Earnings Call: Q2 2015

Jul 22, 2015

Summary

H1 net profit rose 36% to DKK 9.4bn as income increased and core impairments fell 78%. FY net profit guidance was raised above DKK 16bn, despite ongoing margin pressure from negative rates.

Good day, and welcome to the interim report first half of 2015 conference call. Today's conference call is being recorded. At this time, I would like to turn the conference over to Thomas Borgen, CEO. Please go ahead, sir. Thank you, operator, and thank you all for taking time to listen to this call today. Together with me today, I have our CFO, Henrik Ramlau-Hansen, and Head of IR, Claus Ingar Jensen with me. Slide 2, please. In today's call, we have the pleasure of presenting Danske Bank's financial results for the first half of 2015. We aim to keep this presentation to around 20 minutes, and as usual, after the presentation, we will open up for Q&As. Since we have almost finished the de-leveraging of our Irish exposure, I do not expect the financial results from non-core activities to have any effect on the P&L. I will make no specific comments about this in my presentation. However, the non-core information is available in the appendix. Afterwards, feel free to contact our IR department if you have any more questions. Slide 3, please. The first half of 2015 was a satisfactory period for Danske. We experienced a high level of customer activity across our markets, driven by improved macroeconomic conditions and the positive effects of executing our strategy. Our net profit came in at DKK 9.4 billion for the period, and that's despite the challenges posed by the negative central bank interest rates. It's our view that the results demonstrate the value of our diversified business model, which enables us to mitigate the negative effect on NII by increasing income from other business activities. Our financial performance, which exceeded our expectations, was driven by gains in almost all income lines and substantially lower impairment charges. The improvements in earnings reflect strengthening relationship with our customers and a further inflow of new customers, as well as our innovative new business solutions. Our return on equity came in at 12.5% for the first half. This is a large improvement from the year before, when it was at 7.6%, excluding the income from the sale of Nets. Net profit for the period was DKK 9.4 billion, and this is 36% higher than the same period last year. Total income rose 6% to more than DKK 23 billion, with a strong rise in fee income, in particular because of stronger customer activity. NII was stable despite severe pressure from the negative interest rate environment. Expenses were down 2% as a result of our continued focus on cost efficiency and despite an increase in customer activity. The cost-income ratio now comes in at 46.4% and more than 4% better than the year before. Loan impairment charges in our core activities declined a full 78% from the level the year before. The trend was owing to steady improvements in credit quality in Denmark, in particular, on the strength of low interest rates. Our capital base remained strong with a common equity Tier 1 ratio of 14.3% and a total capital ratio of 18.7% at the end of June. The share buyback program of DKK 5 billion we initiated at the end of March is proceeding according to plan. By the end of the period, we had bought back more than 9.7 million shares with a gross value of DKK 1.9 billion. Our ratings improved in the first half of 2015. In June, Moody's announced upgrades of our long-term rating to A2 and our short-term rating to P-1. In July, S&P changed its outlook from negative to stable. We are very pleased that we have now met our ambitions for our ratings in 2015. Finally, we have revised our guidance for 2015. We now expect a net profit above DKK 16 billion, owing mainly to the positive development in income and impairments. This is an increase from our earlier guidance of a net profit above DKK 14 billion. Slide 4, please. Let me now take you through our income statement item by item. NII came in at DKK 10.8 billion, which was almost the same as in the year before. We saw positive effects from higher lending volume, higher bond portfolio income, and lower funding costs, although the item was adversely affected by pressure on deposit margins. Net fee income rose 80% as we benefited from increased customer activity, mortgage refinancing, and positive developments at Danske Capital. Net trading income was up 2% to DKK 4.2 billion. This is despite the fact that in the first half of 2014, the item including a one-off gain of DKK 1 billion from the sale of Nets. Trading income in the first quarter was extraordinarily high, and that declined somewhat in the second quarter. The result from Danica's insurance business amounted to DKK 1.1 billion, up 20%. Danica benefited from high investment income and was therefore able to book the full risk allowance for all four interest rate groups. So total income rose 6% above the level last year. Operating expenses were down 2% to DKK 10.8 billion. As said, the cost income ratio improved more than four percentage points, now standing just above 46 percentage points. Slide 5, please. All three banking units made good progress in comparison with the performance in the same period last year. We saw increased customer activity at all units with good gains in most income lines, while we were also able to reduce expenses by maintaining our focus on cost efficiency measures. The pressure on NII is especially important issue for personal banking, where the floor risk is the most severe. All three business 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 a strong result on the basis of increased customer activity, with pre-tax ROE rising 6.1 percentage points, now at 20.6%. There were improvements in most areas. The NII was 12% lower owing to heavy pressure on deposit margins, and that was in Denmark in particular. Fee income and trading income was up 25% and 31% respectively, as the very low interest rate led to increased demand for investment solutions and high mortgage refinancing activity. Expenses were down slightly, and impairments continued to decline, falling 32% below the level the year before. We saw in personal banking strong inflow of new business from the beginning of the year, and lending rose 24% over the level the year before. In Sweden, the new management team is now in place and working to strengthen our business position. At Business Banking, we saw strong momentum across all markets. There