Earnings Call: Q4 2011

Feb 9, 2012

Summary

2011 net profit was DKK 1.7bn as weak insurance results and high impairments weighed on earnings. For 2012, earnings were expected to remain low, with high loan losses and uncertain markets partly offset by higher lending margins and cost controls.

Welcome to the Danske Bank Annual Report for 2011. 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, CFO Henrik Ramlau-Hansen. Sir, you may begin. Thank you very much, operator, and good afternoon, and thank you for taking the time to attend this presentation of Danske Bank's financial results for 2011. With me today is Head of Investor Relations, Martin Gottlob and Elisabeth Toftmann Klintholm. Please go to slide 2. In today's presentation, we will of course focus on our financial results for the fourth quarter of 2011 and the year as a whole. I will comment on Danske Bank's solid capital position, strong liquidity, and outlook for 2012. I would also like to give you some more details on the cost-saving program that we announced last quarter. After the presentation, as usual, we will open up for a Q&A session. Please go to slide 3. Danske Bank's net profit for 2011 was DKK 1.7 billion. This result is unsatisfactory and below our ambitions. The main reasons it fell short were the financial turmoil which affected Danica's performance, difficult conditions in a number of our markets, and the macroeconomic downturn that caused loan losses to remain high. Our capital base and liquidity remained strong throughout the year. They were also bolstered by the DKK 20 billion capital injection we made in April. Our funding for 2012 is already 50% complete. Net interest income improved throughout the year, and we expect the trend to continue in 2012. We will also continue to focus on costs. All in all, we expect the result for 2012 to remain at a low level. Please go to slide 4. In 2011, total income fell 6%, or just under DKK 3 billion from the level in 2010. The main reason was a sharp drop in income from insurance. Net interest income was generally in line with 2010. In the beginning of the year, we expected it to rise substantially because of higher interest rates from the central banks. But when the European debt crisis reignited over the summer and the central banks lowered their lending rates, the outlook changed, and we needed to work harder to defend our NII. Activity generally remained subdued, and fee income fell, mainly because of the fee expense for the individual state guarantee we have. Danske Markets adopted a lower risk profile in the second half of the year, but posted gains from solid customer activity in the Nordic markets in the fourth quarter. Total trading income was within our guidance. We continue to focus on costs, although Q4 once again proved to be a seasonally expensive quarter. For the year as a whole, expenses were flat, and that was better than we had expected. Impairments fell 5% from the level in 2010 but rose towards the end of the year. The main reasons were a persistently difficult market in Ireland and, to a lesser extent, Northern Ireland. In the second half, loan losses in Denmark increased, and we also saw losses at our CIB unit. Please go to slide 5. As mentioned, net interest income was almost the same as in 2010, but there were both positive and negative factors behind this. Quarterly net interest bottomed out in the first quarter and then rose 11%, or more than DKK 600 million by the end of the year. From the first half to the second half, they rose DKK 859 million, more than the DKK 500 million guidance in our third quarter report. Since Q3, the central banks have lowered rates further, and this put our net interest income under renewed pressure. To counteract this, we have increased lending margins further. For instance, in Denmark, we announced a margin increase in December. All these margin increases would raise net interest income by an estimated DKK 2.5 billion from 2011 to 2012, but a good part of the increase will be offset by the lower central bank rates already in effect. Assuming no further changes, we expect the overall effect will be positive, and thus that net interest income will rise in 2012. Please go to slide 6. Fee income fell 5% in 2011, mainly because of the expense for the individual state guarantee on the DKK 36 billion in bonds issued in 2009. The fee payment of around DKK 70 million per quarter will continue until July 2012. Assets under management were almost unchanged at Danske Capital, but solid returns generated performance fees of around DKK 200 million in Q4. The underlying trend in Danske Capital's fee income was down slightly because of a shift in investment allocation from equities to bonds. Please go to slide 7. Net trading income for 2011 came in at DKK 7.3 billion, which was within our guidance. In Q4, net trading income was DKK 1.6 billion, and this was a positive surprise after the weak third quarter. The unstable market conditions in Q3 made us reduce the overall risk level at Danske Markets, and we kept it low in the fourth quarter. Customer activity was strong, particularly in the bond market, and we benefited from that. In addition, the new facility from the ECB improved liquidity and had a positive effect on the market as volatility declined. This raised the fourth quarter result. We reduced our exposure to the troubled European sovereigns in 2011 from EUR 7 billion to EUR 2.5 billion on a gross basis and net from EUR 5 billion to EUR 1.3 billion. Our current net exposure is to Ireland and Spain only. Please go to slide 8. Income from insurance came in at DKK 569 million for 2011. This is significantly below Danica's earnings capacity, and it reflects the difficult market conditions in the second half of the year. The result is better than we had expected at the beginning of the fourth quarter, however. The improvement in the quarter was owing to good performances in equity prices and credit spreads, which raised the results for traditional insurance. This enabled us to book the risk allowance for one interest rate group and to reverse most of the extraordinary strengthening of customer funds we made in Q3. In the fourth quarter, Danica adjusted the