Earnings Call: Q2 2017

Jul 20, 2017

Summary

H1 net profit rose 10% to DKK 10.3bn, supported by stronger customer activity, higher fee and trading income, and net impairment reversals. FY net profit guidance increased to DKK 18bn-DKK 20bn, with expenses expected around 2016 levels.

Good day, and welcome to the Danske Bank financial results for the first half 2017 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Thomas F. Borgen, CEO. Please go ahead, sir. Thank you, operator, and thank you all for taking time to listen to this call today. Together with me today, I have the CFO, Jacob Aarup-Andersen, and the Head of IR, Claus Ingar Jensen. Slide 1, please. In today's call, we have the pleasure of presenting Danske Bank's financial results for the first half of 2017. We aim to keep this presentation to around 15 minutes. After the presentation, we will open up for a Q&A session as usual. Afterwards, feel free to contact our IR department if you have any more questions. Slide 2, please. The first half of 2017 was a satisfactory period for Danske Bank. Our net profit amounted to DKK 10.3 billion, up 10% from the level in the same period the year before. The result represents a return on shareholders' equity of 13.5%, an increase of more than one percentage point from the first half of 2016. In isolation, our Q2 result showed a continuation of our solid business development with a return of equity of 12.6%. We continue to build Danske Bank as a solid, balanced, and predictable institution. The strong underlying business momentum continued in the first half of the year, driven by stronger customer activity at all business units, in particular in Norway and Sweden, where we continued to strengthen our position as a Nordic universal bank. The expansion of our footprint in the Nordics is on a solid path, and we will continue on a balanced and predictable basis. During the period, loan growth for the group was up 3% from the same period last year, despite headwinds from currency effects. We saw good inflows of new business in Norway and in Sweden in particular, where our second partnership agreement took effect in the second quarter. Our relatively new Wealth Management division is now starting to show traction, and we continue to see good long-term potential within this area. At C&I, we continue to see solid progress in terms of servicing our customers with strong advice and good execution capabilities. Our risk appetite is at moderate level, and capital consumption is presently at low levels. The development in the first half of the year was backed by better macroeconomic trends in all of the Nordic regions. The development in the financial markets supported the business momentum as customer activity remained high, particularly in the first quarter. The high activity level had a positive effect on trading income, whereas fee income benefited from good demand for capital market solutions. Expenses rose from the level in the first half last year due to higher customer activity, our decision to further enhance our digital capabilities, and initiatives taken to meet increased regulatory requirements. Based on the speed of customer adaptation to new digital solutions, we see ample opportunities. However, certain investments are made with a view to securing the medium to long-term competitive position for the bank. Credit quality is solid, and in the second quarter, as in the first, we booked a net reversal, which had a positive effect on the financial results. Our capital position remained very strong. The core capital ratio of 16.2%, which is about our target level, is net of the total share buyback program of DKK 10 billion we are currently executing. Finally, we have revised our outlook for the full year. We now expect net profit to be in the range of DKK 18 billion-DKK 20 billion. We will comment on this later in this call. 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. Starting with net interest income, here we came in at DKK 11.4 billion. This is 6% above the level in the same period the year before, and it was driven by lending growth of 3%. Excluding currency effects, NII was up 7%. Net interest income was adversely affected by a one-off of DKK 90 million, and in Q2, there was one more interest day than in the preceding quarter. Net fee income came in at DKK 7.6 billion, up 13% from the level last year, when fee income was low due to subdued investment activity. The increase came from all Nordic business units, but Wealth Management in particular. Net trading income came in at DKK 4.5 billion, up 21%, and was driven by strong customer activity at C&I, primarily in the first quarter. Other income fell significantly from the level last year, where we benefited from the sale of our domicile property in Copenhagen. Adjusted for the sale, other income was down only slightly. Operating expenses were up 3% to DKK 11.5 billion. The figure for the same period last year was based on lower customer activity and included one-offs. In the first half of this year, expenses reflect higher activity and our continued focus on digitalization. Furthermore, expenses for regulatory compliance projects increased. The cost income ratio came in at 47.1%, a decline of more than one percentage point from the year before. Finally, we saw net reversals of loan impairment charges of DKK 0.5 billion as a result of improved credit quality, in particular at Business Banking. Slide 4, please. In the first half of the