of approximately 1.1 percentage point pro forma as the end of 2015. Slide 11, please. The strong financial results for 2015 are an important step towards meeting our target of a return on equity of above 12.5% by 2018 at the latest. In late 2014, we outlined the assumptions behind our plan to raise the return on equity to the desired level in 2018 at the latest. The developments we saw in 2015 led us to recalibrate some of the elements of the plan. We adjusted the starting point to reflect the fact that ROE we achieved in 2015 is significantly higher than what we had expected a year ago. We also adjusted for some income and cost items for 2015 that we consider to be mainly of a one-off nature. Finally, in our bridge, we now assume that interest rates stay at the present very low level. We adjust our assumptions in two areas. Firstly, the effect from funding. The benefit from a decline in funding cost is now assumed to be slightly lower because of wider funding spreads in general. Secondly, loan losses. The significant improvement we had expected to materialize from 2016 to 2018 has already occurred. We continue to expect loan losses to remain at a low level. On the cost side, we continue to expect positive contributions from strict cost control and further efficiency measures. The extent to which we can and will reduce cost is, of course, subject to the levels of growth and investments. We see the plan as ambitious but realistic, and we remain fully committed to delivering on the target. Slide 12, please. Finally, I would like to present our guidance for 2016. We expect largely unchanged macroeconomic conditions with very low interest rates and moderate lending growth in Denmark in particular. For net interest income, we expect the pressure on margins to continue while we will benefit from volume growth and lower funding costs. For fee income, we expect the underlying trend to continue, but at a lower pace than in 2015 because of lower mortgage refinancing activity. Trading income remains subject to customer activity and volatility in the financial markets. We expect expenses to decline from the level in 2015. Loan impairment charges are expected to be at the low level. So net profit for 2016 is expected to be in line with the net profit for 2015. Slide 13, please. Those were my initial comments and messages. We are now ready for your questions. Please limit yourself to 2 questions. If you are listening to the conference call from our website, you are more than welcome to ask questions by email. Operator, we are ready for the Q&A session. Thank you. If you would like to ask a question at this time, please press star 1 on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star 2. Again, please press star 1 if you would like to ask a question. We have our first question from Jan Wolter from Credit Suisse. Please go ahead. Yes. Hi, all. Jan Wolter here from Credit Suisse. Thanks for taking the questions. First, on costs, they are expected to fall from the 2015 level, but what base is used? Just to clarify that. Is it 2015 costs excluding impairment and the restructuring costs? I think the bank booked around DKK 600 million in restructuring charges in 2015, so that would make the base around DKK 21.2 billion. Is that the guidance we should expect, OpEx level to fall from that level? Second question on regulation. I think politicians and the business minister in Denmark has commented that the politicians will look at the regulatory environment and see if there could be any improvements and changes. In what areas does the bank see that regulation could improve going forward? Thank you. I will take the first question, and Henrik will take the first question on the cost side. When it comes to regulation, I think regulators and politicians in general are looking at the macro effects or the macro potential effects of regulation. I think that is prudent, and that is also taking place in Denmark. Generally, I would say that we are comfortable with the present regulation in Denmark. It is predictable, and we have see-through. But there is certain consequences of higher capital charges, particularly through our activity in the capital markets, which creates certain less liquidity in the bond market, which again, will have a cost at the end user. The bank is not by itself negatively impacted by lower liquidity. But of course, that illiquidity premium needs to be paid by someone in society, and that's the kind of issues which I think the regulators or the politician will look at. We have a good see-through on what we know, but the big unknown is what everyone discuss is Basel IV. Your guess is as good as our guess, and we are prepared when something comes through in that case. I think the more important thing is that we are very well capitalized, strong position, and we are prepared for whatever needs to come through. So it's not a major issue for us now on regulation, as we think we have a good see-through on the upcoming events. Regarding your expense question, first of all, the guidance is in relation to the DKK 21.8 billion, where we guide that we expect costs, reported cost in 2016 to be below DKK 21.8. So the goodwill impairment charge of DKK 4.6, so to say, you can ignore that effect. Many thanks. Just to follow up quickly then on Thomas' answer regarding regulation. Did