discount curve according to the new guidance from the Danish FSA. The spread between Danish and German interest rates is now measured as an average over 12 months instead of the current level, and the spread can only be positive. This change reduced insurance liabilities by DKK 2.8 billion. If the Danish rate stays at or below the German rate over the next 12 months, it is unlikely that we will be able to book the full risk allowance, if any, for 2012. Furthermore, any decline in the 12-month average spread will require a strengthening of liabilities that will have an adverse effect on earnings. This could, in case, lead to a negative insurance result. Please go to slide 9. We continued to pay close attention to cost in 2011, and it paid off. Total expenses came in just under DKK 26 billion, the same level as in 2010. Underlying expenses rose by some 3% because of higher investments in IT, marketing expenses, and cost inflation. The estimated expense for the three Danish banks that went into receivership in 2011 was DKK 742 million, and this includes a reversal of DKK 220 million in the fourth quarter because of an increased dividend from Fjordbank Mors. From 2010 to 2011, the number of full-time employees declined with 200. Expenses rose in the fourth quarter mainly because of normal seasonal effects, but the level was better than expected. One reason was a reduction of the expense for Fjordbank Mors that I just mentioned. The remaining difference came from lower than expected year-end expenses. Please go to slide 10. Loan impairment charges came to DKK 4.8 billion in the fourth quarter and totaled DKK 13.2 billion for the full year. We must acknowledge that they remain high, but only 5% lower than in 2010. The loan loss ratio came in at 68 basis points for the year. In the fourth quarter, it was 99 basis points. Adjusted for the reversal from Lehman Brothers in the third quarter, impairments rose DKK 1.3 billion from Q3 to Q4. The increase was owing primarily to higher charges in Denmark and at CIB, but they also ticked up in Finland and Sweden from very low levels in the previous quarters. The charges include reverses of around DKK 500 million in collective impairments. When we break the charges down into customer segments, SMEs account for more than 60% in Q4. The rest is split almost evenly between CIB and personal customers. Please go to slide 11. In Denmark, impairments rose for the second consecutive quarter. The loan loss ratio was 69 basis points, up from 46 in the third quarter. The increase was caused by the faltering Danish economy. SMEs still account for most of the Danish commercial property. Agriculture and consumer discretionary predominate within the SMEs. Some 25% came from personal customers, mainly bank customers with a part deriving from the loan loss guarantees that the bank gives to Realkredit Danmark. Impairment charges also rose in the other Nordic countries except for Norway. In all three countries, the charges came from a very small number of fairly large corporate customers. Please go to slide 12. Staying in the Nordic region, our CIB unit saw a significant increase in impairments. The reason was a few exposures in shipping and construction. The overall quality of the CIB book remains strong. At Northern Bank, impairments fell to DKK 524 million. As in the preceding quarter, around two-thirds of the losses were related to land bank. Personal customers are still sound, accounting for less than 10% of the charges. Impairments in Ireland stayed high at DKK 1.6 billion. The proportion from commercial property declined to some 50% of the losses. The biggest sub-segment was property because of falling cash flow from lower rental income and loss of tenants. Impairments on personal customers rose somewhat. They came mainly from mortgages and amounted to about just under 25% of the Irish impairments for the quarter. Please go to slide 13. Let me spend a minute on the risk of increasing impairments in our mortgage books in Denmark and Ireland. Denmark is our largest mortgage exposure, and during 2011, the housing market had a record high number of houses for sale and declining prices. The latest forecast of unemployment also shifted to an increase. Admittedly, the clouds are growing darker, but the situation appears manageable. In Denmark, arrears declined further during 2011 to now 0.7%. Record low interest rates are clearly a positive factor that helps to keep impairments down. Another positive element is that unemployment, which is the most important leading indicator of losses on Danish mortgages, is expected to rise only moderately. We also paid close attention to Ireland because of its high unemployment and the large numbers of arrears, which is quickly approaching 10% for the market. However, National Irish Bank's mortgage book has performed well so far, with arrears much below the market average, actually close to one-third, and there are no signs that this is about to change. We expect impairments to increase further, however, because the average loan-to-value, LTV ratio is now 119, indicating a price drop of more than 60% from the peak. Some 20% of the volume, or DKK 5 billion, is now above an LTV of 100. Please go to slide 14. Our funding plan for 2011 was DKK 73 billion, and we will finish that in October, even though the wholesale market made funding really difficult in the second half of the year. Our current estimate of funding for 2012 is around DKK 50 billion-DKK 60 billion. We funded the first DKK 5 billion in Q4 and another DKK 7 billion in January. Also, the DKK 17 billion senior unsecured loan that we had issued to Eik Credit Denmark was repaid during the quarter, reducing our need for new senior unsecured funding. This means that we have completed half of our total planned funding for 2012. It is still our goal to raise our 2012 funding by a combination of covered bonds and senior unsecured loans. I would like to reiterate that we have potential collateral to meet the rest of our 2012 funding with covered bonds. Please go to slide 15. Let us have a closer look at the funding structure of our loan portfolio. Of our DKK 1,700 billion in lending, 43% is RD mortgages that are fully