Earnings Call: Q3 2017

Nov 2, 2017

Summary

9M net profit rose 7% to DKK 15.3bn, supported by stronger customer activity and loan impairment reversals. The 2017 net profit outlook was raised to DKK 19bn–DKK 21bn, while capital remained strong.

Good day, ladies and gentlemen, and welcome to the Danske Bank third quarter 2017 conference call. For your information, today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Thomas Borgen. Please go ahead, sir. Thank you, operator, and thank you all for taking time to listen in to this call today. I have with me in the room today our CEO, Jacob Aarup-Andersen, and Head of IR, Claus Jensen. Slide 1, please. In today's call, we have the pleasure of presenting Danske Bank's financial results for the first 9 months of 2017. We aim to keep this presentation to around 15 minutes. After the presentation, we will open up for a Q&A as usual. Afterwards, feel free to contact our IR department if you have any more questions. Slide 2, please. With a net profit of DKK 15.3 billion, the first 9 months of 2017 was a satisfying period for Danske. Net profit rose 7% over the level in the same period the year before, and the return on shareholders' equity was 13.3%, an increase of 0.7 percentage points from the first 9 months of 2016. The financial results clearly demonstrate not only for the first 9 months, but also for the third quarter in isolation, that we continue to meet our financial targets by maintaining a strong focus on becoming an even more customer-centric, simple, and efficient bank. The development in the first 9 months of the year was backed by positive macroeconomic trends in the Nordic region, most notably in Denmark and Finland, where GDP growth is now above 2%. The strong underlying business momentum continued in the first 9 months of the year, based on a solid and well-balanced inflow of business from personal and business customers across the Nordics. Loan growth for the group was up 3% from the same period last year. The execution of our Nordic strategy continues. In Norway and Sweden in particular, the good momentum was generated by the partnership agreements as well as a strong development in Business Banking. In both countries, lending rose above group average, while at the same time, we maintained a strong focus on credit quality. The full potential of our new customer relations are further to be explored. The development in the financial markets were more positive in the first 9 months than in the same period of last year. Customer activity increased in the period, particularly in the first half of the year, and our capital market activities have been able to take advantage of the business opportunities, and thereby continued to strengthen our competitive position in the Nordic market. In Wealth Management, we also benefited from stronger customer activity, evidenced by a net inflow of customers and a strong increase in premiums. We are confident that our newly formed Wealth Management organization will be able to utilize the long-term potential in this area. Expenses rose from the level in the first 9 months of last year because of initiatives taken to meet increased regulatory requirements and our decision to further enhance digital capabilities in order to secure Danske Bank's long-term competitive position. Higher costs related to increased customer activity, however, were mitigated by efficiency measures. Credit quality remained strong and had a positive impact on the financial results. We continue to see a net reversal of loan impairment charges now for the fourth consecutive quarter. Our capital position remained very strong. The CET1 capital ratio was 16.7% by the end of the third quarter, which is well above our target. The number is net of the total share buy-back programme of DKK 10 billion we are currently executing on. Overall, our result for the first 9 months clearly demonstrates that we continue to develop Danske Bank as a solid, balanced, and predictable financial institution. Finally, we have revised our outlook for the full year. We now expect net profit for 2017 to be in the range of DKK 19 billion to DKK 21 billion. I will now turn the presentation over to Jacob, who will take you through the financial results in more detail. Slide 3, please. Thank you, Thomas. Let's take a look at the main items of our financial results. Net interest income came in at DKK 17.4 billion. This was a 7% increase over the level in the same period the year before, and it was driven mainly by lending growth of 3%. Excluding currency effects, NII was up 8%. In Q3, there was one more interest day than in the preceding quarter. Looking at net fee income, this came in at DKK 11.1 billion, up 9% from the level last year, when fee income was low because of subdued investment activity. All Nordic business units contributed to the increase, but Wealth Management and C&I in particular. Net trading income came in at DKK 6.3 billion, unchanged from the same period the year before, and was driven by strong customer activity at C&I, primarily in the beginning of the year. Other income fell significantly from the level last year, when we benefited from the sale of our domiciled properties in Copenhagen. Operating expenses were up 2% to DKK 17 billion. The figure for the same period last year was based on lower IT-related costs and included positive one-offs. In the first 9 months of this year, expenses reflect increased expenses for regulatory compliance projects and a continued focus on digitalization, whereas higher activity-related costs were mitigated by efficiency measures. The cost/income ratio came in at 47.2%, slightly below the level of the year before. Finally, we saw net loan impairment reversals of DKK 0.6 billion as a result of improved credit quality, in particular at Business Banking. Slide 4, please. In the first 9 months of the year, our two Nordic banking units, Personal Banking and Business Banking, benefited from good business momentum in almost all markets. The improvement in the results was based on higher customer activity than last year and a good inflow of new business in Norway and Sweden in particular. In Northern Ireland, the lower U.K. rates and the development in the pound sterling had an adverse effect on the financial results. Now let's look more closely at the three different units. Personal Banking delivered