Earnings Call: Q4 2014

Feb 3, 2015

Summary

2014 net profit was DKK 12.9bn excluding a DKK 9.1bn goodwill impairment, with higher income and lower costs and impairments. 2015 net profit was forecast above DKK 14bn, with ROE targeted above 12.5% by 2018.

Welcome to the annual report 2014 conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to CEO, Thomas Borgen. Thomas, you may now begin. Thank you, operator. Thank you all for taking time to listen in to this call today. Other participants are Chief Financial Officer, Henrik Ramlau-Hansen, and Head of Investor Relations, Claus Ingar Jensen. Slide 2, please. In today's call, I have the pleasure of presenting Danske Bank's financial results for 2014. We will also offer some insight into our plan for increasing shareholders' return on equity to above 12%, and we will update you on the progress of our ongoing business review. At the end, we will present our financial targets and our outlook for the current year 2015. Our aim is to keep this presentation to around 20 minutes, and after the presentation, we will open up for Q&A as usual. Slide 3, please. Allow me to begin with a few general comments about the state of Danske Bank before we continue with the actual numbers. 2014 was a good year for Danske Bank. We managed to increase the top line, strengthen the underlying business, and increase activity across the group as a result of firm focus on delivering long-term value to our customers. We continued our efforts to make the bank more customer-oriented, simple, and efficient, and we launched several new initiatives and products in the various business units to strengthen our customer value proposition further. The year also marked the end of a number of challenging years in the wake of the financial crisis and new regulation. In April, we repaid the DKK 24 billion in hybrid capital that we raised from the Danish state. We saw our rating upgrade by S&P and Moody's, and we strengthened our capital position and funding situation. Also, we did well in the EBA stress test this autumn, and we have successfully wound up most of the Irish activities. In terms of financial performance, we have delivered the best results since 2007. Although we have made significant progress in 2014, we still have hard work ahead to meet our long-term targets for profitability and customer satisfaction. The following comments on the results for 2014 will be based on figures excluding the goodwill write-off of DKK 9.1 billion we booked in Q4. Our return on equity came in at 8.5% in 2014. This is a large improvement from the ROE of 5% the year before. Excluding income from the sale of Nets, the return on equity was 7.8%. The net profit came to DKK 12.9 billion for the full year. This is more than 80% higher than the level in 2013, and it was driven by improvements in all areas. We lifted total income by 10% to almost DKK 44 billion with good progress in all income lines. This was despite the fact that the macroeconomic environment did not offer much support as low interest rates and low growth continued. Expenses declined to DKK 22.6 billion due to our ongoing cost efficiency measures. This was in line with the revised guidance for lower expenses in our latest interim report. Impairments in our core activities came in at DKK 2.8 billion for the full year. This is a decline of 32% compared with 2013, as we saw an improvement in credit quality last year. The result of our non-core activities was a loss before tax of DKK 1.5 billion. The Irish property divestment proceeded according to plan. Our capital base remained strong with a Common Equity Tier 1 ratio of 15.1% and a total capital ratio of 19.3% at the end of 2014. On that basis, the board of directors is proposing a dividend of DKK 5.5 per share, which represents a payout ratio of 43%. Furthermore, the board of directors has decided to initiate a buyback program of DKK 5 billion in 2015. Finally, we expect a net profit for 2015 above DKK 14 billion. Slide 4, please. Now let me take you through our income statements item by item. Net interest income came in at DKK 23.1 billion. This was 5% above the level the year before due to repricing of deposits, lower funding costs, and additional income from the investment of our liquidity bond portfolio. Fee income rose 11% as we benefited from stronger customer activity and positive development at Danske Capital. Net trading income was up 30%. The result included the gain on Nets of around DKK 1 billion, which was booked in the second quarter. Excluding this one-off item, the result was driven by higher client-driven income from capital markets and transaction banking business. Income from our FICC operation was negatively affected by challenging market conditions and new regulatory requirements. The result from Danica's insurance business amounted to DKK 2.4 billion, up from the weak 2013 result of DKK 1.1 billion. It was possible to book the risk allowance to income for all four interest rate groups and additional DKK 600 million from the shadow account balance. Total income rose 10% compared with the level in 2013. Operating expenses fell 5% as a result of our continued focus on costs and efficiency measures, and the cost-income ratio dropped 8.3 percentage points to 51.6%. Finally, in the last quarter of 2014, we took an impairment charge of DKK 9.1 billion on goodwill related to our activities in Finland, Northern Ireland, and Estonia. The charge was based on assumptions of weaker long-term macroeconomic developments, and it does not reflect our short-term expectations for the business units. Slide 5, please. In 2014, we saw good progress in the financial performance of all three banking units. We saw an increase in activity and earnings in many areas as we strengthened the relationship with customers and launched innovative solutions and products. Personal Banking delivered a satisfactory result as pre-tax ROE, excluding goodwill impairment, rose 4.6 percentage points to 14.4%. There were improvements in most areas. Net interest income was slightly lower, however, mainly because of continued pressure on deposit margins. Fee income and trading income were up 9% and 12% respectively, and they benefited from higher customer activity. Costs were reduced 9% as a result of cost efficiency. Impairments continued to decline, particularly in Denmark, and were 25% below the level the year before. Customer satisfaction rose overall at Personal Banking with