Earnings Call: Q2 2018

Jul 18, 2018

Summary

H1 net profit was DKK 9.1bn as weaker trading income offset lending growth and strong credit quality. FY profit guidance stayed at DKK 18bn–20bn, with results expected at the lower end; the Estonian AML investigation remained unresolved.

Good day, and welcome to the Danske Bank financial results for the first half of 2018. Today's conference is being recorded. At this time, I would like to turn the conference over to Thomas Borgen, CEO. Please go ahead, sir. Thank you, operator, and thank you all for taking the time to listen in to this call today. With me today, I have the Interim CFO, Morten Mosegaard, with us, and Head of IR, Claus Ingar Jensen. Slide 1, please. In today's call, we have the pleasure of presenting the bank's financial results for the first half of 2018. We aim to keep this presentation to around 50 minutes. After the presentation, we will open up for Q&A session as usual, and spend as much time as needed. Afterwards, feel free to contact our IR department if you have any more questions. Slide 2, please. With a net profit of DKK 9.1 billion, the first half of 2018 represents a period of mixed financial results for Danske. The result for the first half of the year represents a return on shareholders' equity of 11.9%. The result came in lower than the first half of 2017, when we benefited from strong trading income in FICC in particular. The financial results for the period were based on stable Nordic economies. The significantly lower income from trading in the financial markets can be attributed to geopolitical events, turbulent stock markets, and a high degree of uncertainty regarding the direction of interest rates. This resulted in challenging market conditions, and thereby a negative impact on trading income in particular. However, our customer-driven business model in FICC has a solid track record, which we expect to benefit from once market conditions become more benign. The stable business momentum in the Nordic economies led to an increase in lending of 2%, or 3% adjusted for currency effects, from the same period the year before. The underlying momentum was good, based on good customer activity in most markets. In Sweden in particular, we continue to see strong growth in our corporate lending activities and positive development in our personal banking activities, supported by the partnership agreements. In Finland, where the increase in corporate lending continued, we have also started to see the positive effects from the expanded partnerships with Akava. Also in Denmark, we have started to see more notable uplift in corporate lending. In Denmark, we have now completed our acquisition of SEB Pension Denmark, which has added 200,000 new customers and approximately DKK 100 billion of assets under management, thus enabling Danica Pension to have even stronger product offerings going forward. Expenses come in slightly lower than in the period last year, primarily as a result of lower performance-based compensation and a continued reduction of expenses. Our capital position remains strong. The CET1 capital ratio of 15.9%, which is above our target level, is net of the total share buyback program of DKK 10 billion we are currently executing. The continuation of benign macroeconomic conditions had a positive impact on the credit quality and financial result, as the development in the first half of the year resulted in net reversals now for the seventh consecutive quarter. We are happy to see that customer satisfaction was at the same level as in the surveys at the end of 2017. In most of the markets, we are on target that is among the top two in customer satisfaction. A high level of customer satisfaction can only be achieved if we are able to provide the best possible customer experience. As part of our ongoing efforts to do so, we announced new strategic initiatives in the first half of 2018 to become the Nordic integrator in the financial sector. Our new strategic initiatives encompass a new organizational structure and a wide range of initiatives with the aim of moving even closer to our customers, our employees, and societies we are a part of. The new organizational structure, which will serve as a strong facilitator for the Nordic integrator strategy, was implemented at the beginning of May, and we will start reporting in the new line from the third quarter this year. All in all, in the first half of 2018, we continued to see positive underlying trends in our business, characterized by good customer activity. Despite a lower contribution from trading activities, we continued to see a solid and well-balanced inflow of new business from personal and business customers across all the Nordic markets. Finally, I would like to comment on the announcement we publicized this morning in relation to the Estonian AML case. The investigations into the issue related to the now closed down non-resident portfolio at our Estonian branch between 2007 and 2015 continue to progress according to plan. The investigations are comprehensive, covering a period of nine years and a large quantity of data. While it is too early to conclude as to the extent of suspicious transactions, it is clear that Danske Bank has failed to live up to our own standards and expectations of our stakeholders in terms of preventing our Estonian branch from being used for potential illegitimate activities. As well as being committed to transparency with respect to the findings of the investigations, including a clear account of the issue, causes, and accountabilities, the board of directors and the executive board are also determined that Danske Bank should not benefit financially from suspicious transactions in the Estonian non-resident portfolio. Consequently, it is Danske Bank's intention to make the gross income generated from such transactions in the period from 2007 to 2015 available for efforts that support the interest of the societies in which we operate, such as, for example, combating international financial crime. As it is a comprehensive investigation and is anchored with the board of directors, has not yet been finalized, it is too early to determine the amount to be made available. For reference, the total gross income for the non-resident portfolio between 2007 and 2015 has been estimated at around DKK 1.5 billion. Conclusions from the investigations will be