good results, with profit before loan impairment charges up 14% to DKK 3.9 billion. Total income was 5% higher than last year, and that's owing to improvement in all income lines. Expenses were down 1%, despite higher activity and regulation-driven investments. Looking at impairment charges, here we saw a small reversal which reflects a continuation of strong credit quality. The return on allocated capital was 21.5%. Total lending volume was up 2% owing to growth in Norway and Sweden, where lending volumes measured in local currency rose 8% and 18% respectively. These strong gains came primarily from our partnership agreements, under which we continue to see a good inflow of new customers, particularly in Sweden. In Denmark, where volume was stable, the trend towards higher mortgage lending and lower lending within conventional loan products continued, however, at a slower pace. In Finland, lending volume was up 1%. Moving to Business Banking. Here we continued the solid progress in all markets. Overall profit before loan impairment charges was up 11%. Measured in local currency, lending volume was up in all markets, most notably in Norway and Sweden, where volumes rose 11% and 10% respectively. But also in Finland, growth in lending had gained further momentum and was up 8% from the year before. In Denmark, excluding Realkredit Danmark, our mortgage unit, lending rose 5%. Total income was 5% higher than last year due to higher customer activity. The improvement was driven by NII and fee income. Expenses were down 4%, owing to efficiency measures offsetting higher regulatory and activity-related costs. Impairment charges showed a significant reversal of DKK 0.8 billion as a result of strong credit quality. The return on allocated capital was 18.1%. Finally, in Northern Ireland, the result was adversely affected by the depreciation of the pound sterling, lower interest rates, and reduced loan impairment reversals. The underlying performance was positive, with good growth in new business. Total income fell 11%. Adjusted for the depreciation of the currency, it was down 4% as a result of lower U.K. interest rates and one-off income last year. Expenses were unchanged. Again, adjusted for the exchange rate effect, they were up 9%, partly due to increased pension-related costs and investments. The return on allocated capital was 14.5%. Slide 5, please. Now let's take a closer look at Personal Banking Sweden as a good example of how we're realizing our Nordic potential. A significant part of the growth we see in Sweden is based on the strategic partnership agreements with Saco and TCO, which started to have a visible effect on our numbers for the second half of last year. Onboarding takes place digitally for more than 90% of new customers. Since the second quarter of 2016, lending has increased 22%, accompanied by an increase in NII of 41%. The new business is clearly profitable for us, as the effect on cost has only been marginal. There are three important points to note from our growth in Sweden. First, we maintain a very strong focus on credit quality. The partnership agreements represent a selected growth strategy with sound credit quality, as is clearly demonstrated by the PD numbers for the Saco customers. Secondly, the inflow of new customers gives us a very good platform for cross-selling in the medium to longer term. Opportunities that are key for us in order to obtain a stable and balanced presence in Sweden. Thirdly, we comply with the 25% risk weight floor in Sweden. Finally, we have established Danske Hypotek, our new mortgage subsidiary in Sweden, dedicated to obtaining local funding on a level playing field with the Swedish banks. Slide six, please. Let's have a look at the units that are more dependent on the capital markets. At C&I, profit before impairments rose 23% over the level last year, when customer activity was low due to challenging market conditions. Increased activity in FICC was fueled by a number of geopolitical events, primarily in the first quarter of the year. Whereas activity within capital markets and general banking remained high during the first nine months. Total income rose 13%, owing to improvement in all major income lines. Fee income benefited from increased customer activity within all areas in capital markets and a number of large transactions in general banking. Expenses were broadly unchanged despite high activity in the period. Impairments, which by nature fluctuate at C&I, amounted to DKK 0.4 billion. That's down 51% from the level last year. The charges were primarily against exposure to the oil sector. Despite high activity at C&I, capital consumption was stable and was down 3% from the level in Q2 due to lower counterparty and market risk. At Wealth Management, profit before tax was up 2% as the unit, like the other business units, benefited from improved market conditions and higher customer activity. Fee income was up 12% from the level last year, driven mainly by an increase in assets under management and higher customer activity. Expenses were up 7% due to higher activity and an increase in costs for the implementation of new regulations. Assets under management were up 10% from the level in the same period last year. In the first nine months of this year, premiums in Danica and net sales from asset management amounted to DKK 29 billion and DKK 11 billion respectively. Slide seven, please. Moving on to expenses. Total expenses for the first nine months of the year amounted to DKK 17 billion, up 2% from the level last year. In the first nine months of last year, expenses benefited from positive one-offs and lower IT-related costs than we have seen this year. The increase in expenses related to IT-related regulatory compliance work, enabling us to implement and comply with regulatory requirements such as MiFID II, GDPR, PSD2, and other regulation. Furthermore, we continue to prioritize our digital capabilities. That's a key driver for enhancing the customer experience and more efficient end-to-end processes. The increased costs related to higher activity were mitigated by efficiency measures. The underlying cost development remains satisfying, and we confirm our outlook for expenses for the full year to be around the level in 2016. Slide eight, please. The positive trend in credit quality continued in the third quarter. In the preceding