Earnings Call: Q4 2013

Feb 6, 2014

Summary

2013 net profit rose 51% to DKK 7.1bn as expenses and impairments declined, though total income fell 12%. 2014 net profit guidance was DKK 9bn–DKK 12bn, with income expected to exceed 2013.

Welcome to the annual report 2013 conference call. At this time, all participants are in a 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 your host, CEO Thomas Borgen. Sir, you may begin. Thank you, operator, and thank you all for taking the time to listen in on this call today. I am joined today with our Chief Financial Officer, Henrik Ramlau-Hansen, Head of Investor Relations, Julie Quist, and Chief Investor Relations Officer, Elisabeth Clinton. Slide 2, please. The scope of today's call is to present Danske Bank's financial results for 2013. We will also run briefly through the results of our business units, and we will offer additional insight into selected topics, including our capital and liquidity positions. At the end, we will wrap up with a strategy update and our outlook for the current year 2014. We aim to keep this presentation at no more than approximately 20 minutes, and after presentation, we will, as usual, open up for Q&As. As always, feel free to contact our Investor Relations department if you have any more questions. Slide 3, please. In summary, we reported a net profit for 2013 of DKK 7.1 billion, which was an increase of 51% from the DKK 4.7 billion in 2012. It was in line with the guidance of DKK 6 billion-DKK 8 billion that we issued along with our Q3 results. Our ROE for the year came in at 5%, up from the 3.6% last year. In other words, we continued to move in the right direction, but the results remain unsatisfactory. Our total income for the full year came in at DKK 40 billion, which was a decline from last year, mainly because of lower trading and insurance income. We reduced expenses by 1% to DKK 24.3 billion, despite another year of high restructuring costs. Impairments fell 45% compared with last year, with improvements at all business units. The net profit benefited from a significant improvement at the Non-core unit. Our capital remains strong with a Core Tier 1 ratio of 14.7% and a total capital ratio of 24.4% for the year. On that basis, Danske Bank's board of directors is proposing a dividend of DKK 2 per share, which represents a payout ratio of 28%. If approved by the shareholders, this will be our first dividend payment in six years, and we see this as an important step towards meeting our financial targets. Finally, we expect to report a net profit for 2014 in the range of DKK 9 billion-DKK 10 billion. Slide 4, please. Let me highlight the following from our income statement. I will start by commenting on the full year 2013. We saw improvements in the net fee income and other income lines, while net interest income, net trading income, and net insurance income saw declines year-on-year. The drop in NII came from lower short-term rates and a continuation of weak demand for lending, whereas the decline income from trading and insurance were due to more difficult conditions in the financial markets. Altogether, this led to a decline of 12% in total income to DKK 40 billion. When we look at Q4 2013, however, we see improvements in all lines versus Q3. NII was up 1% due to higher lending margin and deposit volumes. Fee income rose 22% on gains at all business units and at performance fees at Danske Capital. Trading stabilized at more normalized level in Q4. Total income came in at DKK 10.9 billion in Q4, which marked a 20% increase over the preceding quarter. Expenses were generally stable in 2013, although in Q4, they were actually 24% higher than Q3. This was due mainly to restructuring charges and some seasonality, which we will return to later. Impairments dropped substantially in 2013. There was also a small decline from Q3 to Q4. Slide five, please. The financial results for the full year 2013 in Personal Banking and Business Banking showed improvements of more than 50% compared with the year before. At C&I, profit before tax declined. Let's have a look at some of the important drivers. At Personal Banking and Business Banking, total income was broadly unchanged as lower NII was offset by increases in some of the other income lines. Expenses were contained. The solid improvement in profit before tax came from significant reductions in loan impairment charges. We will revert to this in more detail later. Total income at C&I dropped due to lower income from trading, specifically from market making, which the 9% increase in client-driven income was not able to compensate for. NII and fee income also rose, but not enough to close the gap. Expenses at C&I increased slightly due to high investments in selected product areas. Finally, impairments declined significantly. Slide six, please. If we look at Danske Capital and Danica, we are pleased to see that in 2013, Danske Capital was able to outperform the strong results they achieved in 2012. Danske Capital's profit before tax came in 21% above last year's level on the number of positive underlying factors, such as increased net sales, more assets under management, and higher fees. Danske Capital also strengthened their position as a leading Nordic asset manager with successful new product offerings, including managed account solutions and alternative investments. On top of this, Danske Capital received a number of important awards for both equity and fixed income performance. Danica Pension's financial results for 2013 were adversely affected by the negative returns on the financial markets towards the end of the second quarter. However, the underlying insurance result was in fact up 4% and premiums in Denmark, Sweden, and Norway increased by 9%. The financial market conditions normalized in the second half of the year and in spite of the poor results in the second quarter, we were able to book the risk allowance for three out of four interest rate groups, albeit only part for one group. Slide seven, please. Turning to our operations in Ireland. For 2013, at the Non-core unit, we had a pre-tax loss of DKK 1.4 billion. This was a substantial reduction from the loss of DKK 4.8 billion in 2012. The reasons for the improvement were, first, that the Irish property market are stabilizing, and second, that we are deleveraging our portfolio while staying within our impairment guidance. As you can see from this slide, our property sales in Ireland are progressing well. The number of properties on the market or under offer is increasing, and this bodes well for future divestments. in 2013, we divested 523 properties, more than half of them in Q4. Because of the divestments, our RWA at Non-core Ireland continued to decline in 2013, closing at DKK 23 billion. The implementation of the IRB orders, however, blurs the picture by increasing RWA. If we instead look at the gross credit exposure for the new Non-core unit, the exposure was in fact reduced from DKK 58.5 