improvements in Finland and Denmark as well as the other markets, all from low levels, though. We are moving in the right direction, but it is clear that we still have a lot of work ahead of us before we reach our goals. At Business Banking, we saw steady improvements in customer satisfaction and we are on target in four out of five markets. It is very good news that customer satisfaction improved in Denmark as well. Altogether, 2014 was a very good year for Business Banking. For instance, we saw a positive trend in business volumes in all markets and pre-tax ROE, again excluding goodwill impairments, rose 2.6 percentage points to 13.5%. Net interest income was slightly up as increased business volume compensated for pressure on deposit margins. Fee income was up 8% as a result of higher customer activity and compensated for lower trading income. Impairments declined significantly as a result of improved credit quality. Finally, at C&I, profit before tax rose 23%, while ROE was almost unchanged as a result of an increase in allocated capital caused by new regulatory requirements. Total income benefited from good underlying growth as NII and fee income grew 18% and 27% respectively. Income from general banking, capital markets, and sales was up 17% as C&I continued to focus on client-driven income. Income from our FICC operation suffered from low volatility and low interest rates and was down from the level in 2013. Impairments followed a positive trend we saw at the other banking units and were 21% lower than the year before. C&I maintained its very strong position in the Nordic markets. Slide six, please. Let us turn to our activities within asset management and insurance. Both business units delivered a good performance in 2014. Danske Capital increased profit before tax by 24% compared with the year before. The result was owing to an increase in assets under management and higher margins. The improvements reflect higher net sales and gains on assets under management from the positive financial markets. Net sales to customers outside Denmark rose to 59%, evidence that Danske Capital's strategy of improving business with international customers is succeeding. Assets under management rose 9%, now at DKK 795 billion. Danica, our insurance subsidiary, saw a net income of DKK 2.4 billion. The result was significantly higher than the year before, owing to improved conditions in the financial market. As a result of the positive investment result, the risk allowance could be booked to income for all four interest rate groups, and DKK 600 million could be transferred from the shadow account. We continue to see strong synergies between Danica and the banking units. In 2014, cross-selling of pension products to personal customers through the bank increased by 17%. Slide seven, please. Moving on to our operating expenses. Overall, we are satisfied with our performance in 2014 as we executed our cost reduction initiatives according to plan. Operating expenses amounted to DKK 22.6 billion. This is 5% lower than the year before and in line with our guidance for the full year. We achieved this through our commitment to ongoing cost efficiency measures, and it resulted in a cost-income ratio of 51.6%, down 8.3% from 2013. Operating expenses were down in all underlying cost lines. Reduction in staff, consultancy, and office expenses made significant contributions to our cost performance. In the fourth quarter, operating expenses rose 10%, partly from higher severance payments and other restructuring costs as we continue to implement cost measures that will reduce the cost base further in 2015. Going forward, we will continue to strengthen our organizational structure with group services operations in the Baltics and the insourcing of IT activities in India. We are confident this will reduce the cost base going forward. There is no doubt that we must maintain a strong focus on expenses at all business units and also support functions, as this will continue to play an important role in our efforts to achieve our long-term targets. Slide 8, please. The decline in loan impairment charges was an important driver behind our improved result in 2014. The charges came in at DKK 2.8 billion or 32% less than the year before, and that included around DKK 900 million as a result of the AQR process. Impairments were lower at all three bank units, primarily because of improved macroeconomic conditions in Denmark. At Personal Banking, impairments rose in the fourth quarter, mainly because of the AQR related charges that we mentioned in our guidance the quarter before. At Business Banking, which benefited from improved macroeconomic conditions, impairments declined significantly in Q4. The charges included additional collective charges of DKK 150 million against our exposure to agriculture. At C&I, where impairments usually fluctuates between quarters, impairments rose during the fourth quarter owing to a couple of large exposures. The loan loss ratio, including non-core activities, declined seven basis points from the level the year before, now to 20 basis points. Slide 9, please. We strengthened our capital position in 2014. At the end of the year, we had a Common Equity Tier 1 capital ratio of 15.1% and a total capital ratio of 19.3%. In April, the repayment of the state hybrid capital of DKK 24 billion reduced the capital ratio, all things equal, by 2.7 percentage points. The decline was partly offset by a new Additional Tier 1 issue and other capital instruments. At the end of the year, our leverage ratio was 4.1% according to transitional rules and 3.6% when the new rules are fully phased in. On the basis of our strong capital position, the board of directors has decided to initiate a share buyback of DKK 5 billion in 2015. This will affect the Common Equity Tier 1 ratio by 0.6 of a percentage point as of the end of 2014, as it will be included in our reporting for the first quarter this year. We have also revised our dividend payout target to 40%-50% of net profit. As part of our capital plan, we will consider issuing other capital instruments as a partial or full replacement of the redeemed equity in order to optimize our capital structure. Turning now to our non-core activity on slide 11. We have made good progress on the winding up of our loan portfolio and other activities in Ireland and now it's almost completed. In 2014, we completed the winding up of retail operations and have now closed all