Earnings Call: Q3 2015

Oct 29, 2015

Summary

9M net profit rose 28% to DKK 13.1bn as fees, cost control and sharply lower impairments offset NII pressure. FY profit guidance remained above DKK 16bn, with cautious NII expectations and a strong capital position.

Good day, and welcome to the interim report first nine months of 2015 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Thomas F. Borgen, CEO. Please go ahead, sir. Thank you, operator. Thank you all for taking the time to listen in to this call today. Today I have with me our CFO, Henrik Ramlau-Hansen, and Head of Investor Relations, Claus Ingar Jensen. Slide 2, please. We'll try in today's call to present the financial results for the first nine months of 2015, and we aim to have this presentation to around 20 minutes. After presentations, we will open for Q&A as usual, but afterwards feel free to contact our IR department if you have any more detailed questions. Slide 3, please. Despite a challenging environment with very low and even negative rates, we delivered a satisfactory result for the first nine months of 2015. The improvements in our performance were driven mainly by better macroeconomic conditions, low impairments, a continuing focus on cost, and not least increased customer activity, but that's particular in the first two quarters. The activity level was bolstered both by the interest rate development and the volatility on the financial markets. There is no doubt that it's also a sign that our focus on creating value for all our stakeholders is producing good results. We saw lower customer activity in the third quarter, though, and this was a reflection of overall market sentiment, including negative interest rates and margin pressure. Since customer activity was marginally lower than expected, total income was also below our expectations for the quarter. In the bigger picture, the results for the first nine months demonstrates the strength of the diversified business model that enables us to mitigate the effects of negative rates by increasing income in other areas. The results also show that our underlying business remains strong and we are on track in executing on our strategy of becoming a more customer-driven, simple, and efficient financial partner for our customers. Overall, we delivered a strong financial performance. Costs remain under control, and we have a very solid capital position. The return on equity for the first nine months was 11.5%, well above our ambitions of 9.5% for the full year. Net profit for the period was DKK 13.1 billion. This is 28% higher than in the same period last year, and the rise was driven by improvements in fee income, lower expenses, and a significant drop in loan impairment charges. Total income was up 1% to DKK 33 billion, driven by a strong rise in fee income in particular because of higher customer activity. NII was down slightly owing to severe pressure from negative central bank rates and pressure on margins. Expenses were down 4% as a result of our continuing focus on cost efficiency and despite an increase in customer activity, particularly in first and second quarter. The cost-income ratio came in at 48.3%, an improvement of more than 2 percentage points compared with the year before. Loan impairment charges in our core activities declined a full 90% from the level the year before. The trend was owing to a steady improvement in credit quality in Denmark in particular. Our capital base remained very strong with a common equity tier one ratio of 15.7% and a total capital ratio of 20.6% at the end of September. The share buyback program for DKK 5 billion that we began at the end of March has almost now been completed. Finally, we maintain our guidance for 2015 for net profit above DKK 16 billion. Slide 4, please. Let me take you through our income statement item by item. NII came in at DKK 16.2 billion. The level was slightly lower than the year before due to this item being adversely affected by negative central bank rates and pressure on margins throughout most of the year. On the other hand, it benefited from slightly higher lending volume, higher bond portfolio income, and lower funding costs. Net fee income rose 12% because of increased customer activity, mortgage refinancing in the first half of the year, and positive development in Danske Capital. Net trading income was down 9% to DKK 5.3 billion. In the first 9 months of 2014, the item included a one-off gain of DKK 1 billion from the sale of Nets. Excluding the Nets sale, trading income was a solid income within FICC, equities, and capital markets. Customer activity declined in the third quarter owing to uncertainty about monetary policy in the U.S. and the Chinese economy, among other things. The result from Danica's insurance business was DKK 1.4 billion, up 2%, and it enabled us to book the full risk allowance for 3 out of 4 interest rate groups. Total income was slightly higher than the level last year. Operating expenses were down 4% to DKK 16 billion, and a cost-income ratio improved more than 2 percentage points, now standing at 48.3%. Slide 5, please. All 3 banking units made good progress in comparison with the performance in the same period last year. We saw increased customer activity in all business units with good gains in most income lines, and