Earnings Call: Q1 2015

Apr 30, 2015

Summary

Q1 net profit rose 76% to DKK 5bn, with trading, insurance and customer activity offsetting low-rate pressure on NII. FY net profit guidance remained above DKK 14bn amid rate and economic uncertainty.

Welcome to the Danske Bank's financial results for the first quarter 2015 conference. At this time, all participants are in listening only mode. Later we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to your host, CEO, Thomas Borgen. You may begin. Thank you, operator, and thank you all for taking time to listen in on the call today. In the room with me today, I have the CFO, Henrik Ramlau-Hansen, and our head of IR, Claus Jensen. Slide 2, please. In today's call, I have the pleasure of presenting our financial results for the first quarter of 2015. We will also explain how we see the effect of the extremely low rates on our diversified business model. We aim to keep this presentation to around 20 minutes. After the presentation, we will, as usually, open up for Q&A. Afterwards, feel free to contact our investor relation department if you have any more questions. Slide 3, please. With a net profit of 5 billion kroner for the first quarter of 2015, we have made a strong start to the year, despite the challenges that the substantial decline in central bank rates gave us during the period. I see that the results demonstrate the value of our diversified business model, which enables us to mitigate the negative effect on the NII by increasing income from other business activities. The strong quarterly earnings, which actually exceeded our expectations, were driven by gains in trading and insurance income in particular. The result was also owing to further positive developments in our underlying business as we were able to increase volume and attract new customers across all our business units. For the first quarter, our return on equity came in at 13.2%. This is a substantial improvement from 7.7% the year before. Net profit for the period was 5 billion. This is 76% higher than the level in Q1 last year, and it was driven by improvements in all areas. Our total income rose 80% to more than 12 billion with good progress on all the income lines. This occurred despite severe pressure on NII from unusually low rates. Expenses were flat from the first quarter last year, so the cost income ratio came in at 44.5% or eight percentage points better than in Q1 in 2014. Loan impairment charges, which continue to show the benefit of improving credit quality, amounted to 500 million, down 22% from the year before. The result for non-core activity was a gain of 90 million and in line with our expectations. The Irish property divestments proceeds according to plan, and in the first quarter, we also sold our SME loan portfolio with a gross value of 4 billion. Our capital base remained strong with a common equity tier one ratio of 14.1% and a total capital ratio of 18.4% in Q1 2015. Finally, we reaffirm our guidance for 2015. We expect a net profit for 2015 above DKK 14 billion. Even though the result for the period exceeded our expectations, we find it prudent to maintain this outlook because of continuing uncertainty about interest rates and economic activity. Slide 4, please. Now let me take you through our income statements item by item. NII came in at DKK 5.3 billion. This was 3% above the level the year before, and it reflects larger volumes, lower funding costs, and the repayment of the state hybrids. The item was adversely affected by negative interest rates during part of the quarter. The mitigating actions we have announced will first take effect in the second quarter. Fee income rose 19% as we benefited from increased customer activity, mortgage refinancing, and positive developments at Danske Capital. Net trade income came in at DKK 2.7 billion, up 43% from the level last year. The result was driven primarily by high customer activity in the financial markets as a result of significant development in interest rates and FX. We also saw a positive contribution from fair value adjustment at Group Treasury, whereas model-driven CVA charges had a negative effect. The result for our insurance business amounted to DKK 800 million, almost double the level from last year, as Danica benefited from the positive trend in the financial markets. Danica was therefore able to book the full risk allowance for all interest rate groups. Total income rose 80% above the level last year. Operating expenses were unchanged from the level last year at DKK 5.4 billion, and the cost-income ratio, as said, improved 8 percentage points, now standing at 44.5%. Slide 5, please. All three banking units saw very positive developments in the quarter. Overall, we saw a consolidation of the top-line results and continued to focus on cost efficiency. Customer activity increased at all banking units, and loan impairment charges continued to drop at Personal Banking and Business Banking. If we look at Personal Banking, they delivered a strong result on increasing customer activity with the pre-tax ROE rising 7.4 percentage points, now standing at 20.1%. There were improvements in all areas except NII. The NII was somewhat lower, owing to heavy pressure on deposit