billion in Q3 to DKK 55.6 billion in Q4. The RWA for the new Non-core unit, including the Non-core conduits exposure, now amounts to DKK 59 billion. Because of our decision to discontinue the Personal Banking and Business Banking operations in Ireland, we had restructuring charges of DKK 141 million in Q4. These charges were booked into two businesses. Slide 8, please. Moving on to expenses. We reduced expenses by 1% to DKK 24.3 billion, despite another year of high restructuring costs. This figure includes DKK 550 million relating to core activities in Ireland. In the first half of 2013, expenses were stable at around DKK 6 billion, and in Q3, we saw a significant drop to DKK 5.5 billion due to seasonality. In Q4, expenses increased to DKK 6.9 billion. The quarter was affected by a number of one-offs and seasonality effects that blur the picture. Let's have a look at some of the moving parts between Q3 and Q4. Expenses for Q4 were clearly affected by the initiatives we announced in our Q3 report as part of our effort to meet our targets. Restructuring Ireland and the reduction in the Non-core customer-facing staff in November involved extra expenses of around DKK 350 million. On top of that, we had an increase in expenses relating to property and rent of about DKK 300 million. Around half of this increase was due to a correction from the preceding quarter. Costs related to marketing and consultancy rose to DKK 144 million. As you are well aware, we are reducing these two items substantially going forward, but we obviously need to recognize that and what we already have spent. As a usual seasonality effect, expenses for holiday and bonus payments increased in Q4. To sum up, although there is a large increase in expenses in Q4, our cost-saving initiatives remain on track. With our actions to reduce our spend and to operate with few employees, we expect expenses for 2014 to be around DKK 23 billion. For 2015, we expect total expenses to come in below DKK 23 billion. Slide 9, please. In 2013, impairments declined from the levels we saw in 2012. For the year as a whole, the drop was 55% for core activities and 75% for Non-core. In sum, a total decline of 57%. The reason for the lower impairment levels were improved macroeconomic conditions in our core markets and Denmark in particular. For Q4, impairments for our core activities came in at DKK 845 million, down 12% from Q3. Impairments in Non-core were up slightly at DKK 255 million. Impairments totaled DKK 1.1 billion in the quarter. This corresponds to a loan loss ratio of 23 basis points, which is the lowest level since 2008. The decline in impairments in Q4 for core activities came mostly at C&I, while charges were generally stable at Personal and Business Banking. Slide 10, please. Our capital ratios remained solid in 2013. We are pleased to see that despite implementing most of the IRB orders, we were able to increase the ratios slightly during the year. In Q4, we improved the Tier 2 capital ratio through a number of new issues in various currencies. The issues amounted to DKK 13.9 billion, and this improved the total capital ratio by 1.6 percentage points. In doing this, we completed the first part of our plan for the replacement of the DKK 24 billion in hybrid capital from the Danish state in 2009. Our intention remains to repay the hybrid capital at the first call in Q2 this year. We are publishing our leverage ratio for the first time at 4.6% and a fully phased-in leverage ratio of 3.3%. Slide 11, please. In 2013, we raised close to DKK 40 billion in new funding. This was significantly lower than in the preceding years, and it reflects the underlying trend in our loan-to-deposit ratio. Low demand for new loans and stable deposits have clearly reduced our need for new funding. We will see a substantial amount of redemption this year, DKK 65 billion to be precise. We expect the need for new funding to be limited to between DKK 20 billion and DKK 40 billion, however. The repayment of the state hybrid will have a positive effect on our funding cost and thereby the NII, not only because of the quantity of new funding we are raising is lower, but also because we are now paying a much lower spread for both Tier 1 and Tier 2, as well as senior and covered bonds. Slide 12, please. Let's turn to Realkredit Danmark, which is an important part of the bank's funding through its secured mortgage lending products. This market is changing, with new products being created, intensified regulation, and renewed attention from the rating agencies. While we still offer customers a wide variety of products, their pricing reflects the underlying cost and risks to a greater degree than it did a few years ago. One important example is our new pricing structure, which gives customers an incentive to amortize and to choose longer interest reset periods in the floaters while favoring loans with low loan-to-value ratios or loans based on fixed rate bonds. With a differentiated pricing model, customers pay for the features they want. This benefits customers while taking into account our cost of service. We can see that the new pricing structure steers the portfolio towards longer-term funding. For example, at our refinancing auction in Q4 last year, the total amount of FlexLån, so-called F1 and F2, of DKK 105 billion was reduced by 30%. Most of these customers switched to another product type with longer-term funding, while some chose FlexLån with longer interest reset periods. Even though the changes in Q4 were substantial, this is not a new trend. Since the end of 2011, the amount of outstanding Flex F1 and F2 has been reduced by DKK 94 billion to now DKK 130 billion. We welcome this trend because it benefits both our customers and the bank by reducing customers' interest rates and refinancing risk. Slide 13, please. Let me briefly touch upon a couple of strategic points. Our mission and vision stand firm. Our vision remains to be recognized as the most trusted financial partner, and we continue working to set new standards in financial services. In our Q3 report, we explained how we plan to accelerate the execution of our strategy on the basis of customer attention, simplicity, and efficiency. This work is progressing as planned. As you know, we review our business units to identify additional areas for optimization. Slide 14, please. In 2013, we took a number of important steps to strengthen our position in the market and our product offering. Let me highlight a few of the developments. Since the launch of our MobilePay app in Denmark last year, we have had more than 1 million downloads. Also, our private banking unit was named the best private banking bank in Denmark by the Financial Times. In Business Banking, one of the most important developments in our market-leading tablet banking and mobile banking solutions for business on the go. It's also worth mentioning that business customer satisfaction is on target in three out of five