we were also able to reduce expenses as a result of cost efficiency measures. The pressure on NII is still an important issue, especially for personal banking, where the floor risk on deposit margins has had a greater effect than it does at business banking and C&I. All 3 units benefited from the mitigating actions we introduced in the first quarter and from better credit quality as impairment charges fell sharply. Personal banking delivered strong results on the basis of increased customer activity, with pre-tax ROE rising 6 percentage points to 21.3%. There were improvements in most areas. Total income came in at 3% lower than the year before as a result of heavy pressure on net interest income in Denmark in particular, but it was partly offset by increases in fee income and trading because of higher customer activity. Expenses were down 2% due to tight cost control despite the increase in customer activity. Impairments dropped 57% from the level the year before as household finances continued to improve, and as a result, profit before tax rose 8%. Developments in lending volume remained mixed, though. In Denmark, we saw modest growth in mortgage loans as a result of high activity in the housing market, but low demand for conventional bank loans, leading to a small decrease overall. At our Norwegian operation, however, we saw a strong inflow of new business, which I will return to. At business banking, we continued to see strong momentum in all markets. There was a good increase in activity in Sweden and Norway, where lending grew 10% and 19% respectively. In Denmark, lending rose 2%. Pre-tax ROE rose 7.2 percentage points to 20.5% as the increased activity, lower costs, and reversal of impairments more than offset the effect of negative interest rates. Total income was up 4%, a result of improvements in all income lines. Expenses were down 2% as a result of tight cost control and despite an increase in customer activity. Impairments showed a net reversal of DKK 193 million owing to our ongoing efforts to improve credit quality, combined with better market conditions and rising collateral values. Finally, at C&I, profits before tax rose 23%, while ROE was up three percentage points, now at 15%. We saw very high client activity, especially during the first half of the year, with a strong inflow of business in both FICC and capital markets. With internal banking, income rose as a result of increased lending volumes and margins. We can say that total income benefited from good underlying growth in all income lines. Net trading income rose 11%, and higher volume and mitigating action compensated for the drop in deposit margins. Expenses were down two percentage points despite increased client activity. Impairments, which normally fluctuate between quarters, had no effect on the results as we saw small net reversals in the third quarter. Slide six, please. Let's have a look at asset management and insurance. Danske Capital and Danica Pension both had strong performance in the first nine months. Danske Capital, collaborating extensively with personal banking and business banking, benefited from increasing customer demand for investment solutions. It also made good progress within alternative investments and hedge funds. Danske Capital's profit before tax rose 90% owing to an increase in average asset under management and a small rise in margins. The improvements reflect higher net sales of DKK 33 billion, including a 26% rise in sales to clients outside Denmark. At Danica, net income rose 2%. The investment results enable us to book the full risk allowance for three out of four interest rate groups as part of the allowance for the last one. The underlying result from insurance business was up 9%, with total premiums up 8% on continuing growth in Sweden and Norway. Slide seven, please. Let's have a look on our expenses. In the first nine months, operating expenses fell 4% to DKK 16 billion. This will reduce the cost-income ratio by 2.3 percentage points to 48.3%. We reduced expenses through strong cost efficiency measures despite an increase in customer activity. We are committed to maintaining a strong focus on expenses. Our efforts to reduce normal expenses to less than DKK 22 billion for the full year are progressing according to plan. Slide eight, please. We continue to benefit from a more positive macroeconomic environment and from our ongoing efforts to improve credit quality. The charges for our core activities amounted to around DKK 200 million for the first nine months, as we have posted another small reversal in the third quarter. Impairment charges were slightly lower at all business units, most sharply at business banking, with a drop of more than DKK 1 billion from the level in the same period last year. The loan loss ratio, including non-core activities, declined from 17 basis points the year before to 1 basis point. Slide nine, please. Credit quality has been improving for several quarters, as evident in the decreasing probability of default. The positive trend at the business units continued in the third quarter. At both business banking and personal banking, we saw the effect of improved collateral values underpinned by the very low interest rate, primarily in Denmark. The agriculture industry continued to be a