Earnings Call: Q2 2016

Jul 21, 2016

Summary

H1 net profit was DKK 9.4bn and ROE 12.4%, with lending growth and very low impairments offsetting weak fees and challenging markets. NII guidance improved, while fee income remained pressured and capital targets were raised to 14%-15% CET1.

Good day, and welcome to Danske Bank's first half-year results 2016. Today's conference is being recorded. At this time, I would like to turn the conference over to the CEO, Thomas Borgen. Please go ahead. Thank you, operator. Thank you all for taking the time to listen in to this call today. Other participants in today's call is our CFO, Jacob Aarup-Andersen, and Head of IR, Claus Jensen. Please go to slide 1. In today's call, we have the pleasure of presenting Danske Bank's financial results for the first half of 2016. 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. Despite challenging market conditions, Danske Bank posted satisfactory financial results for the first six months of 2016, with a net profit of DKK 9.4 billion and a 12.4% return on shareholders' equity. The results were in line with those from the same period last year. Market conditions in the first half of the year included more widespread negative interest rates, volatile financial markets, low to moderate macroeconomic growth, and therefore, relatively low activity, especially within asset management, and generally subdued demand. Our results demonstrate the strength of our diversified business model, however, and show that the continued execution of our strategy of becoming a more customer-centric, simple, and efficient bank is yielding results. The macroeconomic environment varied somewhat in our main markets, with Sweden still showing high growth and Norway leveling off, although still at a decent level, supported by more stable oil price in Q2. Finland and Denmark continued at around the same growth rate of just below 1%. The outcome of the U.K. referendum on EU membership will probably cause lower economic growth in the U.K., and to some extent in Europe, but it's too early to predict the exact effects. The Nordic markets will probably be affected less than other continental European economies. Our operations in Northern Ireland account for about 3% of our lending, and any lower U.K. activity will have only a marginal effect on our performance going forward. Developments in the financial markets were a key theme in the period. The very negative market sentiment we saw early in the year, with widening credit spreads and general risk aversion, was followed by stronger customer activity at the end of the first quarter as the ECB's monetary policy initiatives in March reinforced investor confidence. Customer activity remained higher throughout the second quarter and had a significant effect on our trading income. We saw good progress in lending activities as volume grew 4% over the level in the first half of last year. The increase came from Business Banking in all markets, and we continued to see solid growth at Personal Banking in Norway. Sweden began picking up speed as a result of our partnership agreement. The trend was more flattish in Denmark and Finland. In Denmark, customers continued to move from unsecured lending to mortgage lending. We are very pleased to see that customer satisfaction continues to improve as this is a priority for us. We have made significant progress in the past six months, and we met our goal of being in the top two at most business units in most markets. The picture on costs may appear somewhat blurred as we had extraordinarily low expenses in Q1 and somewhat higher expenses in Q2. However, we are on track to make the bank even more efficient and bring expenses further down as we have done steadily over several years. Our credit quality remained solid, and impairments were very low. Finally, we were able to maintain a very healthy capital position in the period due to solid earnings and diligent business optimization. All in all, a satisfactory period in a challenging environment. We feel that we are making good progress towards our ROE target of at least 12.5% by 2018 at latest. The various components leading to 12.5% may change slightly, but that reflects the strength of our diversified business model. I will now turn the presentation over to our CFO, 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 10.7 billion. This was almost unchanged from the year before as lending growth of 4% and lower funding costs mitigated margin pressure. Net fee income was 10% lower than in the same period last year, where we benefited from strong customer activity, including extensive remortgaging. In the second quarter, subdued investment activity and a decline in assets under management from lower asset values also had adverse effects. Net trading income came in at DKK 3.7 billion, down 15% from the level last year, where we benefited from extraordinarily high customer activity. The figure reflects negative credit value adjustments of DKK 0.6 billion and also a gain on the sale of Visa Europe of DKK 0.3 billion. The improvement in client activity that we saw at the end of the first quarter, after a period of difficult market conditions, continued throughout the second quarter when trading income rose 34% over the level in the first quarter. Other