margins. The mitigating actions we have announced will start to take effect in the second quarter. Fee income and trading income were up 27% and 31% respectively, as the very low interest rates led to high mortgage refinancing activity and increased demand for investment solutions. Expenses were almost unchanged. Impairments continued to decline and were 27% below the level the year before. Business-wise, we saw strong inflow of new businesses in Norway in the quarter. Lending in Norway rose 10% compared with the preceding quarter after the agreement we made with Akademikerne, and we expect to benefit from this also going forward. In Sweden, where the new management is now fully operational, we announced changes in the branch organization as part of a new platform for growing a profitable business in line with our ambitions as a Nordic universal bank. At Business Banking, the strong momentum we have seen during the past couple of quarters continued. There was a good increase in business activity in Sweden and Norway, where lending volumes grew 3% and 6% respectively compared with the preceding quarter. In Denmark, Business Banking continued to expand, particularly the MobilePay universe, by launching a collaboration with a large supermarket chain, and we expect more agreements to follow. Pre-tax ROE rose close to 7% and now stands at 18.7%. Financially, NII improved as increased business volumes compensated for the pressure on the deposit margins. Fee income was up 30% as a result of higher customer activity, and impairments declined significantly as a result of improved credit quality and more positive market conditions. Finally, at C&I, profit before tax rose 37%, while ROE was up 4.9%, now standing above 17%. C&I had a very busy quarter as developments in the fixed income and FX market led to a very strong increase in customer activity. Against this background, income at the FICC rose 53%, and our Capital Markets business also benefited from strong activity in equities, corporate finance, and bond issuance. According to Bloomberg, Danske became the largest originator of corporate bonds in the Nordic region in the first quarter, with 8% of all issuance. Financially, total income benefited from good underlying growth in all income lines. NII rose 10% as increasing volume compensated for the drop in deposit margins. Expenses were up slightly over the level of the first quarter last year, primarily because of performance-based compensation. Impairments, which normally fluctuates between quarters, amounted to DKK 164 million and related to a few large exposures. Slide seven, please. If we look at our activities within asset management and insurance, both business units continued to deliver a solid performance in the first quarter, and Danske Capital is especially a good example of how our diversified business model compensates from the negative rate environment. The unit responded quickly to the significant changes in interest rates by introducing new investment products tailored to customers who want an alternative to bank deposits. Danske Capital increased its profit before tax 22% over the level the year before. The result was owing to an increase in assets under management and a moderate rise in margins. The improvements reflects high net sales and positive financial markets. Net sales to customer outside Denmark rose to 40%, while assets under management were up 9%, now standing at 813 billion Danish kroner. Danica, our insurance subsidiary, saw a net income of DKK 800 million. The result was significantly higher than the year before, owing to improved conditions in the financial market. As a result of the positive investment result, the risk allowance could be booked to income for all four interest rate groups. Also importantly, the underlying result in Danica was up 7%, with premiums up 6%. Slide seven, please. If we look at our expenses and operating expenses, it was almost unchanged from the year before, now amounting to DKK 5.4 billion. The increase in staff cost compared with the year before was caused by increasing bonuses as a result of strong performance at C&I and a one-off expense related to a pension fund liability. The higher activity level at the business units during the quarter also entailed slightly higher costs. We are committed to maintain a strong focus on expenses at all business units, including support functions, and we expect to continue our cost initiatives during the rest of the year with the aim of reducing nominal expenses to less than DKK 22 billion for the full year. Slide eight, please. The decline in loan impairment charges continued, and it made an important contribution to the improved quarterly result. The charges came in at DKK 500 million for core activities or 22% less than the year before. Impairments were lower at Personal Banking and much lower at Business Banking. We saw a drop of 70% driven by better macroeconomic conditions in Denmark. The loan loss ratio, including non-core activities, declined from 20 basis points to eight basis points or from 14 basis points to 11 basis points in core activities comparing Q1 2015 with Q1 2014. Slide nine, please. Our capital position declined in the first quarter, but it remained very