year, our two Nordic banking units, Personal Banking and Business Banking, benefited from good business momentum in 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, lower U.K. rates and the development in pound sterling had an adverse effect on the financial results. Now let's look more closely at the three units. Personal Banking delivered good results, with profit before loan impairment charges up 13% to DKK 2.6 billion. Total income was 6% higher than last year, owing to improvements in all income lines. In the first quarter last year, both fee and trading income were adversely affected by the low customer activity. Expenses were up 2%, owing primarily to regulatory-driven investments and IT development. Impairment charges remained low, although higher than last year. Finally, the return on allocated capital was 21.7%. Total lending volume was up 2%, owing to growth in Norway and Sweden, where lending volume measured in local currency rose 10% and 18%, respectively. These strong gains came primarily from the partnership agreements. In Denmark, where volume was stable, the trend towards higher mortgage lending and lower lending in conventional loan products continued, however, at a lower pace. In Finland, lending volume was up 1%. Turning to Business Banking, here we continued the good progress in all markets. Overall profit before loan impairment charges was up 7%. Lending volume measured in local currency was up in all markets, most notably in Sweden, where it rose 8%, followed by Norway and Finland, which saw increases of 6% and 5% respectively. In Denmark, excluding Realkredit Danmark, lending rose 8%. Total income was 3% higher than last year due to higher customer activity. The improvement was driven by NII and fee income. Expenses were down 2%, owing to efficiency measures offsetting higher regulatory costs. Impairment charges showed a significant reversal in the period, which I will comment on later in the call. Finally, the return on allocated capital was 17.9%. Moving to Northern Ireland. Here, the result was adversely affected by the depreciation of the pound sterling after the U.K. referendum last year. Lower interest rates and reduced loan impairment reversal also had an impact on the reported result from the level in the same period last year. Total income fell 9%. Adjusted for the depreciation of the currency, it was unchanged from the level last year, despite an interest rate cut in the U.K. in August. Expenses were unchanged. Adjusted for FX, they were up 10%, partly due to increased pension-related costs and investments. The return on allocated capital was 16.1% against 14.6% last year, driven mainly by lower capital. Slide 5, please. Let's have a look at the units that are more dependent on the capital markets. At C&I, profit before impairments rose 47% over the level last year, when customer activity was low due to challenging market conditions. A number of geopolitical events fueled activity this year, primarily in the first quarter. The activity level in FICC in particular normalized somewhat in the second quarter, whereas activity remained high in capital markets. Total income rose 27%, owing to improvements in all major income lines. Fee income benefited from good customer activity both in general banking and intense issuance activity within capital markets. Expenses were up 4% due to higher activity and positive one-offs in the first half of 2016. Impairments, which by nature fluctuate at C&I, amounted to DKK 0.2 billion. The charges were primarily against exposure to the oil sector. Despite high activity at C&I, capital consumption was stable and was down 5% from the level in Q1 because of lower counterparty and market risk. At Wealth Management, profit before tax was up 10% as the unit, like the other business units, benefited from improved market conditions and higher customer activity. Fee income was up 15% from the level last year, driven mainly by an increase in assets under management and higher customer activity. Expenses were up 8% because of higher activity and an increase in regulatory compliance costs. Assets under management were up 12% from the level in the same period last year. In the first half of this year, premiums in Danica and net sales from asset management amounted to DKK 20 billion and DKK 13 billion respectively. Slide six, please. Moving on to expenses. Total expenses for the first half of the year amounted to DKK 11.5 billion. That's up 3% from the level last year. In the first half of last year, expenses benefited from positive one-offs and lower customer activity than we have seen this year. The increase in expenses relates to higher customer activity and digitalization efforts. Furthermore, significant resources are invested in IT-related regulatory compliance, enabling us to implement regulatory requirements such as MiFID II, GDPR, PSD2, and others. The underlying cost development remains satisfying. Based on the higher activity level and a heavy regulatory agenda, we have decided, however, to adjust our outlook for expenses for the full year, something I will return to later in this call. Slide seven, please. The positive trend in credit quality continued in the second quarter. As in the preceding quarter, we had a net reversal for the group. The reversal in the first half of the year was DKK 0.5 billion against a net reversal of DKK 0.2 billion for the same period in 2016. The loan loss ratio for the first half of 2017, excluding non-core