reported by September 2018. The amount and the way in which it will be made available will be decided after we have concluded on the investigations. Overall, we maintain our guidance for the full year of a net profit in the range of DKK 18 billion-DKK 20 billion. However, on the basis of lower trading income in the first half of the year, we now expect net profit to be in the lower end of the range. At this point, the net profit outlook for 2018 does not reflect a provision for waiving income from suspicious transactions in Estonia. The impact will be presented once conclusions from our internal investigations becomes available. Morten, could you please proceed? Thank you, Thomas. Slide 3, please. Let's take a look at the main items of our financial results. Net interest income for the first half of the year came in at DKK 11.8 billion. This was a 2% increase from the level seen in the same period last year. Excluding currency effects, NII was up 3% and is driven mainly by lending growth, which is also 3%. Net interest margins were affected by lower deposit margins. Looking at fee income, it came in at DKK 7.5 billion, down 3% from last year. Fee income was stable in the Nordic banking units, but lower customer activity in our capital market business reduced fee income at C&I and wealth management from the level in the strong first half of 2017. Net trading income came in at DKK 2.5 billion. It's down 40% from the same period last year when income was very high. Income in the first half of the year was affected by challenging market conditions caused by a high degree of uncertainty in the financial markets. Operating expenses came in at DKK 11.4 billion. It's down 1%, reflecting lower activity and a continued focus on efficiency measures, but also continued increase in costs for regulatory compliance as well as new strategy initiatives. Finally, we saw net loan impairment reversals of DKK 0.7 billion as a result of improved credit quality, in particular at Business Banking. Slide 4, please. Looking at the banking units, in the first half of the year, we continued to see good business momentum in our two Nordic banking units, Personal Banking and Business Banking. Both business units saw increased lending based on higher customer activity than last year and a good inflow of new business in Norway and Sweden in particular. In Finland, the economic recovery has been followed by increasing demand for credit, primarily from corporates. At Business Banking Finland, lending rose 11% from the level in the same period last year. In Northern Ireland, the business momentum was good, with an increase in both volume and income. Let's look more closely at these units. Looking at Personal Banking, it delivered a stable result with profit before loan impairment charges almost unchanged at DKK 2.5 billion. Total income was down 4%, but mainly due to the sale of Koksvin. The effect from an increased lending volume was offset by negative currency effects and margin pressure. Expenses were down 6% due to the sale of Koksvin and efficiency measures. Impairment charges showed a net reversal and reflect overall strong credit quality. The return on allocated capital was 21.2%. Total lending volume was up 2% owing to the growth in Norway and Sweden, where lending volumes measured in local currency rose 6% and 14% respectively. The depreciation of the Swedish kroner led to lower reported growth rates in Danish kroner. These strong gains came primarily from our partnership agreements, under which we continue to see an inflow of new clients, especially in Sweden. In Denmark, where lending volume was up 2%, the trend towards higher mortgage lending and lower lending within conventional loan products continued to slow down. In Finland, lending volume was up 1%. Looking at Business Banking, we continued the solid progress in all markets. Overall profit before loan impairment charges was up 6%. Measured in local currency, lending volume was up in all markets, and most notably in Sweden and Finland, where volumes rose 13% and 11% respectively. In Norway, growth in lending was up 7% from the year before. In Denmark, lending rose 2% in the first half of the year. However, the trend was somewhat stronger in the second quarter. Total income was 5% higher than last year due to higher customer activity. The improvement was driven by net interest income in particular. Expenses were up 4%, owing to IT investments and higher regulatory costs, but also expenses related to the reorganization following new strategic initiatives. Impairment charges showed a reversal of DKK 0.5 billion as a result of strong credit quality. The return on allocated capital was 19.4%. Finally, Northern Ireland profit before loan impairment charges rose 9% measured in local currency and is supported by good underlying performance and customer activity, despite the continued uncertainty we have around Brexit. Total income was up 1%. Adjusted for currency, it was up 2%, as lending and deposit volumes grew 9% and 11% respectively. Expenses fell 4%, 2% in local currencies, reflecting the effect of the restructuring initiatives. Impairment charges showed an expense owing to a few cases in the first quarter. Return on allocated capital was 10.3%. Slide 5, please. C&I and Wealth Management. Let's have a look at those. C&I profit before impairments declined 35% from the level in the same period last year, when income was a very high level in FICC in particular. In the first half of this year, C&I experienced challenging market conditions due to geopolitical events and uncertainty about the direction of interest rates. Activity in debt capital markets was based on good issuance activity, exceeding the level in the year earlier period. Within general banking, income rose as a result of refinancing activity and increased lending, excluding collateral management agreements in Denmark and Norway. Total income declined 23% from the level in the same period last year, mainly because of lower fee and trading income, whereas NII benefited from an increase in lending, also excluding collateral management agreements. Expenses declined 3% due to lower activity and lower performance-related costs. Impairments showed a net reversal of DKK 85 million as the credit quality of the oil-related exposure continued to stabilize. Looking at Wealth Management, profit before tax was down 24% from the