quarters, we had a net reversal for the group. The reversals for the first nine months of the year were DKK 0.6 billion against a charge of DKK 0.2 billion in the same period in 2016. The loan loss ratio for the first nine months of 2017, excluding Non-core, was -4 basis points. With a net reversal of DKK 0.2 billion in the third quarter, Business Banking had the largest decline among our core business units, driven by reversals within agriculture and a continuation of positive outcomes of workout cases, mainly in Denmark. At C&I, we booked impairment charges of DKK 0.1 billion in the third quarter, mainly against oil-related exposure as the difficult market conditions for subcontractors in the oil and gas industry continued. Individual impairment charges accounted for the increase in the quarter. Collective charges stood at DKK 1.2 billion, up slightly from the preceding quarter. At Non-core, reversals in the third quarter amounted to DKK 0.2 billion relating to exposures in Non-core banking. Slide 9, please. Our capital position remained very strong with a reported common equity tier one capital ratio of 16.7%. That is up 0.5 percentage points from the preceding quarter and well above our target range of 14%-15%. The full deduction of the DKK 10 billion share buy-back programme was booked in the first quarter. Total capital ratio was 21.6%, up from 21.1% at the end of the second quarter. The REA level fell DKK 10 billion in the third quarter. That is owing to a reduction in market and counterparty risk as a result of the currently low volatility in the financial markets. The leverage ratio was 4.2% according to transitional rules and 4.1% on the basis of fully phased-in rules. The share buy-back programme of DKK 10 billion in 2017 is progressing according to plan. As at the end of week 43, we had bought back 30.6 million shares, representing a gross value of DKK 7.5 billion. We aim to communicate capital distribution for 2017 in connection with the annual financial report in February 2018. Slide 10, please. Finally, our outlook. We now expect net profit for 2017 to be in the range of DKK 19 billion-DKK 21 billion. This is due to higher than expected income in all major income lines as a result of higher customer activity and also lower loan impairment charges in the first nine months of 2017. The outlook is subject to uncertainty and macroeconomic development. Now over to Thomas, and slide 11, please. Thank you. 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, sir. Ladies and gentlemen, if you would like to ask a question at this time, please press the star or the asterisk key, followed by the digit 1 on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star 2. Again, please press star 1 to ask a question, and as a reminder, we ask everyone to limit themselves to 2 questions in order to facilitate questions from everybody today. Again, star 1 to ask a question. We will now take the first question from Jakob Brink from Nordea. Please go ahead. Hello, and thanks for taking questions. The first one regarding NII. Could you maybe give us a bit more detail? There's some, I don't know if they're funny, but some pretty large moves in the different business segments. I see Norway and Sweden NIM goes up quite a bit quarter-on-quarter. I've seen in the weekend press that you have talked about lowering the rates for mortgages in Norway. So should we expect it to come back in the fourth quarter to around the Q1 level or Q2 level? Also, Northern Ireland, a pretty big drop in NII quarter-on-quarter. So could you just elaborate a bit on that? My second question on fee income. It looks like your asset management and pension fees are somewhat soft in this quarter, at least compared to Q2. So it doesn't quite follow the normal seasonality. Could you also give us a bit more detail on that, please? Thanks. Okay. Thank you. Thank you, Jacob. Let me try to answer your questions here. Let's start on the NII side. You are pointing to the movements in the quarter on NII. If we just take a quick overview of the different lines here. You are right that you are seeing an improvement in Sweden and Norway on the NII side. When we communicated here, you are seeing overall flattish margins across the group, but what you are pointing to is Sweden and Norway. We have seen a slight increase in the reported lending margins. The reason has been better funding conditions, so you can say the spread has improved, and conditions have been amenable to that. You point directly to an announcement around Norway. It is correct that we have, in certain segments, been out communicating slightly lower prices. We do not guide you exactly to where the margin in Norway will be in Q4. We will let you do some work on your own there. I am sure you will be able to do that. But obviously, that can have a small effect on the margin. But obviously then, if you do believe that, there is also a potential volume effect going the other way. Otherwise, when you look at NII, I think one thing you need to, when you refer to Northern Ireland also, one thing you need to be cognizant of is the movement in NII other, which you have to net out when you look at the different business units. And NII other goes up a bit in this quarter, and it is only natural that we see this increase in internal bank when we have a growing lending book and lower liquidity costs. There is, as you know, a lag effect in terms of reversing this into the business units. So that number goes up and down, and it does have some technical effect into some of the NII on a quarterly basis. But we are not seeing a change in margins in Northern Ireland as you asked for. So it is pure technicalities what you are seeing. And do remember, as we have already spoken about, there is also some one-off effects in Q2 and Q3 on NII that you need to net out here. You know we flagged a DKK 90 million one-off in Q2, and we are flagging a DKK 40 million one-off here in Q3 in NII other. So those effects you also have to take into account. So some moving parts, but overall, no change in Northern Ireland, and it is correct that there is a slight margin increase in Sweden and Norway. On the fee side, you asked on Wealth Management. It is correct that we are seeing a small drop in Wealth Management in Q3. That is seasonality. When we look at seasonality here, I think there is two things to point