personal and business accounts. The management of the performing personal mortgage portfolio has been outsourced to a loan service provider in Ireland. Property sales progress as expected. More than 1,600 properties were sold in 2014, and we have made agreements to sell another 900 properties. We expect to sell the remaining stock on the market, namely 470 properties, in the first half of this year. We have reduced credit exposure by DKK 9 billion to DKK 39 billion, partly through property sales. The reduction includes the SME portfolio of around DKK 4 billion that is expected to be sold in the first half of this year. The SME portfolio is therefore booked as assets held for sale. For the full year, impairments against our non-core Irish exposure amounted to DKK 930 million, which includes charges related to the AQR and an additional charge to cover the expected sale of the SME portfolio. Against this background, we do not expect any material impairment charges from non-core Ireland in 2015. Next slide, please. We are making progress towards our target of increasing our return on equity to 9% in 2015. But as you all know, we have also had a longer-term ambition of a return on equity above 12% since 2013. As we approach the end of the short-term target period, we believe this is the right time to communicate our plans going forward. Let me start with two important premises. First, since our total capital has changed due to the recent write-off or write-down of goodwill, the starting point for return on equity at the end of 2015 is now 9.5%. Second, we expect unchanged macroeconomic conditions. That means low growth and low credit demand. We have calibrated the bridge on the basis of solid and reasonable assumptions to ensure that we deliver a return on equity of above 12.5% in 2018 at the latest. Let me run you through the various elements. On the cost side, we will continue our strict cost control, and we are planning further efficiency measures, not only to mitigate inflation but also to take out normally costs down further. This is an ambition element, since we reduced costs significantly in 2014, and we plan further reductions in 2015. We expect positive contributions from funding and ratings. We will refinance expensive maturing funding at lower cost, and we expect to improve our ratings to a strong single A. Modest loan growth is part of the bridge. Our assumptions are in line with the growth rate we saw in 2014. Income initiatives are based on further improvements at Danske Capital and Danica and also on efforts to optimize pricing at all our business units. We expect slightly lower loan losses since there will be no effect from loan impairment charges related to non-core Ireland or AQR, and we expect to see modest additional improvements in overall credit quality, although not to the same extent as we have seen previously. And finally, we assume higher nominal equity in 2018, even after distributions to shareholders. Returning excess capital to our shareholders is an important driver for reaching our target for return on equity in 2018 at the latest. We consider the plan ambitious but realistic, and we are confident about the course we have set to achieve our ambitions for 2018. Next slide, please. As you know, we are reviewing our business operations throughout the year. The business review has led us to reaffirm our position as a Nordic universal bank with operations in Denmark, Sweden, Norway, and Finland. We have also stated that we aim to grow our activities in Sweden and Norway, and we adjust the business model at C&I to reflect both regulatory and market-related changes. We have now completed the business review for our operations in the Baltics. Danske Bank has been active since 2007 in the three Baltic countries, where we provide services to both business and personal customers. at the end of 2014, lending in the Baltics amounted to DKK 19 billion, or 1.2% of our total lending. We reached two conclusions in our review of the Baltics. First, we want to strengthen our Business Banking operations there for the benefit of both Nordic and local business customers. It is important for our strategy as a Nordic universal bank that we support our business customers in their activities outside the Nordic region. We will invest around DKK 100 million in Business Banking operations in the next one or two years, mainly to strengthen our IT platform. Second, our Personal Banking operations do not have sufficient scale to generate acceptable returns. We will therefore gradually exit Personal Banking in the Baltics while maintaining service levels for our customers and honoring our agreements. We will present Personal Banking activities as part of non-core effective January 1, 2015. Next slide, please. Finally, I would like to present our guidance for 2015. We expect economic growth to remain slow and fragile in a low interest rate environment as in 2014. We continue to expect total income around the same level as in 2014. We expect that the item will benefit from lower funding costs and slightly higher customer activity. We expect expenses to be below DKK 22 billion. Impairment charges in our core activities are likely to remain low. Altogether, we expect net profit for 2015 of above DKK 14 billion. However, the guidance is subject to greater uncertainty than usual due to the extraordinary interest rate environment which presently prevails in the Euro area and the Danish krone markets. Next slide, please. Those were my 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 now ready for the Q&A session. Thank you. We will now begin the question and answer session. If you have a question, please press star and then 1 on your touchtone phone. If you wish to be removed from the queue, please press the hash key or the pound sign. Once again, I remind you, if you have a question, you have to press star and then 1 on your touchtone phone. Our first question is coming from Mads Thinggaard from Handelsbanken. Please go ahead, sir. Yes, hello. Thank you for taking my question. The first one is on the drag from increased capital in the bridge in 2018 of only 1.5 percentage points. That points to very large redistribution to shareholders in the coming years. Could you perhaps put a bit more flavor on what kind of payout ratio you are operating with and what you are thinking here? Also the buybacks, if that means we can expect at least DKK 5 billion in buybacks again in 2016 and 