Earnings Call: Q3 2016

Oct 28, 2016

Summary

9M net profit rose 9% to DKK 14.3bn, with 12.6% return on equity amid subdued markets. Full-year profit is expected to exceed 2015 adjusted for goodwill impairment, supported by stronger trading income.

Thank you operator, and thank you all for taking the time to listen in on this call today. With me today, I have our CFO, Jacob Aarup-Andersen, and our 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 9 months of 2016. We aim to keep this presentation to around 15 minutes. After the presentation, we will, as usually, open up for Q&A. Afterwards, feel free to contact our IR department if you have any more questions. Slide 2, please. With a net profit of DKK 14.3 billion, the first 9 months of 2016 were a satisfying period for Danske Bank. Net profit rose 9% over the level in the same period the year before, and the return on shareholders' equity was 12.6%. This is in line with our longer-term ambition to improve profitability, and we achieved the result despite challenging market conditions. These conditions included a continuation of negative interest rates, volatile financial markets, and low to moderate macroeconomic growth. This resulted in relatively low activity, subdued demand, and continuing strong competition. Our results demonstrate that we continue to benefit from the strength of our diversified business model, however, and the execution of our strategy of becoming a more customer-centric, simple, and efficient bank is now yielding good results. The macroeconomic environment varied somewhat in our main markets with a slightly more positive trend in Denmark and Finland, while in Sweden, growth slowed down from a high level. In Norway, oil prices supported moderate growth. Developments in the financial markets were a key theme in the period. The very negative sentiment we saw early in the year was followed by strong customer activity at our C&I business that was only interrupted around the UK referendum. Customer activity remained very robust throughout the third quarter and had a significant positive effect on our trading income. We saw good progress in lending activity as volume grew 5% over the level in the first 9 months of 2015. Business banking showed increase in all markets and a solid growth continued at Personal Banking Norway. Sweden has now also gained momentum after the agreement with Saco. The trend was more flattish in Denmark and also Finland. In Denmark, customers continued to switch from unsecured lending to mortgage lending. We continued to have a strong focus on costs, and we delivered according to our plan in the period. Since market conditions remain challenging, however, we will continue to initiate efficiency measures as needed. Credit quality remained solid, and impairments remained very low. Challenges persisted in a couple of industries due to weak market conditions, particularly in agriculture and oil and gas. Like with capital, we maintained a very solid position with strong capital ratios due to solid earnings and diligent business optimization. Regarding customer satisfaction, which takes top priority for us, we made significant progress and met our goal of being on the top 2 at most business units in most markets. Customer satisfaction continued to improve in the third quarter and in Denmark in particular. All in all, a satisfactory period in a challenging environment. Finally, we have revised our outlook for the full year. We now expect net profit to be higher than our net profit in 2015. 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 16.3 billion. That is 1% higher than in the year before due to lending growth of 5% and lower funding costs mitigated our margin pressure. Adjusted for FX effects, NII was up 2%. Net fee income declined 8% from the level in the same period last year, where we benefited from strong customer activity, including extensive remortgaging. This year, fee income was also affected by subdued investment activity and a lower risk allowance at wealth management. Net trading income came in at DKK 6.3 billion. That's up 17% as a result of very robust client activity at C&I in the second and third quarters in particular. The figure reflects negative credit value adjustments of DKK 0.6 billion and also a gain on the sale of Visa Europe of around DKK 0.4 billion. Other income rose because of property sales and an ordinary value adjustment on our associated holdings such as Danish Ship Finance. Operating expenses were down 2% to DKK 16.6 billion. That's mainly because of a lower net contribution to the Danish Resolution Fund and also lower depreciation of intangible assets, and this is despite increased costs related to regulatory requirements. The cost-income ratio came in at 47.3%, a decline of more than two percentage points. Finally, credit quality. Credit quality remains strong. We saw minor impairment charges of DKK 0.2 billion in our core activities in the first nine months, in line with the level from last year. Slide 4, please. We saw satisfactory developments at our two Nordic banking units, Personal Banking and Business Banking, although income was lower than in the same period last year, where we benefited from exceptionally high investment and remortgaging activity. The underlying business continued to improve as we saw an inflow of new business at both units. Our focus on cost efficiency and strong credit quality also continued to support our performance. If we look at Personal Banking, here we delivered good results with profit before tax up 31% to DKK 3.7 billion. Total income was 5% lower than in the year before, due to pressure in all income lines. In 2015, activity-driven income, particularly income from remortgaging activity in Denmark, was very high. Expenses were down 9%, owing primarily to cost efficiency, lower depreciation of intangible assets, and changes in the cost associated with guarantee funds. Impairment charges showed a net reversal of DKK 0.3 billion, mainly because of higher collateral values in Denmark. Total