both the national supervisor in Denmark as well as any ECB member of the supervisory team sign off on the higher buyback proposal that the bank announced today of DKK 9 billion? Thank you. We are regulated by the Danish FSA, and it's the Danish FSA who sign off on the approval. Okay, thanks for clarification. We will now take our next question from Masih Yazdi from SEB. Please go ahead. Hi, Masih Yazdi from SEB here. First question on your net profit guidance. I think it's difficult to understand your guidance on net profit, if you look at your guidance on the other income lines. Can you give a more detailed guidance, for example, on the lines of impairments, for example, and not just loan losses, but impairments on tangible and intangible assets? What do you expect there and what is needed to happen on that line for your net profit guidance for 2016 to materialize? Do you also take in your cost for AT1 holders as well in that number of DKK 17.7 billion net profit for 2016? Thanks. No, the last one, it's not taken into account. Of course not. It's a very different accounting treatment, as you know. I will try to guide you through our guidance, if that's what you're asking me to do, and give some more color to it. I think I'll go it through line by line, so all can listen in to that extent. We saying that we think probably that NII will stay in line with 2015. However, growth can surprise positively on the upside. So we could see a slightly higher NII with unchanged rates. On the fee, we see a positive underlying growth throughout the business. However, we had a couple of one-offs, which are hard to replicate in 2016, particularly on the remortgage. But underlying, there is a good activity and good drive. On trading. Trading can benefit from very good customer activity in the first part of 2015. It is hard to expect the same in 2016, but it is also very hard to guide on trading specifically, because it will depend on the customer activity and the market volatility. On other income, we say that we will always benefit from certain one-offs, as we always will have certain one-offs on the cost line. That is a part of the ongoing business. There is nothing material in other income in 2016 compared to 2015. Otherwise, we are always looking at optimizing the real estate portfolio and in some other small adjustments. But it is the underlying business which is benefiting from a stronger development. Expenses. We are very clear on the bridge that cost will come down towards 2018, and if you use the midpoint of 0.75%, that is approximately DKK 1 billion to DKK 1.1 billion. How we will cut that cost towards 2018, we need to see, depending on customer activity and the investments we are doing. We have shown very diligent cost management, and we will continue to do that. We will get some tailwind in 2016, particular to the resolution fund and deposit guarantee scheme. When it comes to impairments were very low, actually zero in 2015. We expect them to also be low in 2016. Exactly how low, it is very difficult to guide more specifically, and that we have done that it should remain low. Remember that in our bridge towards 2018, we have guided it low, below 10 basis points. But we achieved that faster and more substantial than we first had expected. Finally, take into account that the tax rate in 2016 will be slightly lower than the tax rate in 2015. To be specific, 1.5%. All good things being equal means approximately DKK 300 million. I hope that clarifies some of the questions. It does. Thank you. Just on depreciation, because you have had intangible and tangible depreciations in 2015 totaling about DKK 1.1 billion. Can you give any guidance on that as well? Claus? Yeah, there will be an effect on the expense line of around DKK 400 million. That is something we included in the bridge. As coming in in 2017. But since we have written down the intangible assets as part of our goodwill write-down in late 2015, that will already come here in 2016. Okay. Just finally, on your fee income guidance there, has that taken in the weak stock market performance at the start of 2016? Because that should lower your asset under management quite substantially at this point, rebasing that at the current level versus where we ended year-end 2015 at. We do not adjust our guidance on one month's effects. We are here for a slightly longer period of time. So no, the answer is no, but we will always be a replica to some extent of market movements. But this has not adjusted or require us to adjust our guidance. Okay. Thank you very much. We will now take our next question from Asbjørn Mørk from Carnegie. Please go ahead. Yes, good afternoon. Asbjørn from Carnegie here. A couple of questions. First of all, on your NII. Thomas, you say that you expect flat to slightly higher NII. I understand the fact that you say that you can grow your volumes, but I am also thinking maybe you could tell us a little bit about the margins on your front book. So the margin on the new loans that you take on relative to the margins on the loans that basically run off. Also adding to this, what you think you can do additionally, if, for instance, the ECB should lower the rate further and hence the Danish Central Bank would lower the rate back to 75 basis points negative, is there anything you can do, and I guess especially the