challenge, however, so we booked additional collective charges against this industry. We also booked collective charges against the possible effects of low oil prices in Norway. The balance on the allowance account is now DKK 33 billion. Slide 10, please. Our capital position improved significantly in the third quarter. At the end of the quarter, the common equity tier one capital ratio was up 1.4 percentage points to 15.7%, and the total capital ratio was now at 20.6%. The strong increase in the capital ratios was owing primarily to decrease in the risk exposure amount of DKK 60 billion. Market risk and counterparty risk fell DKK 26 billion, owing mainly to lower volatility in the financial markets and smaller positions. Credit risk also declined, mainly because of the implementation of the foundation IRB model in Finland, which had an effect of DKK 19 billion, and also due to improved credit quality and currency effects. As a result, the total risk exposure amount was DKK 832 billion at the end of the quarter. As part of our ongoing capital optimization, we issued a EUR 500 million bond loan from Danica in September. The transaction was very successful with a strong order book and good investor diversification. The issue reduced the deduction for Danica at the group level, and this raised the common equity tier one ratio by about 10 basis points. We expect this positive effect to be around 35 basis points in 2018, when CRD IV is fully phased in. Slide 11, please. Part of our strategy of being a Nordic universal bank is to grow our personal banking activities in Norway and Sweden. We therefore launched further initiatives in Norway in the beginning of the year. The agreement we made with the Norwegian Academic Federation created a strong partnership and a cornerstone for our growth strategy in Norway. It provides us with an excellent opportunity to develop a strong long-term relationship with personal customers with very sound credit quality. We have succeeded in offering attractive value propositions to our new customer base, and this continued to generate an inflow of new business. We also had good inflow of customers unrelated to Akademikerne. This trend led to an increase in lending in Norway of about DKK 25 billion. The accompanying growth in NII was around 13% as lending margins in the country have been under pressure in the past couple of quarters. The inflow of new customers gives us a very good platform for substantial cross-sales in the medium to long term. The credit quality of the lending book is strong and continues to improve. Slide 12, please. Let me now turn to the guidance for the full year. We are maintaining our guidance for net profit for 2015 of above DKK 16 billion. We expect total income to be in line with the level in 2014 on the strength of high net trading income in the first quarter and lower funding costs. Negative central bank interest rates are putting pressure on NII, however, and developments in the financial markets poses risk for trading income and insurance income. We expect expenses to be below DKK 22 billion. We expect impairment charges for our core activities to remain low in Q4 and thus for the full year decline significantly from the level in 2014. At our non-core unit, we expect a pre-tax result around zero. Slide 13, please. Finally, let me comment briefly on our new app for the mobile devices. The apps are designed to give our stakeholders a simple and efficient way to obtain a variety of information about Danske Bank. If you have any questions about the new apps, please feel free to contact our IR department at any time. Slide 14, please. Those were my initial comments and messages. We are now ready for your questions. Please limit yourself for 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. Ladies and gentlemen, if you would like to ask a question today, please press star one on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Once again, please press star one to ask a question. We will take our first question from Jan Wolter of Credit Suisse. Please go ahead. Your line is open. Yes, good afternoon. Jan Wolter here, Credit Suisse, and two questions. First, the bank says it considers buybacks if the results are satisfactory for 2015. In that context, is the bank comfortable running at capital level around 14%, or does the regulatory uncertainty call for capital levels well above that? The bank is now around the 15% mark. So that's the first question. The second one is the FSA orders, which I think Danske has said will be implemented in the fourth quarter. Is that still relevant and is the impact around DKK 15 billion, or what kind of guidance can we get on that? Thank you. Yeah. Let me take your first question. We have given a guidance that we have a policy to be above 13% of common equity Tier 1 in the long run. However, for 2015, we have said that it is prudent to be around 14%. Looking into 2016, with the present knowledge of the management, it will be management's recommendation to the board of directors to be around 14% also in 2016. So your assumption is right, that that is our guidance, and we have also said that we have a dividend policy of paying out between 40% to 50% of earnings, and excess capital will be distributed back to the shareholders in one way or another. As you know, we