markets. Corporates & Institutions ranked number one in Prospera's Corporate Banking 2013 Nordic and Institutional Banking 2013 Nordic categories, a very important achievement that cements our position across the Nordics. At Danica Pension, customer satisfaction was also on target with a significant improvement to second place in Denmark. Danica also launched an online facility called Pension Check, which received an award from Investment & Pensions Europe 2013. Finally, Danske Capital was named by Morningstar best in equities in Denmark for the fifth year running and also best equity fund in Norway. We are confident that we're moving in the right direction, but let's have a look at what lies ahead. Slide 15, please. Our return on equity came in at 5%, leaving a gap of four percentage points to our target for 2015. We aim to reach this ROE target of 9% in 2015 through a combination of income and cost-saving initiatives, normalization of some income lines, and a smaller loss of non-core. Let me run you through some of the planned actions. On the income side, our new initiatives include a continued focus on optimizing the pricing structures across our businesses. We are also extending the duration of part of our bond portfolio from very short placements overnight. We expect continuing tailwinds from lower funding and capital costs as we replace part of the state hybrid and continue to refinance our current outstanding funding at lower cost. Income from market making and insurance is expected to return to normal. In addition, our efforts to increase income at C&I includes an intensified focus on expanding selected product areas. Our cost-saving measures are progressing according to plan, and we reduced staff by more than 700 in Q4 2013. The loss at non-core is expected to be marginal in 2015 as impairments are expected to be much lower. Finally, the increase in the RWA from the implementation of the IRB orders has led to an increase in the expected level of equity in 2015. We have a lot of hard work ahead of us, but management are confident in the plan we have laid out and the course we have set. Slide 16, please. Finally, a few comments to our outlook for 2014. Please note that our guidance is based on the adjusted financial highlights. The adjustments were made for the transfer of the Irish Personal and Business Banking units to Non-core. Just to set the macro scene, we expect to continue to be operating in a fragile growth environment with low interest rates. Of course, this is not unique to Danske Bank, but it leads us to expect demand to remain subdued. Our progress in 2014, therefore, would probably not be driven by growth in our balance sheet. We therefore expect NII to be adversely affected by a continuation of low demand for loans. We expect lower funding costs to more than compensate for this, however. Total income is likely to exceed the level of 2013. More specifically, we expect to see increases in trading and insurance income, which are expected to revert to more normalized levels. As previously mentioned, expenses are likely to come in around DKK 23 billion in 2014. We expect impairments at core activities to be broadly in line with this year's level, which was at DKK 4.1 billion. For Non-core, we expect impairments of up to DKK 2 billion for 2014. This leads us to an expected net profit for 2014 in the range of DKK 9 billion-DKK 12 billion, and thus a further improvement in our results from 2013. 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 more than welcome to ask questions by email. Operator, we are 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 then one on your touchtone phone. If you wish to be removed from the queue, please press the hash key or the pound sign. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touchtone phone. Christian Hede from Nordea is online with a question. Yes, good afternoon. This is Christian Hede from Nordea in Copenhagen. I have two questions, one relating to slide number 12 and one to slide number 15. If we take slide number 11 first on Realkredit Danmark, then it is obvious that you are having some success in moving the customers towards longer durations. But at the same time, I noticed from the picture here that that also means that customers will have to pay lower fees to Danske Bank. Do you have any bottom line forecasts for this? If you are too successful, then I guess it will hit your bottom line, and how do you react to that? And slide 15, the bridging table. I noticed that you have an income driver called extension of the duration of the group's bond portfolio. I would like to hear a bit more about that. It seems like an odd time to move out the curve on bonds, but please give me your answers. Yes. We have been very conscious in extending the duration of the F1 or F2 to the benefit for our customers and to the benefit of the bank's rating, as it has been implied by the rating agencies that they feel that the amount of F1 and F2 are too high. We may agree or disagree, but that is what the rating agencies tells us. All things being equal, this has a negative effect on the P&L, but the benefit of moving clients out the curve and the benefit of possibility of speeding up a possible upgrade more than compensate the potential fee reduction we may see as a consequence of this successful movement out of F1 and F2. This is actually going very well and according to our plan. However, Christian, I think that we cannot expect the same percentage movements going forward. We think the speed will probably take down slightly. On your second question regarding the bond portfolio, that was something we announced last quarter, that we have all of our bonds in the short end, basically over nights. We are building up a portfolio which will have a carry of approximately some hundred million DKK. We will go along the curve of approximate duration around two years to two and a half. We think that is very sensible, and as you know, as the average duration on the curve, we were able to replace that continuously. It will be a bad bet if you believe that the forward curve is not right, but it is a small pickup for us, and I think we are one of the few institutions who has placed all the bond portfolio in the very short end, and that is what we are compensating now. The reason why we are not taking a bigger chunk is because of the low interest rate environment, which you alluded to yourself. Thank you very much. Next question please. Esben Nicholas Mørk from Carnegie is online with a question. Yes, good morning. Good afternoon, guys. Esben from Carnegie. Two questions. First on your mortgage side or back to the mortgage side. Just wondering a little bit how you see the competitive environment here and any chances of general price hikes. You have some competitors out offering quite attractive mortgage products within the last couple of quarters. In general, also the political discussion in Denmark concerning the rating and the extension