was a good increase in activity in Sweden and Norway, where lending volumes grew 12% and 21% respectively. In Denmark, business banking more than compensated for the effect of negative interest rates with lending growth and a reversal of impairments and the mitigating actions we took in the first quarter. Pre-tax ROE rose eight percentage points, now at 21.1%. The NII improved as increased business volumes compensated. Fee income was up 12% and basically due to high customer activity, and impairments declined significantly, and we saw net reversal of around DKK 100 million as a result of our ongoing efforts to improve credit quality. At C&I, profit rose 58%, while ROE was up six percentage points, now at 16.7%. We saw significantly higher client activity during volatile financial markets. FICC had a very busy half year owing to developments in the fixed income and FX markets, and its income rose 44%. Our capital markets business also benefited from strong client activity with income up 13%. Within general banking, income rose as a result of increased lending volume, whereas deposit margins were affected by the low interest rates. In sum, C&I total income benefited from good underlying growth in all income lines. Expenses were down slightly despite significantly high activity and impairments, which normally fluctuates between quarters, had almost no effects on the result as we saw net reversals in the second quarter. Please, slide six. Let's turn to our activities within asset management and insurance. Danske Capital and Danica Pension had strong performance in the first half of the year. Danske Capital, which continued to deliver solid growth in profit before tax, offers a good example of how our diversified business model works. Danske Capital developed solutions to take advantage of increasing customer demand for alternative to bank deposits. The unit also made good progress within alternative investments in which assets under management rose 4% in the first half of the year. Danske Capital's profit before tax rose 25%, which was both due to increase in asset under management and a slight rise in margins. The improvements also reflects higher net sales of DKK 24 billion, including 21% to clients outside Denmark. At Danica, net income rose 20%, owing to high investment returns as conditions in the financial markets improved. The investment results in turn enabled us to book the risk allowance to income for all four interest groups. The underlying result from insurance business was up 1%, with premiums up 8%. Slide seven, please. If you look at expenses in the first half of the year, operating expenses fell 2%, now at DKK 10.8 billion. We achieved this lower cost level even though higher activity at the business units during the period entailed higher costs. We are committed to maintaining a strong focus on expenses, and we expect to continue our cost initiatives during the rest of the year, with the aim of reducing normal expenses to less than DKK 22 billion for the full year. Slide 8, please. As we continue to see an improvement in credit quality, loan impairment charges continue to fall, making a significant contribution to the first half results. The charges for core activities came in at DKK 300 million, dropping as much as 78% from the level the year before. Impairment in the first half of the year were lower in all business units, most sharply at Business Banking, which had the net reversals of DKK 100 million. In the non-core activities, we had net reversals of the same amount. Total charges for the group amounted to around DKK 150 million. The loan loss ratio, including non-core activities, declined from 17 basis points to 2 basis points, and from 14 basis points to 3 basis points on our core activities. Slide 9, please. The trend towards lower impairment charges is not new. In the last four quarters, we have seen a drop in both new and increased charges. Since the last quarter of 2014, we have also seen net reversals of individual charges. The notable development in Business Banking are primarily related to Denmark and commercial property in particular. Within Personal Banking, we see higher collective values as house prices have increased in Copenhagen and other major cities in Denmark, and underpinned by the very low interest rate environment. As we consider the improving trend in our customer financial positions as sustainable over the coming quarters, we have revised our impairment charges for 2015 to be significantly lower than in 2014. Slide 10, please. Our capital position improved in the second quarter. At the end of the quarter, we had a common equity Tier 1 capital ratio of 14.3% and a total capital ratio of 18.7%. The increase in the capital ratio was due to our earnings during the quarter, whereas there were no material effect from the risk exposure amount in the period. At the beginning of the period, however, the capital ratio declined by 0.1% as a result of an accounting change at Danica. The risk exposure amount was affected by a decline in credit risk as the sale of the SME portfolio in non-core more than offset the rise in new lending. During the quarter, we implemented new models for market risk and counterparty credit risk, and this led to a small decline. Although the very high volatility of loan yields had a larger contrary effect in the second quarter. In the remainder of the year, we expect to see further decline from continuing capital optimization, whereas the combined effect of outstanding regulatory issues will attain a modest rise. We expect REA to grow in the second half of the year. However, in total, we estimate that the total REA will be around Q1 level at year-end. Slide 11, please. Danske Bank has a good franchise in Northern Ireland. The financial results have improved in the past couple of years, and we expect the performance to continue on a positive track. As part of our ongoing business review, we have considered how we can further strengthen our operations in this market. One important conclusion from the review is that we see limited operational synergies and customer interactions between the activities in Northern Ireland and those in the Nordic markets. We have therefore decided, beginning in January, that Danske Bank Northern Ireland will function as a separate business unit, and its financial results will be presented separately. Operating Northern Ireland on a standalone basis will strengthen our organization as a Nordic universal bank, and we are confident that it will enable local management in Northern