lending volume was up 4%, owing mainly to growth in Norway and Sweden, where lending volume measured in local currency rose 18% and 10%, respectively. These strong gains came primarily from partnership agreements in both countries. In Denmark, where volume was almost stable, the trend towards higher mortgage lending and lower lending in conventional loan products continued. In Finland, demand remained sluggish and volume was almost stable. At Business Banking, we continued to see good activity in all markets. There was healthy growth in Sweden and Norway with lending volume measured in local currency up 18% and 12%, respectively. In Denmark, excluding Realkredit Danmark, lending rose 6%, and in Finland it was up 10%. Overall profit before tax declined 2%. Total income was down 3% from the level in 2015, when customer activity in Denmark in particular was very high. NII benefited from higher lending, whereas low customer activity had an adverse effect on fees and trading income. Expenses were up 2%, partly because of higher regulatory costs. Impairments showed a small net reversal due to improved credit quality in Denmark and Finland in particular. Finally, our business in Northern Bank, where we showed satisfactory developments throughout the period. Although a change in the exchange rate of around 11% had an adverse effect on the reported results. Total income fell 5% and profit before loan impairment charges was down 3%. Adjusted for the depreciation of the currency, the items were up 5% and 8%, respectively. Expenses were down 7% due to increased indirect taxation costs. Adjusted for the exchange rate, they were up 3%. As for impairments, we posted another reversal of charges on the basis of better conditions in the property market, although the reversal was smaller than the one last year. After the UK referendum on EU membership, uncertainty about future economic growth has continued to dampen business investment, but consumer confidence remained positive and our business performance remained robust. Slide 5, please. At C&I, profit before impairments rose 3% over the level last year, but higher impairments caused profit before tax to be 16% lower. Market conditions were challenging in the beginning of the year with low client activity and negative value adjustments. Nevertheless, conditions improved significantly in the second and the third quarters, particularly for FICC. Total income rose 4%, mainly because of higher NII and trading income. Fee income was lower because of a decline in activity in the beginning of the year. Expenses were up 5% due to higher activity, but also increased cost for the Danish Resolution Fund. Impairments, which by nature fluctuate at C&I, amounted to DKK 0.8 billion, including DKK 0.5 billion in collective charges. Oil-related exposure accounted for all of the charges. At Wealth Management, profit before tax was 5% lower than in the year before, as market developments and high volatility caused lower customer activity, mainly in the first part of the year. Fee income fell 5%, mainly because of lower performance and risk allowance fees, while management fees, the largest component of our fee income, were stable. Trading income was DKK 0.2 billion higher, owing mainly to a one-off income relating to insurance contracts. Excluding this item, trading income was almost unchanged. Assets under management were up 3%, owing to an inflow of DKK 28 billion from net sales and premiums. Return on allocated capital improved again in the third quarter due to lower capital consumption as we continue to work on capital efficiency in Wealth Management. Slide 6, please. We move on to expenses. Overall expenses continue to develop as expected. In the first 9 months of the year, operating expenses amounted to DKK 16.6 billion. That is 2% lower than in the year before, primarily due to the lower net contributions to the Danish Resolution Fund, and the decline also affects lower depreciation of intangible assets. In the third quarter, expenses declined 6% from the level in the second quarter, when there were extra regulatory costs. The number of FTEs were 2% higher. This occurred because of insourcing of IT resources and increased staffing in compliance functions. Slide 7, please. The positive trend in credit quality continued at most business units. Overall, the group booked a charge of DKK 0.1 billion, a small decline from the level last year. The loan loss ratio, excluding non-core, was 1 basis point in the period. Personal banking showed a significant decline with a net reversal of DKK 0.3 billion. The positive trend was caused by higher collateral values, mainly in Denmark, where the housing market improved. At business banking, we saw a small net reversal led by commercial property in Denmark. Our agriculture exposure remains challenging, however, and we booked additional collective charges of DKK 50 million in the third quarter. At C&I, we booked DKK 0.5 billion in impairments in the third quarter. The vast majority were against oil exposure as we continued to see weak market conditions as expected. Around half of the charges were collective impairments, and they brought our total collective charges against direct oil-related exposure at C&I close to DKK 0.7 billion. Slide 8, please. At the end of the third quarter, the common equity tier one capital ratio was unchanged from the end of the second quarter at 15.8%. The contribution from net profit after our usual reservation for dividend payments was offset by an increase in the risk exposure amount. The REA rose DKK 14 billion in the third quarter from a low level in Q2. Most of the increase, DKK 12 billion of that, was owing to market risk, partly from the effect of CVA hedging. Lending activities led to an increase in credit risk of around DKK 3 billion. Our leverage ratio was 4.3% according to transitional rules and 4.0% when the new rules are fully phased in. Slide 9, please. We now expect net profit for 2016 to be higher than net profit before goodwill impairment in 2015. This is primarily due to higher than expected net trading income. The outlook is subject to uncertainty in macroeconomic development. Our ambition for a return on shareholders' equity of at least 12.5% in 2018 at the latest remains unchanged. Slide 10, please. 