solid. At the end of the quarter, we had a common equity Tier 1 capital ratio of 14.1% and a total capital ratio of 18.4%. A number of factors affected the common equity Tier 1 capital ratio in Q1. Last quarter, we announced the effect of the full share buyback program as a Q1 effect. In combination with phasing in CRD IV, this had an effect of 0.8% on the ratio. Second, we saw a significant rise in business activity, and this in turn caused an increase of DKK 30 billion in the total risk exposure amount. This increase was based on growing lending volumes and significantly stronger activity, especially at C&I, which resulted in higher counterparty risk and market risk. Total capital ratio declined 0.9 of a percentage point from the level in Q4. The decline was offset partly by a new additional Tier 1 issue in February of €750 million as part of our ongoing capital management measures. At the end of the quarter, our leverage ratio was 4.1% according to transitional rules and 3.7% when the new rules are fully phased in. The share buyback program commenced at the end of March, and it is proceeding according to plan. Slide 10, please. In the first quarter, we continued to unwind the remainder of our exposure in Ireland. In February, we sold the SME portfolio of around DKK 4 billion, but with effect on the group's overall capital charge first in Q2. In addition, we also sold or have agreed to sell 950 properties, leaving us with only a small number of properties on the market. Total credit exposure to non-core activities increased DKK 7.4 billion to DKK 47 billion because of our decision to transfer our exposure to personal customers in the Baltics to non-core unit on January 1. The result from non-core activities in the first quarter was a gain of DKK 90 million as we saw a small reversal of loan impairment charges. This was in line with our expectations, and we continue to expect no material impairment charges in 2015. Slide 11, please. The very low interest rate environment has a negative effect on NII, but it should also have a positive effect on our performance, where increasing customer activity is beneficial for trading, fees, and credit quality. Let me try to give you a more comprehensive view of the possible dynamic effects we should expect if interest rates stays at today's very low level for a prolonged period. First of all, the short-term effects were evident in the first quarter, when Personal Banking and Business Banking saw lower NII income, but C&I and Danske Capital saw increased customer activity that drove up trading and fee income. Danica also benefited from positive developments in investment activities. From a longer-term perspective, however, the effects tend to change. At Personal Banking, it is important to recognize that the business is very deposit rich, and as we have explained before, we will not pass the negative interest rates on to personal customers. The very low rates, however, are likely to have a positive effect on credit quality. For that reason, we expect loan impairments to decline. We also expect that higher activity-based income will partly compensate for the pressure on NII, as the very low rates will continue to stimulate growth, particularly in Denmark. We are, of course, constantly monitoring our fee structure in order to adapt to changing in market conditions. Against this background, the longer-term effect on Personal Banking could be neutral or perhaps a small drag on earnings. The trend we expect at Business Banking is largely the same, although we pass on some of the negative rates to our larger business customers. In combination with a positive effect of better credit quality and higher activity-based income, this leads us to believe that the longer-term effect of the pressure on NII in Business Banking can be neutralized or, in best case, outweighed by other factors. At C&I, we pass on most of the negative rates to our customers. The customers at General Banking and Capital Markets will benefit from low interest rates, which will lead to ample new business opportunities, which will benefit our C&I activity-based income. In addition, we expect customer activity at FICC to remain at a level that reflects the higher volatility in the FX markets and the effect on the yield curves from quantitative easings in the Eurozone. It, of course, remains difficult to predict the longer-term effects of changes in volatility and yield curves, however. Overall, C&I could even benefit from the effects of negative interest rates. At Danske Capital, the positive short-term trend is driven by switching between asset classes, and this will undoubtedly continue over the longer term. The quest for a reasonable return from various assets will be driven not only by the trend in Danish interest rates, but also to a large degree from the effect of the ECB's quantitative easing program in the Eurozone. At our life insurance business, legacy products with guaranteed benefits are increasingly challenged as the reinvestment yield of the portfolio falls, making it harder for us to deliver high returns. However, in the past 12 months, Danica has improved its investments organization significantly, both with regards to structure, strategy, and people. Danica