level in the first half of last year. The negative development was due mainly to adverse development in the health and accident business. Danica Pension saw positive development driven by strong premium growth in Denmark and Sweden in particular. Fee income was down 2% from the level in the first half of last year. Fee income in the first half of last year benefited from product launches and higher customer activity. Trading income came in lower than last year, adversely affected by a lower investment result in the health and accident business. Other income showed a small negative result in the first half of the year due to a lower risk result in the health and accident business. Expenses were up 5%, due mainly to increased regulatory costs and operating expenses from the acquisition of SEB Pension Denmark. Assets under management was up 10%, due mainly to the acquisition of SEB Pension Denmark. In the first half of this year, net sales asset management amounted to a negative DKK 3.5 billion because of outflow from a few large customers. Premiums in Danica Pension amounted to DKK 22.9 billion against DKK 20.4 billion in the first half of last year, due mainly to positive developments in Denmark and Sweden, and it include premiums from SEB Pension Denmark. Slide six, please. Moving to expenses. Total expenses for the first half of the year amounted to DKK 11.4 billion. It's down 1% from the level last year. The decrease reflects lower activity and lower IT expenses, but also costs related to the acquisition of SEB and cost for the reorganization following our new strategy. The sale of the real estate broker Koksvin also contributed to the decline in expenses. Expenses continue to be affected by higher cost for regulatory compliance and digitalization. We now expect expenses for the full year to be higher than in 2017, due mainly to the inclusion of operating costs in SEB Pension Denmark. Slide seven, please. Credit quality continued to be strong in the second quarter. Net reversals for our core activities amounted to DKK 0.4 billion. The loan loss ratio for the quarter, excluding non-core activities, was minus eight basis points. With a net reversal of DKK 0.3 billion in the second quarter, Business Banking continued to provide the most significant contribution to the net reversals we have had now for eight consecutive quarters. The reversals were driven by positive macroeconomic conditions in Denmark and a continuation of positive outcomes of workout cases. At C&I, impairment charges amounted to a net reversal in the second quarter as the credit quality of the oil-related exposure continued to be stable. In Northern Ireland, we had a small net reversal in the second quarter after charges related to a few cases in the first quarter. Slide eight, please. Our capital position remained at a strong level, with reported common equity tier one capital ratio of 15.9%, well above our target range of 14%-15%. The figure includes the full effect of the acquisition of SEB Pension Denmark of 0.5%. We consider the effect to be of a temporary nature, subject to capital optimization, which is expected to reduce the capital effect to less than 0.1% later this year. The total capital ratio was 21.5%, down 0.1% from the preceding quarter. The REA level came in slightly lower, owing to lower market risk. The leverage ratio was 4.3% according to the transitional rules. If you take the fully phased-in rules, the leverage ratio was 4.2%. The minimum common equity tier one requirement increased from 12.3% to 12.6%, mainly due to an increase in the pillar two add-on of DKK 5 billion for higher compliance and reputational risk as a result of the orders issued to Danske Bank by the Danish FSA on May 3. Slide nine, please. Finally, the outlook for 2018. We continue to expect net interest income to be higher than in 2017, as we will benefit mainly from volume growth. This is unchanged from our previous outlook. The outlook for fee income has been revised. We now expect fee income to remain strong, including the effect from the acquisition of SEB Pension Denmark and subject to customer activity. The outlook for expenses has also been revised. We now expect expenses to be higher than in 2017, due mainly to the effect from the acquisition of SEB Pension Denmark. The outlook for impairments have also been revised. We now expect loan impairments to be at a low level. Finally, we are confirming the net profit outlook to be in the range of DKK 18 billion to DKK 17 billion. However, on the basis of the trading income we saw in the first half of this year, we now expect net profit to be in the lower end of the range. As Thomas mentioned, at this point, the net profit outlook for 2018 does not reflect the provision for waiving income from suspicious transactions in Estonia. This income will be presented once conclusions from our internal investigation becomes available. Slide 10, please, and over to you, Thomas. Those were our initial comments and messages. We are now ready for your questions. Please limit yourself to two questions. If you are listening to the conference call from our website, you are welcome to ask questions by email. Operator, we are ready for the Q&A session. Thank you. If you would like to ask a question over the phone, please press star one. We will now take our first question from Jakob Brink from Nordea. Please go ahead. Your line is open. Thank you, and good afternoon. I have two questions, please. The first one is regarding net interest income. Looking at your presentation, there's your maturing and issued funding in the quarter. It seems like you paid 87 basis points for senior non-preferred. Also looking at the screens, it looks like your current senior debt with five-year maturity is trading close to 80. Just wondering, what is your issuance targets for the rest of the year? Should we expect DKK 20 billion of senior debt will be redeemed? Or will that be replaced by senior non-preferred at that price? Or basically, what is your ambitions or targets regarding funding? Secondly, now with SEB Pension on board, could you then give us a bit more detail on what we should expect with regard to revenues and costs of the SEB Pension? Thank you. Thank you, Jacob, for the question. If I would comment on the first question on our funding plan for the year, we have communicated that we expect to issue funding of DKK 60 billion