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 ready for the Q&A session. Thank you. If you would like to ask a question today, please press the star or 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. Again, please press star 1 to ask a question. We will now take our first question from Omar Keenan from Deutsche Bank. Please go ahead. Good afternoon. Thank you very much for taking the questions. I have two questions, please. Firstly, on net interest income, what is the management strategy for managing NII for the current rate environment? Could you just perhaps give us a little bit of color as to where you have seen customer margins stronger and weaker? My second question is on the buyback. I see that the DKK 9 billion was completed in the third quarter. Was there any consideration given to perhaps topping up that buyback for the rest of the year, given that common equity tier one is currently above the 14%-15% range? Do you think your share price is too high now to do more buyback? Thanks. Hi, Omar. It is Jacob. Why do I start with the second question? The buyback is not completed. I refer you to page 4 of the interim report, where we state that DKK 5.9 billion of the DKK 9 billion has been completed. So we still have a bit more than DKK 3 billion to buyback on the program, so it has not been completed. To your first question. We have been working in a negative interest rate environment for a very long time. It is not new for us going forward as we expect basically the same environment moving into 2017 at the earliest. Basically, we believe the rates will be plus or minus present level. I think we need to take a step back when we look at the NII. You will probably recall that we, in Q4 and in Q1, confirmed that we saw NII for 2016 to be flattish with a risk on the upside. At the Q2 conference, we said that now we are more comfortable that we have bottomed out on the NII, and it is more risk on the upside. That is also why you can see that the NII is up 1% or 2% adjusted for the foreign exchange development. In this conference call, we confirm the Q2 guidance when it comes to NII, that we see that there is a risk on the upside, if you call it a risk, and that we have bottomed out on the NII. What surprised us maybe slightly in Q3 in particular was that there was some more pressure on personal banking in Norway than what we had anticipated. That is basically the only negative effect, which was just slight negative surprise. Otherwise, the margin compression developed as we expected. If we look forward more specifically, we can see that the margin compression are continuing to ease off. We will also from the 1st of October have the full effect of the mortgage repricing in Denmark. In addition, we get the tailwinds of the refinancing, which are well described in the fact book. We are comfortable with the guidance we gave in Q2, and we are confirming that in Q3. Basically it develops in slowly and surely in the right direction. There is one question out there, of course, that is the volume. We had a growth of 5% year-on-year. It probably should be around those level, maybe slightly below, but it is too early to be more specific on the volume for the time being. But it is interesting to note that we are also taking market share in Denmark, which is underlying a low growth market. I guess could maybe just add one thing, Omar, on the NII. If you look at the back pages of the investor pack, then you will see that we have done DKK 74 billion of our funding this year, versus DKK 52 billion redeemed. We have pre-funded ahead of schedule, which also means that there is obviously a little bit of an added NII cost to that in the short term, which is obviously something that turns into a tailwind going forward. Okay. That's great. Maybe if I could just ask a follow-up question on the net interest income. I appreciate the comments on volume. That sounds quite encouraging. I guess, is it correct that we're noticing a little bit of a pattern here across the markets? Because if we look at Denmark, as you correctly highlighted, you're taking market share, but I guess we also comment that you've been a lot more cautious on the mortgage margin repricing. So I think the average that's been announced has been around 5 basis points, whereas if I look at Nordea, it's more in the 10-15 basis points range. Same if we look at Norway, Finland. If we look at Norway, Nordea announced a 10 basis points mortgage margin hike, I think last week. Are there any intentions to follow them on pricing? Similar as well in Finland, I think there's been some corporate repricing and the start of account charges being applied. So firstly, do you see these lending margin trend improvements as well? Will it allow Danske to maybe do a little bit more on lending margin? Or are you happy to be taking market share for a little bit longer? Yeah, it was some very technical and very specific issues, and we can take that offline. But basically, it depends which market we are in. But overall, we will always balance the growth against profitability. And what we can see is that the lending we're putting on the books are profitable. So said, the Norwegian margin on mortgages are on the edge. But as we sell additional products, and it's very solid clients, we are building a very solid book for the future. So that's the only area where it has been lower than expected. Otherwise, the margins are developing as we want, and I think we are finding a very fine balance of building a solid book in all the markets. And yes, we are repricing the part of the book in Denmark, and that's going according to plan. Okay, great. Thank you. Just to add, Omar, you mentioned 5 basis points in the Danish mortgages. We are increasing prices here as of 1st of October by 25 basis