match-funded. Another 47% is funded by deposits, leaving only 10% to be funded by senior debt and covered bonds. The fact that senior unsecured funding is more expensive for us than for many of our Nordic peers is thus manageable since we use it to fund only a marginal part of our loan portfolio. Like funding, liquidity is also very important in this period, and our liquidity remains very strong. Measured by the Moody's 12-month liquidity curve, we would have more than DKK 100 billion in liquidity 12 months ahead without access to the capital markets. Add to this that we would not run out of liquidity for 2.5 to 3 years, even if we are cut off from issuing new funding. Part of our liquidity position is a bond portfolio of DKK 465 billion. Most of the portfolio is central bank eligible, and we used bonds from the portfolio in December when we tapped the three-year European Central Bank facility to draw €1.5 billion, or DKK 11 billion. Please go to slide 16. Our capital position remains strong. At the end of 2011, our Core Tier 1 ratio stood at 11.8%. In 2011, we updated our advanced internal ratings-based models, and this increased risk-weighted assets by 34 billion. We also completed our normal parameter update, and this raised RWA by another 20 billion. This quarter, we incorporated Basel 2.5, which increased market risk by 18 billion. This is somewhat lower than we had expected in our Q3 report because of changes in the portfolio and a general reduction of the risk profile. Going forward, market risk may fluctuate because of similar changes. Still, we closed the year with a Core Tier 1 ratio above 10%. Please go to slide 17. Now let us look ahead. The macroeconomic scenario is not very encouraging. GDP growth is falling in most countries, and we expect economic contraction in a number of countries, including Sweden and Finland. Norway and the Baltic countries remain the exceptions. Low economic growth is expected to keep the interest rates low. Lack of optimism will dampen consumption and reduce economic activity, and unemployment is expected to rise. This means that the outlook for business volume is weak, and loan losses can increase, especially in the Nordic countries. In our main market, Denmark, house prices have fallen, and the large number of houses for sale suggests that they will come down further. We also believe that unemployment will increase in Denmark in the coming year. For Ireland, we expect positive or by modest economic growth in the coming years. This year will be difficult, however. Please go to slide 18. The steps we are taking to reduce cost are an important factor in restoring the group's earnings. Last quarter, we announced a three-year cost-saving program running from 2012 to 2014. Our goal is to reduce cost by DKK 2 billion. The five elements we are working with are distribution, operations, external spend, global overhead, and IT as an integral part of the four other elements. We believe that intelligent IT investments should be seen as a common aspect of these elements. For instance, changes in distribution channels and a reduction of the headcount are both made possible by our continuing IT investments and the strong IT platform that extends throughout the group. Let's have a look at a few examples of the key effects of our investment in the IT platform. Three years ago, in 2008, we performed 62 million teller transactions on average of 13 transactions per customer. In 2011, the number was down 31% to 43 million teller transactions or nine transactions per customer. In the same period, we invested in our capacity to send digital letters to customers. Since 2008, the number of digital letters has risen from 25 to 58 million letters per year. This represents 33 million physical letters per year that we no longer need to send, saving us some hundred millions. Let me mention a few other examples of this rapid digitalization. More than 95% of all transactions at Danske Bank today are online transactions or automated agreements. We see a strong movement towards mobile platforms, digital archives, and self-service solutions. Yet another benefit of this trend is a reduction of inbound calls to our 24-hour customer service line, with inbound activity declining 29% from 2008 to 2011. These digitalization measures enable us to rethink banking, and IT is at the heart of our cost reduction program. We expect that our actions will produce an effect on our results towards the end of the year. Please go to slide 19. Turning to 2012, we see that the economic climate is deteriorating, interest rates are low, and loan losses high. Add to this new regulations and more expensive funding markets, and we find ourselves in an environment where it is challenging to run a bank. We therefore expect our 2012 earnings to remain at a low level. The uncertainty is very high. We expect activity to remain low with limited volume growth. Net interest income will continue to rise because of the higher lending margins we have already implemented. We expect fees to be fairly stable, but trading income depends on the capital markets. Danica's result depends on the capital markets too, and it is also affected by the relation between Danish and German interest rates described earlier. The risk allowance may be postponed, and the loss is possible. Finally, loan losses. Given the bleak economic outlook, we expect loan losses will remain high in 2012. It is difficult to assess whether they will be higher or lower than this year. I would like to conclude by spending a moment on the outlook for Danske Bank's earnings capacity. Because of the uncertainties in the banking environment, our focus right now is on enabling Danske Bank to cover the cost of capital. With a return on equity of 1.4% in 2011, we still have a way to go. The initiatives on income and expenses that we have taken and that we are prepared to take should improve our return on equity substantially in the coming years. It is our ambition to gradually achieve a return in line with our peers. Our focus will remain on things we are able to control ourselves, and I promise you that we will continue our hard work also in 2012. Please go to slide 20. That concludes our presentation