activities, was minus five basis points. With a net reversal of DKK 0.3 billion in the second quarter, Business Banking had the largest decline as the positive effect of increased collateral values in the commercial property segment and the positive outcome of workout cases mainly in Denmark continued. Market conditions for the agriculture industry improved, and reversals of DKK 2.2 billion were made in the second quarter. At Personal Banking, we had a small reversal of DKK 53 million, reflecting strong and stable credit quality. At C&I, we booked impairment charges of DKK 0.2 billion in the second quarter, mainly against oil-related exposure as the difficult market conditions for subcontractors in the oil and gas industry continued. The individual impairment charges against this industry amounted to DKK 0.1 billion, and collective charges now stand at DKK 1.1 billion, which is almost unchanged from the preceding quarter. Slide eight, please. Our capital position remained very strong with a reported common equity tier one capital ratio of 16.2%, which is up 0.7 percentage points from the preceding quarter and well above our target of 14%-15%. The full deduction of the DKK 10 billion share buyback program was booked in the first quarter. Total capital ratio was 21.1%, up from 20.4% at the end of the first quarter. The REA level fell DKK 20 billion in the second quarter, owing to a reduction in all risk categories. Credit risk was reduced because of continued improvement in overall credit quality, whereas both market and counterparty risk benefited from low volatility in the financial markets. The leverage ratio was 4.1%, according to both transitional rules and fully phased-in new rules. The share buyback of DKK 10 billion in 2017 is progressing according to plan. As of the end of week 28, we had bought back 18.6 million shares, representing a gross value of DKK 4.5 billion. Slide 9, please. In short, as Thomas mentioned in the beginning of the call, we are changing our outlook for net profit for 2017. on the basis of the satisfactory financial performance in the first half of the year, we now expect net profit for the full year to be in the range of DKK 18 billion-DKK 20 billion. That is up from our previous outlook of between DKK 17 billion and DKK 19 billion. Fee income is now expected to be higher than in 2016, subject to customer activity, whereas we expect expenses to be around the same level as in 2016. Finally, for loan impairment charges, we now expect them to remain low. Slide 10, please, and over to you, Thomas. Thank you, Jacob. 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 now ready for the Q&A session. Thank you. If you wish to ask a question at this time, please press star 1 on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. We shall now take our first question from Mads Thinggaard from Handelsbanken. Please go ahead. Hi, this is Mads Thinggaard from Handelsbanken with two questions. The first is relating to lending growth in Personal Banking in Sweden, where it seems you have a rather high growth rate here in Q2, I guess in local currencies, around 5% quarter-on-quarter. Compared to official statistics, that implies perhaps over 2 percentage point month-over-month in June. Could you put a bit of flavor on what to expect going forward on this? Should we annualize this over 2% in June, or is it initially from TCO, or what should we expect here? Then my second question relates to the margins in Personal Banking in Norway, where there seems to be again now a quite hefty uptick in NII quarter-on-quarter. As far as I can calculate, the margins go up by 9 basis points versus Q1. Is that reflecting improved market conditions, less competitions in the Norwegian household market, or is it more a technical effect of NIBOR going down in Q2? Thanks. Thanks very much, Mads. I will take the first one. You're right to point out that we have substantial growth in Personal Banking in Sweden from Q1 to Q2. One should always be cautious to take too hard conclusions based on a quarter's growth. So said, remember that the TCO agreement went live on the 1st of April, which is a part of our strategy to have a sustainable and healthy growth in the Nordic markets, basically in Norway, Sweden, and to some extent, Finland. What we could expect is always difficult to be very precise on, but I think we should be able to see healthy double digits, and then we will need to see where this will end going forward. This is a long-term agreement. We have it with Saco; we have it with TCO. TCO has a good potential, but I think we should be cautious to put in a number. So for the time being, as it's only been running for a quarter, but I think it's appreciative that it has started off to a good footing. Mads, let me just take the other question on Personal Banking in Norway. You are right that our margin in the second quarter was improving versus first quarter. There are two effects in that number. First, do remember that when we announced the price increases towards the end of Q4, we said that it would come in phased during Q1. What you are seeing in Q2 is the full effect of the price increases that came in in Q1. One of the price increases was in January and the other one was in March. There is the full effect of those price increases. You are right, then there is also a benefit from NIBOR, which all Norwegian players have. Here in Q2, the big move you see is the lagged effect from Q1. Okay, so no big