on the bonds, how you see this pressure on the mortgage side? The second question on your trading line. This obviously being the fifth quarter in a row where you don't make the DKK 2 billion per quarter if I adjust for one-offs. Should we expect you say normalized trading for next year? Is that DKK 8 billion still? Or if it's not, what do you think should happen for you to get to DKK 8 billion on an annualized basis? Thanks. Yes. We still see at normalized trading for the full year will be DKK 8 billion in 2014. But it will swing between the various quarter as we have higher refinance fees, for example, in the fourth quarter. Some of the reasons, and we can explain that bilaterally, is that we have had some negative P&L effects through the treasury in 2013, which affects this trend line also in fourth quarter, but to a less extent than in Q3. You can assume in your spreadsheet that we'll do DKK 8 billion also in 2014. When it comes to your first question about the price pressure or possibility to price hike, I think it's fair to say that there is a tough price competition in the Danish market. There appears to be good supply and limited demand. In the short term, we don't see a major possibility to increase, on a general sense, the prices in the market. But we will continuously make sure that we are competitive and optimize the price structure accordingly. What we have tried to do and appears to be a success as we are taking market share in Q3 and Q4 in Realkredit, is to have a very transparent pricing structure, which gives the incentive to have amortization and go longer out the curve. Which again has the benefit of us being able to offer the FlexKort and also make sure that people can have a better affordability. Finally, it's also because of the rating. It is important for us to have a reduction, and I think that what we have shown is going to have an impact on particularly S&P and Moody's, and hopefully this will speed up a possible upgrade. But we need that to S&P and Moody's to decide. If I just can go back to the trading side. Have you any ideas what a rating upgrade would mean for your, you can say, normalized trading income on an annualized basis? It's a good question, because it will be phased. As we have seen that certain counterparties has not been able to trade with us on derivatives. That should probably account for a couple of hundred million. Then it's also relating to some funding we do in markets. But we are in the region of the half a billion kroner, which we think will have that effect. Thank you very much. Because Henrik Aamund here, I think also there is an observation that our spreads on senior and covered, they have already to a large degree come down anticipating, so to say, an upgrade or half an upgrade. Next question, please. Mads Thinggaard from Handelsbanken is online with a question. Yes, I have two questions, if I may. One is if I could touch upon your cost guidance for 2014. You are talking about less marketing costs, less costs for consultants, and you also have DKK 800 million severance pay in 2013. On top of that, 137 less branches, around 1,000 less employees. How can it be that we only take the cost development down by DKK 1.3 billion? That is from DKK 24.3 billion to DKK 23 billion. Also perhaps you could touch a little upon how you are going to reach the 12% growth target after 2015. Thank you. Okay. On the cost side, we think we are well on the schedule on 1.3, but we are also assuming that we need restructuring charges in 2013 to make sure that we are also efficient into 2015. You could take it on two different levels. If you exclude restructuring charges and excluding restructuring charges in 2014, we will reduce costs by approximately DKK 1 billion, as we announced during Q3. If you include restructuring charges in 2013 and in 2014, we will still reduce by DKK 1 billion. What I am implying is that we will continue to see restructuring charges in 2014 to make sure that we are efficient into 2015. Does that answer your question? Yes. Thank you. That is clear. We will return to you and your colleagues when we have some more comments about how to reach the 12% long term. Management are fully devoted now to make sure that we deliver the 9% in 2015. In parallel with that, we are of course looking on all options to see how we can have a sustainable business model above 12%, but we have nothing new to add at the present moment. Okay. Thank you. I have a question here from the internet that goes well along with the question that was just asked. Let's take that now. It says, it's from an investor who asks, does the expense guidance for 2014 of DKK 23 billion include provisions for restructuring initiatives, or will these come on top of the DKK 23 billion so that the reported figure will be higher than DKK 23 billion? No. What is the expected level of restructuring provisions? Let's just get that signed off. Henrik Aamund here. No, the DKK 23 billion is the DKK 23 billion for the core activities in 2014, and that will be on a reported basis, so it does include some restructuring charges in 2014 relating to savings expected in 2015. We have not decided, it's an ongoing process, so we cannot say exactly what amount it's going to be. But I think one of the puzzles for some of you asking the question is that it may, so to say, be slightly higher than you anticipate. So it is on a reporting basis includes severance restructuring cost for 2014 relating to 2015. Yeah. Next question, please. Mark Keenan from Deutsche Bank is online with a question. Hi. Good afternoon. Omar Keenan. I just have two questions, please. My first question is on repayment of the state hybrids. I think in the past, you've guided towards half a billion to 1 billion of savings on NII. If I assume that you issue something like DKK 13 billion, some reasonable issuance levels of T2 and AT1, then it feels like you can come in at the very top end of the range of savings that you've pointed us to in the past. Is that a fair assumption to make, and can you give us any more color to your plans and timing? I just have a second question. Thanks. Regarding the repayment of state hybrid, it is right, as you mentioned, that we communicated previously that we will, at some point in the spring, issue Additional Tier 1. We have not decided the amount yet. That will be communicated in due time. It will be less than the DKK 24 billion we are expecting to repay. You are right, it's still valid that we expect an annual savings of around 500 million to 1 billion when we approve all these capital transactions. Do you think it's more likely that you'll come in at the top end of that range versus a few months ago? It's too early to decide. It's too early to decide because we have not determined the exact amount yet. Okay, great. Thanks very much. Just my second question, just about the management review that you're currently conducting across the business. Do you have any early conclusions or