to DKK 80 billion for the full year, and we stand by that announcement. We have issued already close to the bottom range now in the first half of the year, and we intend to stick to the range. The basic issue for us is basically transferring into the new non-preferred senior as we roll out of the existing old funding. If I can come back. Sorry. If I can just ask one more on that. So basically, you have DKK 20 billion more of senior to issue this year, and you're saying you want to issue that as senior non-preferred. Is that correctly understood? You should not expect us to issue more standard senior, unless the price is comparable to the covered bond spreads. So the main issuance will be in the non-preferred senior spread. Okay. Even though it seems relatively expensive, wouldn't you agree? At 87. We have seen the market widen, obviously, and it's been a more difficult market for issuance in general in Q2. I can add, Jacob, that non-preferred senior issuance we have done so far, the pricing on that has been more or less in line with what we have suggested previously as a spread towards the ordinary senior loans. They have come up as well. Okay. Okay. Then the question on SEB and the cost related to SEB. You should bear in mind that there are basically two costs, the standard operating cost related to running SEB Pension, which are roughly between DKK 30 million and DKK 40 million per month. Then you have the amortization of goodwill, which relates to the customer part of the goodwill, which is DKK 1.3 billion in total, that will be amortized over 10 years. So that will also be part of the cost base going forward. When you said in your presentation back in, was it December, when you made the announcement to acquire SEB Pension, you said, I think DKK 600 million to DKK 650 million annual profits. Is that then after the DKK 130 million annually as well? Or is that to be taken out of the DKK 600 million to DKK 650 million? The guidance we gave you on fully phased income from SEB Pension was before any deductions of goodwill. Thank you. Okay. We will now take our next question from Pawel Dziedzic from Goldman Sachs. Please go ahead. Your line is open. Good afternoon, and thank you for the presentation. The first question is just follow up on your guidance. You are now aiming for a lower end of DKK 18 billion-DKK 20 billion range, and after half year, you are roughly halfway there. You have removed reference to cost of risk and obviously showed much better reversal in the first half, but should we expect that to continue? Do you see asset quality of being capable of essentially offsetting this weaker trading income, or actually you expect a pickup in trading activity in the second half? That would be my first question. Then, I have a few questions, AML clarifications, if you do not mind. You basically outlined potential provision related to the case that you will be willing to take. Would you take it in one go, or could it be spread over time? Perhaps if you can comment, I know the investigation is ongoing. Can you share with us if you have received or if you are aware of any information request regarding the case from U.S. authorities? Thank you. Okay. Let me go through those two questions. First of all, our guidance for 2018 within the lower end of the range. This includes all known information for the present time. It is in the lower range, as we have had a more difficult trading condition. To be more specifically, cost of risk has surprised us to the positive in the first half of 2018 and more than we expected when we entered the year. We expect cost of risk also to be very subdued in the second half, but it is very difficult to predict exactly. At a certain point of time, we have to move towards zero. At a certain point in time, it will have a cost. We do not see a major change in the second half, but I think it is fair to assume that we will slowly and surely move towards zero. When it comes to the trading, we are probably the market leader when it comes to FICC business in the Nordic market, at least in Denmark. When there is subdued or difficult trading conditions, particularly in the interest rate environment, we will also be impacted by that. That also means that if it remains subdued, it will not generate substantial income, and if it is normalized, it is substantial income. If it is like 2017, it is a very high number. I think it is fair to say that we have a very solid platform, a very solid team, and nothing has changed that. As you would see on the numbers and as you have probably seen in the market, the rate environment has been very difficult to earn money on during the first half. I think we have to wait to see how the second half turns out. To your second question on the AML. Yes, we have today announced that we forego any profit off the non-resident portfolio on suspicious transactions. The investigation, as you said, is ongoing. When we have some more clarity, we will communicate that to the market. Your question is, do we want to take it in one go? If we have clarity in September, I would expect that the board will take that decision. At this point in time, it is too early to conclude anything more on that issue. Your second point about investigation. We have no insight into any potential fine. If we had, we will note it to yourself in the contingent liability on footnote number 10. All right. That is very clear. Thank you. Can I have just one follow-up on the trading? You mentioned that part of the weakness is related maybe to weaker customer activity. In your presentation, you mentioned that there were small AUM outflows this quarter and partially led by institutional clients. Can you comment on that? Maybe more broadly, does the AML case and overhang, the visibility in media impact in any way your day-to-day business? What I alluded to was only the FICC business, which is the trading income. The AUM business is more a fee-based issue. I will ask Claus to be more specific on the AUM, but on a generic comment, I would say that we are not impacted on the day-to-day operation due to the Estonian case. We can see that we have good customer inflow in all markets, in all segments. We can see that we have good underlying growth on the asset side and requests. It does mean that certain clients may leave us, and that is regrettable. Overall, the business is performing actually very well, as