has developed a new investment strategy to enable a stronger response to these challenges through both innovative portfolio solutions and an accelerated shift into alternative investments. Slide 12, please. Finally, before your questions, let me turn to our guidance for the full year. We reaffirm our guidance of a net profit above DKK 14 billion. While we acknowledge that our results for the first quarter exceeded our expectations, we find it prudent to maintain our guidance as the future developments in interest rates, customer activity, and economic growth remain uncertain. If customer activity remains high and macroeconomic conditions continue to improve, we may revise our guidance. We continue to expect total income at around the same level as in 2014. Income will be benefited from the high net trading income in the first quarter and from lower funding costs, but negative interest rates will put pressure on NII. Expenses are expected to be below DKK 22 billion. Impairment charges in our core activities are expected to remain low. At our non-core business, we expect the pre-tax results at around zero. Slide 13, please. Those were my initial comments and messages. We are now ready for your questions, but please limit yourself to two questions. If you are listening to the conference call from our website, you are welcome to ask questions by email. Operator, we are now ready for the Q&A session. Thank you. We will now begin the question and answer session. If you have a question, please press star then 1 on your touchtone phone. If you wish to be removed from the queue, you can press the hash key or the pound sign. Once again, it is star then 1 to ask a question. First question comes from Asbjørn Mørk from Carnegie. Please go ahead. Yes, good afternoon. I have two questions, please. First of all, if you can guide us a little bit on your net interest income development for the coming quarters. If I remember correctly, you have been saying a couple of times that the mitigating impacts for Q1 from the low interest rates were more or less zero. So what should we expect going forward, especially looking into Q2? And then, of course, also looking into a full-year impact both on a gross and net basis. That would be very helpful. Thank you. The second question on your risk exposure amount, the growth that we see for Q1, how much of that would you see as a temporary growth? And how would that change, or would this change the communication that you have had earlier, saying that your REAs should be largely stable until 2018? Thank you. Yeah. I will ask our CFO to respond to both questions. Henrik. Okay. Thank you very much. Henrik Ramlau here. Your first question in relation to the NII. You are right that our mitigating actions are virtually not included in the Q1 figures. If you take the Q1 figures and, so to say, annualize the Q1 figures, then the mitigating actions should flow into from Q2 and onwards. You should also bear in mind that the full effect of the negative interest rate is not fully embedded in the Q1 figures. Roughly two-third of that is embedded in the Q1 figures. Then you should also add that we have underlyingly a good business momentum in the lending volumes. So net, if you annualize our Q1 figures, we expect our full year net interest income to be above that figure. Then you had a question about our risk exposure, and as Thomas mentioned, of course, the impact of the share buyback and the CRD IV phasing in the 0.2 percentage points are, so to say, full year effect we have included, we have as we should, in the Q1 figures, and they will not reappear in the following quarters, of course. As you can see on the illustration on slide 9, then especially the counterparty risk and the market risk could, to some extent, be treated as a one-off effect. Of course, it depends on how interest rates and currency rates develops in the coming quarters. But to some extent, you can treat them as one-off effects in Q1. Okay. If I could just go back to your net interest income. If I remember correctly, you said that the gross impact, all things equal, would be around DKK 1.4 billion, and that you could mitigate around half of that. Then we have the central bank current account limit increases as well, adding around DKK 300 million or so to your net interest income. So I'm just thinking, is DKK 400 million net headwind from low interest rates, is that the level we should expect for this year? Or am I doing something wrong here? No, I think you're not far off. I think if we recap what we said last time, we said the net effect was around DKK 700 million on all the negative rates adjustments. We have had approximately DKK 250 million in this quarter, and then your calculation makes more or less sense, plus, minus. Okay, and then if I could just follow up on the REA. If I understood you correctly, you say it is a one-off. Does that mean that there will not be any growth for Q2, or does it mean that the growth that we have seen for Q1 will basically disappear again in Q2, and we should expect REAs to come down significantly for the next three quarters? No, what I said was that the counterparty risk follows from the fact that interest rates came down and also the dollar went