positive news on less competition in Norway from the uptick. We think the competitive environment in Norway is good and strong, the way it has been for a number of quarters, but we are not seeing any major changes to report here. Okay, thanks a lot. We will now take our next question from Willis Palomer from Goldman Sachs. Please go ahead. Hello. Thanks for the presentation and taking my questions. The first one is on the cost for the new guidance. As the current first H1 rate is higher than the 2016 level, what items were unusually high in the first half and would disappear in the second half to reach that target? Okay, let's start on the cost. First of all, you're right, the first half is higher than last year. When you look at the difference between the first half of 2017 and first half of 2016, there's a number of moving parts. If we take them a little bit high level, first of all, last year we did have around DKK 140 million of positive one-offs, which we flagged to you at that point. What you're seeing in this half versus last year is also a higher performance-based pay, which is obviously reflecting the higher activity. You're seeing higher severance of around DKK 80 million. You're seeing higher IT expenses, I believe around DKK 130 million. Then you're seeing some higher rent as well as a consequence of us selling our buildings. Especially IT performance-based pay and also, you can say, to some extent, the staff-related cost affecting the regulatory projects are all effects you're seeing in the first half due to these things we mentioned, i.e., the regulatory projects and the activity-based expenses. Some of these effects, like severance and activity-based expenses, you have been very strong in the first half, and I expect it to be lower in the second half. Then you have seen, as we also said just now in the speech, in the first half in Northern Ireland, for example, we have taken some restructuring costs and investment costs. So there are a number of places where we've been investing here in the first half. Some of that will come down. I think it's a multitude of factors. Okay, thank you. That is very clear. The second question is on the capital as the Q1 was up quite a lot and well above the target. Firstly, is there any element in the risk-weighted asset decrease that may reverse in the second half? Secondly, if the capital position allows it compared to your target, will you consider a capital return with a payout ratio above 100% when acting to the Danish FSA for approval? Or would you limit yourself to that cap? Thanks. I will do the last one, and then Jock will take you through the RWA. We have a very clear capital strategy which remains in place, which we have communicated throughout the last couple of years. There is no change that we have the intention to be very solid, and that is to have a core tier one ratio between 14% and 15%. Then we have a dividend policy to be between 40% and 50%. Then we will take and support what we see as profitable growth in those markets we operate in. Here you can see that we are able to capture very healthy growth, particularly in Norway, Sweden, but also Denmark is picking up. Then if we have any excess capital, we will distribute that back to the shareholders in one way or another. What we have done, as you alluded to, we have done that through share buybacks the last couple of years. Then you ask should we pay back more than 100%. I think we need to discuss that when the year is finished, to what level we will pay back to the shareholders and what level it is. But you are right to point out that the FSA approves all change in capital structure that implies share buyback. I can just confirm that we have a good dialogue with FSA, and we will take that discussion with them when we have closed the accounts for the year. Let me address the other question in terms of reversing in the second half. If we just take a quick step back and look at what happened here in the second quarter. REA is down DKK 20 billion. If you just look at the different components, DKK 7 billion is credit risk. That is not driven by any technical model changes or anything like that. It is driven by higher collateral in the book, so generally better credit quality driven by higher collateral and rating migration due to the better credit quality. When we look at the two other components, counterparty risk was down DKK 6 billion, and market risk was down DKK 7 billion. Here, lower volatility and lower counterparty exposure drives this. Obviously, if you do expect a significant increase in market volatility, you could see some of the market risk reverse. We are acknowledging that we are at low levels in terms of market risk. Part of that is driven structurally by the change in business model at C&I over the last couple of years. Do remember that when you look at our market risk levels. We have taken market risk down significantly as part of the new business model. But obviously, cyclicality and higher market volatility could lead to the numbers going back up. Just to add one thing on your first question in terms of cost in the first half, do remember what we spoke about in the Q1, where we said that we were making sure that IT was not so back-end loaded as it had been in previous years. IT is more front-end loaded this year than it has been in the previous years when you look at the numbers. Thank you very much. We will now take our next question from Per Grønborg from ABG. Please go