you can see on the underlying numbers. I will ask Claus to just give some more flavor on AUM. Yes. Your question on the drop in AUM. I think we have seen a trend for a while in the asset management industry that some funds are insourcing mandates, and that is affecting not only us, but many asset managers, and that is the primary reason why there is a drop in net sales in wealth management. That is very clear. Thank you. We will now take our next question from Per Grønborg from SEB. Please go ahead. Your line is open. Yes. Good afternoon. Two questions from my side. First, on capital. Your minimum requirement is now up at 12.6%. A year ago it was 12%. Your group target remains at 14%-15%. Is this something you will have to evaluate later in the year, or have you seen other developments, for instance, regulation that you regard as a lower risk today compared to how you saw it a year ago? My second question. Trading. There has been a lot of discussions about trading. You are talking about the market environment that has been difficult to earn money in. What changes do you need in the market environment to have your market, especially your FICC operations, starting to perform again? As far as I am aware, there has been plenty of volatility in the market, but that has seemingly not been enough, neither in Q1 and especially not in Q2. When we look at peer companies reporting, they are far from as soft as your FICC businesses. Okay. Let me answer those two questions. To the first one, there is no change to our capital target to stay between 14% and 15%, as we have communicated. This implies that there's other risk that has been reduced by half a percent during that period, or is that too simple to put it up that way? I'm not sure I understand, Per. Could you please explain? A year ago, your legal minimum requirement was 12%, now it is 12.6%. This 60 basis point increase is not reflected in how much capital you think you need to have to operate the bank. This must be reflecting that there are other risks that has put a downwards pressure on the needed management buffer. I think it's fair to say that we are probably one of the banks with the largest management buffer, and we still have a very large management buffer, even though the requirements has increased as Morten Mosegaard went through. We also need to take into account that our capital is also impacted by the short-term effect of the SEB acquisition on the upside here. So we're very comfortable with the present number. There's no reason, as we see it now, to change our targets. Okay. Your second question is about FICC, and you in particular probably know this, that the FICC in Danske Bank is skewed to being one of the leaders in the interest rate environment. And the interest environment has not had the same volatility or the steepness of the curve as the equity market in particular have had or the foreign exchange market. We can see that we are taking our clear, fair portion of the trades, but that is lower. But it's a bit harder to generate earnings. We have the same business model; we have the same team in place, so there's nothing fundamentally changed in it, but it's one quarter which has been very difficult. We also need to take into account that in 2017, it was very high volatility in the interest rate market, and there we benefited substantially. Your second question, I think I kind of answered that in the previous question, but just to reiterate, we will always be a reflection of the interest rate market in the Nordics, and if it remains low volatility or flat curves or low trading, it will impact us. But when and if it resumes, we will benefit from that as we've done for many, many years, which history has showed us. Thank you. We will now take our next question from Johan Ekblom from UBS. Please go ahead. Your line is open. Thank you very much. Just two follow-up questions on the AML case. First of all, this initiative or this proposal to take the proceeds from potentially suspicious transactions and donate them. Can you talk a little bit about how that is this a response to the comments from the new Danish Business Minister? It seems a bit odd to announce that now rather than wait till we have the report, given it's been sort of no comments for 10 months. Why not just wait two months and be able to present it all at once? Secondly, going back to your comments on the contingent liabilities note. I think there it's very clear that you say that not only no legal processes, but also none of the discussions or interactions you have with regulators give you any reason to believe that there will be anything that can have a material financial impact. Yet, I think there were some headlines on Bloomberg earlier today where you were quoted as saying that you didn't want to speculate on how big a fine could be. Can you just talk a little bit about the wording in the contingent liability note? What does that actually mean? I would assume that those are carefully considered words. Just want to know if we can read into that in all of your relations with regulators there's nothing to make you think that you will face fines that are material. Yeah. Morten will deep dive into footnote 10. I would just say that I have been presented now with what Bloomberg has said, and it can be misunderstood if you want to misunderstand it. But what you should read is I have no insight of any potential fine. And you need to take away into the size, and the point is we have no insight into it of any potential fine. So that's I think what is the key message. And then footnote 10, Morten will go through. Yeah. So what happens if we get into a lawsuit is obviously that we will evaluate what the outcome is and potentially make a provision. If we are in an early stage of a suit or in a dialogue that we feel could result in a provision, then we are obliged to obviously inform you through the contingent liability section of the report that you have in front of you. So what we have stated here is that there's nothing in the pending lawsuits, disputes or anything like that makes us believe that it will have a material effect on our financial position. That is what we've stated in the note, and that is what Thomas just pronounced before. Does that answer your question? Yeah, just to follow up. So I can take from that it's not only lawsuits and disputes. It very clearly says, "And