2017. Then my second question is on corporates and institutions that shows a bit of a disappointing return on allocated capital in Q4. Of course, the trading was not as good as one could have hoped for, but it seems that you have increased the staff quite a bit there. The capital consumption seems to have gone up instead of down, despite the plan you announced in Q3. Thank you. Yeah. Henrik will answer your first question. I can take your second question. There is no doubt that the changes we are planning for C&I will start taking effect already in the first quarter of 2015. We can see that also taking place in the latter part of 2014, where we can see that customer income is taking a larger part of the income stream. It is actually up 17% compared with 2013. When it comes to the cost, some of the inflated cost in Q4 is based on the restructuring charges we are taking to bring down the cost base into 2015. When it comes to the staff in particular, there is also some technical adjustments, so you shouldn't read too much into the staff numbers per se. Thirdly, there is no doubt that particularly our trading operations had a difficult quarter, particularly in the FIG business. That is something we saw throughout the year, that it was low volatility and low interest rate environment. That is why we are very clear that we are restructuring the business model, and that is ongoing. So said, we are very cautious of remaining a solid and good provider of FIG market services to our clients. We can see that this is very valuable in the quarter we now are, where there is a large interest in the Danish financial markets, where we, as the biggest provider, will benefit from that flow. That doesn't exclude us for continuing the restructuring, which I am very confident will find and take place during 2015 with lower capital and with lower cost. I think we are on track, but we should not read too much into Q4 except confirming that the FIG business is challenged in the old environment, and it will also be challenged going forward. But short term, we are pleased with the activity we see for the time being. Okay. The capital that increases in Q4 plus, is that for regulatory reasons or what is it? It is more fluctuations within market risk in particular. Okay. I don't think you should read too much into that. Okay, thanks. Henrik will then take your capital question. In terms of your capital effect in 2018 in the ROE bridge, the minus 0.5% you referred to, that is correct. That is based on assumption that we expect to have in 2018, a higher equity than on the average during the period, therefore there is a negative effect. I think you are right by referring to that therefore the capital plan includes both dividends and share buybacks according to what we have communicated. A dividend of 40%-50% and share buybacks on top of that, because for the time being, we are quite comfortable running the bank with a Core Tier 1 ratio around 14%, as stated in the assumptions. Things may deviate over time. Also keep in mind that one of the other basic assumptions is that underlyingly, we are assuming that risk-weighted assets are growing around 2%. That is the loan growth assumption, and we still have some outstanding issues with the Danish FSA in terms of some of our orders that are in the process of being implemented. That is so to say, increases risk weights. On the other hand, we have applications as you know, out for IRB approvals in Finland, and we also expect other things being equal, a reduction in risk-weighted assets from the non-core running off. So there are both pluses and minus on the risk-weighted assets, but underlyingly, we assume growing by around 2% and then we have imposed dividends and share buybacks in order to have the Core Tier 1 around 14%. But it seems it's a very small fraction of your income that you are going to retain in equity. Could you give some kind of overall idea of how large a percentage point you are going to retain versus payout? No. The payout in terms of dividends would be- And dividends plus buybacks. How much do you retain and how much do you payout? No, we are very clear in today's announcement that we have a dividend policy between 40% and 50%. To this, the board of directors proposing 43% to the general assembly. And we intend to be within that bracket also in the period of 2018. Then we say clearly that any excess capital above the levels which we have clearly stated, around 40% at least for 2015, we will distribute back to the shareholders. What that amounts to, we cannot say any more about at the present time. Okay, thanks. Next question is from Asbjørn Nicholas from Carnegie. Please go ahead. Yes, good afternoon. Asbjørn from Carnegie here. I have a question on your top line net interest income. I think Thomas, you were quoted today for saying that the impact from the central bank rate cut, all things equal, would be DKK 700 million-DKK 900 million on an annualized basis. I am just wondering if you could elaborate a little bit on this. First of all, in terms of, is this a gross impact and what kind of mitigating impacts do you see going forward? I guess this would mainly hit your bank lending in Denmark and only the small part that is actually linked to the CIBOR rate. How much would that be in terms of volume, and then how do you see the potential for negative deposit rates and other mitigating effects or things you can do here? That was my first question. Then my second question on capital. After the buyback, if my calculations are correct, you are going to be at 13.2% fully loaded Core Tier 1. If I understood you correctly, your long-term target still is around 14%. When should we expect you to sort of reach that 14% level? We are talking about something like DKK 9 billion. Is that something you would want to be at very soon, or should that just be something you want to be at in 2017, 2018? Thank you. Henrik will come back to your last question on that capital. Let me answer your first question. It is correct that the adjustment from the Danish Central Bank from the 5 basis points to -50 basis points, all things being equal, has a negative impact on us between DKK 700 million and DKK 900 million before any mitigating actions. We are of course currently looking into how we can adjust our pricing in order to reflect the significant change market conditions. As we speak, of course, this is going through diverse accounts, starting with the professional market. We