Ireland to better execute their strategy and launch local initiatives that will benefit their customers. At the same time, the operation will continue to benefit from cost efficiencies within the group. Slide 12, please. Finally, before taking your questions, let me turn to our guidance for the full year. We are revising our guidance for the net profit for 2015 from above DKK 14 billion to above DKK 16 billion. The strong outlook is owing mainly to the positive development in income and impairments. We have seen solid customer activity across our business units, and macroeconomic conditions continue to improve. We expect total income to increase from the level in 2014, benefiting from high net trading income in the first quarter and lower funding costs. Negative central bank interest rates are putting pressure on the NII, however, and development in the financial markets pose risks for trading and insurance income. We expect expenses to be below DKK 22 billion. Impairment charges for our core activities are expected to decline to a level significantly lower than in 2014. At our non-core activities, we expect a pre-tax result at around zero. Slide 13, please. Those were the initial comments from us. 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 wish to ask a question at this time, please press star one on your telephone keypad. We will pause for just a moment to allow everyone to signal. As a reminder, please press star one for a question. We are going to take our first question from John Walter from Credit Suisse. Please go ahead. Yes. Hi, John Walter, Credit Suisse. Thanks for taking the questions. First, I wonder about the reorganization in Danske Bank Northern Ireland. Is it correct to say that all the business activities and personnel in the region now is separated strictly from the rest of the group? In addition, what amount of risk-weighted assets are booked in Danske Bank Northern Ireland? That is my first question. The second one is, if we look at the risk weights in the Finnish corporate book where Danske Bank got an approval now for foundation IRB. What are the risk weights post the approval? Is the approval a joint decision between the Danish and Finnish FSA? What does that process look like? Thank you. Okay. I will take the first question, and Henrik will take the two last questions. From the 1st of January in 2016, we will split out all the activities from personal and business into the Danske Bank Northern Ireland operation. From that point of view, you will have a separate accounting line. More importantly, operationally, it will also be separated, even though they will benefit from, of course, being on our technological platform and benefiting from our back office operations. Thank you. That includes both the personal and the business banking activities then, all is separated out from Danske? All will be separated out on the 1st of Jan next year. Regarding your additional questions, in terms of Northern Ireland, we will, in due course, publish comparative figures for Northern Ireland and the banking business units. We hope we will be able to provide that in Q4, and then you will also get the relevant figures you are asking for. In terms of the approval of the FIRB Finland, that has come through together between the Danish FSA and the Finnish FSA, and the rough estimate it will be implemented by the end of Q3 is DKK 10 billion-DKK 15 billion lower risk weights. Thank you. Very clear. Just a follow-up on this, the remaining FSA order in the presentation, the net effect from those model approvals, that is a zero to DKK 5 billion RWA inflation. What is Danske's estimate of the gross RWA inflation? If we look at the recent events, we can see there is pressure on banks to revise risk weights up. I think the question is relevant for investors. Yes. We have the illustration on page 10, where we have mentioned that FSA orders and approvals could be approximately an increase of zero to five. That is the mentioned impact from Foundation Finland I just mentioned. Then it is the implementation of our outstanding, it is what we call FSA Order 2 regarding counterparty risk on corporates. Then we have a minor effect that we are in the future holding more covered bonds related to our LCR requirements. So net-net, our estimate of that is an increase of zero to five, as illustrated on page 10. Then you are right, there is a lot of discussion stories about increasing risk weights. We have no outstanding issues with the Danish FSA. We have also spoken with them before we went public with our Q2 figures. We have only the outstanding issue we have just commented upon the FSA Order 2. Okay. Many thanks for clarifications. We are going to take our second question from Anton Kriakok. Please go ahead. Good afternoon, and thank you for taking my questions. Just two questions, please. Firstly, on NII. In the past, you have outlined a number of measures which you have undertaken to offset the pressure from negative central bank rates in Denmark. I just wanted to confirm what proportion of those measures have come through in Q2, and whether we should expect any more tailwinds to come from your management action on NII in Q3 and Q4. Secondly, just to follow up on the REA point, please. I think previously when you were outlining your targets for 2018, you might have talked about broadly flat REA in the forecast period at Q4 2014 level. Given your new guidance on REA for this year, shall we expect that REA can come down from 2015 level in 2016 and 2017, so that you end up broadly flat in terms of REA by the end of 2018 versus 2014 start? Thank you. Okay. Claus will take your NII question, and Henrik will try to expand on the risk-weighted assets question. Thank you. Thank you. The mitigating actions we have announced after we saw the significant drop in interest rates in Denmark has been implemented and almost in full. You shouldn't expect any further impact from the mitigations we announced earlier this year. That's very clear. Okay, then you had a question regarding the development of our risk-weighted assets towards 2018? Yes, please. In the connection with the report, we have guided you towards the end of the year around the level we had at the end of Q1, and we have tried to illustrate that at page 10. As you have noticed probably, currently we are experienced a little bit of headwind, especially on market risk and counterparty risk. We had an increase of DKK 10 billion in Q2, and we also had an increase of DKK 13 billion in Q1. But still we expect full year to