income rose primarily because of a property sale in the first quarter. Operating expenses were down 3% to DKK 11.1 billion, mainly because of lower net contribution to the Danish Resolution Fund and lower depreciation of intangible assets. Although we also saw increased costs related to regulatory requirements. The cost-income ratio came in at 48.3%, slightly higher than the year before. Finally, credit quality remains strong. We saw a reversal of DKK 0.1 billion in the first half and improvement of DKK 0.4 billion from the level last year. Slide 4, please. At our two Nordic banking units, Personal Banking and Business Banking, we saw satisfactory developments in the first half of the year. Income was lower than in the same period last year. However, we benefited from exceptionally high investment activity 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 strong performance. Starting with Personal Banking. Personal Banking delivered good results with profit before tax up 37% to DKK 2.4 billion. Total income came in 8% lower than in the year before because of decline in fee income. In 2015, activity-driven income, particularly remortgaging activity in Denmark, was very high. Expenses were down 12%, owing primarily to lower activity, lower depreciation of intangible assets, and changes in costs associated with guarantee funds. Impairment charges showed a net reversal of DKK 0.2 billion, mainly because of higher collateral values in Denmark. Total lending volume was up 2% because of gains in Norway and Sweden, where lending volume rose 23% and 8%, primarily because of partnership agreements. In Denmark, where volume was almost stable, the trend of higher mortgage lending and lower lending under conventional loan products continued in the first part of the year. In Finland, demand remained sluggish and volume was almost stable. At Business Banking, we continued to see good momentum in all markets. There was good activity growth in Sweden and Norway, with lending volume rising 12% and 14% respectively. In Denmark, lending rose 9%, excluding Realkredit Danmark. In Finland, where we've seen increased activity in the past three quarters now, lending was up 12%. Overall, profit before tax declined 5%. Total income was down 6% from the level in the first half of 2015, when customer activity in Denmark in particular was very high. Lower customer activity had an adverse effect on fee and trading income, whereas NII benefited from higher lending volume despite the pressure on margins. Expenses were almost unchanged as cost efficiency measures were partly offset by higher regulatory costs. Impairments showed a small net reversal, mainly driven by continued reversals in the Danish commercial property segment. Finally, our business in Northern Ireland. Here we showed satisfactory developments in the first half of the year, although a change in the exchange rate of about 14% had an adverse effect on the results. Total income was down 4%. Before loan impairment charges, profit was up 5%. Adjusted for the depreciation of the currency, the items were up 4% and 13% respectively. Expenses were down 9%, 2% adjusted for the exchange rate, reflecting our focus on cost efficiency. 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 in the same period last year. We do not expect the U.K. referendum on EU membership to have any significant short-term effect on our business in Northern Ireland, which accounts for 3% of total lending for the group. It's still too early to predict the longer-term effect, although uncertainty about future growth has increased. Slide five, please. At C&I, profit before tax declined 26% from the extraordinary high level in the same period last year. Market conditions were challenging mainly in the first two months, and this led to a decline in client activity and negative value adjustments. Conditions improved by the end of the first quarter, however, and client activity increased in the second quarter, particularly for our FICC business and capital markets. Total income declined 9%, mainly because of lower trading income as a result of lower activity and the negative effects of CVA. Lower fee income owing to a decline in activity was offset by an increase in net interest income. Expenses were up slightly, owing primarily to increased costs for the Danish Resolution Fund. Impairments, which by nature fluctuated C&I, amounted to $0.3 billion, mainly because of collective charges against oil-related exposure. At Wealth Management, where we have gathered our activities within asset management, pension savings, and private banking, the performance in the first half of the year was affected by difficult market conditions that caused lower customer activity and a decline in assets under management. Profit before tax at Wealth Management was down 18% from the level in the same period last year, where it was unusually strong. Fee income was down 7%, mainly because of lower performance and risk allowance fees. Whereas management fees, as you know, the largest component of our fee income, was stable. Trading income was $150 million lower than in the same period in 2015, when it was unusually high, owing to a low investment result in the health and accident business. Assets under management fell 4% owing to declining asset