have a share buyback which are more or less completed for this year. Then we have given indications that we may, if Q4 goes as expected, to launch a share buyback also in 2016. That is to be decided finally by the board of directors after Q4 has been closed. When it comes to the second question, Claus will take that. Yeah. Hi, Jan. I guess you are referring to the so-called FSA order number two, where we previously have said that we expect that to be implemented before year-end. However, there is, of course, also a lot of uncertainty around that. We have a deadline which we have communicated on our webpage by the end of June next year, and we do not expect this order to be implemented before 2016. The amount we refer to is probably in that area, yes, around DKK 15 billion, but also with some uncertainty of course. Okay, many thanks. Just a follow-up then on the answer around the capital level. So although there is a lot of regulatory uncertainty on the FSA order as well, then it sounds like the bank is comfortable running with a common equity Tier 1 level which is not at 15% but closer to 14%. That is correct. Everything above 14 then is considered, as you say, excess capital. I will not be precise say 14.0 as a number. I say around 14%. Of course. That is how much I can guide you at the present stage. Implying in your questions, yes, we are in a very good capital position. Secondly, as I have told the investors and you for a while, we have no intention to accumulate capital on the book, rather distribute back to the shareholders. Okay, many thanks for that. We will now take our next question from Omar Keenan of Deutsche Bank. Please go ahead. Your line is open. Good afternoon. Thank you very much for taking the question. I have a question on net interest income, then a follow-up question on capital. Firstly, on net interest income, it looks like the biggest lending margin pressures have come through in Denmark and Sweden business banking and large Corporates & Institutions. Could you please give us some color around what currently the front book dynamic versus the stock is, specifically whether you expect all else equal, more lending margin pressure to come through in the next quarter or whichever time horizon you think appropriate. My second question on capital. How are you thinking about headwinds from future regulation? Are you planning to guide the market and investors with full-year results on what the fundamental review of the trading book new op risk would mean? Probably the more meaningful impact capital floors on credit risk weights. It sounds like the range of capital floors that is being discussed has narrowed from 65%-95% to something more like 60%-70%. Just wondering if you have some comments on that and what your communication around that can be. Thanks. Yeah. It is a very broad question in that I think overall we share your, if I read your question right, that there could be some pressure upwards on the risk-weighted assets on certain assets. But there is no clarity, and there will also be an in-phasing period. We cannot, and will not put a buffer on the buffer for something we do not know what it is for. You need to take into account that our requirements is slightly above 10% totally, and we are well above that level now. So we are well buffered, being around 14, as we have indicated several times now. Then we need to see what comes out from the regulators, and if the rules of the game changes, we will adjust accordingly. Then you had a question on NII. I would say on a general note that what has changed maybe during the last quarter compared to our guidance previously is that it appears for us that the negative or low interest rate environment will remain for a longer period of time than we anticipated, maybe in Q2. That is also related to Denmark. Secondly, as the Nordic banks on a general basis have a good capacity, there could be some margin compression continue going forward. That could impact also Danske. Thirdly, we are, and have the possibility to grow in Denmark and Norway. We have shown that during the last quarters. We had a slight slowdown in Q3 for technical reasons, but we will adjust that growth according to the profitability of those markets. So we are slightly cautious on the development of NII going forward. Looking very short term, Q4, I think we need to prepare for some flattish development, and then we need to see more how Q4 goes, how we can guide further into 2016. Great. Thanks for the color. Thank you. We will now take our next question from Johan Ekblom of Bank of America. Please go ahead. Your line is open. Thank you very much. Just two questions, if I may. Firstly, on asset quality, I think last quarter you said that the best near-term guidance was zero plus or minus a few hundred. Does that still hold for the near future, I guess Q4 and maybe early next year? That is the first question. Then secondly, just on Danske Capital. We have seen a decent margin performance and inflows remain pretty strong. Are we seeing a positive mix effect due to the lower assets from Danica? Does that mean that we can expect the margin in that business to remain stable or even improve somewhat? Okay. Super. When it comes to your first question on asset quality, yes, we are also guiding for Q4 that it should