of Danske Bank's results for 2011, and we are now ready to take your questions. Thank you. If you are listening to the conference call from our website, you are also welcome to ask questions by email. Please, 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 touch tone 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 numbers. Once again, if you have a question, please press star then one on your touch tone phone. Our first question comes from Jakob Brink from Handelsbanken. Hi, it's Jakob from Handelsbanken. I just have three questions, actually. The first one is regarding the guidance. I know you said it was hard to assess the level of loan losses in 2012, but especially for Northern Ireland and Ireland, could you maybe give a bit more detail? I noticed that impairments in Ireland is actually almost flat quarter on quarter. Is this a sign of much lower losses in 2012, or how do you read that? Or should we maybe expect that private residentials will take over and be the next loss driver? Also for 2013 on the guidance, I don't know if I understood you correctly, but did you say that the cost initiatives in 2012 will lead to lower losses going into 2013? Or how should we read that? My second question is regarding capital. As you said, you were positively surprised by the negative impact from moving to CRD3. How should we now look at the total transition to Basel III? Is that still 160 basis points or is that lower now after the market risk wasn't as bad as expected? My third question is regarding the new provision rules from the Danish FSA. I don't know if you have actually looked at those yet, but do you expect any impact on your way of doing provisions on the back of those? Thank you. Okay, let me just start. You asked about our guidance for 2012, and as we have stated, we expect profit to remain at a low level. Especially you asked about Ireland and Northern Bank, and there we continue to expect provisions at a high level also in 2012. You are correct that there may come also more impairments from our personal customers as we have also commented upon. That could be an issue going forward. We still expect high impairments from Ireland. Of course, we also hope very much that on the commercial property side, we gradually can see some light for the end of the tunnel. There is still on Ireland and Northern Bank great uncertainty. You asked about in 2013 about our cost program. Our guidance is that our cost program will start to have effect at the end of the year in 2012. Overall, we guide costs in 2012 at a level roughly equal to 2011. You ask about our capital projection for Basel III, and there we are in terms of market risk, et cetera, we are still guiding an impact of 0.6-0.7 on our capital ratio. It is a little bit from our perspective, a little bit more uncertain also when it is going to take place, any change related to our ownership of Danica, the insurance subsidiary. That may be a little bit further down the time horizon. Still 160 basis points to take out from the 11.8 now. Yes. If you add Danica, then it will be around 150-160 basis points. You had a final question about the new Danish FSA provision rules. It can have some impact, but we do not expect it to be in any major way. We have not finished analyzing the proposal, and there is a hearing round, I think with a deadline of around March 5. They are not finalized yet, but there may be some impact, but probably not in any significant way. Okay. Just to come back on the Irish and Northern Irish, what is the reason why the impairments are flat now, quote, unquote? Is that because you simply run out of loans to impair, or I mean, are things actually starting to look better on the commercial property side? Because I guess you would need quite a lot of private residentials to go bad to offset the very high losses on commercial property. It is Martin here. If you look at the split in Q4 in Ireland, you could see that the commercial property side were down a bit, whereas the personal increased. That is the mix. It is still within the commercial property, it is still investment properties that are giving us the biggest losses because of the increasing vacancies and also reduction of rents. Otherwise it is pretty much the same as we have seen in the previous quarters, last few quarters. Of course, we are all waiting for the things to bottom out in the commercial property market in Ireland. The biggest issue as we see it at the moment is the lack of liquidity in the market. It is difficult to finance acquisition of commercial property in Ireland still. That is an issue. Okay. Thank you. The next question comes from Nick Davey from UBS. Yes. Good afternoon, everybody. Two quick questions from my side, please. The first is on capital. You mentioned there an aspiration to deliver an ROE in line with your peers. Could you please let us know if that's based around the assumption of running a capital ratio broadly in line with your peers? By peers, I presume you're alluding to perhaps your Swedish and Norwegian competitors. If that's the case, could you please just talk us through your capital planning? As the previous question indicated, I suppose if we upfront all of the potential future headwinds, you're running at just above a 10% Core Tier 1 now. You obviously will have noticed that the Swedish target range moving up towards 12%-13%. Is that how you think about where your capital base needs to get to when you start planning for an ROE in line with your peer group? The second question please on these CIB provisions in the quarter. Obviously you've alluded to it being largely shipping driven. If I look in your risk management report on page 59, you talk a little bit about the quality of your shipping portfolio, and it looks like about 20% of that shipping book is in what you would qualify as the higher-risk categories. Could you perhaps just expand a little bit about your experiences in the shipping book, and also then the DKK 1.1 billion or so in the allowance account? Could you perhaps give us some indication of what that's provided for? Is that provided for the DKK 1.7 billion, which is in categories 10 and 11, or do you think perhaps the DKK 10 billion or so