SME and large corporate book, to transfer that negative onto the customers? Basically a little bit on that. Then in terms of your loan losses and the reversals here, as you also said in the presentation, your exposure weighted PD is flat now or maybe slightly increasing. So in terms of this, how can your reversals continue, maybe not for 2016, but maybe looking into 2017? Do you expect to be able to basically lower your allowance count also in 2017? Thank you. Basically three questions. Let me take you through, first of all, the front book and how we see the margin development, and that's on the lending side. It depends on the geography and it depends on the customer segment. If we take Norway first, we see mortgage margins being flat to continued margin compression. On Business Banking in Norway, we see margins coming up. In Sweden, we see Personal Banking margins or mortgages coming up and Business Banking flat-ish. In Denmark, margins are in Personal Banking flat, as you know, and in Business Banking flat to a small margin compression. In Finland, its margin increases both in Personal Banking and in Business Banking. If the central bank or ECB cuts rates and the Danish Central Bank continues to go back to -74 or 75 basis points, it will have maybe a small effect on us. It also depends on the account treatment of how much you can deposit at 0% rates. So the effects are not exactly clear. We've been very clear on passing through the effects to the institutional clients. We have passed it partially through to SME sector, and we have, let's call it, protected the personal clients of a lot of strategic reasons. To compensate for that, we will continue to move our business model to be more fee based. We'll continue to be more efficient, but also to grow profitably. I think we are strategically very well-placed in all the four countries to grow healthy, in the sense of good credit quality. We can grow profitably, and we have a very good base to do it with good customer experience. But so said, if you go further beyond 0.75, of course, we need to think through how we can adjust NII, but it will impact us. Then we can speculate the probability for the central bank to go lower than 0.75, which I or we see as very unlikely. Then you had a question on loan losses. When it comes to LGDs and when it comes to EL, they're all coming down and start to become flat-ish, and PDs are basically also more or less flat-ish. It's something which has continued for many quarters, and of course, when they come to a certain level, they will flat out, and that's what we see now. We have a substantial allowance account, and we can see that our credit book is good. But one has to be cautious that when one are around zero, it is not sustainable for long periods of time. So that's why we have to be cautious on that. There is also some uncertainties which we need to take into account, is the whole oil sector. We are into Norway. We have a small book, but you can have some secondary effect. We see nothing on specific impairments for the time being, but to be prudent, we have done a collective impairment. Secondly, there's still some issues in the agri sector. We are continuing to do collective impairments to be very prudent. So I think we're well-placed, but it's very hard to predict, to be more precise, that it should remain low for 2016 and towards 2018. Okay, if I can just go back to the net interest income. The margin pressure in, for instance, Denmark, is not severe enough to basically offset the volume growth that you're seeing right now in Norway and Sweden. Is that correctly understood, then? First of all, it is very hard to separate all the various markets now. What we are saying is that there is a risk, if you call it a risk, that the NII will be slightly on the upside. That's basically how we see it due to the dynamic effects of the funding, of the growth, and less margin compression. And we take into account that we should be at the present low or negative interest rate environment. Okay. Thank you very much. We will now take our next question from Johan Ekblom from Bank of America. Please go ahead. Thank you. Just a few follow-ups. Firstly, on the fee income, could you just remind us how much that one-off effect, I think from memory you said it was DKK 400 million or DKK 500 million, is sort of extraordinary remortgaging effect last year. Secondly, just coming back to the cost side, I think you have highlighted the DKK 400 or so million on the amortization charge. What is your expectation in terms of severance pay? It has been DKK 500 million to DKK 700 million for the last couple of years, but presumably at least some of this branch and staff rationalization should be coming closer to an end. Is that a number we should expect to drift materially lower near term, or is it something you would expect to be more sticky? First of all, your first question, the number is DKK 300 million. On your second question, a bank of our size will always have restructuring charges or severance pays or extraordinary income. It is a part of running a big bank of our size. What we are trying now is to report to you all inclusive. We did it in 2013, we did it in 2014, we do this in 2015. That means that we will also probably in 2016 have some sort of SAR charges. What they are is too early to put any numbers