will try to protect our personal clients and the current accounts as much as possible. But of course, the professional market will understand that they will have the rates adjusted. The net effect of this could be that we have a negative effect of some hundred million, but we will mitigate quite a substantial amount of those DKK 700 million to DKK 900 million. Remember that this is, as you alluded to, on the NII by itself. The other side of the coin is of course that hopefully this will stimulate some more growth in both Europe and in Denmark, which benefits our clients. Secondly, our clients will have a better disposable income, all things being equal, a better ability to repay or down pay their debt. Finally, as you alluded to, being the biggest bank in Denmark, we naturally see quite a substantial flow of the interest we see from investors now on the Danish market. So the overall effect is still uncertain, but just on the NII by itself, net-net, we can expect some couple hundred million kroner. In terms of your capital question, on slide 9, it appears that after the share buyback on a pro forma basis, our Core Tier 1 drops to 14.5%. Then you alluded to the fully phased-in effect of 1.3 percentage points, then 13.2%. But the point here is that when we state that we will have a Core Tier 1 around 14%, that is on the reported basis, and when we reach 2018, it will all be phased in. So of course, the 1.3 percentage point will be a negative drag over the next three or four years, and in that way ties up capital. But that's how it is. Okay. Thank you very much. That's very clear. Our next question is from Omar Keenan from Deutsche Bank. Please go ahead. Good afternoon. Thanks very much for taking the questions. My first question is on costs. You gave a clear target for 2015 that costs would come in below DKK 22 billion. If I look at your ROE ladder to 2018, you're talking about 0.5% to 1% of the ROE target will be achieved on costs. Is it fair to say that your cost ambition beyond 2015 is below DKK 21 billion if we assume the midpoint of that target is achieved? My second question is just a follow-up on the impact of negative rates. Jordi made a comment just now in the previous question about mitigating the impact of the DKK 700 million to DKK 900 million. I was hoping you could give us just a little bit more color on what you expect that mitigation would be. Is it higher lending margins or starting to charge customers higher fees for accounts? Okay. Thank you. On your first question, it is without doubt that we will be very diligent of costs going forward because I think it's important for a retail operation and a Nordic universal bank to be cost diligent. We have guided below DKK 22 billion in 2015, as you alluded to, and we say in our bridge that costs should contribute net between one half and 1%. If you take the midpoint, it equals to approximately DKK 1.2 billion. So your assumption is not that bad, that it should be around or slightly below DKK 21 billion. Yes, I think you're right on there. If that's enough, we will need to see. It also depends on how the economy is developing. When it comes to negative rates, we are looking at all various options of how to pass on this very extreme situation with negative rates from the Central Bank. We will look into both on the deposit side, we will look also on the lending side. But it is no specific issues it is worthwhile mentioning now, but I can confirm that we are putting in place mitigating actions which makes the net results to be around DKK 200 million. DKK 200 million net? Yeah. Okay, great. That is very clear. Thank you. Next question is from Jakob Brink from ABG Sundal Collier. Please go ahead, sir. Thank you. Two questions. The first one is actually coming back to the capital impact in the return on equity bridge. If I calculate backwards, it might be that it is wrong, but still half a percentage point, given that you will have the CRD IV fully phased in over the forecast period, it basically means that you are going from currently 13.8% to 14% over the forecast period. So that half a percentage point, in my estimate, roughly equals that 20 basis points increase in the fully loaded CRD IV quarter one ratio, which then must implicitly mean that you are expecting flat risk-weighted assets in the forecast period despite volumes growing 2% a year. Is that correct? Or if not, could you then tell us how much you do expect RWAs to grow? That was the first question. The second question is regarding the loan losses and other. Could you maybe tell us about this? Because the way I read it is that you are basing this bridge on 2015 loan losses, which you state will be roughly on the same level as in 2014. I guess there is also some tax impact in the other part. But using this one, we get to group loan losses of around 10 basis points, which I guess is fairly low. Or how should I look at this? Thank you. Yeah. Henrik will try to take an answer to your question. The first question, I will take your second. We have used a lower level, put it that way, on loan losses than we reported in 2014. But remember that 2014 also included both impairments in non-core and the AQR. But sorry, but this bridge does not start in 2015. You are using 9.5% and you did only 8.5% last year. Yeah. Let me just go through, so I'll explain how we think this through. When we move into 2015, we expect that non-core will have no material effect, so that you can exclude that one. Then we expect the impairments to be pretty much at the same level or slightly lower than we've seen in 2014, all things being equal. Going forward, we can see that if our assumption of low but positive growth with low rates, our customers, all things being equal, will be better off. Also taking into account our impairments allowance account. Taking this into account, we expect that we, in this time horizon, will have lower loan losses than we have today. That loan losses in 2018 is probably lower than what you would refer to through the cycle. So that's a different number. But in this time period, we can see that all things being equal and on the basic assumptions we have laid down, that loan losses should come down as the quality of our book improves and the macroeconomic environment improves, but at a slow pace, and it will remain with low interest rate environments. Okay. Thank you. In addition to Thomas' point, there is also a tax effect as you alluded to. Regarding the development