in the categories 8 to 11 is what we should be looking at as far as at-risk shipping lending? Thank you. Okay. Your first question was on our delivering ROE in line with our peers. I can try to elaborate a little bit on that. First of all, there's nothing in our reasoning that says that we should not be able, in Denmark, to generate a return that is in line with what our peers are providing in terms of returns in Denmark. Similarly, in Norway and Sweden and the other Nordic countries, we think that we have a business model and a strategy where we can be able to deliver competitive returns also in terms of ROE going forward, when you compare our return country-wise with also the other banks in the Nordic area. Of course, Ireland and Northern Ireland, to some degree, will for some time be a drag on our earnings because we have substantial negative results there. That's why we are saying that we also expect going forward to be able to deliver results that are competitive and similar to our peers going forward. But for the time being, our goal is to improve our returns and to get it up to cost of capital and beyond that when the time is ready for that. Then you ask about our capital planning. Overall, we feel that we are quite comfortable with the 11.8 Core Tier 1 ratio we have. We have noticed the Swedes have been out with 12% in 2015. Our goal is to live up to what becomes the common EU rules, and we very much encourage that this should be a level playing field for all participants in the European banking area. Also in Denmark, there has been established a committee which will come out with a report later in 2012 of what should be capital requirements and the setup around Danish SIFIs. Before we know more around that, it's difficult for us to come out with a specific capital ratio target. We will wait until there is more clarity around that. Yes, and if we go to the shipping question, I guess it's more shipping than it is CIB question. You are right, if you look at the risk management report that we have a gross exposure of DKK 9.7 billion, which you believe is in danger, is in rating category 8 to 11. If you just take the one in what we normally call non-performing in 10 and 11, the amount of that is DKK 3.3 billion, and this means that if you look at the impairments we have made, we have roughly impaired a little more than one-third of that, 36%. So we think it's a fairly good reservation we have made on that, giving the amount of non-secured part of that portfolio. Okay. Thank you. And just the second- Just adding, if you ask the part we have in category 8-9, whether they will be in danger, yes, of course, they are a bit more in danger than the one that has a better rating category. But there's two ways that these customers can move. They can be better, or they can be worse, and time will show. Okay, that's very clear. Thank you. The next question comes from Klaus Heimark from ABG. Yes. Good afternoon, gentlemen. Just a couple of questions here. Firstly, with regards to this lower impact on the risk-weighted assets from Basel 2.5, should we expect any earnings impact from you reducing your exposure here? Should we expect that, for example, normalized trading income will be lower going forward than what you've previously guided? Secondly, there's been some talk about changing the payment of the deposit guarantee in Denmark, and I believe that the latest figure I've heard is a cost for the whole sector of DKK 1.8 billion-DKK 2 billion. To what extent do you believe that you would be able to pass on your share of those costs to your customers? Those were my two questions. Thank you. Okay. Your first question was relating to the RWA and the introduction of Basel 2.5, where we have indicated that the effect was DKK 18 billion on risk-weighted assets, and that was probably a little bit lower than we previously had communicated. Behind the 18 is actually a figure saying that the impact of Basel 2.5 has been DKK 24 billion, then probably around DKK 6 billion is a reduction because at the end of the year, we had a slightly lower risk level. That is why we ended up with the 18 as being the 24 as the original impact, then DKK 6 billion reduction because slightly lower risk. We have not changed our communication around our earnings in trading incomes and Danske Markets, and we still expect earnings around DKK 1.5 billion-DKK 2 billion in a normal year. But of course, it can fluctuate from quarter to quarter. In a normal quarter. In a normal quarter. If the risk is a little bit lower, then probably also the earnings will be a little bit lower. Then you asked to the deposit guarantee scheme. It hasn't been passed yet, but we hope very much that it will come through parliament. You are correct that there are some estimates out there that the cost for the total sector will be around DKK 1.8 billion-DKK 2 billion, and our fair share of that would then be roughly DKK 600 million-DKK 700 million per year. You are asking whether we can pass that on to the customers, and that will be a cost item, just like the close to DKK 800 million we had this year for the faltering banks. We had close to DKK 800 million as a cost item we paid to some of the banks that went down during 2011. Of course, it would be part of the entire cost base, and that is also why we are in the process of gradually raising margins. Okay, thank you. The next question comes from Andreas Håkansson from Exane. Yes. Hi. Two questions. First one is on your net interest income guidance. You say that net interest income is likely to increase from the 2011 level, and then you talk about that you do not assume further rate cuts. Could you give us some sensitivity to if you see another 25 or 50 basis points, when are we going to start to see a negative growth between the two years? Second question is on your mortgage company, Realkredit Danmark. You have DKK 34.5 billion of additional collateral there today. Could you just tell me when was the LTV last updated? Because it seems like house prices fell by roughly 10% in 2011, but you do not upgrade it quite year on year basis. So can you tell us when are we going to get the impact from last year's decline into the collateral need in