be around the level we had by the end of Q1 2015. Towards 2018, it's a little bit difficult for the time being. Of course, it depends also especially on how growth will develop in the coming years. I think it's too early to comment in details on the development of risk-weighted assets towards 2018. I think you should take into account that when we did the bridge, we assumed a loan growth of approximately 2%. It appears that the loan growth will be slightly higher in that time period. If that takes place, one should also expect that risk-weighted assets will follow that profitable growth. It's just so you see that in connection with the growth. Okay. Understood. Thank you very much. We are going to take our next question from Christopher Rokyst from Barclays. Please go ahead. Your line is open. Yes, thank you. Thanks for taking the questions. The first one is on NII, and the second one on Danske Markets. On NII, you mentioned for the first half year the pressure from tighter deposit margins. But if I look on the quarter-on-quarter, it seems like worsening lending margins has been an even greater pressure. I do not know if you could please perhaps provide your view on what has happened in your most important markets with regards to lending margins, and perhaps even what you expect going forward. Secondly, on Danske Markets, I noted that there is actually more allocated capital in this quarter than was in the previous quarter. I think you mentioned in the report that this is due to buffers that you still see necessary for that underlying business. I wonder if you could just. I am trying to reconcile that with the strategy for the investment bank that you outlined, and the exit, if I may put it that way, from certain business lines. I wonder what you now write with regards to buffers being required, how that is consistent with exiting the more volatile parts of the investment bank. Then perhaps also more generally, if I am looking at your investment bank and your trading revenue, trading in particular, please, if you could just elaborate a little bit on how much of what we have seen this quarter is market making, how much is driven by customer flows, and how you consider the volatility of that revenue stream going forward. Yep. I will start with the last question. The strategy within our C&I and in Danske Markets in particular has not changed. We can see that the structural issues of pressure on the profitability on a traditional FICC business will remain in force, and that is why our strategy will continue. However, short term, there has been extreme volatility, which we have been able to benefit from, both of helping our clients and make a substantial return to our shareholders. That volatility has made us needed to set aside higher allocated capital, primarily based on counterparty risk and based on market risk. But that does not preclude us from taking down the volatility and taking down the resources. That underlying strategy is in place, and we follow that through. So when or if volatility comes down, that allocation will fall through. You also see in various numbers that the risk in the business is also coming substantially down. When it comes to the quality of the income in the trading, it is improving quarter by quarter, and actually customer income is up 23% half year against half year. Let's call it the investments which was done in 2012 and 2013 and 2014 are paying off quarter by quarter. We are very comfortable with the development of our trading operation. If you want to go into details, I suggest that you take that directly with the IR department if you want that more broken down, and we can give you all that insight you want. Claus will like then to answer your question on NII. Yes, it is correct that there has been a negative impact from lending margins in the second quarter, especially when it comes to personal banking. This is not a new trend, but something we have seen over a number of quarters, that there is a shift in the product mix in our personal banking division, where housing loans or mortgages are becoming more popular on the expense of more traditional banking loans. At the same time, as we also have alluded to over a number of quarters, the recent uptick in the economy in Denmark have not yet affected appetite for personal lending to any larger extent. Then we also, on top of that, we do have to admit that there is still some pressure on lending margins across all our business, and that goes also for personal banking. Then there is the third explanation, which is rather technical explanation, is that we saw a rather positive impact in Q1 on lending margins, so that there is a sort of lagging effect from the interest rate movements we saw in the first quarter and then into the second quarter on our accounts. Thank you. Can I just ask with regards to the mix shift that you mentioned initially, where do we stand today in terms of the split of the personal banking book between what you call traditional banking loans versus mortgages? Where have we come from? At the sort of a peak where lending margins were higher? Where your blended margins were higher? I don't know whether we should take that bilaterally afterwards, Christopher, but there has been a shift over time between mortgage lending and personal banking and the more traditional banking loans. That's also a development we have seen in the second quarter. Okay, thank you very much. We are now going to take our next question from Daniel Tutoy from J.P. Morgan. Please go ahead. Your line is open. Hi, good afternoon. Daniel Tutoy, J.P. Morgan here. Two questions, both on costs, actually. The first one was on the unchanged cost guidance. If I just simply annualize H1 costs adjusted for the one-off from Q1, I get to about DKK 21.3 billion for the full year. I appreciate your guidance is for below DKK 22 billion. Even if I adjust for seasonality at the end of the year, that still leaves quite a meaningful gap between those two figures. Just wondering if perhaps I'm missing anything here in terms of cost developments in H2. Secondly, more specifically on C&I appreciate that market activity and revenues in C&I have been considerably higher than what you were expecting when you set your targets at the end of last year. But the H1 run rate on costs still, from what I can tell, gets you to above the upper end or even above the upper end of the DKK 4 billion to DKK 4.5 billion target range that you set in Q3. Are the cost savings here more back-end loaded in nature, or should we expect those