thoughts versus a few months ago that's coming out of the process? Thanks. Nothing to share with you at the present moment. Okay. If I can just push my luck and ask just one more question. Just to follow up on a previous question around mortgage margins and potential for further repricing. One of your competitors, Nykredit, if they ultimately end up repricing their back book, do you think in that kind of scenario there's potential for further repricing that Danske can do later on in the year on the mortgage book? Okay, thanks. We all living in a competitive environment, depending on how our competitors and customer behave. Depending on how the competitive position will develop, we will always optimize the balance between these issues in review. Let's see what happens. At the present, I think we should be realistic. We see this tough and hard competition, and let's see how that will develop going forward. Okay, great. Thanks very much. Thank you. Next question please. Jakob Brink from ABG is online with a question. Yeah. Two questions, please. The first one is regarding trading. We did already talk about it. You said something about the treasury impact that you had had in the second half of 2013, I guess. I guess you are alluding to the impact of having a fairly high liquidity coverage ratio. Could you maybe talk a bit, you do state that this is part of your, in your liquidity and capital chapter, you do talk positively about you having almost 130%. Could we not expect that going forward, or what exactly do you mean? I guess there is a few hundred million DKK per quarter negative impact in trading from having this very high liquidity coverage ratio. Is that what you mean when you say that we should hit a normal level of trading income in 2014? Regarding costs, I know we also discussed this already, but if then we talk about 2015, if you basically already had DKK 23.8 billion in 2013, excluding the DKK 500 million from Ireland, which will be moved to Non-core, then you take out the DKK 800 million severance pay, then you are down to DKK 23 billion. You should get some savings from having laid off all those people last year. Then you are down to somewhat below DKK 23 billion. Then you have new restructuring costs, but then you are going to save DKK 1 billion, which means you should end up quite a bit below the DKK 23 billion. Isn't that correct, or am I missing something? Jacob, you are good in maths. We are guiding on 2013. Sorry, on 2014. We also said we are committed to our 9% in 2015. That also means that we work on top line on costs. It is too early for us to guide on 2015, but I think you have done some good homework, so I will leave it at that. Secondly, you asked about the trading. I will leave it to Henrik to comment on that one. Okay. Yeah. As Thomas mentioned in the beginning, there is a negative impact on the trading line from the treasury results that is negative around DKK 1 billion, and that is partly due to the liquidity portfolio as you alluded to, but it is also partly due to that we have an internal system where we transfer liquidity and our funding cost around between the banking units, and that has had a negative impact on the treasury line due to the fact that there has been low demand for lending. Lending has been declining, and that has created a negative result on treasury. That will be corrected going forward into 2014, so that we are changing the internal prices we have for funding and liquidity, and that would, in that way, have a positive impact on the treasury result for 2014. But of course, there will be a similar negative impact in NII, but then in NII will be positively impacted from the general lower funding costs. I hope that So basically you are saying that you will keep the 130 or whatever level liquidity coverage ratio, but the cost of it will be transferred from trading from net interest income for 2014. Part of it, but we have not decided at what level the LCR should be. I think, Jacob, also, we also see that the run rate on the LCR is high, and it is probably too high. So we will also bring that down in the present environment. So I think we will also get some benefit of that. But what exactly that means in kroner, we need to come back to, but that is our intention. But also going back to your cost question, I think it is important that the restructuring charges we are expecting in 2014 is pretty much the same level as we have in 2013. Okay. Thank you very much. Next question, please. Chintan Joshi from Nomura is online with a question. Hi. Chintan Joshi from Nomura. Good afternoon. I have a question on slide 11, the top left chart where you've given a breakdown of your redemption profile for 2014. I just wanted to understand this chart properly. If I look at senior unsecured, it shows DKK 29 billion is coming up for redemption. The 133 basis points, is that what the cost of that DKK 29 billion senior unsecured is currently on your book? You are asking if. Sorry. You are asking about the DKK 29 billion? Yeah, DKK 29 billion and the 133 basis points. What do they mean? DKK 29 billion seems clear that that is what is coming up for redemption. I am confused about the 133 basis points. Sorry. That is the spread cost, our reference spread, the Euribor cost of 133. Okay. If I look at refinancing this on some kind of three, four-year duration currently, that gives you about DKK 200 million benefit. Is that how I should think about this slide? Yeah. I haven't done the calculations, but you can assume that all the redemptions will fall away. Then, of course, we'll be refinancing an amount between DKK 20 billion-DKK 40 billion. Some will be Tier 1, some will be Tier 2, and some will be covered a senior. The sum is a positive development. I haven't done exactly the maths, but that you can get from IR later. Your assumptions are correct. Just on the chart below that, so the bottom left chart, DKK 20 billion to DKK 40 billion of funding plan. Could you give us some sense of what mix it'll be between senior unsecured and covered bonds? There will be Tier 1/Tier 2 issues we have commented upon a couple of times, and then the remaining part will be a split between senior and covered, and usually we say 50/50. That's something we'll take along the road. We also say that the improvement in our funding costs just regarding Tier 1 and Tier 2 would also in 2014 be some hundred millions compared to 2013. I think generally can say that the required needs are very subdued, so we will probably more issue senior covered bonds to keep some market-making for investors as we expect a subdued request on the lending side. Okay. My second question was actually on that subdued credit demand. What are your expectations for volume growth for the next year? In particular, if you can also talk about Non-core. You ran off about DKK 8.5 billion of lending in the year. Can you accelerate that in 2014? Just want to get a picture of volume growth both including and excluding