to. One is private banking activity in the private banking space will impact the investment fees. And the other point is, you have not seen any fund launches in Q3 due to the summer period, and those two effects will be seen on the fee line. So it is activity driven. There is no major mix change or anything else to point to in Wealth Management. Many thanks. We will now take our next question from Jan Wolter from Credit Suisse. Please go ahead. Yes. Hi, Jan Wolter, Credit Suisse. Thanks for taking my questions. If I just start looking at the capital and the counterparty risk and market risk seems to be going down here, at least in the last couple of quarters. I think in the beginning of the year, your counterparty risk just shy of DKK 50 billion, market risk around that level as well. Now I think we've seen those two come down by 20%-25% year to date. If you just could talk to why that is it only because or absolute majority reason being low volatility and low client activity or is there a meaningful part which is driven by de-risking? If so, then should we expect market and counterparty risk to jump up again? That's my first question. On the treasury NII there, is there any impact in the quarter or in the past couple of quarters in real economic terms, i.e., lower funding cost which will be sustainable going forward? Or is this just a transfer from the B business unit to treasury? Thank you. Okay. Let's start with the capital one. You are definitely right that market risk and counterparty risk has come down. You know that we have been very focused on the de-risking of our C&I business. You know that has been a multi-year story, and we have also said it continued into this year. A good part of this is de-risking. But we have also said in recent quarters that we are also seeing the effect of the very low market volatility. We would not be surprised if market volatility comes up, that you will see some increase in market risk, but not to the extent of the entire drop you have seen there. Expect to see some comeback if there is volatility there, but generally this is a good de-risking from the team. On treasury NII, this is as I said, this is a BU versus treasury internal bank component. We do not run any proprietary risk in our treasury department. This is not treasury gains we are talking about. This is a question of funding the business unit. Okay, many thanks. If I may just follow up on the capital there. I think in the report you state that you expect a smooth adaption to changing regulatory requirement. What does that mean really? Do you need to think in terms now of scaling back the buyback program in order to adapt to an uncertain outcome from Basel IV, for example, or other regulatory requirements? If you could share some color on that, please. Thank you. Sure. Thanks for that question. I think when we talk about smooth, it is actually, I guess we mean calm is the word as well. You are referring to future regulation. When we look at our capital position, it is very strong. Let us just have that starting point. We generated another 50 basis points in this quarter at 16.6% fully phased. We are 4.6% above our fully phased capital requirement. With that starting point and the continued capital generation of the group, we feel we are in a very, very strong position on the capital side. That is what the statement reflects. We can obviously not talk about what our distributions will be in the coming years because that is up to the board, et cetera. But we are highlighting again today that we have a very strong capital position, and from that perspective, obviously our guidance on capital and distributions have not changed. Okay. That is very clear. Many thanks. We will now take our next question from Valérie Palermo from Goldman Sachs. Please go ahead. Hello, good afternoon. Thanks for taking my questions. The first one is on the revenue line, still on the fee income, the follow-up to the previous one. Could you maybe elaborate what happened on the flow side? I understand there were no new launch of fund, but why was there outflow this quarter despite the very strong performance? Also the management fee margin went down quite a lot. Is it purely seasonality related, or was it anything else to flag on the pricing side? The second question is on the volume side, where it was quite strong across the board, except in the corporate division, if you could say a word on that, and also on the partnership agreements. When you say it started to be visible, how would it translate when it will be fully visible, especially on the TCO deal that started recently? Okay. Let us start on the fee side. On the fee side, you are referring to the comment around outflow in Q3 on Wealth Management. We have seen some specific clients deciding to insource some of their mandates for internal reasons. It is not performance related or anything else, and that will happen once in a while. When we look at the underlying trend in terms of the sales flow, it is a continuation of what we have seen so far. There is no drama around that. In terms of management fee and your question on whether we are seeing deteriorating pricing, no, we are not. There are obviously always some mix effects when you look at the margins on a quarterly basis, but part of the management fee here will also be activity driven. Generally, no, we are not seeing a change in momentum on the sales side, and we are not seeing a change in the momentum on the pricing side as well. It is a low seasonal quarter but the underlying trends are continuing. On the volumes on C&I, do remember that the C&I business is very lumpy. This is obviously a large commitment to large corporates, et cetera, and often it is transaction driven, large M&A driven. It can be bridge-to-bond in these types of situations, which also means that larger facilities will then flow out of the accounts again, et cetera. We have seen very good activity in this segment, but large corporates are washed with cash and therefore a lot of our activity then actually occurs in our capital markets business instead of on the lending book. There is no major drama in the fact that the C&I lending book is down a bit in the quarter. You asked finally about partnership agreements and when we would see the full effect of TCO. You can see we feel we are seeing quite a good effect of TCO in the numbers. It