points on one and two year adjustable rate mortgages and 20 basis points on three and four year. Just to clarify that. No. Yes, I understand that. I guess the 5 basis points was the average on the book. I think it is That could be right. I haven't done the maths myself, but that could be right. But it depends, of course, on what kind of mitigating actions we will see from our customers and to what extent they will mitigate into other kind of products. Okay, great. Thank you very much. We can now take our next question from Jakob Brink from ABG. Please go ahead. Thank you. Just coming back to net interest income, please. Could you just tell us a bit more about what exactly went on in Norway? It seems like commercial margins are up a bit in the quarter, and then personal margins actually down some 10 basis points if I calculated correctly. Is that just the competition you talked about or is something else going on as well? On asset management or portfolio investment fees, they are relatively weak in the quarter. Could maybe put a few comments on those as well, please. Thank you. I will take your first one. No, you are exactly right. The margins in business has developed healthy in Norway for a couple of quarters. We probably will see another quarter or two where it continue to works up, and then it may flatten out. In personal, it has been very tough competition, but also at the funding cost for most banks in the short end of the curve has been more expensive. That is basically what is the consequence of that. Just, Jacob, on your question on wealth management fees. We're not seeing a change in the underlying fee picture at wealth management. There's obviously some seasonality which you are aware of, that Q4 is a heavy quarter on performance fees in wealth management. At the same time, there are some funnies when you look at the numbers in terms of looking at the average AUM or the end of period AUM. We did see Q3 AUM go up. But when you look at the nine-month period, which is what we're reporting a lot of on here, the average can still be smaller. There's no deterioration of the underlying fees in wealth. We're seeing a bit better fee performance in general in Q3, partly due to the wealth business and partly due to remortgaging activity in Denmark across the business. No real change in Q3 versus Q2 on the wealth fee side. Okay. Thanks a lot. We can now take our next question from Willis Palermo from Goldman Sachs. Please go ahead. Hi. Good afternoon. Thanks for taking my question. I have two on revenues. The first one is on NII again. Just wonder if you could give me a bit of clarification regarding the non-core part of the NII, which is growing faster. What are the dynamics of the treasury here, and what kind of level should we expect going forward? Also, if you have also a sense already of what you want to see going into 2017. The second one on the fee side. Just wanted to understand if anything particular happened in the C&I division where fees were particularly under pressure and at the lowest point over the last quarters. Related to that, if you could give a bit more detail on the growth initiative, similarly for NII to go into 2017 for fee growth. Thanks. Okay. Thank you for the question. I'm assuming when you refer to non-core NII, you mean other, right? Our non-core NII is falling, and it will continue to fall simply because the book runs off. So NII on that part keeps on running off. If we look at other, which is where treasury is, we generally caution on a quarterly basis to spend too much time on other versus the different business units. As we also spoke a bit about around Q2, we do see when there is a bit of volatility on the rate side that allocating NII between the treasury side and the BUs can have a quarter lag. We saw that in Q2, and we're seeing that in Q3 for these movements. So you need to look at NII across the whole group when you look at these effects. Other is not one-offs. It's not lower quality. It is simply a question of allocation. That is obviously something we constantly focus on, trying to remove as much volatility here. But there was a decent amount of volatility in Q3, and that means we book a bit more in other this quarter than we usually do. But I wouldn't read more into that. When you look into 2017, as you know, we're not guiding on 2017 at this stage. I guess Thomas gave a good overview of how we're seeing trends in the different markets. We do see good volume growth. Obviously, you have to have your own assumption on how that volume growth continues into 2017. We are quite confident that we can continue to see some decent volume growth, but we're not guiding to a specific level. At the same time, as Thomas said, we do see margins flattening out and being constructive on the upside. At the same time also, funding will continue to roll at better prices. I can refer you to also our investor pack, where we have an overview of everything that will be redeemed in 2017. You can also see which levels we currently issue at. That should give you a good feel for the funding benefit in 2017 as well. In terms of the overall contribution from treasury, and you can say the hold-to-maturity portfolio there, we would expect roughly the same effects as we're seeing at the moment. So adding those trends together, I think we can be constructive on NII, but we will not be giving a guidance into 2017. Then I believe you also asked on C&I and fees. On fees and C&I, you need to remember that our C&I business, the trading has been very strong in Q3. But fees in C&I are more driven by traditional capital markets business, which is seasonally not a great quarter in Q3. That is why you saw lower fees in Q3 versus Q2. But that is pure seasonality. There has been a few large deals in the Nordic region, but that sort of masks the fact that capital markets activity has not been particularly strong in the quarter. You have probably a stronger view on what market activity we will see in Q4, et cetera, so I will not speculate on that, but there is