RD? Thanks. Okay. First, you had a question in terms of our guidance on net interest income. We are writing in the report that some of the margins increases we have communicated and done, including also margin increases in Realkredit Danmark, should other things being equal, to have an impact on our net interest income of DKK 2.5 billion. We also mentioned in the report that there is an offsetting a negative impact from the reductions of up to around 50 basis point, which the central banks, ECB and also the Danish Central Bank did at the end of 2011. That would have a significant negative impact because there will be a full year impact in 2012. That is why we are communicating, other things being equal, DKK 2.5 billion up, and then the negative impact of rate reduction of roughly 50 basis point from the central banks. That is other things being equal. If rates get down further, then you can see on slide 5 in our presentation that our current interest rate sensitivity across all currencies is around DKK 800 million downwards if rates are reduced by 25 basis points. You can see that on page 5 in the presentation. Good. Yeah. Elisabeth will answer your RD question. Well, with regards to looking at the loan-to-value levels and the over-collateralization and the supplementary collateral that we need to post in our capital centers, the covered bond legislation asks us to look at loan-to-value levels every year for the corporate loans and every third year for the retail mortgages. Unless something extraordinary happens, and that is actually a price decline, as you are alluding to, of 10% in one year, then we cannot wait three years to look at the retail mortgages. We need to look at the loan-to-value levels right now. So we are basically turning over a little bit more than a third of our portfolio right now. Remember that we are more exposed in the greater Copenhagen area, and prices are more stable here than they are in the rest of the country. Also remember that when you look at our supplementary collateral, that we can both use our capital base in RD, which is about DKK 45 billion, but we can also use the loan loss guarantees that we have. So prices could actually from the current level drop with about 15%, and we still have enough capital to post the supplementary collateral that we need to post. Yeah. Can I just follow up on that? You said that you had DKK 45 billion in Realkredit in terms of equity. When I look at the Realkredit Danmark division, you have DKK 45.5 billion capital allocated to that division. But if you have DKK 45 billion in Realkredit, that means that you roughly just have DKK 500 million in the rest of the retail bank, which there are still loans of some DKK 240 billion, what I guess has a higher risk weight than in a mortgage bank. Isn't it you actually then undercapitalized in the retail bank? No. What you see, what you refer to as capital allocation to Realkredit Danmark, that is a simple allocation we are doing based on the group's entire capital. We have the group's entire capital reallocated to the various business units, where we disregard, so to say, the legal setup. The DKK 45 billion in equity Elisabeth referred to, that is the equity in the legal entity Realkredit Danmark, and that is where the rules we talked about apply. But isn't it the same effect if it's illegal or non-legal entities, the money is still tied into Realkredit Danmark, right? No, but that's not the way you calculate capital ratios, et cetera, on a bank group level. Okay. Thank you. The next question comes from Omar Keenan from Nomura. Hi, thanks for taking the questions. Just two, if I may. Firstly, just on your tax guidance for 2012, can we assume something similar to the full year for 2011 because of your guided losses in Ireland that there might not be that much improvement next year? Secondly, you said on the last call that you were doing some work on sensitivities of retail loan losses in Denmark to house prices and unemployment. Could you give us a bit more color on if unemployment increases by 1% and house prices fall another 10% over 2012, what your thoughts are on what loan losses on Denmark could be on those assumptions? Thank you. Your first question in relation to tax guidance. I do not know how your spreadsheet is working, but I would rather suggest that you look to our supplementary page 22, where you can see how you easily can calculate the tax rate we have when you adjust for the fact that we do not activate the loss we have in Ireland. So you cannot just use the same tax rate as we had in 2011. You cannot use that in 2012, but you can use the same calculation methodology, and that is illustrated on page 22 in our supplementary information. With regards to the sensitivity in house prices, I'm not exactly sure what you're alluding to. But when we look at our forecast for unemployment for 2012 and 2013, we expect an additional 15,000 to 20,000 people to become unemployed, going up from roughly 165,000 to 185,000. And we expect house prices as a consequence of that, and our interest rate forecast, which are more or less flat interest rates to come down an additional 5% over the coming year. Our expectations for loan losses in Denmark, we haven't said specifically. We've said that for the group level, 2012 could come in in the same magnitude as 2011, meaning it might be a little bit higher, might be a little bit lower. But in total, the impact of slightly increasing unemployment in Denmark and house prices coming down by, let's say 5%, the effect of that is included in our overall guidance. Okay. Thank you very much. The next question comes from Ronnie Bren from KBW. Good afternoon. Thanks for taking the time for the question as usual. A quick question on the deposit insurance, a follow-up to the question the colleague asked. You will include it in the cost line you said. Is that part of your target to keep costs flat, or would this be on top? That would be the first question. The second question is on the profit guidance. What is a low profit? At the moment, the consensus is looking for about a quadrupling of the profits from 2011. Do you think that's realistic? Could we be looking at a loss scenario if, for