savings not to come through as given that market activity is higher than you were expecting? Thank you. Let me take the first question first. There is no question that the higher activity has a higher cost associated with it which is just purely related if it should be incentive-based or otherwise. That's the first. Secondly, some of the costs are back-ended, and some of the downsizing on the cost will not be seen before the third and fourth quarter. So the run rate into 2016 will be lower and within the range we have guided. Again, due to that very high activity, which we have said several times, or at least the last two quarters you alluded to, has done some of these adjustments by selection being postponed somewhat. Henrik would like to answer your question when it comes to the overall cost. Yeah. But I have not very much to add. We are at DKK 10.75 billion half year, and two times that is DKK 21.5 billion. As you pointed out correctly, there are some seasonality usually with somewhat higher cost in Q4. We also have a payment to a resolution fund we'll need to pay by the end of the year. That will be roughly DKK 150 million. I don't know if you have included that. So there are, also in the second quarter, in the second half, there will be one-offs we need to take into account. So we have really not very much more to add that will come in below DKK 22 billion. Okay, great. Thanks very much. Thank you. Going to take our next question from Jakob Brink from ABG. Please go ahead. Your line is open. Yeah. Thank you. Sorry for getting back to the cost line, but, Thomas, did you just say that the run rate at the end of the year would be lower, and also that due to activity, you have more staff now than you probably need going forward? Because then I guess you will actually see somewhat lower underlying cost in the fourth quarter. Then the previous question, I guess, is quite right that you do end up quite a lot below DKK 22 billion. Or maybe I misunderstood it. My second question is also regarding the net interest income versus the growth in risk-weighted assets. I think in the past two quarters, the credit risk-related growth in RWAs have been around DKK 20 billion, if you look at the core businesses, but net interest income is not really moving. Also, as we just discussed before, there's quite a severe lending margin pressure. So it seems like maybe your growth in Norway is being done at very low rates and hence not really impacting NII. I think also last quarter you said that part of the growth in Q1 in Norway, we should see that in Q2, but also that doesn't really seem to be the case as Norwegian NII is hardly up quarter on quarter. Could you give us more details on that, please? Let me take your first question. What I answered, because I think that was the question, it was on C&I specifically. Okay. Some of the costs will fall out later in the year, but that is particular on C&I. C&I has an impact on the overall figures, but I do not think you should overestimate C&I on the total cost. I think that is what I alluded to. I think Henrik would like to take you through both the RWA and the NII question. You commented upon our underlying credit growth in terms of risk weights, and you are right that our underlying growth in credit risk due to lending, I have it actually at DKK 18 billion. You said 20, so that is not going to change so much. You are correct on that. But as Claus commented upon previously, we have a clear volume effect of the growth, but we also have, in the second quarter, a minor effect of lending margin pressure, which is also visible in the fact book. But of course, longer term, the growth will lead into additional NII. But it is just like you pointed out before, Claus, that in Q1 was a lot better. In personal banking, you had almost DKK 70 million quarter-on-quarter positive in personal banking in Q1. Now you have a negative DKK 77 million. So it is a rather big swing. I know you said part of it was technical, but still, it is quite a big difference. There has also been a shift in the volume, especially in the personal banking in Denmark during the quarter. Okay. Thanks a lot. Thank you. Next question is from Omar Keenan from Deutsche Bank. Please go ahead. Good afternoon. Thank you very much for taking the questions. I had firstly a question on net interest income. The current policy rate is -75 basis points. I am just wondering if we do get a first 25 or 50 basis point rate hike, and we can come out of being very deep in negative territory. Would you be able to keep the benefit from the management mitigation measures that you have taken so far? My second question was just on asset quality. Do you have a rough sensitivity to a 5% increase in house prices and rents in Denmark and what that means in terms of provision releases? Just so that we have a rough idea going forward, if the macro picture continues to be positive in Denmark, then what that could potentially mean for releases next year. Thank you. Yeah. Let me answer your first question. The interest rate sensitivity of the bank has not changed. If you take the group level, it is still around DKK 700 million per 25 basis points. If you look at Denmark by itself, 25 basis points could mean somewhere around DKK 0.5 billion, all things being equal. If the central bank, or I would say when the central bank adjusts rates as the pressure on the krone is abating somewhat, it I think is more a question of when it will happen, will have a positive effect. The exact effect, we do not know, but it should be around DKK 300 million to DKK 400 million, all things being equal. Why it is slightly lower than DKK 500 million is that the money market rate has come up somewhat in the Danish market. That is why the effect will be slightly lower than the DKK 500 million we are seeing. As we move more, or if we move more to the zero, we should have most of the benefit at Danske Bank as we are to a very large extent subsidizing or protecting our private clients as of today. That is why we will gain most of that back. When it comes to asset quality, Claus would like to answer that? Yes, and your question around the correlation between asset pricing and impairment development, I would say we are very cautious in giving you any general guideline because there are a number of different factors implementing the impairment development going forward. It is not that you can look at house prices and calculate a certain rise into improvement in our impairments. That may go for the personal customers, but when we are talking