in risk-weighted assets, Jakob, you are an expert in reverse engineering. Roughly speaking, you are correct. Roughly speaking, risk-weighted assets are assumed to be roughly plus or minus constant for the period. There's an uptick due to the loan growth as we talked about, but remember, we will have factored in the deleveraging runoff of non-core. As you know, as we have commented previously, we're also working on bringing capital consumption down in C&I as well. So roughly speaking, yes, to a flat risk weight is over the period towards 2018. Okay. Thank you very much. Next question is coming from Andreas Håkansson from Exane. Please go ahead. Yes. Hi. Just one follow-up on net interest income first. You talked about the impact on this 50 basis points reduction or close to 50 basis points. Could you tell me, has the sensitivity increased the further lower or the lower we go? If we get another rate cut in the next couple of days or weeks, that is going to be worse than the impact for the previous 50 points, or are we talking about similar impacts? Related to the rate changes as well, we see that we have remortgaging activities picking up and people are moving away from floaters and interest-only to fixed-rate mortgages again. Margins, I think, are quite much lower on fixed-rate mortgages. So will we see an impact on mortgage margins from that mix effect? Second question is on the whole reason why rates are going down, and that is the speculation about the peg, of course. Are you hedging your EUR Danish krone exposure? What would be the impact of a 10% move in the Danish krone against the EUR, please? Claus will answer your first question, and I will take your second. I can take that first. First of all, it is clearly anchored in both the Danish society, the fiscal policy, and the monetary policy for many hundred years, and since 1982 of pegging the Danish krone. We are very confident that peg will be kept, and that's without doubt, and that the central bank has the tools ready to make sure that it will stay at that place. If, unless unlikely and highly unlikely that will take place, if it happen, we at Danske do not have any exposure directly which will impact us negatively if, for whatever reason, the krone appreciated. Indirectly, it will have some impact that it may create some volatility in the Danish society that certain of our customers may have a higher currency on the export market. But for Danske directly, it has no impact on the P&L. There is one issue which we need to deal with, that is Danica, but that's more related to the discount curve where the Danish life and pension sector have a discount curve more based on the euro than on the Danish interest rate environment. So that's a different perspective. But krone-wise, there is no issue for Danske. Sorry, before we go to the next question, but can you tell us how big portion of your revenues comes from non-Danish krone? Well, we don't hedge the- 40% or something. 60% Danish. Yeah. Maybe only 40. 60% Danish, but that 40% should then see a quite material weakening. Wouldn't that be the case? Well, yeah, that's right. You have the exposure that your profit may be lower, all things being equal. There is absolutely no reason to go out and hedge the future profit on our certainty that the krone would remain pegged. Okay, thanks. To your question around interest rate sensitivity, the 700-900 that Thomas guided for previously is based on an interest rate sensitivity more or less unchanged to what we have communicated previously, meaning around DKK 800 million, plus or minus 25 basis points. Of course, we are looking into how this sensitivity develops when we are having more floor risk on our deposits. For the time being, that number is still valid. We can, of course, if we should break it up, say that there is a slightly higher sensitivity now on the deposit side, but on the other hand, there is a slight mitigating effect coming from our hold-to-maturity portfolio. How that will develop going forward is not something we can assess for the time being, but we are, of course, closely monitoring our interest rate sensitivity if we are going deeper into this negative rate environment. On the mortgages, do we see a mix effect there? Yeah, on the mortgages, you are right. If the current environment leads to customers taking out much more fixed rate mortgages, you are right that on average, the fees we are getting there on a per annum basis are lower. On the other hand, just in Q1, if it happens, there is an upside for conversion fees. It costs money to move from one type of loan to another. But of course, we will monitor that going forward. But in general, we are encouraging customers to take out long-term fixed rates in this environment where interest rates are really low, a golden opportunity to take that out. It hits us on the income side on the short run, but longer term, it is fine for Danske Bank and the customer and so on. And what is the difference between the fixed and floater margins? Is it almost twice as high on the floaters interest only? Yes. If you include the refinancing fee on the floaters, I think that is more or less the right number. Yes. Okay. Thanks. The next question will come from Christian Hoege from Nordea. Please go ahead, sir. Yes. Thank you and good afternoon. I guess most of my questions have been answered, but I was wondering if you look at the Deposit Guarantee Fund going forward, what is the expected effect for you? Is this ever going to stop the extraordinary payment, or will you have to continue that beyond 2016, 2017, 2018? That would be my first question. The other one would be on trading income. I know you're not guiding on this, but still I would ask for a bit of guidance. We see FICC income being very weak in Q4 and under a lot of pressure. I guess a part of that has gone the other way in January. But how tough is the market for you, and should we expect that you are at these depressed levels forever, or is this part of your plan that you would recover to just a bit of what you used to have? Thank you. I will take your last question, and Claus will respond to your first question. There is no doubt, and we have been very clear on it, that the FICC business, also at Danske, has been challenged both through structural and cyclical issues. The structural weaknesses of the FICC business has not changed. It is there to stay due to the much more capital requirement in that business