is a very high growth rate. What we have also said is that we will not approach all TCO members at one time. This will be a continued work from our side in terms of gradually broadening out the offering to make sure that we are approaching an amount of people that we can also handle in terms of treating them well, et cetera. Therefore, we think you will be seeing a good effect of TCO for quite a long time. But we do not have a certain measure as when you see full effect, et cetera. It is going to be an ongoing effect from TCO. Thank you very much. Our next question comes from Amal Shah from Redburn. Please go ahead. Oh, hi there. I've got two questions. First one is, in the second quarter you mentioned setting up a proper structure to generate the fee growth from the partnership agreements. Could you give us the progress on this and what sort of fee to NII split we should expect? Then the second question was, has the slowdown in the Norwegian, Swedish housing markets affected your outlook for how much growth you can expect from these partnership agreements? Okay. Thanks, Amal. I think in terms of your first question, I don't know if we have said that we would set up a specific structure. I think you're referring to our ambition to make sure that we cross-sell well enough on the partnership agreements, which is clearly a strong ambition from our side and hopefully also something you heard me refer to when we went through the slides. At some point, we can give more data as data comes along. As we've had more quarters with the partnership agreements, we can start being a bit more precise in terms of cross-sell, et cetera. There's a clear ambition and clear targets internally in terms of how to drive cross-sell in these partnership agreements. It's a very fair question. At this stage, we're not giving numbers on it. But I can guarantee you it's a big focus for the management team to make sure we get the full value out of these customer relationships. Then on your other question was in terms of outlook for the partnership agreements, given the backdrop you described on property markets. Do remember one thing here, so let's just take a quick step back. Danske Bank, in both the Swedish and the Norwegian market, is one that entails that we can grow significantly more than the market if we want to and if we find a good risk-adjusted possible growth. So for us, whether housing markets are up or down 5% does not make a material difference in terms of the attractiveness of the partnership agreements or the potential for us. There is a very large group of potential clients in these partnership agreements, and for us it's more a question of making sure that we can offer them the right customer proposition, value proposition that makes it attractive for them. So we do not think property markets up or down will have a massive impact on the potential. So I think that's the short version from here. Okay. Thank you very much. We will now take our next question from Mads Thinggaard from ABG. Please go ahead. Hi, this is Mads Thinggaard from ABG here with two questions, and the first one relates to the high growth you have in Business Banking in both Norway and Sweden this quarter. Could you put a bit more flavor on that? What is exactly happening here, and why are you taking so large shares here? Could you confirm that there is no link to the drop in C&I, meaning that you have moved customers to Business Banking? That was the first question. On the second question, regarding your unchanged communication on distributions. That may seem a bit different from what you hear from some of the local peers, and perhaps also what the Danish FSA are kind of communicating about getting distributions down in this year. There, I know you cannot say anything about what it is going to be. I am just curious if you have felt some change with the Danish authorities in the discussions of distributions, or you feel that they have unchanged stand towards distributions. Thanks. Thanks, Mads. I will take the first one in terms of Business Banking. Yes, very pleased to see that you have seen the good growth rates in Business Banking in Norway and Sweden. As you say, they are a bit higher than the market, but do remember they have been a bit higher than the market for quite a long time. For us, this is not a dramatic change in this specific quarter. We are still riding good diversified business in both markets, so it is not one specific segment that is driving it. Business Banking, we do acknowledge that the growth rates were a little bit higher this quarter compared to last quarter, but there is also some lumpiness here in terms of larger deals, et cetera. This is a continuation of the diversified growth you have seen. I am not to speculate why we continue to see some good growth in terms of a competitive perspective. What I can say is that we are very pleased with the quality of the business we are putting on the books. You asked a fine question there in terms of C&I. Yeah. There's no technicalities there. We're not moving business across the lines. So it's two different things. Great. Thanks. Okay, Mads, to your other question about distribution. I think the starting point is that our capital strategy and capital distribution is unchanged. First of all, we aim to meet our capital targets, and as you may recall, that is to have a Tier 1 between 14% and 15%. Subsequently, we intend to keep the dividend between 40% and 50% after profits. Thirdly, then we would like to take the profitable growth we see in our core markets, in other words, the Nordic markets, which we've also been able to do during many quarters. Then we have said, if there is any excess capital, we would like to distribute that back to the shareholders in one way or another. That has not changed, but the final payout strategy, or payment conclusions, will be a part of the board's discussion after Q4. Then you allude to a question about the regulator. I think it's fair to say that one of the regulator's mandate is to remind all institutions to remain diligent on payouts. That is not new. I see no change in the way we have a dialogue with the Danish FSA, but of course, all FSAs, including the Danish FSA, will always remind institutions to remain diligent. Okay, thanks. We will now take our next question from Andreas Hakansson from Exane BNP Paribas. Please go