prices. The drop in asset prices was partly offset by a positive inflow from net sales and premiums of DKK 25 billion. Finally, allocated capital was around DKK 3 billion lower as a result of lower solvency capital requirements at Danica Pension. Slide 6, please. Moving on to expenses. Operating expenses in the first half of the year amounted to DKK 11.1 billion. That is 3% lower than in the year before due to lower net contribution to the resolution fund and the deposit guarantee fund. The decline also reflects lower depreciation of intangible assets. Expenses in the second quarter were higher than in the first quarter due to seasonality and a couple of positive one-offs in Q1. We also had some extra expenses related to the ramp-up of our efforts on the regulatory front, especially for anti-money laundering activities, which remains a key focus area for the group. In addition, our sale of property in the recent years is leading to some higher rental costs. Finally, the increase in the number of FTEs from the year before derived from additional insourcing activities as part of our cost efficiency initiatives and from new hirings in compliance functions. Slide 7, please. The positive trend in credit quality continued in the first half of the year. We had a net reversal of DKK 0.1 billion against a charge of DKK 0.3 billion in the first half of 2015. The loan loss ratio, including non-core activities, was minus two basis points for the period. Personal Banking showed the biggest change from the first half of 2015. The positive trend was driven by higher collateral values, mainly in Denmark, where the housing market improved. At Business Banking, we saw a small net reversal in the first half of the year driven by the commercial property segment in Denmark. Our agriculture exposure, particularly in the dairy segment, remained challenging, and we booked impairment charges of around DKK 0.3 billion in the second quarter against this. In the second quarter, collective charges increased DKK 50 million against both oil-related exposure at C&I and second-round oil effects at Business Banking. This brings our total collective charges against oil-related exposures in C&I and Business Banking close to DKK 0.7 billion. Slide 8, please. at the end of the second quarter, the common equity Tier 1 capital ratio was a solid 15.8% on a reported basis. The increase from 15.0% at the end of the first quarter was owing mainly to a significantly lower total REA. The credit risk exposure amount was down DKK 17 billion despite increased lending. The decline owed mainly to a new accounting treatment of our ownership shares in LR Realkredit and Danmarks Skibskredit, but it had no effect on the core Tier 1 ratio because there was a corresponding reduction in our capital. Market risk exposure was down DKK 24 billion, and that was the most significant change in the total REA amount. The decline can be attributed mainly to reduced positions at C&I. The leverage ratio was 4.3% according to transitional rules and 4.0% when the new rules are fully phased in. A final note on capital. As part of our ongoing capital assessment, we have revised our capital targets. In light of the current regulatory uncertainty, our new core Tier 1 capital ratio target is 14%-15% in the short to medium term. We have revised our total capital ratio target to around 19%. We will reassess the targets as regulatory requirements become clearer. Slide 9, please. We maintain our outlook for net profit for 2016 to be in line with net profit before goodwill impairments in 2015. On net interest income, we now expect somewhat less pressure on margins for the remainder of 2016, and we will benefit from volume growth and somewhat lower funding costs. However, in the light of weak activity levels and uncertainty in the financial markets, we now expect fee income for 2016 to be lower than in 2015. Our ambition for return on shareholders' equity of at least 12.5% in 2018 at the latest remains unchanged. Slide 10, please. Okay. Those were our initial comments and the messages. We are now ready for your questions. As usual, please limit yourself to two questions. If you are listening to the conference call from a website, you are welcome to ask questions by email. Operator, we are ready for the Q&A session. Thank you. If you'd like to ask a question over the telephone, please press the star or asterisk key followed by the digit 1. Please ensure 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 have questions over the telephone. Will I take the first question? Yes. Please go ahead. We will take our first question from Mads Thinggaard from Handelsbanken Capital Markets. Please go ahead. Yes. Hi, this is Mads from Handelsbanken Capital Markets. I have my two questions. The first one is aimed at your revised NII guidance. On the Q1 conference call, you guided NII for 2016 flat to up. How should we translate this revision of the NII guidance? Does that mean it's still flat to up, or is it just up, or is it significantly up now? Also, looking at your new Wealth Management division, it seems it's off to perhaps a bit of a slow start. I noticed your fee income in Norway and Sweden, where you are growing lending volumes a lot appear to be still on a quite low level. Do you have any upcoming initiatives