dialogues with public authorities or inspections or compliance with the AML legislation." So that means that even if it's not an actual lawsuit or an official investigation, there's nothing in your conversations with regulatory authorities that leaves you thinking that there is a material financial impact. I think you just read the note, so we can only agree. Okay. No, that is fine. I just wanted to make sure because it seemed inconsistent with what Bloomberg was quoting, and I just wanted to make sure that I had understood things correctly. Yes. It is my apologies that I did not read exactly those three words, which could have been misread if you want to do it. So my apologies, Johan Ekblom. Just on the decision to announce this sort of potential DKK 1.5 billion, I do not know what we should call it, but why not wait until the AML investigation is finished? It seems like it is just creating more confusion because you are only able to tell half of the story. No. Well, I apologize if you think it creates more confusion. We are actually trying to create clarity to all stakeholders. Because we take a view, and I think we take it on behalf of all stakeholders, that Danske Bank had the view that we should not benefit financially from any suspicion transactions that have taken place in the non-resident portfolio of the Estonian branch. We are, as you know, in the midst of the investigation. But just for reference, we are giving you the gross earnings in that portfolio between 2007 to 2015, which has been estimated to approximately DKK 1.5 billion. So that gives you a reference point. And this is actually to try to be helpful to all stakeholders to be clear on what the view from the executive board and the board of directors is. It gave you a clear indication of the estimate of total earnings in the period. But yes, we have not been able to, at this point of time, to quantify the number of suspicious transactions because it is extensive. A comprehensive analysis will need to take place. And when we have it, and expect it in September, we will give some more clarity on that. Thank you. Our next question comes from Kim Bergoe from Deutsche Bank. Please go ahead. Your line is open. Hi. Two questions from me. First, if you could talk a little bit about how you see the margin development in different markets and competitive pressures. Then secondly, back to this, we just talked about the 1.5 million. Just to be sure, this is the total amount. So this, we could think of as this is the maximum amount, right? Then whatever it turns out is likely to be a smaller amount than that. Thank you. Morten will do the margins, and I will just respond to your last question first. I would not like to use your wording, but I think it's fair to say, when we communicate an estimate of the gross earnings in the whole period, it gives you a good reference point that then I allow all of you to take your own conclusions based on that. If I should elaborate a little bit on margins in the various countries and segments. There's overall, generally, structurally, more flattish development, but then you will see a couple of notable impacts. The biggest one is what you see in Norway. That is related to NIBOR, and it affects the personal banking segment in particular. I'm guessing you've also seen that from other banks. That is a movement in NIBOR driving the margin down as NIBOR goes up. I think that is normal volatility and not so much a structural trend. You see a little bit of the same in the STIBOR in personal banking. So overall, it's been a little bit down here on the lending margins in Q2, mainly on the personal segments. In the business banking segment, it's been more constructive. There's a little bit of pressure, but overall, I would say the development is much more flattish. Thank you. Our next question comes from Sofie Peterzens from JP Morgan. Please go ahead, your line is open. Yeah. Hi, here is Sofie from JP Morgan. I wanted to ask about excess capital. I know your core CET1 target is unchanged, but how should we think about excess capital going forward, and, in particular, your dividend payout and buybacks, if it's fair to assume that you will maintain the 40%-60% dividend payout and also the DKK 10 billion per year buybacks? That would be my first question. The second question is just a follow-up on the margins in the personal banking division. How should we think about them going forward? Because the lending rates, as you mentioned, fell 5 basis points quarter-on-quarter. Given that NIBOR has stabilized, is it fair to assume that we'll see a rebound or kind of flat margins going forward in personal banking? Thank you. Thank you. I'll take your first question, Morten will take your second. We have the same capital strategy going forward as we have had. First of all, we have to meet our target, which you said is between 14% and 15%. Then we will distribute a dividend between 40% and 60%, and there is no change on that. Then we will take all the profitable growth we find which is relevant in those markets we operate in. Here we have the track record of growing very well. If we have any excess capital, we will distribute that back to the shareholders in one way or another. The last couple of years, that has been done through share buybacks. There is no difference in our strategic thinking when it comes to the way we utilize the bank's capital. I would also like to add that the bank's capital position today is very strong, as we alluded to. We are well prepared going forward. Just to take your questions on margins in Norway. In the short term, we are affected by the movements in NIBOR, meaning that if NIBOR stabilizes and NIBOR moves down, then you will see a positive impact on margins. Longer term, structurally, obviously, market will adapt. It is a rational market, and we will move with it, but we will not move up and down randomly as rates go up and down in the short term. Okay. That is very clear on NIBOR, but just very quickly on just the capital comment. Is it fair to assume that DKK 10 billion buybacks will be maintained going forward? I cannot comment on buybacks. As we have said consistently, buybacks is not a goal in itself. It is a residual, and it is something which the boards consider at the end of the year with the Danish FSA's approval to adjust the capital structure. But what I can say, there is no change in the