up. Also, the increase in market risk is due to the turbulence that we experienced in the financial markets here in Q1. Of course, when our growth continues in the coming quarters, there will also be an impact on the growth in the coming quarters. But as we have been through a number of times with you know that we have a number of issues outstanding with the FSA, the various models implementations, and so on. They will, of course, have an impact also in the coming quarters. Okay. Thank you very much. Our next question comes from Jakob Brink from ABG. Please go ahead. Yes, sorry for actually going back to where we left with the other question. In the Q4 conference call, as Espian just stated as well, you said that RWA would be flat until 2018. Now you start with a 7% growth in the first quarter. As far as I understand now you are talking about flat RWAs for the full year 2015. What is it that should mitigate the expected 2% loan growth from 2015 to 2018? I mean, if you will actually have flat RWAs at the end of this year. That is the first question. The second question is, you show a graph someplace showing that return on equity, allocated equity goes up in all the business units. I also noticed that the capital allocation in all those business units is actually coming down quite significantly, and the unallocated capital is up to DKK 21 billion from DKK 8 billion in Q1 last year. Could you give us some detail on why you are putting so much capital into unallocated and what is the plan with that going forward? Thank you. I will take your first question. It is important question. When we presented the bridge, and that is the ROE bridge from 2015, 2018, we assumed a flat ROE, sorry, a flat risk-weight basis based on a 2% loan growth. All other things being equal, there is no changes to that expectations. There is some technical issues in Q1 which has made risk-weighted assets slightly higher, but that will fall off again in Q2 and Q3. So it is more a timing issue. However, the growth, the underlying growth in Q1 has been much higher on two accounts. One is the counterparty, which Henrik alluded to, which may fall off again, we do not know. More importantly is that we have had a higher underlying loan growth, actually 3 percentage points in Q1. That is a profitable growth, and that growth is slightly higher than we predicted. If we continue to see profitable growth, we may have a higher risk-weighted asset than we indicated in the bridge for the ROE. But that should only sustain and be supportive for the business case of Danske Bank. Was that okay, Jacob? Yes. Excellent. Thank you. Then your second question. Yeah. Sorry. You had a question around allocated capital. Yeah, just looking that it seems like a lot of the improvement in return on equity from 12.7% to 20% in Personal Banking and so forth is, it's a lot driven by the fact that you have lowered the allocated capital from DKK 32 billion to DKK 26 billion in the Personal Banking and so forth. Then you end up with a lot of unallocated capital. Why is that? We can perhaps take it bilaterally, but the major impact is, of course, that we made goodwill write-off of DKK 9 billion in Q4. Yeah, that's true. That's at least a contributing factor. But the unallocated, I guess that doesn't explain the unallocated part of why that is up so much. But part of the unallocated is that we have started the year with a common equity tier one ratio of 15%, and we basically allocate 14% out to the business unit. But we can take that bilaterally. Okay. Thank you. Our next question comes from Mads Thinggaard from Handelsbanken. Please go ahead. Yes, good afternoon. This is Mads Thinggaard with the two questions. The first is regarding the high lending growth we see this quarter. I think it could be helpful, if possible, if you could try to establish a link from this 2.6 sequential lending growth to its income. How much income do you think this will generate? Of course, that also relates to the increase in the RWA and the capital there. So I think that could be quite helpful, and also if you expect this growth to continue. Then touching on also on the capital allocation within C&I. Of course, it is up this quarter again on the high activity. I also noted that the employees are up again in Q1 as it was in Q4. But you made this plan in Q3 about cutting capital consumption in C&I and also cutting costs in C&I. Could you perhaps put some light on when we should expect capital consumption and FTEs to come down in C&I? Yeah. Thank you. When it comes to capital allocation specifically, I will leave that to Henrik Ramlau-Hansen. But the strategy within C&I is going just according to plan. The FTEs you should be very cautious about because that is more technical and movements between the various business units, particularly between Business Banking and C&I, and you will see a big drop there and also some movements between operation and C&I. So the cost plan, the de-risking is going as planned, and there is no change to that. That said, first quarter was a very high activity level, so we have not reduced to the same speed as we intended, and that is why the adjustment actually just came yesterday or was at least announced yesterday with a further cut of 50 