within Wealth Management that could change the income level on fee income in Norway and Sweden? Those were my two questions. Thanks. Okay. Thanks very much, Mads, for your question. When it comes to the NII, you are correctly referring to our old statement being flat to the risk on the upside. We are now guiding that NII is going to be higher than previously. We can see that our volume growth seems to be higher than expected. At the same time, we see somewhat less pressure on the margins, and that's primarily outside Denmark. We can also see that the pressure on deposit margins is partly mitigated by the favorable development in the hold-to-maturity portfolio. The final thing, which is something we alluded to several times, is also that we see that beginning to take effect now, is that the refinancing at lower rates than the old funding is starting to come through in the NII. All that combined makes us more comfortable on the NII going forward. If you want, we can go it later if anybody has that, how we see the various markets, but that's the overall guidance we're giving. Okay. When it comes to the Wealth Management, let's all remind ourselves that this is a unit which has been established three months ago, and we need it to have some time to put in place the various platforms. We have a very good starting platform with a very well-functioning life business with Danica. We have a Danske Capital. It's performed well for many years, and we have an exceptionally strong private banking division. I think the slow start of this quarter, which is only one quarter, is more a reflection of the uncertainty in the market. We are very comfortable with the underlying macroeconomic trends of wealth accumulation in the Nordics towards 2020, and we believe we have a very good starting point. Our ambitions, our strategy has not been changed, but you need to look at beyond one quarter. Okay, but are you going to focus more on this area, on bringing up the income and cross-selling now in this year? Do you have something that could make a change at this point? We are constantly looking to optimize our franchise. We have established the wealth unit as a significant signal to the organization and the market that Wealth Management in the wider extent is a strategic area for us to focus on. That goes without saying, and that continues as we laid down in the communication to you in connection with Q1. Fees are generally something we will constantly work on and have constantly worked on, and it's more and more important as we are expecting to work in a low-rate environment for a prolonged period of time. Again, we cannot distance ourselves from the market activity. So if there is lower market activity, it will have some impact on our underlying fee business. However, fee business is something we will and will continue to work on, and I'm very positive in the long run on the fees, but it can fluctuate quarter to quarter. Okay, thanks. We will now take our next question from Willis Palermo from Goldman Sachs. Please go ahead. Hi. Thanks for the presentation. Thank you. My question, I have two as well. The first one is on capital and your revised guidance or revised targets. I was wondering what triggered this over the last three months compared to the previous target. I understand there are some more uncertainty, but is there anything specific you're thinking about, and does it change at all the capital policy for the end of the year? The second question is on NII again. I was wondering if you could give a bit of color on the Danish mortgage rate and the repricing you're ongoing, and what kind of impact you're expecting by the end of the year. Thanks. Okay, thank you very much. I'll start with your capital question. I think it's a completely fair question. If we just take a step back on the capital side. We do have a very strong capital position, even adjusting for our recent buyback. That gives us a lot of flexibility both to fund profitable growth. It allows us to absorb any increases in REA from a market risk and counterparty risk, which you know are low at the moment, and it allows us at the same time to continue to reward our shareholders. We have an ongoing assessment of our capital levels, and we have assessed that the current heightened regulatory uncertainty, especially the debate around Basel IV has led to a need for a bit more prudency, and therefore we adjusted our targets. You know that we, up until recently, had around 14 as our target and 14-15, so it's a slight adjustment. Once we have more clarity on the main regulatory unknowns out there, we will reassess our target levels again, but we felt it was prudent to do this adjustment. Okay. Your question on NII, and you alluded to Danish mortgages in specific. We have communicated previously that approximately one third of our mortgage book is being repriced, and two thirds are not being repriced, and it is particularly the short end of that curve. That is what we call the F1, F2, and F3s. If you just do the mechanical calculation, that will all things be equal, have an NII impact of approximately DKK 300 million on an annual effect. However, we believe that certain clients will move out from the short end of the curve to longer duration. Exactly the dynamic effects, we do not know, and