ahead. Yes, good afternoon, everyone. We have covered a few things, so I just really just have a follow-up on a different topic, and that is coming into this money laundering. I know that the Estonian FSA has got an ongoing investigation, and we read about the French courts. Could you tell me if the Danish FSA investigating at the moment, and have you had any contacts with any U.S. authorities of any kind related to the money laundering? Thanks. Okay, thanks for your question. Let's take the French first. We are currently early in the stage of the investigation. The bank has not been invited at this point, and of course, there is no certainty that it will be. In that sense, it's too early to speculate on any outcome. Then you have a wider question. We have a continuous dialogue with supervisory authorities in the markets where the bank is active, including the U.S. As a part of our ongoing dialogue with authorities in those markets, we have also discussed these matters, and several financial supervisor authorities, including the Danish FSA, have asked questions pertaining to this case. We do not, of course, comment on individual interactions with supervisory authorities, but in Denmark, you know that orders and reprimands are publicly available. Have you made any provisions or thought about making provisions for any potential fines coming out of it? No, no finance provisions have been taken at this point. We currently do not foresee fines and legal costs in this matter that will have any material impact on Danske Bank. Okay, thanks very much. We will now take our next question from Per Grønborg from SEB. Please go ahead. Yes, good afternoon. This is a set of numbers where it is actually quite easy to get through. A few nitty-gritty questions. Norway Business Banking, quite large loan loss now for the second quarter in a row. Can you comment a bit on that? I guess it is oil-related that is climbing from C&I down to the bit smaller clients. Then on your divestment in Ireland, you now tell that you have closed the deal. Can you give us some indication of the REA impact? There does not seem to be anything already at this time. I assume that the cost related to the transaction and the big loan loss versus in non-core relates to the transaction, so there will be no impact in the fourth quarter. Is that the right way of looking at it? Can I squeeze in a third one also to the anti-money laundering issue? The cost related to the investigation you are doing currently, will that be any visible amount, or is that something we shouldn't be concerned about? Okay. Let me do the Irish one to start with. You asked in terms of the release of capital, and we expect the release of capital from the sale of non-core Ireland to be between DKK 5 billion and DKK 6 billion of REA, and we expect that to happen in Q4, if the transaction obviously closes in Q4 as expected. It is expected to close there. Then you are right that there are some movements on the non-core line, and they are reflecting what has been going on in Ireland. So you are spot on in terms of that. You asked about Q4 impacts. We, at this stage, expect non-core to report a gain of probably around DKK 100 million in Q4. So the non-core line, it is not going to be dramatic, but probably around DKK 100 million in Q4. But the big impact here, as you also pointed to yourself, is the REA impact, which is a release in Q4. Okay, to your two other questions. No, our own investigation will not have any material impact on the cost issue. Then to Norway Business Banking, you are right that the impairments are slightly higher in Norway than we see in other markets, and these are related to primarily, as you also alluded to, the oil service sector, which has stabilized. But to some extent could be challenged, but it seems to be stabilized with present oil prices. Secondly, there has been one particular case who has been challenged in Business Banking during the quarter, which has also been public in the Norwegian press. Okay, thank you. We will now take our next question from Johan Ekblom from UBS. Please go ahead. Thank you. I think most things have been answered. Maybe just two bit more detailed questions. In terms of your capital allocation, why do we see such a big increase in the capital allocation in Personal Banking this quarter? That's the first thing. Then secondly, I think two or three times during your presentation, you referred to the weak top line in Northern Ireland due to low rates. Now we have slightly higher rates in the U.K. Do you have any impact or, what kind of sensitivity should we expect from that? Hey, Johan. Thanks for the questions. Let's just take them one at a time here. In terms of Personal Banking, you're right, the capital allocation goes up. It goes up not due to a massive change or model or anything like that, but there is a quite strong lending growth, as you've noticed in Personal Banking, and that obviously drives some capital allocation. We show on our little deep dive on Personal Banking Sweden, we also write there that we adhere to the Swedish regulators' 25% risk weight floor on Swedish mortgages. You can see a lot of growth in Sweden this quarter as well, so that also impacts the REA as well. So our capital allocation follows the regulatory capital usage, as you know, and therefore it's a reflection of the strong lending growth. Your other question in terms of weak top line in Northern Ireland. Yes, we have also noticed the decision of the Bank of England today. It will naturally have a positive impact on Northern Ireland. We haven't given the sensitivity, but it is a small help to the Northern Irish top line, which we appreciate. I also understand that they said in the statement today that we should not expect many further hikes in the near future. So it's a small little improvement, yes. Thank you. Can I come back to the capital allocation? It's up 9% in the quarter, which no matter how I FX adjust my volumes, if all the growth is in Swedish mortgages, I still struggle to get there. Is there any time lag in how you implement this, or did you allocate out the 25% this quarter for the first time, or is it just a bit of a random walk in that sense? No, I can guarantee you we don't do random walks, but there can be a quarter to quarter in terms of the averaging, et cetera. I am very happy for IR to just to walk you through it