nothing fundamentally that we feel we need to address on the fee side in C&I. That is more seasonality. That will also be the message going into 2017. We generally have a strong capital markets franchise in C&I, which is where most of these fees get generated, and we have no reason to believe that they shouldn't get their fair share of the wallet in 2017. We can now take our next question from Yafei Tian from Citi. Please go ahead. Thank you for taking the question. I have two quick ones. The first is on asset quality, referring to slide 25 of the presentation, where you have given a very detailed breakdown of the oil-related exposures. My question is more around the oil services. I can see that there has been no individual impairment charges provided at all for the C&I oil services. I was wondering, is it because you expect the quality of the book is very good and you don't expect much losses to come from this space? If I were to add up the total oil service and oil offshore, which are the two more problematic areas, and the total amount of provisions you have made against this space, then it's around 5% of total provisions. Do you see this as sufficient for now? What kind of trends that you are seeing can make you different to the current provision level? The second question is more around the Northern Ireland business. It is a more generic question. Even before Brexit, we already see that the loan growth in Northern Ireland started to somewhat slow down and reducing. I was thinking from a long-term perspective, what is the strategy for your Northern Ireland portfolio? Are you looking to grow or you are just looking to maintain it as the status quo? Thank you. Yeah. Hi, Yafei. It is Claus here. I can answer your question on the credit quality side. It is true, as you said, we have made no individual impairments against oil service, only against offshore, as you can see on slide 25. But we have made more collective impairments as the challenges for the oil sector remains. Whether it will be of the same kind in the future, that depends very much on market conditions. But as far as we can see, market conditions for the oil exposure will remain challenging in the short to the medium term. To your question about Northern Ireland, and in relation to the consequence of the Brexit. The signals we get are that there is a mixed economic consequences, at least for the short term. We can see that the consumer behavior is as nothing had happened, while on the business side, there is slightly less investment activity. Our activity is very concentrated around Northern Ireland, where we have a very good franchise. The credit quality and the value proposition we are having are good, and we have the ambition to develop that franchise slowly and surely going forward. There is no particular change in our strategy, but we will take into account that there may be a slower economic development and make sure that we are constantly cost-efficient to remain competitive in the local market. There is no news on Northern Ireland. We continue to develop Northern Ireland within the framework of that there may be some challenges going forward, but they have not been realized yet. How it impacts Danske Bank is marginal, as Northern Bank is a small operation with all due respect to the size of Danske, and it is more a currency effect than maybe anything else. Okay. Thank you for the clarification. Thank you so much. We can now take our next question from Mads Thinggaard from Handelsbanken Capital Markets. Please go ahead. Thank you for taking my questions. This is Mads from Handelsbanken Capital Markets. I have two questions, and the first one is returning to NII and the verbal guidance you gave on the conference call Q2, where you said there would be, or you saw approximately DKK 150 million in savings on funding costs for the second half of 2016. It is quite clear now that you probably funded more than you knew you were going to do it at that point in time. But perhaps you could shed some light on how much of this came through in Q3 and what to expect Q4, and if the number is still DKK 150 million for the second half or it is a bit less now. Then digging again into this bit weird development in Norway where lending is up more than 5% and NII is only up 1.3%. Is there some kind of currency impact here that gives a different treatment of volumes versus income? In a sense, the NOK went up late in the quarter with the oil price, or at least a part of the increase, and is there a translational effect here that could have an overhang into Q4? That was the two questions. Yeah. I'll do the last one. There is nothing more to add to Norway on the NII. The currency effect has been marginal and is marginal change delta-wise as the krone has been weak or may have appreciated somewhat, but it's still not the major explanation for a weak NII in personal banking. No, it is that competition has been tough, and the margins have been squeezed slightly more than we could anticipate. Let's now see how competition develops, but I can just reiterate what I said. We're very comfortable with the growth. It's very solid, what we put on the books, and it's a very solid book for the future. But it's too early to predict exactly how they will develop. I can be pretty firm on saying that I think we have reached the bottom when it comes to the margins in Norway, at least for the time being. Hi, Mads. On the first question on the pre-funding, I think that's a very fair question. You know our business well, so you also know that we have to be opportunistic in terms of when markets are there and are especially good, then we obviously pre-fund. Therefore, when we look at the number, you're right that we didn't see as much of an effect in Q3 as we may have expected there. So you can combine that with the lending margin effect that Thomas talked about in Norway. So when you look at the DKK 150 million you talk about, and you take that on a quarterly basis, we probably, as we look at it here, only achieved around half of