on. We are in a constant change and we need to prepare for that. We may also need to set aside in 2016. To what extent and to what amount, it is too early, but I think you should take into account that it should remain at a certain level to make sure that we always upgrade the competence and always make sure that we are ready for change. I cannot get closer to that because we run the bank, again, long term, and I am trying to give you a sense that this is how we want also to run it going forward. Okay. Maybe then just on the cost side, the 18.5 you report the sort of underlying cost, would you expect that number to continue down also in 2016? Henrik, you want to put some color on it? I would say the 18.5, as we have illustrated on slide seven as a kind of underlying cost. Underlying, there will be some reductions due to the efficiencies we do. We will, on the other hand, have inflation pushing up our cost. Keep in mind also that we are investing in digitalization of the bank. We have some growth initiatives, Norway and Sweden as examples, and also AML compliance. Know Your Customer are elements that take up more and more resources within the bank. I think it's difficult to put exactly whether that will be flattish or a little bit up and down. I think the key message from management is that towards 2018, we were very diligent on cost, and we will adjust also the cost according to the activity which we see in the market. Because I think it's crucial in a low growth, low interest environment to become even more efficient going forward, and that's why management will utilize those means. Perfect. Thank you. We will now take our next question from Daniel Do-Thoi from JP Morgan. Please go ahead. Hi, good afternoon. Just two questions from me. The first one was on Norway and the second one on your payout policy. Just on Norway, particularly in Business Banking, the high level of loan losses over the last few quarters, around DKK 300 million in the second half. I guess this mostly relates to the collective provisions— In Business Banking, yes. that you have the collective provisions that you have taken against the oil book. If the oil price were to remain at this level, should we expect that this level of provisioning also continues in future quarters? That's my first question. The second one was on the payout policy, particularly the split between dividends and buybacks going forward. I guess the question is, should we expect a more modest growth in the nominal dividend in future years given your guidance on flat profits, and also the fact that you're close to your 50% upper limit on the payout ratio? Or would you actually consider tilting that distribution a little bit towards the dividend, i.e., loosening up the 40%-50% payout ratio range? Thank you. I will do your last question, and then Claus will answer your first question. We are very adamant about running a solid bank through the cycles with a very clear capital and distribution policy. We have a policy of having a Common Equity Tier 1 at least 13%. However, due to all the uncertainties, both on the macro side and regulation side, we think it's prudent to run around 14%. Secondly, we have said that we would like to have a dividend policy which is robust through the cycles, which also can encapsulate any profitable growth we can take with us, and also make sure that our investors have a see-through or predictability on dividend. Based on that, we think it's prudent to have a dividend policy between 40% and 50%, and there is no discussion at the present stage to adjust that one. Then we have said, if we have any excess capital after meeting those three requirements, we will distribute that back to the shareholders. That we did with a share buyback, as you recall, in 2015 on the 2014 results, and that's why the board has made a share buyback program announcement today of DKK 9 billion in 2016 based on 2015 results. Going forward, there is no ambition by itself for us to do a share buyback. We would rather like to reinvest your capital profitable at least 12.5%. But if there is not enough opportunities to do that diligently or profitable enough, we will give that capital back to the shareholders in one way or another. So that's how we will do it. So it's giving you predictability through the cycle, and it's going to be robust through the cycle. Okay, thanks. Can I just follow up on that? Is there any kind of ambition to maintain a nominally growing dividend in krona terms, please? We have no specific target on that, so we need to stick to what we said. So it will depend then, of course, on the development of the underlying profit. Sure. Thank you. Okay, then I leave it to Claus to answer your first question. Yes, your question around impairment charges in our Norwegian operation. We took collective impairments against second round effects in the third quarter, and we have added to that by DKK 50 million in the fourth quarter. Secondly, we took also collective impairment charges in our C&I operation, which is directly related to our oil exposure. It is difficult to say how this will develop this year. But of course, we cannot rule out that there could be additional impairments going forward on top of what we have already seen. That is very much a question around how oil prices will develop during 2016. I would also