strategy we are putting forward, but how it concretely will materialize, it is too early to comment on. Okay. Thank you very much. Our next question comes from Andreas Håkansson from Exane. Please go ahead, your line is open. Hi, good afternoon, everyone. Just coming back a little bit to the NII. There was a movement from the other division, treasury division, to mainly personal banking. Could you tell me, was that evenly split between the countries, and what size was it overall? Yeah, I think I will take that. That is a little bit of follow-up to what we discussed previously, Andreas. The majority of the effect there is coming in through personal banking and some in business banking. When we are talking about that we, through the FTP, are compensating the business units with a better compensation for deposits, it would automatically mean that it is Denmark we are talking about, as this is where we have the majority of our deposits in the personal banking division. But if the movement was DKK 100 million in other, and most of it moved to personal banking, that means that underlying NII in Denmark must have been down very significantly. I don't think you can see it that way. There was a move from NII and other activities, and that reflects an increase in the business units. But you cannot look at the number like for like, because there are also many other components in the equation. Okay, and then just secondly, on the Realkredit Danmark, the NII fell in the quarter even though volumes were up. Could you tell us what's happening with the mortgage margins in Denmark? So I think if you are referring to the margins that we disclose in the fact book, you can see that the number fluctuates and has been fluctuating- No, I- between 6 and 84 basis points. No, sorry. I was looking at the quarter report of Realkredit Danmark that was also published today, where the NII was declining in the quarter, even though volumes were up. It is really the contribution margin. I think we will have to look into that, and then we will come back to you after the call. Is that okay? That's fine. Thanks. As a reminder to ask a question, please press star one. Our next question comes from Mads Thinggaard from ABG. Please go ahead. Your line is open. Yeah. Hi, this is Mads from ABG. Thank you for taking my questions. I have one on costs and I guess employees. I can see full-time employees, they are up a bit more than 2% quarter on quarter, and that is despite the move you do of, I guess, moving Baltic employees to non-core. Is this compliance-related personnel, regulatory compliance people needed? Is it of a permanent nature in your view? Then also going a bit back to the, let's say, special donation to society from, or potential donation to society from the money laundering. I can understand you're not really saying anything about buybacks here and whether it would come down significantly from last year. But when you set the distributions for 2018, would it then be possible to exclude this donation from, I guess, the cost base when you do that? Will that be part of the 2018 net profit you will distribute? Thanks. Okay. First of all, thanks for the question. The FTE question I can take first. First of all, it is not so that the FTEs just disappear because we did transfer them into non-core. What you see on the FTE line is mainly the inclusion of SEB personnel. That is the major part of it. Then we have over summer, always in Finland, a seasonal uptick in temporary staff. We have seen that for a number of years. Then there is a slight increase, which is more on the regulatory side, and that is mainly personnel which are in Estonia and to a certain extent India. That is the- Okay. It is very moderate actually, the compliance part of the- Yes, that is very moderate. Okay. Understood. Thanks. Now, I think there was a second question, and I think that was regarding capital distribution. Was that right? Yeah, sure. On whether you would, when you set the distributions for 2018, if you would be able to exclude the potential donation to society that we do not yet know how much will be from, I guess you will include it in the cost base once you implement it. Could you pay out as if that consideration were not part of your P&L? No, I think it is fair to assume that this will go through the expense line, and depending on the size, it will impact the financial performance. And of course, that will be a part of the equation of how the capital distribution will be done. Okay, great. Thanks. The next question comes from Paulina Sokolova from Barclays. Please go ahead. Your line is open. Hi. Thank you for taking my question. It is just a clarification, actually, of your updated cost guidance. You are saying you will now have higher costs in 2018 rather than slightly higher guidance previously. At the time you made the previous guidance, you had already announced the acquisition of SEB Pension. I am wondering what has changed between now and then to make you increase the cost guidance. Is it just mechanically you are now including those costs that you did not previously? Also if you could just elaborate on the other factors that are driving up the cost guidance besides the acquisition, that would be great. Thank you. Right. Thank you. I think what we stated previously regarding the acquisition was that we will have restructuring costs related to the SEB integration of DKK 300 million to DKK 350 million. Then we will have operating costs, which depends on when exactly we would take over SEB, and that we would come back to you once we know that date, and we know that date now. So the difference that you will have to factor in here is mainly that we are now including the operating cost and the goodwill amortization of SEB Pension. That is the main reason for the change in cost guidance here. Thank you. There are no other kind of factors besides not linked to the SEB Pension acquisition that are driving up guidance? No, you saw that we are down 1%, and we have already said that before taking into account SEB, we would be up slightly year-on-year, and we stick to that guidance. Okay. Thank you very much. The next question comes from Jacob Kruse from Autonomous. Please go ahead. Your line is open. Hi. Thank you. Just one question on the cost base. You talked in the wealth business about the cost for the acquisition of SEB Denmark. Was there an acquisition-related