what we would have expected in the quarter. So you're more in the DKK 30 million to DKK 40 million instead of the DKK 75 million. Looking into Q4, we can give you more color on the redemption schedules. That's probably too detailed for this, but the effects will roughly be the same in Q4 as well. Okay, as a delta effect then in Q4. But it depends, of course, to what extent we will use any interesting opportunities to pre-fund our 2017 need. Yeah, okay. Very clear. Thanks. We can now take our next question from Jan Wolter from Credit Suisse. Please go ahead. Yes. Hi, Jan Wolter, Credit Suisse. Thanks for taking the questions. If I stay with the NII to start with there, what do you think Danske Bank can do now to offset the negative margin trend in Danish banking? I think the margins there, both in retail banking or personal banking as well as business banking, they have been falling for six, seven quarters, more or less every quarter, with some volatility. I know you increased the charge for SME clients by 10 basis points or so in the quarter in Danish SME segment. Do you see anything that you can do to mitigate the margin fall, or do you see a reversal there? That is my first question. Thank you. Okay, that was your first and only question then. Unfortunately, I have to correct you. Personal banking margins has basically been flattish for many, many quarters. What we see is that some of our clients are switching out of, what we call, unsecured borrowing into secured borrowing. So that is the switch you see while the mortgage margins have been very stable. And that is what we just alluded to earlier in the conference, which we are now increasing on the short end quite substantially, taking effect 1st of October. Secondly, on business banking, the margins have come down. As I alluded to earlier, some of the margin compression are easing off. But it is too early to say exactly how it will develop, but we see more now a flattish development going forward. We have worked in a negative interest environment for a very long time, and we have constantly optimized both the lending side and the deposit side to remain competitive, but also pass through those effects, which we think is right on the deposit side. And we will continue to optimize that, both lending and deposit, to remain competitive. So it is nothing particularly new going forward. It is as we have done for the last couple years, to always optimize the NII within the framework of being competitive and make sure that it is a reasonable return to our shareholders. Thank you. Just another question on the capital and buyback. Has there been any material change in how Danske Bank sees the regulatory environment compared to November last year when the board took the decision on the DKK 9 billion buyback program and the dividend? What I am getting at is if you have seen anything in the regulatory environment or in Danske Bank's performance that is materially different from the assessment that you did in November last year. Thank you. Hey, Jan, it's Jacob here. As you know, around Q2, we came out with new capital targets, where we stipulated a capital target range of 14%-15% common equity tier one. We said at that time that it was also to reflect the regulatory uncertainty, especially around the complex we all refer to as Basel IV. We haven't seen any change since then in terms of the regulatory uncertainty. If we just take a step back here, we do have a very strong capital position, even adjusting for our ongoing buyback. We generate more than 2% common equity tier one capital a year, as you know, and that provides a very strong foundation. Our excess capital position, as you see from the material, is significant. We have 3.7% common equity tier one above our fully phased capital requirement of 11.9%, so we are in a very strong capital position. Our payout policy remains. We have flexibility to fund profitable growth. We can absorb any increases in REA, whether that comes from market risk or counterparty risk, and we can, at the same time, continue to reward shareholders. First payouts, 40%-50% payout ratio as we have guided you to, and then excess capital via buybacks. Nothing has changed there. Our capital position is very solid, and no new views on the regulatory environment. Okay, many thanks. If I may, the final one on the voluntary resignation offer that was discussed previously, pre to the report. How should we see that? Is that part of achieving the DKK 1 billion lower cost plan that Danske Bank has? Is this something that could come over and above that, the impact from staff reductions coming from this offer? Thank you. Jan, we have continuously worked on making sure that we are an efficient bank so we can stay very competitive towards our clients going forward. This voluntary offer we've given to the employees is just a part of our ongoing business optimization. Don't read anything more into that than we will remain diligent on cost and making sure that we always remain competitive. Okay. Many thanks for taking my questions. We can now take our next question from Anton Kryachok from UBS. Please go ahead. Your line is open. Thank you, and good afternoon. Just two questions on my side. The first one, please, on the capital outlook. You've alluded to the fact that loan book growth has surprised you positively, and you've mentioned the 5% year-on-year loan book growth. If this kind of environment persists, how does management think about prioritization of capital? Would you finance happily this growth if you find it ROE accretive, or would you prefer to defend excess capital return story by maintaining the buyback program close to the current levels? The first question, please. Then the second one on costs. I think in your opening remarks, you've kind of alluded to the fact that you're willing to do more on costs if revenue environment proves more difficult. Is it you hinting that you can do more than DKK 1 billion previously announced? Is it just a reiteration of commitment to the current DKK 1 billion cost