we just had to wait and see. The mortgage market in itself, it is not the main driver for the revised guidance on NII. The main revision is that we see less margin compression on the lending side, and we see flattening out margin compression on the deposit side. I also alluded to both the growth in basically all our markets, and that we have a very solid hold-to-maturity portfolio. I think it is a combination of all of these factors which makes us comfortable that the NII is now going upwards. Okay. Thank you very much. We will now take our next question from Jan Wolter from Credit Suisse. Please go ahead. Yes. Hi, Jan Wolter here, Credit Suisse. Thanks for taking the questions. Given that the company is already around 80 basis points or so above the new top end capital target here of 14%-15%, and that the bank is already paying out close to 100% of this year's profits, how does management see the payouts over and above the current DKK 9 billion in buybacks? Could that be a way to adjust the capital structure closer to the target level, or is that a less likely scenario? That was my first question. Okay. Thanks, Jan. It is correct that we are above the 14%-15% level. If you look at REA developments from here, we would expect credit REA to move up with lending growth, but we also caution that market risk is low for historical purposes at the moment, so you should take that into account as well. We have changed nothing around our payout policy. After we have met our capital ratios and funded good profitable growth, we will, as our policy states, continue to distribute between 40% and 50% of our net profit and dividends to shareholders. If there's excess capital beyond our capital targets, then we will distribute back to shareholders. We will not at this stage be drawn into a debate about the size of our distributions next year. I can hear you alluding to the fact that we have a good capital position, and we agree to that. Thank you. Is it so that the company doesn't need to call an AGM or EGM rather to take that decision, it's a board decision to change the buyback? Yeah. Share buyback is something the board approves and then, sorry recommends, and then the FSA approves it. Everything with dividend is of course, an AGM decision. Okay. But it is a board- Not- Thank you. It is a board decision to approve the or board proposes it to the FSA, and the FSA approves any further measures on capital in terms of buybacks. Exactly. Thank you. The second question is then on costs. If we look at the guidance, I think the company has said below DKK 23.2 billion for the year. I think this implies a fairly marked pickup here in cost to above the DKK 6 billion per quarter level. Is that how investors should think about Danske Bank cost base in the near term, or how should we think about it, especially in the light of higher regulatory cost? Thank you. Thank you, Jan. No, that's not how you should think about it. Let me give you some color here, because, obviously as Thomas alluded to in the beginning of his introduction remarks, we did have a very strong cost performance in Q1. At the Q1 time, we did flag that there was some one-offs in those numbers plus some seasonality. We also highlighted that we expected increasing regulatory costs and continued need for digital investments, and that the Q1 number therefore was too low a run rate. These are indeed the effects you are seeing in Q2. Besides the removal of one-offs and the Q1 low seasonality being removed, we did see a ramp up in regulatory cost in Q2 as we invested extra to deliver on our ambitious agenda, especially within AML. Some of those costs are mainly external consultants, for example, will fall away in the coming quarters. If I can give you the following approach in terms of looking at our cost for this year. You are right that we are guiding for lower absolute cost than last year. I think there are two ways of approaching the expected level of cost in 2016. First of all, we are still comfortable with the guidance we've given you in the return on equity bridge, where the midpoint shows DKK 1 billion lower absolute costs over three years, with the majority being realized this year. That's the first point. You can also approach it this way. If you take the total cost for the first half, so both Q1 and Q2 together, then you have a decent run rate, which you then need to add some usual Q4 seasonality to and adjust for potentially higher or lower activity that depends on your own assumptions from that perspective. But I think those are two good ways of approaching the number. Okay. Many thanks, Peter. We will now take our next question from Johan Ekblom from Bank of America. Please go ahead. Thank you. If I can just come back quickly to the capital and the market risk exposure amounts. You clearly had an ambition to reduce the capital consumption of Corporates & Institutions for some time. What we saw in this quarter is clearly some of that is de-risking around U.K. referendum and things like that. Should we expect all of it to come back on, or can you give us any guidance as to what is permanent and what is maybe a temporary decision? It's a good question. You are exactly right in that we have worked over several quarters, actually a couple of years now, to adjust the business model