Non-core. Yeah. Non-core is very separate there. That's an ordinary de-leveraging which was taking place. If you look at underlying, we do not expect the same de-leveraging taking place as we saw in 2013. We expect basically business to be flattish. Corporates & Institutions, maybe a small increase, but we're very uncertain on Personal Banking. We may see a de-leverage taking place there, but it's too early to make that call for the time being. So we will have to follow that quarter by quarter. But you would participate if there was credit demand in the system? Sorry, what's that? You would participate if there was credit demand in the system, you would not lose market share? Well, it's absolutely no intention to lose market share, but it's our intention to optimize the price and volume. We have such a high market share, so market share by itself is not important, but it's not a goal to lose market share, if that's your question. Okay, understood. Thank you. Next question, please. Jan Wolter from Credit Suisse is online with a question. Yes, good afternoon. Jan Wolter here, Credit Suisse. Two questions, if I can. The first one, if you just could elaborate a little bit on the NII impact from prolonging the bond portfolio this quarter. Then I wonder, the DKK 50 billion something that is now in the hold to maturity portfolio, is that the amount that you have prolonged, so to speak? Do you plan to increase this further? Is that what you are saying? Yeah. Henrik will try to do this more. I'm not fully 100% what you ask about, but let's take it piece by piece. Yeah. Sorry. The impact of extending your duration on the bond portfolio, which you discussed earlier on the call. Has that had an NII impact this quarter, a positive impact or No, it has had no impact on the Q4. The portfolio is gradually in the process of being built up, taking into account the market environment and so on. On an annual basis, we expect it, as we mentioned previously, to contribute DKK 100 million to our total income. It will be part of the treasury portfolio, and it will be booked on the NII line. Okay. That's very clear. Thank you. And then just to answer your second question, we have an available-for-sale portfolio, some kind of legacy portfolio that you can see in our accounts, and that has nothing to do with the new portfolio we talked about. Okay. Many thanks for the clarification there. Then I wonder about the trading income as well. Would you consider the fourth quarter as more of a normal trading quarter for Danske Bank, especially in the Corporates & Institutions business, if we disregard the one-off effect there from the Tier 2 redemption and the extra liquidity cost that you are booking in that business? Just look at the customer activity and how the risk result has been developing during the quarter. Thank you. I think you are pretty much coming to the right conclusions. Okay. That is very clear. Thank you. Okay. Next question, please. Johan Ekblom from Bank of America is online with a question. Thank you. If I can just come back to your guidance a bit, and you talked about a flat revenue picture year-on-year, and we spent plenty of time on this call talking about the positive impacts on NII from extending durations from repayment of government hybrids, et cetera. You told us to expect a normalized trading year of DKK 8 billion. My question is really, how do you get to a flat revenue picture? It sounds to me like there's DKK 2 billion in the trading in what you're saying. There's probably some improvement in insurance. I don't see why fee income should be down, and NII should be up as well. Can you please explain your revenue outlook? On page 16, we have to say that total income expected to be above the level in 2013. In the annual report, in the guidance section, we write that we expect most of our income lines to be above certain levels. Both on fees and NII, insurance, trading, so we guide an increase. I am not sure where I I understand. Sorry. That is fine. Thank you. Okay. Next question, please. Nick Davey from UBS is online with a question. Yes, good afternoon, everyone. Two questions, please, from my side. The first one, please, on Ireland. Just want to come back to this guidance of DKK 2 billion of impairments in 2014. As you said yourselves, I think in the presentation, DKK 95 million of impairments in Q4. Firstly, could you just comment on that DKK 95 million number? I guess that means you've had some nice write-backs in the core book. Then maybe just expand the outlook for 2014 a little bit please, just to get a sense. I think you talk in the appendix of your slides about having a DKK 500 million provision potentially at the end of 2014. I'm just trying to just square these two bits of guidance where you're clearly having some nice low levels of provision currently, why you think that would get materially worse in 2014. What we're guiding, and I hope I said that it was up to DKK 2 billion, which includes the number you alluded to there, DKK 500 million, which we communicated in Q3 with regards to the SME portfolio we moved from core to non-core. You are right, that in Q4 we saw both some reversals and the net came out at the number you alluded to. It's very hard for us to be more precise than we have given the guidance on. But we're comfortable that we will be within the DKK 2 billion, and then we need to take it quarter by quarter. That's basically what we can communicate at the present time, Nick. Thanks. Can I ask a quick follow-up question on slide 34, just whilst we're there on the house price trends in Ireland and where you, I guess, have marked the book to your own internal price indexes. Yeah. Is there any reason why your internal price indexes will stay where they are? Do you track the market, or is this where the book is marked, where your internal indices are, or what's the external index? Just to Yes. There is an external index, and that's the one who's referred to as the CSO index. It is also right which is indicated on the slide that we have a slightly more conservative price index, which we use when we go into our impairments. The CSO has a very low liquidity, and that's why we think it's difficult to use that as a correct measures. It appears when we back test that our internal price index actually is pretty correct. That's why we can also see that our guidance which we have given seems to be pretty much correct. Again, it depends on, as you know, development in Ireland in 2014. We have no reason to believe that it should turn negative. The question is if it will continue to turn positive. Very clear. Thank you. Can I ask a quick second question, please? Just jumping onto net interest income in the Corporates & Institutions business, which has clearly been on a fast improving trajectory. So in your slides, I think up 14% quarter-on-quarter, I think it's up 50% relative to the previous Q4 of 2012. You referenced some repricing in your slide. I'm just trying to get my head