model. That's why we're very firm of continue to change and adjust that business model. Nothing has changed there. The more cyclical issue, that was also hitting us in 2014, particular in fourth quarter, but also in the three other quarters. Of course, there is some more activity, or I would call it substantially more activities based on the strong interest in the Danish markets, but we cannot base the business model on short-term interest in the Danish market. We will continue to make sure that this is a sustainable, customer-driven, low risk, capital light business model going forward, but at the same time, make sure that we can service our clients in a very professional way in the FICC business going forward. All in all, it is going according to plan, and we do not guide, as you said, for trading income, but we will make sure that this is a profitable business for all stakeholders. Claus? Yeah. Then in respect to your question on the payments to the Deposit Guarantee Fund, this amounts to around DKK 600 million per annum, and it will stop sometime during 2016, everything else being equal in the Danish banking sector. Then we are looking into a new obligation, and that will be to the Single Resolution Fund, which is the Danish version of what you will see introduced in the banking union. This contribution will, as it looks right now, come into effect by the end of this year, and it will be spread over a longer period than what we have seen previously, meaning that sometimes when we do not have the payments anymore to the Deposit Guarantee Fund in Denmark, then there will be a small relief on our cost side. That is how it looks right now, but there is still some uncertainty to the speed of implementation for our payments to this fund. Thank you. Does this mean that you would have a couple of quarters where you pay to both schemes? That cannot be totally excluded, no. Okay. Thank you. Next question is from Jan Wolter from Credit Suisse. Please go ahead. Yes. Hi, Jan Wolter, Credit Suisse. Just a question around the Baltic Retail, which you today announced will be restructured or you will exit that business. Will there be a restructuring charge in conjunction with that? The second question, is Northern Ireland part of Danske Bank home market? I noticed you closed five branches in the fourth quarter, and it has been a couple of years since any branches in that region were closed. So I wonder how you think about that going forward. Thank you. No, there will be no restructuring charges, which will not be a part of our cost guidance. There's no surprises to that extent. Second, Northern Ireland is a good operation for us. It has turned a corner. We are expecting that Northern Ireland will perform better and better. We will let them optimize that business going forward. Okay. Very clear, man. Thanks. Next question is from Anton Kayak from UBS. Please go ahead. Good afternoon. Thank you very much for taking my questions. Just two follow-ups, please, on your targets. The first one is on interest rates. Can you please give us your sensitivity to rising interest rates? I remember you previously talked about DKK 800 million, but it would be interesting to know how much can you overshoot on your ROE target if actually interest rate environment improves. Just as a clarification on this point, in your slide pack, you say that you use interest rates as per end of 2014. Does it mean that the recent fall in central bank rates that we have seen in the last two months represent an additional headwind to the targets? The second question please, on costs. You have alluded to an additional DKK 1 billion or perhaps more of cost cuts in 2016 onwards. Can you please give us some sense on timing of those? Do you expect to see further reduction in 2016 followed by some small inflation in the cost base? Or do you expect this DKK 1 billion plus of cost reductions to be broadly equally splayed between 2016, 2017, and 2018? Thank you very much. Okay. To your first question we are stating that our sensitivity is approximately DKK 750 million per 25 basis points. That will also remain on the upside. But be aware, as you said, we assume flat rates going forward and do not assume any rate increases beyond the zero rate level we had at the end of 2014. So that implies that we have not taken into account that we have half a percent negative rates in 2018. You can have the assumption if you believe that in four years time, we still have 50 basis points minus, but our assumption is based on zero rates to be clear on that one. That's very clear. Thank you. On your second question on the costs. I think you have seen that we were very firm on costs in 2014. We will be firm on costs in 2015. And we will be firm on costs in the coming years. How that would spread out we will need to look into, but we will always need to find a balance of make Danske Bank more efficient to make sure that we invest for the future. And we need to comment on that as we go along. But I just want to make you all very comfortable that cost is something the management is in control of and something we will be very diligent of following up. Also, because digitalization and cost behavior gives us the opportunity to make a better value proposition to the clients, and at the same time make it more cost efficient. Very helpful. Thank you very much. The next question is from Matthew Clark from Nomura. Please go ahead. Good afternoon. Just a follow-up question on the buyback and dividend mix. If you are generating 9%, give or take today, return on equity, and you see it going up to 12%, give or take out in the future, and you have risk-weighted assets flat or not growing. I am just wondering why you are not looking to pay out more in cash dividend. What is it that is causing you to be a bit more hesitant there and use the buyback to mop up the excess capital that is generated rather than committing to a higher cash payout ratio? If you could just talk about your decision-making process in terms of allocating that surplus capital to the dividend program versus the buyback program. Thank you. It is the board's view that we should have a stable dividend policy and a stable dividend payout with a slight upward trend going forward, and a dividend policy which is robust. In that sense the board is actually coming out as you alluded to with a range of 40%-50%, which also is the right level if, which we do not assume, but if there is underlying growth in the