cut program? Thank you. If I take the cost first, let's just remember how we've been guiding you for the last couple of quarters. You remember we said at the time of the Q2 that there were two ways of approaching cost for 2016. We told you we were very comfortable with the ROE bridge we've given you, which showed DKK 1 billion lower absolute cost over three years, and we also said the majority would be realized this year. If you take the total cost for the first half, which was DKK 11.1 billion, we told you there that that was a decent run rate for the full year, and if you added the usual Q4 seasonality on top of that. If you look at Q3, we have followed that guidance. We've actually been a bit lower than the run rate, which is also due to the little bit slower cost seasonality in Q3. We are comfortable reiterating the guidance for this year on the cost side that we also gave around Q2. Nothing has changed there. In terms of cost beyond, we reiterate that we will continue to be very vigilant and focused on cost efficiency, but we are not giving out specific guidance for 2017 and beyond. I think it's more important to take a step back, and the DKK 1 billion you referred to is, of course, the bridge which consists of several parts of delivering a sustainable ROE above 12.5%. It confers to work we will do on pricing adjustment, product development, volume growth, fee development, and also cost. What we're saying is that we will play on all those levers we can work on to enhance the performance of the bank. We primarily do that by making sure that we are very strong on the customer interface. If there is, for whatever reason, lower activity than expected, we can always adjust the costs further. That's basically what we're alluding to, that we will not compromise on that level. Then on your question on capital. First of all, there is no contradiction of terms between making sure that we develop a profitable bank and then we distribute capital back to the shareholders. We are taking the view that we, on behalf of the shareholders, encapsulate profitable growth. If we don't see it's profitable, we will not grow, and then we'll distribute it back to the shareholders. That's basically how we see it. I'm not going to reiterate the very structured way we have the capital plan, as Jacob Aarup-Andersen just alluded to. We have no change in the strategy here. Okay. Thank you so much. We can now take our next question from Per Grönberg from SEB. Please go ahead. Yes. Thank you. It's Per from SEB. Two questions from my side. First related to the previous question on cost and cost income ratio. As far as I can see, you are growing underlying costs adjusted for deposit guarantee and severance pay. It's growing 2.5% year-over-year in the third quarter. You have a cost-income ratio that this quarter is down to the mid-40s, but with normalized trading income would still be in the high 40s. The best in class, they are more like 40%. How should we look at the cost level at Danske? You stated earlier that you want to create a bank that is efficient also on the cost side. To me, it doesn't look like when I look at the cost-to-income ratio. My second question is basically pretty simple. On page 10 of the report, you write that you expect the Basel IV rules to be in place late 2017. That seems to be one year later than most people are expecting. Can you comment a bit on why this is late 2017? Thank you. Thanks, Per. If I can start on the cost side. When you look isolated at Q3, I think it's completely fair that you look at the underlying there. But do remember what we said around Q2, where we told you about regulatory costs being extraordinarily high. We also told you that it would continue into Q3 to some extent, which has been driven by the fact that we've still been ramping on, especially in compliance and AML. That effect will gradually fall out of the numbers as well. As you know, we do not manage the business after a cost-income ratio, and we are therefore not going to give you a specific target on cost-income ratio in this business. But I will just reiterate what Thomas and I have both said here, which is that our focus on costs will continue to be relentless. We will not give you a specific cost-income target. Then on Basel IV. Sorry? Yeah, I'm basically just addressing that it looks like currently you are some 20% less cost efficient than the best in the class. That's probably not sustainable if you want to deliver returns in line with the best in class. Just to comment, Per. Best in class is not necessarily on a cost income. It also depends on the business model, as you know. Of course. Because one has to be cautious on that one. What we are very firm on guiding you on is the ROE, and a stable, predictable, and solid institution. The cost income is residual after we worked on the top line and on the cost. I cannot say any more than we will be efficient bank, and the customer will be a consequence of the other parts. Okay. Then, Per, on your Basel IV question, I have the report in front of me. I think what we're writing here is we expect it to be final in the beginning of 2017. Okay. Did I misread it? Sorry. Yeah, I know there's a lot to digest in a very short time. It could be, at least the one I have in front of me says the beginning. I have the Danish version that says late 2017, but that explains everything. Okay. We will check up on that. Thank you. Glad to know someone reads the Danish version. Thank you. We can now take our next question from Riccardo Rovere from Mediobanca. Please go ahead. Yes, good afternoon to everybody. A couple of questions from me, if I may. You have made some comment on oil and gas and on the agriculture. I was wondering what you are seeing in the shipping industry, what you expect here going forward. This is my first question. The second question I have is it possible to have an idea what is the shortfall to expected loss at the end of the quarter, if any? Thank you. Yeah. Hi, Riccardo. I can take the first part of your question when it