ahead. Yes. Thank you. Two questions from my side. First, I will also dig a bit into the cost side. Basically, what is new this quarter? You are addressing that it is regulation, it is IT. Has there been additional requirements this quarter? It does not seem like it is additional investments in growing the business, where clearly you had a very nice growth, especially in the beginning of the year. My second question is related to the deal on part of the Mandatum business that you will take over at some stage. Where should we expect that to come into your accounts capital-wise? Will there be a DKK 2.5 billion charge on your capital when that one is booked? Or how should we expect it to be consolidated when the deal is closed at some stage? Thanks, Per. Two good questions. First one, let's deal with the cost question. What is new here in the second quarter? You are right that there has not been another uptick in activity-based expenses, as in your question. On the other hand, activity remains very high. You cannot just measure activity by our trading income. You also need to measure it by our fee income, et cetera. We do see activity-based expenses continuing to be high. But the biggest driver here is the many regulatory projects where we are investing heavily. The main big regulatory projects such as MiFID II, NII, data protection, and also AML are taking a lot of resources as we are investing in not just making the necessary changes, but also making it a real business enabler for us going forward. We will continue our focus on taking our structural cost, as we have spoken about many times, through the digitalization across the bank. We are not going to derail our digital agenda, so investments in digital will remain high. We will continue to prepare the bank for the future, which means that when these heavy regulatory implementation projects come in, we will not slow down in the other key agendas for the future bank. You can say it is the combination of that with the continued high activity levels that make us do the change. Then you ask on Mandatum. First of all, we do not expect the Mandatum transaction to close in 2017. We think it closes in 2018. We have not announced what we are planning to do. The only thing that has been announced is that there is an agreement that Mandatum will no longer hold this portfolio in 2018. We have not yet communicated what we decide to do, whether we will hold this portfolio, et cetera. There would not be any hit from Mandatum in our accounts as this is a transaction done at fair value, and therefore the assets will be also transacted at fair value. We do not expect any hit from this transaction. But anyway, this will be a 2018 transaction as well. As I said, we haven't decided fully how we will deal with the portfolio. I would assume since Sampo expects to book a gain that an intangible of some sort will pop up in your books, either goodwill or client intangible, which I guess would have to be deducted from your capital, of course, not from your profit. We're happy to take that offline. I think what you're referring to is what Sampo had the asset booked at in their own accounts, and that does not necessarily reflect what a fair market value of the asset is today. And obviously, as Sampo has announced and we have confirmed, there has been an independent valuation of the asset. Where we transact that. So from an accounting perspective, the gain at Sampo does not need to be matched by a loss at Danske. But we're happy to take that bilaterally. Let's do that. Thank you. We will now take our next question from Andreas Håkansson from BNP. Please go ahead. Yes. Hi, it's Andreas from Exane here. I had a question. We listened to Nordea this morning, and they talked about moving the headquarter, and the focus was very much about banking union. There's been a discussion in Denmark, and now also in Sweden about the banking union. Could you just remind us, what's your stance on the banking union for Denmark? Do you see any impact on yourself if Denmark will join? Thanks. Thank you, Andreas. The banking union theme was a discussion in the Danish society a couple of years ago, where we were clear in saying that we thought it was good for the Danish society to consider to join the banking union. There was a couple of specific Danish issues, particularly around the mortgages issues, which needed to be clarified. We have not changed that view. We are just supporting that the Ministry of Business is launching expert group to look into the consequences of joining or not joining the banking union. For Danske individually, it doesn't mean very much, except that we, on a general level, support, let's call it, the common principle across all the European markets. The banking union can be one of the levers to that respect. By isolation, it will not impact Danske a lot, if anything. It's more a thing for society, and that's why it's a political decision. To be clear, what you are referring to is the liquidity rules around the covered bonds, right? That is one of the things which is going to be looked into. It is also how you treat the covered bonds generally. Okay. Thank you. We will now take our next question from Yafei Tian from Citi. Please go ahead. Hi, thank you for taking the question. The first question is around net interest income. We were told there is some one-off in this quarter related to the tax changes booked under net interest income. Can you quantify how much it is and which