underlying economy, which we would like to take benefit of. We do not believe that that growth is taking place, but of course, it will be good if we can have that underlying growth and make sure that we reinvest some of that capital profitable. That is why we keep it within 40%-50%. Said, there is no reason and there is no intention for management or the board of directors to keep excess capital. And we said that excess capital will be redistributed back to the shareholders in one way or another. The traditional method has been to do it by share buyback, and that's what we have done or will start in 2015. It's probably one of the tools we'll also use going forward. So it's the balance profile we are trying to communicate to the market, a continuous small increase in the dividend within the brackets 40% to 50%, and any excess capital beyond what is needed to keep our capital ratios at the levels we discussed, we will probably use other methods to get that back to the investors. Can I just follow up and clarify, in terms of the 2% volume growth you talk about within your target, does that refer to the core loan book or does that refer to the total loan book including the non-core business that's in run off? No, that's just the core. That's basically the three business units lending in the Nordics excluding, of course, the non-core. You should look at the 2% not as a guidance, but it is a prudent assumption in the bridge. Again, trying to come through to you that we are prudent in the way we build the bridge, based on low growth environments. Very clear. Thank you. Then we have a question from the email. It is from Pujara from Credit Suisse, who is asking, "I had a question with regards to the share buyback program. You mentioned in your annual report that in order to replace part of or whole of the redeemed equity, you would consider other securities as a means of optimizing the capital structure. Give some more color, please. Yes. It is right. It is written in the annual report. The point is that while we are reducing capital by buying back shares, we are also firm on keeping a prudent total capital ratio. We also have an, as you know, so to say, outstanding issue with S&P, we want to get rid of the negative outlook. We also have a leverage ratio to look at. Therefore, it could be part of our plan of issuing additional capital instruments to support the total capital ratio, AT1 as being an example. Thank you. Next question please. The next question will come from Daniel Dotoy. Please go ahead. Hi. Good afternoon. Actually, just one question remaining for me, and it is related to risk weights. Given the scale of the recent rate cuts and based on your discussions with the regulator in the past, do you expect this could result in a similar discussion or a setting of mortgage risk weights as we have seen in Sweden and Norway? Thank you. That is a question we have got a number of times since Sweden moved into a higher risk weight territory, and it is still too premature for us to comment upon. As far as we know, we have no ongoing discussions with the local regulator on higher risk weights, but we know there is a commission in Denmark looking into whether there should be some separate Danish requirements for leverage ratio, and in that context, also looking into this risk-weight debate. Okay, great. Thanks very much. Next question is from Johan Ekblom from Bank of America. Please go ahead. Thank you. Just two questions from my side. Number one, in the ROE bridge, you are assuming a cost inflation of 2%. I guess with all of Europe battling deflation, is that an assumption based on contractually agreed salary hikes, or is that just another example of a prudent planning assumption? Then secondly, just technically regarding the buyback, when should we expect you to start buying back shares? Do you have any sort of rule of thumb? Do you want to do it evenly through the year, or you will be opportunistic depending on share price moves? Then finally, can you just confirm you will cancel all the shares at next year's AGM? Okay. Heddy will answer your second question. I will take your first one. I think you are right that look at the assumptions beneath the bridge as trying to be prudent and realistic, but at the same time aspirational. The 2% is nothing to do with any agreement on salary or anything else. It is basically based on a prudent increase in underlying inflation. You may be right that salaries and other costs may come at a lower level. But I think again you should take our ROE bridge based on solid, prudent foundations, and then we need to deliver on that day by day, year by year. In terms of your question relating to the buyback program of shares, as you know, there are some practical issues that need to get organized before we can actually start the share buyback program. But the plan is to do it as soon as practical possible, and the intention is also to cancel the shares at the following AGM. It will probably not be split into sections. It will be one program that will, given the volume of the traded shares, it will of course run for some months. So you will execute that rather quickly then? As soon as practical possible. Yes. Thank you. Okay, can we have the last question, operator? The last question will come from Ronit Ghose from Citigroup. Please go ahead. Hi. Just two quick questions. First of all, on the balance sheet, you've seen quite a big increase in your repos on your asset side, about DKK 20 billion. I was wondering why that was. Secondly, on the margin sensitivity discussion, I know there's lots of questions about it. Could you remind me how much of your deposits or liabilities you have a floor risk on? You're basically close to zero and you can't reduce further. Thank you. When repos are DKK 20 billion, I think that's just swings, which is natural, which we have no particular comments on. That will swing. The second question, I think we need to get back to you on because that's a very specific question on that issue. So why don't IR give you a call, Ronit, on that particular question. Okay, thank you. Okay. Thank you all for your keen interest in Danske and for your very good questions. As always, you're welcome to contact our Investor Relations department if you have any more questions after you have had time to look at the accounts in more detail. A transcript of this conference call will be added to our website within the next few days. Thank you very much.