comes to shipping. Please note that the oil-related exposure we are mentioning on slide 25 is a combination of exposure into shipping and energy and utilities. Shipping is actually part of the oil-related exposure, and this is where we see difficult market conditions, especially when it comes to offshore activities within the shipping industry. I think the answer we gave previously when it comes to market conditions on oil-related exposure is to some extent also valid for part of the shipping exposure as this exposure is making up for a part of what we call oil-related exposure. Okay. Are you asking about shipping exposure outside oil-related? Because that's a different question, and there we have a very acceptable book, and are not any particular guidance to give you there, as is a part of our solid portfolios. But you don't see any signal of weakening because other banks in Germany are flagging some kind of a weak situation. You see nothing? There are certain segments which are weak, and others it could be dry bulk and stuff like that, but there's nothing for us to guide you in any particular direction. We've been very firm, and I have to go back to the bridge. That we expect impairments towards 2018 to remain low. We're saying it should stay below 10 basis points, and that includes the oil and offshore, the agriculture, and anything else could happen. We have no particular guidance on that sector in particular. Okay. Thank you. Very clear. With regard to the expected shortfall to expected loss for IRB models, if any? I think we will take that bilaterally if you speak to IR staff. No problem. And we can now take our next question from Kim Bergoe from Nordea. Please go ahead. Your line is open. Hi, this is Kim Bergoe from Nordea. Just one high-level question from me, and I appreciate you are not guiding for 2017 yet. But just if you could make some sort of general remarks about where in your portfolio, both of businesses and geographically, where you do see an opportunity for Danske to sort of outgrow the general market. Where are the opportunities for you? Thanks. Thank you very much. We can see that we are very well-placed, both in personal banking and in business banking and C&I in all our markets. Overall, we can grow profitable in all markets. But of course, in the markets we are larger, we will grow more with the market. That is, first of all, in Denmark, and second of all, in Finland. We would expect to continue to grow above the market in Norway and Sweden, as we have seen during the last couple of years. It has been a healthy growth. It is very solid growth, and it is a growth which building a very solid franchise for the future. Said, we have had some challenges on NII, particular on personal banking in Norway, which we have been through now several times. But we are very comfortable on the book we are building. That is how we see it. In addition, of course, the wealth division is also now coming up to speed, which has a great potential in particular the Norway and Swedish market. We will continue to ramp up our position in Finland and to some extent defend our position in Denmark. We are comfortable with the growth opportunities, but it will be a profitable growth, and if it is not profitable, then we will take the growth down and then rather redistribute any excess capital back to the shareholders. Okay. Thank you very much. Could we have the last question please, operator? Yes, of course. Last question from Chris Manners from Morgan Stanley. Please go ahead. Good afternoon, everyone. Two questions, if I may. The first one was on IFRS 9, and if you had any sort of thoughts on preliminary impact and maybe if even you may not be able to quantify it, but what sort of percentage of your assets do you think might be in stage 2? Maybe we could have a stab at trying calculating it. The second question was just on non-core. Obviously, last 12 months, you've almost halved the non-core area down from 27 to 14, which is a pretty good result. Seems to have got a little bit sticky the last couple of quarters. Just maybe if you could provide us a little bit of outlook on where the sticking points are and how quickly you're going to be able to get that down. Thanks. Hi, Chris. Two good questions and relevant. Let me just take the IFRS 9 first. I am going to have to disappoint you a little bit here. As we said before, IFRS 9 will not have a significant impact on Danske in terms of the one-off impact. We will not be giving you the potential number at this stage. We are still in the detailed discussion with the FSA around the details here, and we just don't think it makes sense to start giving out specific numbers that we may have to change afterwards. There is no indication that that guidance will change, but it is not having a material impact on us as a one-off effect. We are working diligently here in terms of making sure that we are fully ready and prepared also to implement this as an ongoing measure from 2018 and onwards. If you bear with us, we will hold off giving you specific impacts here. That obviously also pertains to giving you different buckets, phase 1, phase 2, phase 3, even though I understand why you would like to see the number. On non-core, yes, we have delevered that quite rapidly, as you say. We will in Q4, there will be another DKK 1 billion of REA disappearing in Q4 due to a sale we did here in Q3 in Ireland on some non-performing portfolios. Therefore this does continue, but we are getting to a point where we are, as you also note, left with a portfolio of well-performing conduits, and then a performing mortgage book both in the Baltics and in Ireland. They will run off according to plan, and that is the only guidance we can give. Super. That is very helpful. Thanks, Jacob. Thank you. Okay. Thank you all for your keen interest in Danske and your very good questions. As always, you are all welcome to contact our IR department if you have any more questions at your time to look at the 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.