around really the pace of improvement in NII. Any more color you can give us. If I understand correctly, there's not been any improvements here from liquidity portfolios or any more risk-taking. So just please, a sense of what's driving this line. Thank you. Yeah. Well, first of all, I think after what Danske has been through with regard to risk, it's definitely not increasing the risk profile of the bank. Secondly, you should see this as a very positive development on the business activity we've seen within C&I. Said, C&I will always price based on the market, and it's very difficult to price outside the market. It seems to be a more pricing discipline within the market, within this customer area, and we can follow that. Finally, we have seen very good activity in this environment in 2013 with a lot of refinancing and activity fees, which of course then is amortized as NII. I think that's the key reason. In addition, you can see that we have had some good developments on the deposit side. Okay, that is very clear. So if in the future DCM activity was slower for a quarter or 2, we might see some volatility in that line. Is that more or less correct? But underlying trend is No, not on DCM. That is the debt capital market. That goes on the capital markets line. This is refinancing is exactly banking loans being refinancing, either extending maturity, short maturity, or they are basically refinancing. So that is traditional banking loan. Okay. So the stock of 150 billion or so of lending is more or less flat, but you think as these refinance, you have managed to get your net interest margin from, say, 120 basis points to 170 from some more discipline. Okay. It is a positive trend. Thank you. Okay. Next question, please. Ronit Ghose from Citi is online with a question. Hi, great. Thanks. It's Ronak from Citi. I just wanted to follow up on NII as my first question. Just to clarify that last comment on Corporates & Institutions. There's a refi of loans. Is that in the other interest? I'm looking on slide 11 of the fact book, page 11. Quarter on quarter, the big jump is in the other interest. I'm guessing that's the refi. On linked on NII, I had a question on basically if I'm looking at the other division in Personal and Business Banking, it looks like if I look at the margin trends and client activity loans and deposits, Personal Banking seems to have improved more than Business Banking. Could you just talk a little bit around that? Is there any sort of trend in Personal versus Business Banking to talk about? Thank you. I heard you say that I'm going to compare Personal with Business. On what line, sorry? It's the lending margin versus the deposit margin. In Personal and Business Banking, again, I'm still on page 11 of the fact book. Lending margin is up DKK 44 million Q and Q in Personal Banking, and in Business Banking it's up more, it's up DKK 50 million. But in Business Banking, the deposit margin has also gone down about the same amount, whereas in Personal Banking, the deposit margin hasn't moved much. So it looks like net there's a better margin trend in Personal Banking. You'd be to hang on to your loan repricing more. So if you just add some more color around what's going on there. Yeah. Some of the explanation on the deposit side is technical. It is due to something we call funds transfer pricing, how we clear liquidity in the bank, which we changed during Q4 due to our, let us call, very good liquidity position. Sorry? That affected Business Banking, but not Personal Banking as much? Exactly. Got it. Yeah. It affects Business Banking more than Personal as we price more, let us make it simple, we price richer for sticky deposits and less for less sticky. Naturally, business by definition has less sticky deposits than the personal. That is the main reason why you see that change. Otherwise, personal business are continuing optimizing the margin of volumes, and we will continue to do that every quarter during 2014. If you have some very specific questions on that split up, which we should be cautious to conclude too much about, I recommend that you call our Investor Relations department, who can give you some insight into which figures you could use for your analytical work. Generally, we can say that as we have very well liquidity, good deposit ratio, we will be slightly more aggressive of pricing down deposits, but that is both on personal and in business. Got it. That is clear. Thank you. Can I just have a second separate question on headcount reduction, please? In the fourth quarter, you saw a very nice, quite a large increase in the Personal Banking division headcount. When I look over the last year or two, nearly all the headcount reduction has come in Personal Banking. Could you comment, I know you probably can't give us numbers around right now on this call about the total headcount for the group, et cetera, but in terms of just the distribution, the spread of headcount reduction, it has been very concentrated in Personal Banking, more so than Business Banking or C&I. Could we expect more of an evenly distributed headcount reduction? Is there more to do in the other divisions or is it still very much in the future going to be in the Personal Banking division area? That was a lot of assumption questions. Generally, you can assume that we will continue to reduce the number of FTEs. How many depends on the development, the activity, and that we always now work to simplify and become more efficient. In that sense, we will take it also in what we call non-customer facing units, which we did particularly in Q4 2013. We will continue also in Personal Banking, because we can see that customer behavior is changing. They are moving more and more to digital solutions. We can see that our processes are becoming more efficient, that means we need also less support staff. Generally, we will look at all units. But it is something we need to do individually, and it is a number we don't focus on. It is actually the total efficiency numbers, which is more important than the number of FTEs. Okay. Next question. One or two more questions. We need to wrap up so we can have two or three more questions. Gregory Perdon from Albert is online with a question. Congratulations on your results. Great job. Two questions from me. The first one is one of the earlier questions was on your LCR of 127%, which is very good. We would like to know how you calculate the denominator in relation to the 30 days of cash outflow, and whether that calculation is based on a regular period or a period of stress. The second question we have is, what is the bank's position in relation to the forthcoming EU Commission vote in relation to Level 1, Level 2? If the outcome is negative, what is the bank's strategy? Okay, two good questions. First of all, thank you for your comment. I will leave it to Henrik to answer the technical questions. The LCR of 127% is a calculation where in the numerator we have our liquid