example, things in Danica don't go well, et cetera? Lastly, a bit more generic question we have. There was a lot of noise about a new shareholder of yours, Cevian is an activist shareholder. Have you seen any impact yet from the new shareholder there? Thank you. First you asked about the deposit insurance where there will be a guaranteed cost of DKK 1.8 billion-DKK 2 billion for the sector as a whole, roughly DKK 600 million-DKK 700 million for us as a bank. When that takes effect, that is part of our, let's call it budgeting process that we have that expense in 2012. So that is included in our guidance of- Clear us being at the same level. Okay. You asked about what is the low profit. I think we have also written that we expect it to remain low. You can of course elaborate on that by yourself. You ask whether it could be a loss. Everything can happen, but a loss is not part of our main scenario. Essentially your main scenario, would that be more like basically a flat profit year on year, essentially? Give or take. It can be high, it can be lower. Our guidance is that it will remain at a similar level as we have earned it. Understood. Mm-hmm. If we had decided to give a more precise guidance for the profit for this year, we would have written that in the report. I know. It is always worth trying. Yeah. Sure. Of course, as you can appreciate from the figures, impairments is a big swing factor here in question. There is no doubt about that. Yeah. The last question, I just want to see whether you have any feedback to share on your new shareholder. Cevian has announced that they are a 5% shareholder, and we welcome all shareholders, and we have regular meetings with Cevian, investor meetings, as we have with our other investors. Okay. Thank you. The next question comes from Simon Christensen of DB Markets. Yes, good afternoon. I have two questions. It says in your, I cannot recall whether it is in the guidance or at least it is in the report, it says that you are prepared to take more steps on cost side and also on the income generation on top of what you have already done. My thoughts are a little bit, what will trigger whether you will make these efforts or are they already planned? Is this of the same magnitude as you have done throughout 2011 of roughly DKK 4.5 billion in total? That was the first question. The second is relating to your uptake of the LTRO. You have a remaining funding need in 2012 for DKK 20 billion-DKK 30 billion. Do you plan to fill that with ECB money? Thanks. Your first question was about, what did you actually ask about cost? We communicated the cost program, DKK 2 billion over a three-year period, and we are working on that, and we expect to live up to that. We do not have any plans of escalating or increasing that further. Then you commented upon our interest income, and there things may develop over time. Given the fact that we need to get our earnings up, more regulation, more capital requirements for banks, et cetera, we may consider going forward further rate hikes, depending upon how things develop. Then you ask about our remaining funding need of around DKK 30 billion. There we look into the various opportunities that are available. The ECB is one, covered bonds and senior funding are others. We will take a pragmatic financial view upon the various funding vehicles, and we may use ECB further, or we may use senior funding and covered bonds when appropriate. Okay, thanks. Should I understand this as that you do not have any? I heard you say that you are prepared to take more steps on the cost side. What you are saying now is that you have no plans of cutting costs even further than what you have already communicated. Is that correct? That is correct. Okay. What would trigger whether you would implement further margin expansion on the lending side? Would that be rate cuts from the ECB? If there come further rate cuts, if the loan, if impairments deteriorate, how the next quarters develop. Okay. Thank you. The next question comes from Jan Wolter from Deutsche Bank. Yes. Hi, Jan Wolter, Deutsche Bank. A couple of questions, if I may. First, did you say that the group loan losses 2012 could be on a similar level as 2011, or did you refer to the Danish book? I think, Elisabeth, you commented on that earlier. Question number two, when you talk about flat costs 2012, what level are you then referring to? Is it the stated DKK 26 billion or something else? On the cost as well, did you say that you are aiming for DKK 2 billion lower nominal costs 2014 compared to the level 2012, or what is the reduction there in nominal cost we should look for? The third question, you mentioned insurance negative profit contribution. Does that mean a negative overall? If yes, how could it be that bad? If not the negative profit contribution, what is the driver of that? Is it only the lower discount rates, or is it something else that you have to build reserves in the paid-up policies, et cetera? Thank you. First, your question about loan loss levels, and I think you are right. First of all, we communicate around the entire loan loss levels or the entire impairments for the group as a whole. They may be at the same level as in 2011, or they may be higher, or they may be lower. Still a great uncertainty around the impairment levels. Then you asked about our cost program, and there we have communicated that we will aim at saving roughly DKK 2 billion. That is roughly 10% of our underlying cost base. If you take that over a couple of years and also assume that there is an underlying inflation of 1%-2%, then you end up with nominal costs that are probably flat or perhaps trending a little bit downwards. Finally, you had a question about insurance. Just to finish cost, then for the actual year 2012, we have guided cost at the same level as 2011. Total cost. Total cost. Then you had insurance, and I am sorry, it is a little bit technical, the insurance issue. First, because Danica has part of the paid-up policy they need to recover, it is quite unlikely that they will be able to book a risk allowance in 2012. That is one thing that is a drag on profit, if there is no risk allowance for 2012. Secondly, there is this special case with