to C&I to be more capital light. We did also, due to the adjustment of how to allocate capital put some more capital allocation towards the C&I during 2016. That reduction you see in Q2 in particular is as planned, and according to the strategy. You should not expect it to come fully back. That type of capital consumption may fluctuate slightly between quarters due to the activities in the market. Overall, capital management and capital constrainment in a C&I business is and will remain a key priority for C&I. The short answer is, yes, this is low, maybe too low short-term, but overall, the trend is in place. Perfect. Thank you very much. We will now take our next question from Jacob Brink from ABG. Please go ahead. Hi, it's Jacob from ABG with two questions, please. The first one is regarding the funding cost tailwind into the second half of the year. I know you gave us a slide with your expected redemptions and issues, but could you maybe quantify a bit just to help us, what would be the positive impact in the second half of the year compared to the first half of the year from lower funding costs? Second question, sorry to come back to this, but your changed guidance on capital. I think you said, Jacob, that it was prudent to change it now, but what is it exactly that have made you change your mind? Also, if I'm not mistaken, you have actually acted according to roughly this target before, i.e., when you'd said 14, it has really been around 14.5 or maybe even 14.5-15. You change it to 14-15, so should we then actually assume higher than 15, or how should we actually interpret this change? Thank you. I will ask Claus to do your first question. Yes, we have completed DKK 34 billion, and that is more or less half of what we will have of redemptions in 2016. What is rolling off for the rest of the year is to a higher extent covered bonds, and to a lesser extent, senior. There will be further tailwind on the funding cost side, and if we should quantify that will have an impact of approximately DKK 150 million. On a full year basis or in the second half of the year? Second half of the year. Okay, thanks a lot. Okay, on your capital side question, I think you asked if you should now expect us to be above the 14%-15% going forward. No, we've given this capital target range for clarity from your perspective. You're also asking what triggered it, why now? There is not one specific trigger event. As I said, we've been assessing our capital levels, and it's only prudent that we do that as a major player here. This is not something that has been driven by a single event. We have obviously discussed this with the FSA, as you would expect us to do. We have a very good dialogue with the FSA, and the Danish FSA acknowledges our new targets and the solid capital position of Danske Bank. It hasn't been triggered by something specifically. But we think this is a prudent level, and it provides more clarity. Okay. Thank you. We will now take our next question from Daniel Dutoy from J.P. Morgan. Please go ahead. Hi. Thanks for taking the questions. I just have two questions. The first one is on NII. The second one is just on your current buyback program. On NII, I guess just over half of your quarter-on-quarter increase at the group level was booked within treasury this quarter. Can you just give a little bit more detail on what is driving this, and also how sustainable it is? I think previously, Thomas, you mentioned something about the hold-to-maturity portfolio. Then, the second one on the buyback. If I look at, in your report, you have bought back about DKK 3.6 billion since the start of February till the end of June, which if I calculated correctly, is a run rate of around DKK 700 million a month. To get to the DKK 9 billion by year-end, I think you would need to up the run rate quite a bit, around 30%. How much flexibility is there to increase that run rate or to perhaps acquire larger blocks in the market? Thank you. Well, I can answer your question related to the share buyback program, and it is actually not possible for us to have any influence on the share buyback program. As you know, this is done according to the Safe Harbour Regulation. It is solely up to the operator to execute on the share buyback program during the year. Okay, but the target remains to complete it within the calendar year, is that correct? No, February. No. February. When we came with the full-year result, we said in a year, which means February next year. Understood. Thank you. To the first question. First of all, you should be cautious in putting too much emphasis short-term on the various components of the margin combination as we have adjusted and will continue to adjust what we call internal transfer pricing. That said, we can tell you that the hold-to-maturity, which you asked to specifically, seems to be holding up well, even in a low interest rate environment. So it's just a confirmation that even though the rates have come down, it has not and do not seems to affect negatively on our hold-to-maturity as we will need to refinancing maturing as it comes along. The average tenure is approximately three years. I think it's more important to comment on that the underlying drivers of the NII is, as I have alluded to, a solid and healthy volume, which is slightly