about business banking customers, it is much more complicated, and that is why we will be very careful in pointing to a one-to-one relationship between collateral values and impairment charges. That is it. Thanks. Two great answers. Thank you. We are going to take our next question from Johan Ekblom from Bank of America. Please go ahead. Thank you. I think most things have been covered, but if we can just focus for a minute on the fee income, which has been phenomenally strong, really across all business units. Last quarter, you spoke about some 200 million of incremental fees from the very high remortgaging activity. Can you give us an update on where we were in the second quarter? If we now have less favorable 30-year rates, what kind of headwind do you see in the second half on the fee income line? Yes, you are correct. We mentioned the number 200 million in the first quarter. As you know, long-term rates have increased significantly, and that's putting some pressure on the remortgaging activity. So April was the month in the second quarter where we still saw some activity. On half year, over half year, that's around DKK 300 million. Given the current level of interest rates, we expect the activity in the second half to be much lower in the mortgage area. The total remortgaging of 300 is the sort of incremental versus 2014. What's the total? I mean, just to get a sense for what level we could expect in the second half. That is not something we can guide for. It depends very much on interest rate development in the second half of the year. Understood. Thank you. We are going to take our next question from Matthew Clark from Nomura. Please go ahead. Your line is open. Good afternoon. Just firstly, another question on the NII. Once we take account of the DKK 77 million of payroll one-off and your mitigating actions and maybe some day count effect, there really was not much underlying growth quarter-on-quarter. Do you think that is what we should expect for the next few coming quarters, that the margin pressure is just going to offset any growth benefits that can show through, and we should be thinking a flattish NII in the near term? Then, specifically coming back to an earlier question on Norway, there does seem to be a startling discrepancy between the volume growth you have seen in personal banking in Norway and the NII growth. Is there anything in particular that is going on there that is delaying that volume growth showing up in NII, and are you happy with that development? Finally, just on loan loss charge, what would you say was the underlying loan loss charge for the second quarter if you strip out the kind of discretionary reserve release that you chose to make? Thank you. If I do the last question first, it is very hard to guide on a specific number when it comes to impairment charges in the second half. I think it is important to take into account that C&I could move both ways, but there is no strong indications that we should have any negative surprises on C&I in the second half. Underlying business banking is also looking good. There should be no negative surprises there, neither in personal. If this will be a small positive or small negative number, it is very hard to say. But generally, we can see that we expect a very low impairment for the rest of the year, and that is the closest we can get to a number. So from that perspective, it looks very strong as our clients are in a much better financial position than we have seen in many years. When you say very low, do you mean versus the first quarter very low? The second quarter is obviously so extreme that it is very hard to use it as any kind of benchmark. I think one should always be cautious to use one quarter as a guiding principle, particularly when you have C&I, which accounts for a significant write back. But what we are saying is that there should be very low impairments going forward, and if that is a small positive or negative number, it is very hard to guide any closer on. Thanks. Okay. Then you asked about the NII. There is no question that we have been pressured on the deposit side. That pressure has been abating, and we see no particular pressure taking place for the rest of the year on deposit by itself, as most of that has been priced through. We are still looking at continued mitigating actions, but that will be of minor effects as we will continue to try to protect our private customers of not introducing negative rates. On the lending side, we can see that there is some pressure building up more from that our customers, as Claus alluded to, going from traditional banking products into mortgage products. We expect that to continue for another period, but maybe at a lower pace. In business banking, we see margins being flattish to a small pressure, but that's a combination that, let's call it very good credits getting slightly better terms and conditions. The ordinary credits get pretty flattish, and the weaker credits are still being repriced at the correct level. Within C&I, there has been a repricing taking place during 2013 and 2014, and we expect pretty much flattish margins going forward. Then back to the lending growth. We expect the lending growth to be healthy going forward, particularly in some of our four units, which the number will turn out depending on the lending growth and the average volume which we put on the books. The lending in Norway will come through as very profitable, and you should be cautious again to look at quarter by quarter. But of course, the underlying growth is profitable for us and then, of course, profitable for the shareholders. Can I just revisit Norway with some specifics? Because the volume growth is startling. You've gone from DKK 71 billion at the end of the year to DKK 87 billion now, and net interest income's hardly shifted. Is that as you expected it to be? Because this is clearly a major initiative from you, but it's hard to see the impact here. What's coming through the other line in Norway personal banking, which has been growing quite nicely. If you could just shed some light there, please. I do not fully agree with you. If you take our fact book, then our Q1 2015 is, in terms of total income in Norway, much better than Q1 2014. Q2 2015 is much better than Q2 2014. I do not 100% follow your arguments. We can see good growth in total income in Norway, and we are also taking on new mortgages at decent margins. I think we could take it bilaterally, but we do not 100% agree with your observation. Okay, let's take it offline. Thank