a discount curve, and if Danish rates, 10-year government rates remain below German rates, then there could be a negative profit contribution from a strengthening of the reserves, which could be DKK 1.6 billion in the year 2012. It is a combination of these two effects, both the fact that there will be no risk allowance and this extra strengthening of the reserves that could lead, in total, to a loss. That is what we have been trying to communicate. I am sorry, it is a little bit complicated, and you can call us later if you want more details on that. Let me add that if the situation turns out that the Danish rate against the German moves back and gets higher, then of course this DKK 1.6 billion could disappear again. Thanks. And thanks, very clear answer. Just on the last point that you mentioned there, Morten. The Danish rate today compared to the German, does that imply that you have this DKK 1.6 billion negative effect or part of that currently? 2012 on average today is still negative, yes. No, it is still positive, but it will come down assuming the current rate will continue throughout the year. Okay. It's always the 12 months average you have to look at. Okay. Very clear. Thank you. The next question comes from Masi Gaste from Credit Suisse. Hi. Just one question from me, really. It's on slide 13 in your presentation on the LTVs for Denmark and Ireland. At what point during 2011 are you basing those LTVs on? Is that year-end 2011, or is it just some previous point during the year? Thanks. It is when we have last looked at the portfolio, and as I said earlier, we have to look for the special Danish covered bonds at the loans-to-value levels every year for commercial loans, they are not included in that chart, and every third year on the residential mortgage loans. So the last time we have looked at that number will be in there. Hello? I suggest that we come back on that. I suggest we come back on that. So probably Elisabeth will contact you. Yes. Okay. Thank you. The next question comes from Chintan Joshi from Nomura. Hi, good afternoon. Two follow-up questions, please. If I look at your slide 33, where you have given your shipping disclosures, you have got estimated collateral of DKK 26.4 and gross exposure of DKK 49.5. Am I right in calculating the LTV as about 185% out there? Is that the right calculation and right way of looking at it? My second question is if you could remind us what percentage of investment properties in Ireland have you already impaired? Thank you. Answering your question about shipping. It is not all our exposure to shipping companies that is in ships, so to speak. There could be other kinds of loans there, so you cannot calculate an LTV on each individual ships. That average would be 100 and whatever you came up to. That calculation cannot be used. These are shipping exposures, but they could be something besides just direct lending for ships, is it? We have a big shipping company, and then we have a total exposure to that, and that could be something we are financing some ships, where we have a good collateral, but it could also be other kinds of credits we have offered to this company. Okay. In terms of your question, Irish commercial property on page 28, I think it indicates that we have non-performing loans. In our case, it includes loans in categories 10 and 11. We have non-performing loans around 80%. You can see that on page 28. Yes. Thank you. Just if I follow up on the shipping. So how should I read that estimated collateral DKK 26.4 billion relative to the gross exposure? That is, if you take the collateral we have on the exposure, that is DKK 26.4 billion, but it is not that all loans we have in this book is related to one single ship. It could also be to the corporation as such. Okay, got it. Thank you. Okay. Are there more questions? Our last question comes from Jacob Kruse from Autonomous Research. Oh, hi. Jacob from Autonomous. Just two quick questions. Firstly, on the agriculture thing, agriculture book in Realkredit Danmark. The PD there has gone up now to close to 7%, but your loss level is only 0.2%, which looks very different from the unsecured book. I understand that these are secured loans, but do you see a risk that you could get substantially higher credit losses there, if the weakness in the agriculture space remains? Just the other question was on Cevian. Do I get you right that you have not had any meetings with them, where they have had any proposals in their role as a shareholder? Thank you. Yes. If you look at the agricultural exposure, you're right that we still don't see many arrears in that part of the book we have in Realkredit Danmark, and that's one reason why the impairments we have made so far is only quite modest, only a 0.6% of the gross exposure. You could always set up a scenario where there will be higher losses there, but we still believe that the biggest risk we have in our Danish agricultural exposure is in the book we have in the bank, the DKK 10.9 billion. Within that it's pig farmers that is most at risk at the moment. There we have, as you see it, a coverage ratio of more than 40% at the moment. Regarding your question regarding Cevian, as I mentioned, we meet them as we meet other investors in the bank. Cevian has also had meetings with our CEO and the chairman of the board. I think if you want to know more about Cevian's thoughts, you contact Cevian. It is not up to us to comment on Cevian's thoughts. Mm-hmm. Okay. Thank you. We have no further questions at this time. Thank you. Okay. I would like to thank you all for your interest in Danske Bank and for your questions. As always, you are all welcome to contact us if you have more questions after you have had time to look at the accounts in detail. We have also promised to come back on a couple of questions. As usual, we will be ready to talk to you until 9:00 P.M. this evening, Central European time, and of course, again tomorrow morning. A transcript of this conference call presentation will appear on our website shortly, and a transcript of the Q&A session will be added within a few days. Thank you very much for your participation. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.