be plus or minus zero. It could be a small positive, small negative that could depend on single individual credits. Looking into 2016, it is very hard to be very specific, but I think we could expect low to very low impairments as we can see that we have a good quality book, and we continue to see or expect at least low rates, which then again will have a positive effect on our book. But we need to come back to you after Q4 to have more specific on 2016, but Q4 should have no surprises in that respect. When it comes to Danske Capital, Henrik will respond to that. Yes. You are right. We are having experienced a good development in Danske Capital, both in terms of volumes and also margins. There has been a transfer of close to DKK 60 billion to Danica, and that has been to a large degree in the bond area. You could call in certain areas a low margin business, whereas Danske Capital is doing a good job of selling, providing advice around alternative investment and also hedge funds, which are typically higher margin business. I think in the short, medium term, we should be able to keep the margins stable. But of course, longer term, there can be pressure in the asset management industry. Thank you. We will now take our next question from Asbjørn Mørk of Carnegie. Please go ahead. Yes, good afternoon. Thanks for taking the questions. I have a couple of questions. First on NII. If I understood you correctly, you were guiding for flat net interest income for Q4 relative to Q3. I am just wondering, I know it is early days and difficult to guide, but if you see anything in the horizon for 2016 and 2017 that makes you more confident about the NII development here. I am just a little bit disappointed about the actual number for Q3, considering that you actually saw a slight positive improvement in short-term rates in Denmark in the quarter. Should we expect this to be the level all things equal going forward? Or do you see anything that could drive your net interest income significantly higher? That was my first question. It is very hard to have a strong view on 2017 at the present stage, even in 2016. I think what will drive the final NII is several things. First of all, it is going to be the short-term rates. Here we can have different views. It appears that Europe and ECB will keep rates at very low levels, even may do a cut, which will have the secondary effect that maybe the Nordics and the Danish central bank will keep rates also at a low level for a slightly longer period of time than we originally expected. That has the implication that we will continue to not gain the positive momentum of deposit margins. Secondly, what will impact the development is the growth. We have said that Denmark will have a sluggish growth. We prepare that, so we see no need to adjust our role guidance of Danish growth. It is going to be from zero to 2% going forward. Of course, we can grow profitably in our other markets, and that we will do. That could be adjustments quarter by quarter, but we can see good momentum in those markets overall. Finally, what will depend is on the margin compression. There seems to be some margin compression. I am not sure exactly how it would play out, but I would like just to be slightly cautious that there seems to be some pressure out there, and if it becomes too much, we will grow slower in the sense that if it is not profitable to grow. That we will need to adjust market by market, segment by segment. I think what is important is that we have so many levers to play on, and if for whatever reason that we can see that it will be difficult to grow NII according to our bridge, we can adjust the fee structure, we can adjust the cost structure, we can adjust several other levers. That is how we will adjust it going forward. I need to be slightly cautious, particular on NII now, before I have some more clarity of how the various markets develops. Okay, a second question on capital. I guess the combination of the risk exposure amount for this quarter, of course, being extremely low. I remember you were hit by the same things that you benefit from now, you were hit from in Q1. I am just curious, should we expect the risk-weighted assets to normalize from here, hence growing significantly in Q4, and hence your current capital level might be higher than it would be normalized? The second thing, adding to this with the capital maneuver you did in Danica, is there anything else you can do that would be similar to this? You are still pretty well capitalized in your life insurance company. Would it be possible for you to do one more of those capital maneuvers? Thank you. When it comes to our very strong improvements in capital ratio, some of it is more of very concrete improvements. Of course, also the improvement of the IRB in Finland. What is driving underlying is that we are taking down the risk in our trading operation, which are freeing up capital, and that is more on a continued basis. However, you are right that certain of the counterparty reductions could, to some extent, come back some of it, but not to the same extent. So there will be some volatility, but not calling it that it will reverse. This is more a constant reduction in RWA, all things being equal. What you would see going forward is that our RWA or REA will more or less