cost rather than an integration of the sort of existing cost base that hit you in this quarter on a temporary basis? I guess that is the question. Thank you. Okay. Well, very simply, no. We have the DKK 300 million-DKK 350 million, and the majority will be taken later. Okay. Thank you. The next question comes from Riccardo Rovere from Mediobanca. Please go ahead. Your line is open. Yeah, good afternoon to everybody. Just a clarification from my side. When you were talking about donating DKK 1.5 billion related to the AML case, the DKK 1.5 billion, this is the amount of kind of proceeds that you think Danske may have, let's say, got from this situation. This amount has nothing to do with any possible fine Danske may be imposed by the various prosecutors or regulators in the various countries. Is that correct? That is correct. So the DKK 1.5 billion is our best estimate of the gross income earned on this portfolio between 2007 and 2015. Okay. Now this is clear. Now, on this topic again, given that you know nothing about what is going on and what the amount of the fine, if any, the 1.5 might be even a lower number, why don't you just stop the buyback for a while, and then eventually you start it again, or you flex it? What is the point in all this situation to continue to have this buyback in place with all this uncertainty? Shouldn't the buyback be a tool that should allow you some kind of flexibility? Thank you for the question. There is no reason whatsoever for us to stop the buyback with the present capital position, with the present earnings, and the present knowledge at hand. So there's absolutely no reason to do that whatsoever. Okay. Very clear. Thanks. Our next question comes from Adrian Cighi from RBC. Please go ahead. Your line is open. Hi there. This is Adrian Cighi from RBC. Just one follow-up, a lot of my questions have been answered already. Do you know the accounting treatment of the potential DKK 1.5 billion, let's call it donation? Is this tax-deductible? Do you expect it to be? Thank you. First of all, just to make it clear again, as Thomas said, the 1.5 is an estimate of the gross income we have made. So there's no knowledge right now about what a potential size of the donation might be. There's not even a knowledge right now on how we're going to do it. So talking about tax deductibility is a little premature, but what I would say is that we intend to give back the money that we have made, the gross income that we have made on this portfolio like for like. So I'm guessing that goes before tax and after tax. Thank you very much. Operator, we have a question coming on our webpage. Okay. So if we may take that question now. Sure. The question is from Jeffrey in Deutsche Bank asking, are you already in talks with the U.S. DOJ regarding the money laundering investigations in Estonia? If no, do you believe them to look at the issue? Again, we have nothing more to add than what we have said already. We went through, I think, with all respect, details of how we will communicate if there is anything to communicate to the market, either through direct press release or through footnote number 10. Operator? Yes. As a reminder, to ask a question, please press star one. Our next question comes from Robin Rane from Kepler Cheuvreux. Please go ahead. Your line is open. Thank you. Just a clarification on the so-called donation. If we assume that eventually you would get a fine, would you think this is included in this giveaway or would that be additional to this? Okay. Thank you. No. What we have said is that if there is any, and against our expectation, any confiscation, this will go against it, but not against any fine if that were to take place. Okay. So that would be in addition? That would be in addition, yes. Okay. Thank you. Okay. Can we have the last question please, operator? Certainly. Our final question comes from Bruce Hamilton from Morgan Stanley. Please go ahead. Your line is open. Hi. Good afternoon, guys, and thank you. Just two quick clarifications. One, just on cost to make sure I understood. Previously you guided that there would be an impact from restructuring of DKK 300 million or DKK 350 million in the 2018 cost base related to the deal. If I take a 6 months run rate of costs, I think you are guiding to about DKK 400 million, including the amortization. Is that kind of the increase year-over-year I should be thinking about with other routes of that DKK 700 million combined? Secondly, from what you are saying about the no reason to stop buyback based on earnings capital and what you know so far, the way we should perhaps think about distribution for this year is that if you were to hit the bottom end of your range of DKK 18 billion to DKK 20 billion, we take off the DKK 1.5 billion, then DKK 16.5 billion based on a payout of close to 100%, including buybacks, would be the start point. Is that the way I should think about it? Thank you. First of all, just to be very specific on the cost guidance. We guided DKK 300 million to DKK 350 million. Those are the total costs. They may not be taken in 2018. They can also be taken partially in 2019. Just to be clear on that. Also our initial cost guidance included guidance slightly up, and then on top of that slightly up, you will add the new cost guidance. Got it. Thank you. You are welcome. To your second question. I think it is being premature to discuss details, how we should distribute capital. That is something for the board to decide when the financial year has closed down. I think what is important, Bruce, is to say that there is no change in our strategy. There is a solid earnings capacity in the bank. It may fluctuate with regards to trading, but that you know well. Then we need to see how the year ends, and then we will take it from there. I think you could, to some extent, use history as a good guidance for how we will also proceed going forward. Thank you. Okay. Thank you for your kind interest in Danske and for your very good questions. As always, you are welcome to contact our IR department if you have more questions after you have time to look into the financial results in more detail. A transcript of this conference call will be added to our website and IR app within the next few days. Have a good afternoon. That will conclude today's call. Thank you for your participation, ladies and gentlemen. You may now disconnect.