like to comment on that we have a very limited exposure to oil and offshore industry. When we believe, and it is not now, when we are further in the cycle, we will probably like to increase the exposure to very good name as we see that we have the capacity and ability to put on very good names. But that we will do further down the cycle when probably some consolidation within the oil and offshore sector has taken place. Sure. Thanks. Can I just confirm then that within Business Banking Norway, the loan impairment charge of DKK 141 million in the fourth quarter, that includes the DKK 50 million of collective provisions that you just mentioned? Yes, that's right. Yep. Excluding the collective provisions, I guess the level is still fairly high. Is that related to any particular exposure, or is there any trends that you're seeing, or should we expect that level to come down in future quarters? Thank you. I don't think we have anything more to add to what we have already said around impairments in Norway. Okay. Thank you. We will now take our next question from Christian Hede from Nordea. Please go ahead. Yes, good afternoon. This is Christian from Nordea in Copenhagen. I have some follow-up questions. I think I will stick to questions on the capital part and looking forward. So I think, Thomas, you briefly touched upon capital and how you see it, but can you say a bit about the main uncertainties from here and when do you expect to have more clarity on whether you could go down to, for example, 13% or whether it is wiser to stay at 14%? Also on a more technical note, could you give us any one-offs coming up on the REA part? I guess the FSA order is going to be implemented here in the first half. Is there anything else we should expect? Finally, on the same topic, the fundamental review of the trading book. I think you have said, Thomas, that this is not going to impact your capital position materially. Can you quantify this and also maybe the timing on implementation? Thank you. Yeah. I will take the last one, then I will leave the word to Henrik. The fundamental review of the trading book is something we are working on. As you know, it is not clear how it will actually end. But we have done various analyses and we are still in the midst of it, but I can confirm that it has a non-significant materiality on our capital position. If it had, we would of course adjust accordingly, but it does not. Henrik would like to comment on the REA. In terms of the development in REA, we have on page 10 shown that the impact of the share buyback program, including the gradual phasing in of CRD4 will lead to a, so to say, pro forma core tier one of 14.7%, starting from the 1st of January 2016, so to say. It is also on page 10 stated that we expect the final implementation of our last FSA order to increase REA by around EUR 15 billion-EUR 20 billion in Q1 2016. That is, so to say, the known unknowns, and that is what is available to communicate. You had a very broad question about uncertainty. I think we know about the uncertainties being just what you mentioned, the fundamental review. Then you have IFRS 9. We are still working on that, but at the same extent, we do not think that it has any material impact on our book. Then we have the in-phasing of CRD4 that we have disclosed is approximately 0.7 percentage points, and then we have what Henrik just alluded to. The only big uncertainty, which none of us has any certainty about, is anything coming out of Basel IV. Then we just have to wait and see how that debate evolves. Thank you. Is it fair to say that you are waiting for CRD4? You are not actually taking it upfront and starting to hold back capital in order to fulfill any possible future requirements from that? I think it's very hard to put aside capital for something you don't know what you should put aside. With the earning capacity and probably the in-phasing of any effect, if any, will be in a prudent way. That's why we are very comfortable with the very strong capital position we now have. Thank you very much. We will now take our next question from Omar Keenan from Deutsche Bank. Please go ahead. Good afternoon. Thank you very much for taking the questions. I just had two quick questions. One a margin question, just perhaps an update on Northern Bank. Firstly, on mortgage margins. If we look at the contribution margin of around 80 basis points, it does look extremely low in a European sector context. We've seen a lot more asset margin expansion elsewhere in Europe given higher capital and liquidity rules. I was just wondering, could you let us know what the product ROE on Danish mortgages is? Is there any likelihood we'll get repricing this year or is it no chance basically? Then a related question on margins. Just on Danish corporate lending, is there any front versus back book dynamic you can give us or try quantify what lending margin pressure we might possibly get? Then just finally an update on Northern Bank. Thank you. I'll do the last one, and Claus will take your two first questions. There is no question that Northern Ireland has since 2008 been through a difficult time, but they stabilized the position in 2012, 2013, and particularly during the two last year, has done a good tremendous turnaround, also due to the macroeconomic turn of U.K. and Northern Ireland in