bond portfolio, including Danish mortgage bonds. In the denominator, it is a 30-day stress cash outflow specified by the Danish FSA, what could happen in case, et cetera, following the CRD IV guidelines. So it is a stress period of what could happen, where they are given assumptions about how much outflow we could expect for the various types of deposits we have, depending on Personal Banking, Business Banking, C&I, et cetera. Regarding the EU Commission, we hope very much that they will eventually vote in favor of acknowledging that the Danish mortgage bonds are highly liquid bonds. There has been the comment by the EBA, but as you rightly mentioned, it is the European Commission and Parliament that is eventually going to determine it. The Danish government is aware of the situation. We are fully comfortable that there will be found a solution that is satisfactory for us as a bank, but also for the entire Danish mortgage market. If, against all odds and against all expectations, there should come a ruling not acknowledging Danish mortgage bonds as being highly liquid, we can work our way around that. It will take some time and cost some money. It is mainly a timing issue, and it is also so that the Danish CP regulation says that if it votes, or if eventually becomes not as expected, then the LCR phasing will be over a number of years. It is mainly a timing issue. But of course, we hope very much that they will vote in favor of the Danish mortgage bonds, because they are actually highly liquid. That is also what the analysis show. It has become really a political issue, and the Danish government is following it very carefully. Okay. Brilliant. Thank you so much. Okay, next question, please. Sofie Peterzens from JPM is online with a question. Yeah. Hi, here is Sofie from J.P. Morgan. I had a question around your core loss guidance of under DKK 4.1 billion for 2014. If I look at the macro picture for Denmark, it looks quite positive. NPLs are down quarter-over-quarter. You have had positive rating migration. Real estate prices are up in Denmark and also in Ireland. If I annualize the fourth quarter losses, I get to DKK 3.4 billion of losses. I was just wondering what, in your view, explains the delta between fourth quarter losses annualized and the DKK 4.1 billion guidance. Thank you. Yeah. Thanks for the question, Sofie. We take into account the macro picture, as you alluded to. An upswing, but still a fragile and somewhat subdued economy. That is why we are guiding at the same level. We should take into account that particularly C&I is a volatile figure, which was very low in this quarter, and it is very hard to predict what that will be in 2014. We have no indications of any particular issues about it, but that is why we have guided at the same level. That is the best guesstimate from the management for the time being. Okay. Also, could you just quickly comment on how the first quarter trading income has done so far, given that the swing in trading will be quite a big factor in your total revenues for 2014? We don't guide in between quarters. Okay. Thanks. Okay. Thanks, Sophie. Next question please. Jacob Kruse from Autonomous is online with a question. Yes. We are ready. Jacob Kruse, you are. Okay. Shall we do next question? We need to wrap up. Andreas Håkansson from Exane is online with a question. Yes. Hi, it's Andreas from Exane. Two questions and two follow-up questions. One is on asset quality. We see actually that provisions are going up in Denmark, in Personal Banking, and improvement is really coming from Finland that moving into reversals in a quarter. Can you tell us what's going on in Denmark? It's interesting in Finland, because both Nordea and Handelsbanken reported quite sharp increases and talked quite negatively about the macro situation. Can you also tell us what's your view on Finland is? Then second question also on the Level 1 and Level 2 assets. Let's say that European Commission votes in line with your recommendations, what would actually be the real impact? You say it would have a monetary impact, what type of impact would it actually mean? Thank you. When it comes to your last question, I have not much to add what Henrik just alluded to and told you. But in addition, of course, as I expected, will be a long transformation or transition period. Let's see what comes out, but that's not a main scenario. Your question about provisions. I think Andreas, that you should see the provisions in the quarter also personal, not as a major change in any direction. It's interquarterly small movements, and I would call it flattish. What we can see in Denmark, and as you see in some of the slides, that the house market has stabilized or even moved up, particularly in the urban areas, which is very positive. In Finland, I agree with you. It's still a subdued economy. The consumer confidence is low, and we still see low growth in Finland. But we have a good and reasonable book in Finland, so we're not very worried. But of course, it's an area we look at all the time together with Norway and Sweden. But it's nothing which worries us, and we take it into account in our guidance for 2014 on loan losses, the sluggish economy in Finland. Okay. Thank you. Could I have the next question, please? Chintan Joshi from Nomura is online with the last question. Hi. Thank you for taking a follow-up. I just wanted to discuss or rather get an update from you on how you're thinking about Sweden, Norway operations. You've been losing market share there. Your competitiveness versus peers would be lower given the funding situation. It is getting better, but I'm just wondering how you're thinking about some of those smaller operations that you have within the group. Thank you. Yes. We have the ambition to grow both in Norway and Sweden profitable, and that's our intention within a good risk profile. We have in 2013 priced our particular mortgages and lending to Corporates well, but we can see that we may adjust that slightly. But overall, we should have a very good story in both those two countries in 2014 into 2015. I think that's the main story in those two countries. Do you see an argument that your cost base just won't be covered enough with revenues compared to your peers? Would you have structurally higher cost income ratio than your peers? Is that a problem? No. We should definitely not have a higher cost income than our comparable peers, and we don't believe we will have it in 2015. We do not have, as we see it, a structural disadvantage. But we need to continue with those income and cost initiatives we have launched, and we need to continue to work on. Thank you. Have a good day. Thank you everyone for some very good questions. We will, as always, be ready to take your questions after this call at our Investor Relations department. A transcript of this conference call, including Q&A session, will be added on our website in the next few days. Thank you very much for your time.