you. Generally, I think it's important to say that we are very comfortable with the expansion we see in Norway, both on the lending side and the ancillary business we are getting there. Over time it will be a very good franchise for all our stakeholders going forward that we are very comfortable with. We are going to take our next question from Jacob Kruse from Autonomous. Please go ahead. Your line is open. Hi. Thank you. So two questions. Firstly, just on that interest income and the mitigation. I just wanted to ask, is all the mitigation that you have done, the DKK 700 million you talked about in Q1, is that going through the NII line or does some of that also end up in your commission line as higher fees on products, et cetera? My second question, I guess, just going back to risk-weighted assets. You said in Q1 that the trading and counterparty risk-weighted assets would come down as the trading profits normalize. I guess I can understand the volatility going up this quarter. But I guess my question is, you've cut the trading assets, you have lesser revenues now. Is there a reason we should not expect your market and counterparty risk-weighted assets coming down over time in a sort of normalized volatility environment? Thank you. Yeah. When it comes to the DKK 700 million and the calculations we did when we discussed that in one of our prior conference calls, that is especially an NII issue. But then we have said that part of our mitigating actions will also involve other types of income as a good example of our diversified business model. So there is effects coming in also on the fee line from what we have initiated. In terms of your counterparty risk, it has actually already in Q2 come down to some extent. On page 10, where we have this bridge on the risk weights, where we have a minus 10, that is a combined effect of market risk and counterparty risk. There's actually in the minus 10, built-in a positive effect of counterparty risk of DKK 4 billion, which offsets the counterparty effect we had of DKK 7 billion in Q1. So this has actually already been halved, and we expect it to come further down in the coming quarters. Okay. Thank you. Just how much of the mitigation effects have we seen in the fee revenues now? So how much has that added incrementally in Q2? It's always hard to separate cold and warm water, because we also see much higher activity in several lines. I think it's fair to say that many of the actions, if you try to isolate it, has come through, and now it's to constantly and continuously work with our client base to help them through this interest rate environment. We can also see that there is higher activity within the corporates, that being both in business banking and in C&I. That's again related to the economic activity in the Nordics, and we can see that it's stable to higher, particularly in the Danish economy. Again, it's slightly hard to single out one particular fee and one particular activity, but many of the initiatives are working, and that we can see coming through in the top line, and that's also why we are guiding upwards for the full year as we see that activity is continuing, and we expect that also continuing into the second half. Okay. Thank you. We are going to take our next question from Riccardo Rovere from Mediobanca. Please go ahead. Your line is open. Yes, good afternoon to everybody, and thanks for taking my two questions. The first one I have is again on reversals, on write-backs. You mentioned that these are mostly due to real estate prices, residential and commercial. Real estate prices have not gone up just over the past three months, but it's quite a while they keep going up. But only this quarter we have seen all these reversals. I'm trying to understand how you account for that. Basically, in this quarter, have you accounted for the real estate price movements of the past, just to say maybe 12 months, 18 months, 24 months, whatever? Is that the way it works? Or is it something that you do every single quarter, you mark to market every single exposure? Because if this is the case, I don't really understand why you should have had all these reversals this quarter and not the quarters before. This is my first question. The second question is on the leverage ratio, 3.8 fully loaded, if I'm not mistaken. This is a bit lower than some of your Swedish peers and definitely lower than your Norwegian peer. Is there any discussion on this parameter with the Danish regulator? Are they pressing you to get a better ratio or at least in line with your competitors? Thanks. When it comes to the impairment development, Ricardo, I can only say that if you have a look at some of the main slides in our presentation, you will see that this is not something that just happened in the second quarter. We have had a long process of lower new and increased impairments, and we have had reversals during quite many quarters. Secondly, you should also be aware that a decent part of the reversals we have made in the second quarter are coming from C&I. And in C&I the nature behind reversals will always be quite volatile. Okay. Ricardo, I can only repeat on an overall level to a question I got earlier, that be cautious on one particular quarter. This is a trend which has continued even longer if you look at one of the slides, the last 12 to 14 quarters actually with continued falling impairment charges. That one quarter has negative is of course positive, but if it's going to be a small positive or small negative number going forward, it's very hard to say, but it will how we see it now remain at very low levels, and then we need to see how it turns out in the end. Mm-hmm. Thanks. Henrik, you also had a question regarding leverage ratio, where we have a leverage ratio of 4.2 on a reported basis and a fully phased-in version of 3.8. We are satisfied with that. We have said that we want to stay around 4% plus minus. The Danish FSA knows that, and there is nothing more to report on that. There is a committee that has been set up that is looking into the leverage ratio, and we also know that the Danish FSA is looking into it, but there is nothing to report on that given what I have just described. Okay. Thanks. Very clear. Thanks. We are going to take our next question from Masih Yazdi from SEB. Please go ahead. Your line is open. Hi, this is Marcel Zilt from SEB. I have a question on your view on the balance between growth and capital repatriation. Going into 2016, this year you are doing 43% payout and DKK 5 billion in share buybacks. Going to that