follow our growth on credit and with small adjustments in market or counterparty risk. Regarding your Danica question, we did this EUR 500 million issue Tier 2 out of Danica, and we have on a number of occasions got the question whether that is so to say a prelude for a dividend out of Danica. That is something we will consider and decide when we do the full year accounts in Danica. It is not in our current sort of say cookbook to do one more issue out of Danica. Okay. If I can just follow up on that with the market risk. So there is no correlation between your market risk-weighted assets and your trading income going forward? Yes. Of course, if you take one step back, Aspen, what we have said, we will adjust the trading model in our FICC business is taking down the risk, the inventory, and what we call counterparty. As a consequence of that, you are also taking out capital, and that is more permanent of nature. Okay. Thank you very much. We have no intention to take up the risk again, because we have been very clear that we would like to bring down the volatility and increase the return on that capital. Okay. That is very clear. Thank you. We will now take our next question from Andreas Håkansson of Exane. Please go ahead. Your line is open. Yes. Hi, it's Andreas from Exane here. I want to talk about NII, but I think we've covered that quite well. Let me just talk a little bit about total revenues. If I look at your guidance for the full year of DKK 44 billion, and if we keep NII flat, that means that other revenue should be closer to DKK 5.7 billion in the fourth quarter, which would be up then 27% from Q3. I just want to ask you, I'm looking at equity markets being down on average. The Swedish banks are saying that activity levels haven't really come back in October at least. Could you tell us what's going to drive other revenues by 27% in the fourth quarter? Thank you. Yeah. Carlos will take that one. Yeah. Please remember, Andreas, we have quite a high seasonality in the fourth quarter in our income line. In the fourth quarter, we are booking performance fee from Danske Capital, and in the fourth quarter, we are also making a decision how to book from the shadow account in Danica. That are two outstanding issues that can affect the revenues in the fourth quarter. Yeah, because last year there was an 8% increase in other income in the fourth quarter compared to the third quarter. We would consider the shadow account as a one-off, so that doesn't really help us with a future forecast. Are you having that in mind when you talk about DKK 44 billion, or can you reach DKK 44 billion without the shadow account? No, the shadow account is an integrated part of our business. That is why the guidance we are giving is including all the relevant items in the quarter. Okay. That is it. Thank you. I do not know. A shadow account has always been a natural part of running an insurance company. Always a Q4 item. Yeah. We will now take our next question from Christian Hede of Nordea. Please go ahead. Your line is open. Yes. Good afternoon. This is Christian Hede from Nordea. Coming back to the sluggish outlook for NII in Denmark, possibly with an outlook of low rates for longer, as you said, would you consider being a first mover in raising mortgage margins, for example? Because I guess the understanding would be that Nykredit would have to move first. Could you do it? Another thing could be negative rates on retail deposits. How close are we to seeing that, and what other levers do you have if you want to increase NII? Thank you. I think one should be very cautious to introduce negative rates on the retail deposits. That's not a part of our present planning, which could have some effects, particularly on how retail depositors move the funds around. So that's not on the agenda. We will constantly review our pricing, and I will not rule anything out. I will not commit to anything. We're constantly reviewing all initiatives in a more holistic picture. We cannot run and will not run this bank on a quarter by quarter. We're here for the long run, making sure that we are a sustainable good bank for all stakeholders, particularly for investors. That means that we need to take one step back and continue on that traction and trajectory we're already in, but we will look at all levers which are necessary. Thank you very much. That was my only question. We will now take our next question from Masih Yazdi of SEB. Please go ahead. Your line is open. Hi, good afternoon. I am going to come back to the capital issue. As you said, you are still targeting a 14% common equity Tier 1 ratio, which implies that you currently have excess capital about DKK 14 billion, and the market is expecting you to make about a net profit of around DKK 16 billion for next year. That is a sum of about DKK 30 billion worth of capital that you might not need as you do not want to build excess capital going forward. Is that sort of technically how we should look at it, that you potentially have DKK 30 billion worth of capital that you can distribute next year in dividends and share buybacks? Secondly, on your growth in Sweden and Norway, especially Sweden, you had this comment or statement from the Danish FSA a couple of weeks ago saying that you should rethink your strategy here in