divisions these are booked? Is it just in Group Center, or is it also distributed into the divisional level? That is the first. The second question is around Denmark loan growth. In the recent data we have seen from the central bank, there seems to be a small pickup in the credit demand in Denmark itself. Do you see that in your numbers, or do you start to see that in the business that you operate in Denmark? Okay. Thank you very much. Let us start with the NII, and you are spot on. There was a couple of movements in the numbers. Let us just make them clear. First of all, when you look quarter on quarter in NII, it is down 1% quarter on quarter in the reported numbers. There is a negative one-off of DKK 91 million in the numbers, which is not attributed to a specific business unit. It is in the other. The two other effects you need to be aware of is obviously the FX effect, which is another negative of around DKK 40 million, and there was a banking day more, which goes the other way of DKK 60 million. If you add up those numbers, you will see that our NII was actually up just below a percent in underlying terms. We are actually quite pleased with that NII performance, as you can imagine. Your other question on loan growth in Denmark, we are seeing, I guess, we need to look at two different markets here, because in Personal Banking, you have seen that we have relatively flat lending volumes. That then splits into two, because we are seeing a decline in our conventional bank lending, while at the same time we are seeing an increase in our mortgage lending. There is an underlying demand for the mortgage lending side, but conventional loan products, we are not seeing any real growth. Business Banking is seeing growth, and we also grew our lending book here in the second quarter. Yes, you are right. We are seeing some growth in the market, more related here to the SME segments and the mortgage market than the conventional bank market. Okay, thank you. We will take our next question from Martin Birk from Carnegie. Please go ahead. Hey, thank you so much for taking my question. My first question is to Personal Banking, Norway and Akademikerne. Are you guys still seeing a big inflow of Akademikerne clients? How much of this growth in Norway comes from the back book? Yes. We are still seeing a good traction with private banking in Norway, of which Akademikerne is still a very important source. Of course, percentage-wise, the numbers will come down as the stock increases. But in absolute terms is more or less at the same level. So it is still a solid growth. What is even more important now going forward is that we get to service the client 360 degrees around meeting more products than just the account and the mortgage. Now we have been able to set up structures to support that. So overall, we should see even better traction going forward on the cross sales, while I think on the mortgage side, it should be more or less flattish when it comes to the volume, which percentage-wise will be in the low double digits. Okay. Thank you so much. My second question is, do you guys have an update on interest rate sensitivity? Yeah, no, there is no news on that. So we have the same sensitivity as we have given in the past. So around DKK 700 million on the upside for 25 basis points and DKK 500 million on the downside. So that is unchanged. But a good question. Thank you so much. We will now take our next question from Riccardo Rovere from Mediobanca. Please go ahead. Good afternoon to everybody. Just one question from me. Let us assume nine months down the road, we are exactly in the same situation of today. So common equity tier one ratio above 16%, no idea whatsoever what is going to happen to Basel IV. Would you suggest a buyback also for 2019? I can only repeat, and I do not want to repeat exactly what I said 12 minutes ago. We are very firm on our capital position and our strategy, and we will stick to that. And we need to wait until the year-end to see where we end up. Okay, fine. Sorry about that, but I have no more to add to that question because it is basically the same question as I got this morning. No problem. It is part of our job to try. Thank you, Riccardo. We will now take our next question from Jacob Kruse from Autonomous. Please go ahead. Hi, thank you. I just wanted to ask, when it comes to your recoveries, how dependent are you on commercial real estate prices there? So what kind of percentage of your provision or your balance sheet provisions would be related to the kind of exposures that are linked to commercial real estate prices? Secondly, where do your valuations that you use for those collateral valuations, how do they compare to actual market prices in your view? Thank you. The very specifics we don't have here because I think it's dangerous to be that detailed. But what we can say is that we have very conservative evaluation when we do our security. We both do a haircut and a very robust market evaluation. So I would say that we have either you can call it cautious or conservative view on it. Most of the reversals are basically based on either workouts or basically that the financial position of our debtor has improved substantially. But also in those cases where there has been issues that the security has improved over a period of time due to basically lower yield requirements improving the security of that property. Of course, being a large player in the Nordics, a part of our book is in the