afterwards. But on a quarter to quarter, there can be an averaging effect as well. The number you are looking at right now is the one you should use. The walk up to Q3, IR can walk you through. Perfect. Thank you. We will now take the next question from Kim Bergoe from Deutsche Bank. Please go ahead. Good afternoon. It is Kim from Deutsche. I think most of my questions have been answered. There is just one from me, and that is in terms of the margin outlook, assuming interest rates stay about where they are and just concentrating on the customer side. You touched a bit upon what you have done in Norway. How should we think about the margin outlook? Where do you see pressures? We have seen some of your Danish peers talking about quite significant pressure in Denmark. What is your own view going forward on customer margins? Thanks. I would say we are in basically 17 business cells or 16, meaning four countries with four business units, and number 17 is, of course, Northern Ireland. I think we are planning and looking into flattish margin basically in all of them, so no major changes. Okay, thank you. Our next question comes from Jeff Dolph from Societe Generale. Please go ahead. Hi, good afternoon, everyone. Jeff here from Soc Gen. I just wanted to spend a little bit of time on Denmark and lending volumes in particular. Looking at the country-by-country guidance and trends that we've seen so far, it does seem to be going a lot slower than everything else. Can you just give us a little bit of feedback as to why that is? First of all, is it a supply issue from yourselves? You deliberately losing market share? Is it a demand issue? Is there anything in the economy that's moving lending volumes forward a little bit? And second of all, as a related question, if things pick up materially in Denmark better than your expectations, would that directly impact your buyback guidance and plans? I know that for you growth is a priority over buyback, so just your thoughts on that would be great. Thank you. Thank you. There's no question that the Danish economy has picked up substantially during the last 12 months, and we see that the GDP for 2017, I expect it to be well above 2%, as close as maybe 2.4%. Our Chief Economist also believe that we will have two or slightly above also in 2018. There is through time very often a link between the growth and request for capital. That said, there is less request for capital for the time being, as many of the Business Banking clients in Denmark are well cash rich. So in that sense, the underlying credit demand is subdued around this 1%-2%. In the private market, we see the same. There is some de-leveraging taking place, which from a societal point of view is only good. That's around the same level. No, we are not losing any market share. Actually, we are slightly gaining a market share. But over time, with such a big market share we have, you should expect us to more or less follow the market, but that can of course fluctuate quarter to quarter. So we will, of course, benefit if the credit demand increases going forward. No, we cannot make a link between the credit demand in Denmark and the payout. That's two different issues, and that goes back to our capital strategy. Okay. Very clear, gentlemen. Thank you very much. Our next question comes from Vardhan Jain from Macquarie. Please go ahead. Yes. Hi there. Thank you for taking my questions. Couple of quick ones. Firstly, on Denmark, one of your peers, Jyske Bank, recently mentioned about the new Danish FSA proposals around limiting certain mortgage products, especially the interest-only and the ARM mortgages. Could you just give us more color around that and how that might impact on the credit outlook for Danish economy? Secondly, just coming back on the buyback question. Clearly, you have a very strong capital position now, but your leverage position is at 4.1%. I guess my question is, would you be comfortable in dipping below the 4% target when you decide on the buyback for next year? Thank you. Thank you very much for your questions. I think what Jyske was referring to is the Danish regulators are looking at implementing a debt-to-income rule for certain types of products. That is correct in terms of interest only, et cetera. It has been a debate for a while, and you see similar things in the other Nordic countries, so it is not a major drama around that. There has been public debate around it because there was a first proposal which is now being amended and has also been delayed. It looks like the amended proposal will have a shape that has, you can say, less impact than the first one based on what we see and hear. We do not think this changes the outlook for the Danish property market materially. It may take some peak momentum out of certain smaller segments, but this is not something that will change anything for us in terms of what we expect for our business going forward here. Your other question was on the leverage ratio. We have a target of maintaining a buffer of around 100 basis points above the 3% recommended level. So that is around 4%. If we dip just below 4%, that is not a major drama for us, but we want to, over time, stay at 4% or above. So it is not a hard limit for us, but it is our target and we obviously run the business to maintain that target. Okay. Thank you. As a reminder, ladies and gentlemen, if you find your question has already been answered, you may remove yourself from the queue by pressing star two. We will now take the next question from Riccardo Rovere from Mediobanca. Please go ahead. Yes. Thank you very much and good afternoon to everybody. Just one question from my side. If I have a look at what has been happening over the past 12 months, I see that the loan book has been growing by around DKK 35 billion, more or less, if my numbers are correct. This is true for Danske, but this is true for the overall country in general. The level of debt in the country has not gone down. Because of available credit and because of negative rates, real estate prices are going up across the board. Real estate prices going up are driving your credit losses, your reversals on one hand, and are also driving your maybe PDs, LGDs, and your risk-weighted assets are down by DKK 45 billion in 12 months. When I look at your payout and I take that into, and I also account for the buyback, you are