Sweden, given what they say is imbalances on the housing market. How does that change your strategy of doubling your market share in Sweden for the next five years? Yeah. Let me take your last question first. I think that it is very prudent for all stakeholders to be aware of the continuing rising of prices, both in Norway and Sweden, when it comes to property. Of course, the FSA is also aware of it as we are, and that is why we will cautiously grow our market share in both Denmark and Norway. But we can do that as we can, let us call it cherry pick, because we are coming from a relatively small market share. We can see that we have been able to do that very successfully in Norway. We have a very good value proposition to our clients, and the quality of the clients, credit quality also is very good, and it is actually improving our book, but it is always something one need to be conscious about. We have not really started the growth in Sweden yet. The reason is we are still preparing the value proposition, and the deal with Saco will first have effect in Q1. We will always take into account a potential house bubble in Sweden. We will not need to adjust our ambition in Sweden, but do it in the right way. When it comes to the capital position, Henrik will just comment on that. I think it was slightly optimistic with your numbers, but Henrik will take it. You mentioned DKK 14 billion. I take that is that you take 1.7 percentage points, that we are currently above the 14%. That is the- That is correct. The DKK 14 billion you are getting. I think it is a little bit optimistic. Also taking into account that when we look into 2016, we also need to take into account that where there is a phasing in of Danica as an example, which is roughly 0.2. So there will be a drop in 0.2 when we move into 2016. We also need to take into account if, as an example, if there is an increase in our risk weights in Q1. We can follow your calculation, but it is perhaps a little bit on the optimistic side. I didn't include Q4, where you're expected to make another DKK 4 billion of profit, so it would be DKK 34 billion in total if I included that. I thought that was fairly cautious. Technically, the point is when you give your recommendation to the board by year end, are you steering towards a 14% common equity Tier 1 ratio by year end 2016 based on your outlook for how 2016 is going to look like? Are you approaching that level by year end 2016? We are considering also our capital ratio towards the year end 2016, but you need to take into account that when we declare dividends, when we declare share buybacks, then you get an immediate drop in Q1. We need, of course, to monitor closely also our capital ratio, especially in Q1 2016. In terms of the profit in Q4, you need to take into account that half of that automatically will be set aside for dividend. There could also be, let's say, a small increase in risk rates in Q4. You need to also to take that into account. Technically, one can do some calculations, but I think it's fair to say that we have a good capital position. We will also need to take into account our rating, we'll take into account our good dialogue with the regulator, and then we'll distribute back to the shareholders the excess amount, which for the reference is around 40%, and I use specifically around 40%. Okay. Thank you very much. We will now take our next question from Mads Thinggaard of Handelsbanken Capital Markets. Please go ahead. Your line is open. Yeah. Hi, this is Mads from Handelsbanken with a couple of questions. I would like to touch a bit again on this growth outlook for Sweden where you are engaging the Swedish mortgage market on this three-tier strategy with online product and low pricing and then also the Saco deal. Could you give us some kind of flavor on what to expect in Q4 and Q1? Is it the same catch-up effect we saw in Norway we could expect or do we see a more slow start on this Swedish engagement? That is my first question. My second question is, it seems that the Danish authorities, they are coming with some transitional rules for the use of CoCos versus the EBA guidelines that would cap the CoCo usage. It also seems that if CoCo instruments are issued before the end of the year, it can be counted fully against the Pillar 2. Is that something you have taken into consideration? Do you consider issuing more CoCos before year-end, and in that way also putting less requirement on real core equity? That was my second question. Thank you. Okay, let me take your first question first. The agreement with Saco in Sweden in personal banking will have no effect in Q4, and it will have very marginal effect in Q1 as the deal is starting up in Q1. I think one should always think that an expansion in the personal banking business takes time because it needs to be in a balanced way. I think Norway has shown a very good success and it now filters through the P&L and we will see the cross sales as we move into 2016. Hopefully we can see some of the tendencies in Sweden, but I think that we will see probably a slower growth in Sweden than we saw in Norway. But the real P&L effect will probably first be seen in the latter part of 2016 moving into 2017. When it comes to your last question, Claus will take that. Yeah. Hi, Mads. I'm not fully aware