commercial property market. We think, and we are cautious that we may peak out at these levels. There should be limited what is left on that by itself, even though it will be a lagging indicator, so it may still be a couple of quarters. But to a more fundamental question, we have a very solid book. We have a very healthy allowance account, and that is also why we are revising our outlook for the impairments going forward for the rest of the year. Overall, it looks healthy, it looks solid, and I think we are on a good trajectory of remaining on very low impairments for 2018. Sorry for 2017. Can I ask for 2018, does it spill over into there or is that a whole new picture? Sorry, that is a new picture. Just my on my slipping tongue here. Thank you very much. We will now take our next question from Vardhman Jain from Macquarie. Please go ahead. Yeah. Hi there. This is Vardhman Jain from Macquarie. Just a couple of questions. First is on your asset quality. If you look at your forbearance data, your forborne loans increased substantially quarter-on-quarter. I mean, it was like a 33% increase. I understand a part of it could be because of the reversals from the non-performing into the performing book, but there is still a big chunk which I couldn't understand. If you could give more color on that. Secondly, if you could give more color on the margins. You mentioned that there is still pressure on the deposit margin side. I saw that on the margin of the C&I book declined from 72 to 68 basis points in the quarter. If you could give more color on that would be great. Thanks. Okay, thank you for the questions. First of all, I'm sorry if you spent a lot of time trying to back out the forbearance numbers, because this is a new reporting from us, and due to improved registrations over the last couple of quarters, this number is showing a technical effect. The increase you're seeing is unfortunately mainly technical from better registrations, and IR would be happy to help you further on it. But it is not reflecting a significant deterioration in forbearance. Let's just make that very clear. Okay, yeah. So apologies if you spent several hours trying to back that out. The other one is on margins. You asked about deposit margins, you asked about C&I. First of all, do be careful in terms of fluctuations on a quarterly basis, especially when we look at margins on a combined basis. You mentioned deposit margins. We need to, as we discussed over the last couple of quarters, NII other, as we also report, is where our internal bank or our funds transfer pricing model goes through. As there are fluctuations in the funds transfer pricing, it can also impact the pricing you see on deposit margins. What you've seen over the last couple of quarters is we have seen a significant growth in deposits in Business Banking and C&I. And that increase in Business Banking and C&I, it's a competitive market where people are pricing these very large deposits, and therefore you can see a slight deterioration in the reported deposit margin from that. It's very good business for us to do that because it's obviously still cheap funding for the bank. So there is an effect of a large deposit increase in these units that distort the margin a bit. We are not seeing a deterioration in lending margins, which could be the inference from your question. We're not seeing a deterioration in lending margins in the large corporate space. So there are these technical effects from funds transfer pricing and the fact that we are taking some large deposits on the book. Okay. Thank you. As a reminder, to ask a question, please press *1 on your telephone keypad. We will now take our next question from Amal Shah from Redburn. Please go ahead. Hi, good afternoon. This is Amal Shah from Redburn. On the new partnership agreement in Sweden, I was just wondering if you can say anything about what sort of penetration rate you can expect to have. What rate have you already achieved in Norway? That is the first question. Thank you. Yeah. Thanks for your question. We take this as the last question. It is very hard to be precise or even fairly right on what the penetration rate can or should be, as this is a new agreement. What we can state as a fact is that TCO has 1.3 million members, and we have the exclusivity with that union. I can also confirm, as I did earlier in the call, that we have had a very healthy start. Let us all remind ourselves we have just been through a quarter. It has been a healthy start. We have some experience with SACO which is still running at very healthy speed. I think we are off to a good start. Let us take this slowly but surely as a positive momentum. In Norway, it is a slightly different agreement, even though it is exclusively academians. Also there we can see that there is a healthy, steady growth quarter by quarter, as I alluded to, and it gives a good foundation for a solid, balanced, predictable growth. I will be cautious to be more precise. We just need to watch it, but be happy that it is off to a good start and the client seems to be very satisfied with the service they get, and I think that is the key importance going forward. Okay, thank you. Okay, thank you all for your interest in Danske Bank and for your very good questions. As always, you are welcome to contact our IR department if you have more questions after you had 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. Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.