higher than expected, less margin compression, both on the lending and on the deposit side. Then we've just been through on the refunding side. So I think that's the main drivers of us now guiding NII from flat to up to more up. Okay. So there's no sort of- Experiencing a momentary interruption in today's conference. Thank you for your patience, and please continue to hold. Is this gone again? Pardon the interruption. This is the operator speaking. Yes. Okay. There was a silence there on the line for the moment. Are you okay to continue with the questions? Yes, we are. Okay. One moment. Okay, Daniel Dutoy, his line is still open for his question. Oh, okay. No, I think that answered most of it. Basically, no one-offs there or any kind of benefit from positioning in the quarter. Can I then also just confirm the tenure of three years, is that relatively unchanged to, let's say, what it was three, six or 12 months ago? Thank you. Yes. Okay. Yes and yes. Great. Thank you very much. We will now take our next question from Omar Keenan from Deutsche Bank. Please go ahead. Good afternoon. Thank you very much for taking the questions. I guess most of my questions were answered, but I just had two more. One on fee income, and then secondly, your view on interest rate policy in Denmark. Firstly, on fee income, if I look at the first half, and I annualize the fee income performance, then I am getting to a figure around DKK 13.5 billion. As we know, there is seasonality in the fourth quarter from the performance fees, which is a couple of hundred million that can get us to maybe DKK 13.9 billion, DKK 14 billion. Just wondering if you could give us an updated view around what you think the fee income growth potential is. Obviously, you have given the kind of ROE ladder, but do you expect any kind of bounce back in fee income, or is this a run rate that we should expect? My second question was what your thoughts were on the Central Bank policy rate in Denmark. Yeah. Jacob will do the first one. Thank you. Let's start with the fees. With the new guidance, yes, we are guiding fees lower, but we are not going to give you a specific number that we are believing in. I think just taking the first half, which we have made very clear, we think reflects subdued activity, would probably be the wrong assumption to just annualize that. You also allude to the fact that Q4 is always strong on the fee side due to specifically the booking of performance fees in our investment businesses, et cetera. This year is due to the, you can say, subdued start to the year. It will be a little bit of an odd one out in terms of growth rates, but we do expect the usual seasonality around fees. You asked about where we see fee growth rates- Sorry. Could I just ask a quick follow-up on the fee income? You said that the first half was affected by subdued activity. Do you see that changing in the second half? Well, that's a good question. We don't have any forward-looking indicators that goes out in terms of the fees for the next six months. That being said, we have seen throughout our channels that the uncertainty also leading up towards Brexit, et cetera, has led to, especially on the investment side, more subdued activity. People have been sitting more on their hands. I think that's a feature you also heard from some of our colleagues in the market, seeing the same sort of trends. Yeah. Our numbers look on a year-on-year basis, may look more hit by that simply from the fact that we had a very strong first half last year, where especially Denmark had remortgaging activity at very high levels. So that gives us a tougher comp to work with. In terms of longer-term fee generation, we don't have any changed view. As Thomas alluded to, we have full confidence especially around the Wealth Management story, where we see a structurally growing fee pool. We have previously mentioned 7%-9% as a structurally growing fee pool from that segment. So we do see good fee growth from 2017 and onwards. Okay, to your second question of the interest rate policy in Denmark. As far as we know, it has not been changed. They set the rate according to the fixed currency peg of the Danish krone to the EUR. The interest rate is today at minus 65. There was a slight inflow in Danish krone during, just before, and under the U.K. vote on EU exit. But that was intervened by the Central Bank by currency intervention. It is our economists' view that the Central Bank will keep the present rates at minus 65 throughout the year, and would rather like to do interventions if there is some pressure. In other words, interest for the Danish krone. So that's the main policy we have. If they would move on cuts, they may move down back to the old low level of minus 75, but it is not our take, and no other market participants who believe they would cut any further than that if they at all will cut to minus 75. The economic effect of a 10 basis points cut, if that would happen, are marginal. Great. Thank you very much. Again, as a reminder to ask a question today, please press star one. We will now take our next question from Jacob Kruse from Autonomous. Please go ahead. Hi. Thank you. Just two questions as well. First, on the credit loss side, could you say anything about how much of your loan loss reserves are