about what you have heard, but from our point of view and what we know for now is that for the time being we can meet our Pillar 2 requirement fully by Additional Tier 1 or Tier 2 with a 7% trigger. We have a proposal on the table which we expect will come into effect from the 1st of January, where we will need to fulfill 56% of our Pillar 2 requirement with common equity Tier 1. That's how we see it for the time being, and as you know, we have ample capital to meet our full solvency need by CET1. Okay. So you haven't heard about this proposal yet with the six-year transitional phase. Then let's just say for- No, but that would make no difference for us, I would say. You also had a question on whether we expect to do any further capital issues this year, and to that, I can say no. Okay, great. That was clear. Thanks. Okay. Can we have one or two more questions and then we conclude? We will now take our next question from Christoffer Rosquist of Barclays. Please go ahead. Your line is open. Yes, good afternoon. It's Christoffer here from Barclays. Two questions. The first one is on funding. If I'm looking in your presentation on slide 31, looking at the prices of what's maturing and what you have achieved on your recent issues, it looks like there are only a few of the maturing positions that are actually priced or costing you more than the recent issues. Should I interpret that as the tailwind to NII from cheaper funding replacing more expensive is coming to an end, or is there a complexity here that I'm missing? That's the first question. Then if I could just come back to what's going on within your trading operations, because we can clearly see your revenues from FICC declining, but it's in a different pattern than the allocated capital shrinking. Is that there's been a lag in actually realizing the capital benefits from de-risking the C&I business? Or would you expect this decline in revenues of a more temporary nature while the benefit in declined capital requirement is more permanent? Thank you. Claus will take your first question. Yes. As you can see from page 31, next year we will have maturing funding which we for the moment are paying quite a high price for, and that is around 96 basis points for the senior part and 93 basis points for the covered bond part. We do admit that spreads have increased over the last couple of months. However, we are still well below where we can achieve new funding. As you can see, the funding we have taken this year, we have paid 45 basis points for the senior part and only 13 basis points for the covered bond part. Right. Okay. Thank you. Your second question, I think you need to take into account that in the, let's use in the old days, one more concern about top line and not capital usage when we're trading within the FICC business. That model has changed considerably after new regulation, that what is much more important is the capital return and the stability of that earning. That means that we have linked the performance much more to the return than the absolute numbers. Going forward, there should be a stronger correlation between capital usage and the revenue. However, there can always be a timing difference between the various quarter. But overall, you should expect that capital is coming down. One could expect that the absolute top line, all things being equal, also coming down, but the return on capital employed will be better and more stable. That's the strategy we put forward at the last business review, and that's the strategy we are following going forward. DKK 2 billion of revenues per quarter and DKK 35 billion-DKK 36 billion of capital, roughly the balance that you're looking at or is there more way to go there? Again, I will be very cautious to put specific numbers on trading. As you know, it will also depend on market conditions, but what you can assume and expect is that we will be very diligent in using our capital, going forward in our trading operation. Thank you. Could I have the last question, please? We will now take our final question from Namita Samtani of Macquarie. Please go ahead. Your line is open. Hi. If you are looking at the Fact Book, net fee income for Denmark is 16% lower than Q2 and about the same for Q1. Just wondering why this was and how to look at it going forward. Thanks. Can you please repeat what area you are looking at? Denmark. Yeah. 16% lower than Q2 and Q1. It is a reflection of lower activity. If you look at personal banking in Denmark, you will see that fee income is down from Q2 to Q3, and that is primarily related to the fact that we have not seen the same remortgaging activity in the third quarter. Trading income is also slightly down due to lower investment activity among our personal customers, whereas we have been able to more or less maintain the same NII in Denmark. Okay. Thank you. Okay. Thank you all for your keen interest in Danske Bank and for your good questions. As always, you are more than welcome to contact our IR department if you have any more questions after you have time to look more into the financial results. A transcript of this conference call will be added to our website within the next few days. Thank you very much and have a good afternoon. Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation. You may now disconnect.