particular. The performance this year has been strong and we expect also Northern Bank to be strong going forward. You need to take into account that Northern Bank have a very strong market position with approximately 30% market share in corporate and approximately 20% market share on current account, though a smaller market share on mortgages, approximately 6%. We expect Northern Bank to continue on the positive path with being accretive for our shareholders going forward. Due to the limited synergies with being a Nordic universal bank, we will detangle them somewhat from the bank and let them operate more independently, but at the same time, taking out the benefits of running on our IT systems. So we're very happy that we support them through a difficult period. Now they're coming out in a smoother water and performing very well. Then Claus will answer your first two questions. Yeah, I think you are right in your view that margins for Danish housing loans are probably lower to what we see elsewhere in Europe. However, it is a very competitive market and there is a lot of both political focus but also some focus from some consumer organizations in Denmark. For the time being, it doesn't look like margins will grow on housing loans in Denmark. Okay. We will now take our next question from Christopher Raciti from Barclays. Please go ahead. Yes, good afternoon. Christopher Raciti from Barclays. Just one question on capital or actually the investment banking reform. I appreciate the comments that you have written on slide 17, but in some quarters, we have actually seen revenues decline and required capital in this division go up. I was just wondering if you could give us a little bit more color to the various moving parts, if there are, this trend that we are seeing now with declining capital requirements could be expected to continue that the volatility due to concentration risk and counterparty risk is out of the book, that those have been legacy positions that are now permanently gone, or is there a risk that this division, given certain market conditions once again could require more capital? That is my only question, actually. Thank you. There is a lot of technicalities in your question. I will ask IR to give you a call after this conference call to give you some more details. But overall, I would say that the de-leveraging, the de-risking of C&I, and the adjustment of the business model is going exactly according to plan. Some of the freed up REA went slightly faster in Q4 than expected due to this counterparty risk as you alluded to. But it is no question that the market risk has been reduced substantially due to our focus on return on capital instead of focus on top line. That is going through the whole business model. I am very happy with the way FICC business model has been adjusted and how we have been able to grow the capital market business. I think overall we have found the right balance now. But when it comes to technicalities, I will ask them to call you after the call. Thank you. Just to confirm, do you have a target capital level for this business in mind, or is that a more fluid concept? No, we gave you in our Q3 2014 guidance when we went through a business review of C&I, we guided you particular on where we believe the income, where we believe the cost should be, and where we believe the capital, and where we believe the ROE should be. If you recall that, you could go back to the presentation we did at that stage. We said capital consumption should be between 32 billion and 37 billion. We are within that range. We said ROE should be in the range between 12% and 20%, and we are basically in the midst of that now. So we are following that plan as we guided you approximately five quarters ago. Thank you very much. We will now take our next question from Andreas Håkansson from Exane. Please go ahead. Apologies. We will now take our next question from Mads Thinggaard from Handelsbanken Capital Markets. Please go ahead. Yes, thank you for taking my questions. This is Mads from Handelsbanken. One of the question is regarding the lending growth in Sweden and what you see here after this very remarkable growth Q4 of almost 9% in reporting currency. What should we expect here going forward? I guess the double-digit growth in Business Banking is not a sustainable run rate, but with the Saco deal taking effect now, what should we expect from Sweden here in 2016? Will it be like the very high growth in Norway we saw last year? Also if you could give a bit of flavor on making this new Swedish covered bond pool, is that simply because the growth is going to be so high, you need to do that in a different way, or what is the motivation behind this? Then I just have a clarifying question on your buybacks. That is showing us the money here on the buybacks on Q4 here, is that kind of confirming that you can just take a reverse engineering-like approach to your CET1 ratio, and assume that you will target 14% point in time, then you will add a small buffer, then you will actually pay out everything above that to a given low point so we can expect the same way of calculating the buybacks in 2017? Thanks. Henrik will take your last question. In terms of your buyback, I think Thomas went through that we start with the dividend, then after having, so to say, done the dividend, we