reserves that are strictly related to house prices, i.e., how much would you recover if house prices recovered back to peak levels, basically, in Denmark and Ireland? My other question was just on the cost target, just to clarify, you say we should look for DKK 1 billion of cost reductions versus 2015. Is that versus the DKK 23.2 billion cost number, so a DKK 22.2 billion cost target? Is that effectively what you are guiding for? Thank you. Why don't we start with the cost, Jacob. When I speak about DKK 1 billion down in absolute cost over three years, that refers to the level in 2015, so that is the DKK 23.25 billion that you allude to. That is the number we are talking about, just to make sure the reference is correct. We are saying the majority of that will be in 2016. Okay. Does that still fit within your midpoint ROE guidance with the other revenue line? Because I seem to remember we were looking at a below DKK 22 billion cost number to back out the 12.5% ROE given your other revenue guidances. I think there's an important point there which is, do remember we have restated Wealth. Please have a look at that as well, because that led to an increase in our absolute costs. It didn't lead to any change in our net income, but we went from a net line around the insurance business. We used to have a one-liner called net insurance income, and now we have grossed up the numbers. We both have the total income and total cost coming from insurance. That has led to a larger absolute cost level without changing our net income. I think that's the effect when you refer to the below DKK 22 billion. Right. Okay, great. Thank you. Your last question was on the effect from better housing prices? Yeah. It's very difficult to give you any precise indication because there are actually quite many moving parts here. But we have previously stated something around that there is, of course, a positive development in credit quality once we see better housing prices. But we also have to admit that we have seen quite a strong development in the Danish market, and we have benefited very much from that. You can see that on our impairment dynamics over the last year or so. So there is, of course, a limit to what extent that we will continue to benefit from higher collateral values. There are areas, not so much within residential real estate, but primarily within commercial real estate, where we could see an effect coming from better pricing of commercial properties. Is it possible to size that pool of recoveries? No. Okay. It is. Thank you. Okay. Can we have your last question, please? We will now take our next question from Riccardo Rovere from Mediobanca. Please go ahead. Yes, thanks for taking my question. Just one, I have. Draghi has just stated that risks in the euro area are tilted to the downside. Shipping and oil and gas are not exactly living their glory days in the Nordic countries. If I am not mistaken, during the call you stated that at the current stage it is too early to state what the risk could be in Northern Ireland from Brexit. In the meantime, you are raising your internal capital target to somewhere between 14 and 15. In the meantime, you have a capital return strategy of paying out basically 100% of your earnings. If I am not mistaken, you also stated that from the current levels, you expect risk assets to go up maybe a little bit in market risk, and maybe also credit risk should grow in line with the volume growth. How sustainable you think it is to have a capital return strategy that allows no capital accumulation unless this comes from lower risk-weighted assets? That was a question with a lot of assumptions, a lot of angles and a difficult one. I think what you are saying is what is our capital strategy, if I understand you right. Our strategy is very clear, very firm at the present stage. Short to medium term, as Jacob has alluded to several times, we find it prudent to have a capital target between 14% and 15%, which is taking into consideration the uncertainty which we all see, and maybe also take into account the uncertainty of what we refer to as Basel IV, but nobody else know really what a Basel IV will end up to be. It is also a confirmation of what our practice has been, that we have held a capital slightly above 14%. Secondly, we are very clear that we have a dividend policy between 40% and 50%, which should be very stable through any cycles. Thirdly, if we have capital beyond the capital position, the dividend and healthy growth, we will distribute that back to the shareholders in way or another. If for whatever reason in the future, we do not have excess capital, we will not distribute excess capital. If we have excess capital, we will distribute excess capital. That is why we have a clear dividend policy. That is why we have a clear capital policy, and that is why we are saying if beyond that we have excess, we will distribute it back. That will, of course, change over time. Okay. Very clear. Thanks. Thank you. Okay, thank you all for your interest in Danske Bank and for your questions. As always, you are all welcome to contact our department if you have more questions, if you have time to look at the financials 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. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.