basically paying out everything, 100% payout. Including the reversals, for how long can this situation be considered sustainable? Because it looks like it is a virtuous circle now, but it could become actually a vicious circle if something goes wrong. For how long do you think this situation can go on? Thank you for that question. We do actually believe the situation is a little bit less dramatic than you paint it here. I think there are a number of things you need to take into account when you do your math here. First of all, you are referring to our growth and the REA movements, et cetera. Let us just remember a couple of facts here. We have over the last couple of years reduced our Non-core book, which obviously has very high risk weights. We have reduced that materially, and as you will know after Q4, it would be close to zero. We will have some exposures left, but very small. So Non-core has been reduced materially. In the same vein, we have grown significantly in low risk areas, which is obviously lower risk weight areas, which means the composition of our REA or risk weights will have a natural positive mix effect. Do remember those facts before we then move into the majority of the REA decrease here, which is market risk and counterparty risk. That is driven by the fact that we have changed our business model in our markets business, where we have moved from having proprietary risk in a number of areas to having a completely client-driven business. So there are many factors that I think you're missing in your equation there. I can see why from a headline perspective it would make sense, but I think you need to have all these facts as part of the equation. On top of that, just the last comment, you mentioned the house prices. Obviously, house prices going up will have a positive effect on any bank simply due to higher collateral values, and therefore it's also a better ability for most of your clients to adhere to their commitments, et cetera. But our business, and when you talk about capital you refer to PDs, LTVs, et cetera, as if we were running a pure point-in-time model. Danske is more of a through-the-cycle build-up, which means that we do not have the same sensitivity around the collateral values as you refer to. So I think there are many nuances. I think the biggest nuances here are around the entire change around market risk and counterparty risk, the de-risking on non-core, and that our growth is happening in these low risk areas. Okay. Very good answer. Thanks. We will now take our next question from Jacob Kruse from Autonomous. Please go ahead. Hi. Jakob from Autonomous. Just, I guess one question. On the cost side, you target DKK 23.6 billion. Last year and the prior year have seen significant seasonality in Q4. How comfortable are you that you can hit that, I guess it's about DKK 5.6 billion of cost in Q4 to do the DKK 23.6 billion target. Thank you. Thanks, Jakob. Well, if I have to be a bit cheeky, we've just delivered a better-than-expected cost in the quarter, so we should be more comfortable. We are comfortable. I think we said very clearly to you guys over the last couple of quarters that in 2017 we would see less seasonality in Q4, and that we are sticking to. We are reiterating our guidance today and are fully behind that. So there's no change to the messaging around that. Okay. Thank you. Operator, can I ask you to deliver the last question, please? Certainly, sir. We will now take our final question from Bruce Hamilton from Morgan Stanley. Please go ahead, Mr. Hamilton. Thanks. Afternoon, guys. Just a couple of follow-up questions. Firstly, on the competitive dynamics in Denmark, both in terms of volumes and margins, I guess one of your peers has a theoretically quite attractive incentive structure on mortgages. How do you see that impacting your ability to compete in pricing in the business? I guess, obviously, you've said already you think margins should be fairly stable across the different parts of the business or in the round, and I just wanted to check how much of that is, do you expect some funding benefits but some compression in lending margins, or is there any other way to think about that? Second question, obviously, as you say, doing a very good job on costs, the targets this year, again. The expectation in the market is that you stick to fairly stable costs looking forward over the next couple of years. Given the efficiencies you're running through the organization, does that strike you as sensible or is that even lowball given what you can achieve? Okay. Let me start on the cost side. I think the answer here would be pretty quick. We don't guide for 2018 and beyond. We've guided for 2017. What I can make very clear is that we are very focused on taking out structural costs. We constantly invest in digitalization across the bank, and therefore it's a massive focus for us to constantly make sure we lower our cost to serve. At the same time, and that's what you see this year, we also see cost pressures from continued investments in our regulatory projects, and we have a very strong IT and digital agenda. So we're seeing some pressures and also a continued focus on efficiencies. You know our focus on this line, but we're not going to give you guidance for 2018 and beyond. Okay. To your first question, in all markets there is good competitive dynamics, including what you asked specifically on the Danish market. We remain very competitive today, and I expect us to remain very competitive tomorrow. You asked specifically of one institution, particular incentive systems makes lives more difficult for us. The answer is no. We are today gaining clients. We are today keeping a very good market share, actually increasing slightly. So I think we remain and will remain very competitive also going forward. Great. Thank you. Okay. Thank you all for your keen interest in Danske and for your good questions. As always, you are welcome to contact our IR department if you have more questions after you have time to look at our financial results in more detail. A transcript of this conference call will be added to our website and the IR app within the next few days. Thank you very much and have a good afternoon. Ladies and gentlemen, this concludes the Danske Bank third quarter 2017 conference call. Thank you all for your participation today. You may now disconnect.