make an assessment whether we have excess capital, looking into our figures for 2016 and so on. In this case, we decided to do DKK 9 billion in share buyback. You cannot mechanically, so to say, reverse engineer out from core tier one of 14% and then automatically calculate a share buyback. You cannot do that. Okay, thanks. Then you asked about the growth in Sweden. First of all, Business Banking has grown constantly during the last couple of years, and are expected to also, forward-looking, have a good, balanced, healthy growth. There is no major change in our appetite or strategy. When it comes to Personal Banking, we have, as you probably know, lost market share in 2013 and 2014. We revamped the whole management team, their platform, and our offering in late 2015 and getting prepared now in 2016. We have, as you probably know now, a very good customer program. We're also voted as the best bank in Sweden in 2016 on private side, and we have this deal with Saco. The deal with Saco is not exclusive as it is in Norway, but we are the preferred partner. I don't think we should plan for the same growth in Sweden as we've done in Norway. The Norway growth was extraordinarily high in 2015. I would also expect that the growth in Norway will come down in 2016. The reason why we should also take down the growth in Norway in 2016 is also to make sure that we cross-sales on these very good clients we've been able to onboard in 2015. When it comes to the covered bond program, that's confirming that we will remain and grow a solid business in Sweden and make sure that we have a balanced funding strategy also in Sweden. As you know today, we're using the covered bond program euro and swap it in to Swedish krona to support that. We'll continue to some extent to utilize that program, but we think it's prudent to now build up a solid domestic program to be on equal footing with our domestic Swedish peers. That's the reason. Okay. Thanks. Could we have one final question, please? Absolutely, sir. We will take our next question from Jacob Kruse from Autonomous. Please go ahead. Hi. Thank you. I just wanted to ask a couple of quick questions. Firstly, do you give any guidance for risk-weighted asset growth for 2016 on an underlying basis, excluding those one-offs? Secondly, just on the cost side, should we basically think about the cost reduction as the reduction of intangible amortization and over DKK 300 million and then another DKK 200 million of lower deposit guarantee scheme, and then with fairly limited additional items? Lastly, do you get any impact of the change to interchange fees in your commission income line? Thank you. Okay. Henrik, would you like to take those three questions? You asked whether we could give any guidance on REA for 2016, and no, we do not do that. We have provided a little bit of guidance that we in Q1 expect this extra REA increase of DKK 15 billion-DKK 20 billion, as we talked about previously, due to implementation of an FSA order. So no, we do not give a specific guidance towards REA 2016. Of course, it will also depend on the growth and development in market risk, counterparty risk, et cetera. Then you asked about our cost, and you are to some extent right that the starting point is the DKK 21.8. Then we have this amortization of name rights, which we have had for the last couple of years, which will not materialize in 2016. That is around DKK 400 million that will come down. Then on top of that, the deposit guarantee scheme will disappear. But on the other hand, we need to pay to a resolution scheme that will be around DKK 400 million-DKK 450 million. These two or three items are, so to say, the starting point. Then, of course, we have the general development in our cost base, inflation, investments, regulatory requirements, et cetera, as we also commented about before. We do not specifically state our interchange fees as you asked about. That is not provided specifically. We expect that fee to have a limited impact since we in Denmark have the Dankort solution, which is the preferred way of payment. This is different from what you see in other countries like Sweden, for instance. Okay, great. Thank you. Okay, Henrik would just like to say a couple of words as this is his last conference call. Okay. Thank you very much. It has been a pleasure being in dialogue with many of you, and hopefully we will continue to meet here in my last remaining quarter. Then on the 1st of April or by the end of March, I will hand over to Jacob Aarup-Andersen, who at that point will be very well equipped to take over as CFO. I also hope to meet some of you in London later this week. It has been a great pleasure, and it has also been a great pleasure to see that the bank is now really moving in the right direction. Also, I think the results have over the last five years improved a little bit. Thank you. Thank you very much, Henrik, and thank you all for your interest in Danske Bank and your questions. As always, you are welcome to contact our IR department if you have more questions after you had time to look at the financial results in detail. A transcript of this conference call will be added to our website and the IRF within the next few days. Thank you very much. That will conclude today's conference call. Thank you, ladies and gentlemen. You may now disconnect.