year, would you be happy to use all the cash or all the capital you generate in addition to your payout ratio to use that for growth if you see prospects for that in the market that you can do that at a profitable level? Or would you be more willing to repeat at least the level of share buybacks you have done this year? Just explain a bit your appetites between growth and capital repatriation, going forward, please. It is a very easy answer to that. We have a dividend policy, which we announced last year, that we will pay between 40% and 50%. If we have excess capital above our financial targets, we will distribute that to the shareholders. Then the question is, how will we potentially use that excess capital between distributing back to shareholders or growth. We feel it is very right to do profitable growth in those markets we are concentrating on. How much that growth will portray into risk-weighted assets, we will need to see at the year-end, but it is highly likely, and you can just use 2014 and 2015 as example of that there will be probably excess capital which need to be distributed back to the shareholders in one way or another, in addition to the dividend. That we will need to return to you, when we see how it looks like at the end of the year. Okay, thank you. Just a second question then. Related to this one, in Q4 when you present your bridge to reach your ROE target, you were guiding for at least guessing for 2% lending growth, as you said. Now just two quarters later, we see much higher lending growth for you than that 2% level. Just wondering sort of the difference between your guidance two quarters ago and the level you have achieved since then, is that due to a strategical change for you guys just in the first six months of this year? Or were you just wrong about macro, the demand, or what kind of levels of profitability you can issue lending on? So where were you wrong? Where have you been wrong the first two quarters relative to the guidance you gave two quarters ago? If we put it in perspective, when we presented a potential loan growth of 2% over the period, we were told by most of you that that was too optimistic, that you will not achieve it. We said this was probably a realistic thing, based on the position we have in the various markets. It seems that our value proposition has been very well received in the markets, and it has exceeded our expectations. And we are very happy to see that the clients are coming into the shop and making this an even better institution for all stakeholders. If we made a mistake, it is that we have been received better than we expected from our customers, and I think that is something we all should be very happy about. Okay. Thank you very much. Okay, the last question, please. We are going to take our last question from Andreas Håkansson from Exane. Please go ahead. Your line is open. Yes, hi. Coming back a little bit to net interest income to start with. I am just comparing the loan growth in Norway to the NII growth, then it is a huge difference in the negative direction. But then if you look at Sweden, you are growing your loans by 2%, but you are growing your NII by 7.5%, so you have almost the exact opposite. Could you tell us what is happening with margins in Sweden then? Also connected with that, in Denmark, you talk about a mix towards more mortgage products, but could you also give us an update on how the mix is moving from FlexLån to fixed loans? I see in your Realkredit statement today that I think the market is now only 5% FlexLån. Could you tell us how that is progressing and what is the difference in margins between your FlexLån and your fixed line or fixed mortgages? Then last question, I am just surprised in the difference in communication. You have a fully loaded Basel III Q1 ratio of 13.3%, and you talk about seeing potential excess capital by the end of the year, and you are happy to distribute it. I am just comparing to Swedbank in Sweden, for example, that is over 22%, and they said that there is so much uncertainty about future capital requirements, so they cannot see that they have any excess capital. What is it that you see? Do you have full visibility of future regulations, so you are comfortable or you are just ignoring it at the moment? Thanks. Of course, I think the last question was out of line, in the sense that we have said that we have a capital target of 30% minimum, and we have said that the capital target for 2015 will be at 40%, and we will constantly review that target as we move along. Of course, we will always adjust and move towards the fully phased in, which will be taken in as we move towards 2018. If or when the rules changes, we will also adjust. But as you probably know more, I hope you know more, is that the Swedes use Pillar 2 to much larger extent than we do. So we are very comfortable with the present capital position of the bank, and we run it very diligently. Your first question, Claus would like to answer. Yeah. When it comes to the allocation of different loans in Realkredit Danmark, we have, over the last couple of quarters, seen a strong trend towards fixed-rate loans with installments. I think this is an answer or a natural choice from our customers since interest rate levels in Denmark have been historically low during that period. Then the other explanation is also that we have done a lot to incentivize our customers to move away from interest-only loans and into installment loans. Could you tell us what is the difference in margins between the fixed and the floating loans at the moment? Yeah. There is a difference in the margins, and if you looked at the fixed-rate loans, then you will pay around 68 basis points in margins. If you look at interest-only loans fixed rate, you will pay around 101 basis point in margin. Yeah. Thanks. Then finally in Sweden, what is going on there since your NII is growing so quickly? Margins in Sweden have been marginally up during the quarter, then we have seen a small increase in volume. Okay. Thank you. But it is a very small increase. Yes. Okay. That was the last question, so thank you all for the interest in Danske and for your questions. As always, you are all welcome to contact our IR department if you have any more questions when you have time to look into the financial results in detail. A transcript of this conference call will be added to our website within the next few days. Thank you. That will conclude today's conference call. Thank you for your participations. Ladies and gentlemen, you may now disconnect.