FTE. I think that the capital allocation went up primarily because of counterparty risk and market risk due to the volatility in this quarter. Underlyingly, there is a de-risking taking place. I think we could just say it's been postponed a quarter due to this very high activity in Q1. That said, if the activity continues, which is a very profitable activity, again, it may be postponed somewhat. Again, it's a trade-off we will need to make at management. Okay, sure. When it comes to the lending side or lending growth, we had, as you alluded to, a 3% lending growth in Q1. It's very hard to predict the lending growth for the full year, but we can see that the response we get from our clients are longer than we have anticipated basically in all our markets. It is a very profitable growth, and it's very hard to see it, particularly in the NII in the Q1 results, as mostly of that growth came with the latter part of the quarter. I think you can make some simple assumptions as we did in the bridge, or the ROE bridge, to assume that the growth will happen at today's margins, and then you can just analyze it, and then you get the effects of the increased lending, actually. That will make it a profitable growth, particularly when you get that similar business with it. I think that's the assumption you can make. Okay. But it came in by the end of the quarter, so that's a bit of an overhang for Q2. Yeah, I think that's fair to say, because you don't start the 1st of January with a full growth, and it's slightly backended. Yes. Okay, great. Thanks a lot. Our next question comes from Ronit Ghose from Citi. Please go ahead. Great. Thank you. Hi, it's Ronit from Citi. I just want to follow up on some of the questions that have been asked already, specifically on the REA development. Again, going back to your slide, I think slide 9, which is very helpful. The vast bulk of the Q-on-Q increase in REA is credit risk. I'm trying to understand if there's any one-off element to it, or is this simply due to the volume growth that you've talked about that you've put on? Because I can see how market risk and counterparty risk could come down, but I'm still trying to really understand how that 896 number can get anywhere close to the 866 at the start of the year. It looks like we'll be at a considerably higher number than 866 as the year goes on, unless there's a lot of model change, other mitigation that I'm not aware of. On a linked point, the volume growth that you've put on, which has positively surprised you. If I break it down into countries, again, in the fact book, you've got some great disclosure. I'm looking at Personal Banking and Business Banking. Could you just tell us in Norway, in Personal Banking, there's a 10 or DKK 11 billion increase in loans or a 15% headline. Now, I know the FX moved, and then there's one big contract you got, the Akademikerne one. So what is the underlying growth rate there, and what do you expect that to be going forward? I mean, just trying to work out, even after adjusting for FX, it looks like there's about a 10% Q-on-Q loan growth in Personal Banking. So once you take out that one big contract win, what's the kind of underlying growth rate, and do you expect to continue to make this major push for the next couple of quarters? We should assume that Business Banking, Personal Banking still sees very strong volume growth in Norway. Thank you. Yeah. Let me take your last question first. Yes, you're very right. Actually, the underlying growth in Norway, both in Business Banking and in Personal Banking, is going very well. There is underlying growth due to a very high intake of new clients. Actually, I think in Q1, we onboarded approximately 250 clients every day, which made this good volume on mortgages at low LTVs. Again, looking forward, I think we are on a good growth path, but I think that we can assume that the growth rate will abate somewhat. But again, it will be at high rates. But having a 40% growth rate, because we're approximately 10% up in Q1, I think it's hard to foresee. So it probably will come down, but high. Business Banking is basically just continuing the growth path it had had in several quarters. So that's just a good ordinary business. On Personal Banking, sorry to butt in, on Personal Banking to the underlying 10% loan growth Q-on-Q, how much of that is a one-off contract win relation? I do not know. But of course, it is not a one contract off, but of course, Sure, I know, yeah. You allude to customers who are related to what you call Akademikerne. Of course, that is a major part of the number of clients come on board. But you probably have seen that there is a very positive sentiment around Danske in Norway, and we are benefiting from that. Yeah, that's right. Yeah. Okay? Okay. On the REAs? Yeah. Let Henrik try to do that one. Yeah, thank you. You asked about the full year development. You also asked about the credit growth and the volume growth. As you can see on slide 9, the blue part, that is roughly the half of the increase of the DKK 30 billion. There, roughly two-third of the blue part is actually the volume growth, the lending. The light blue is some minor model changes. Then you asked about the full year effect if you take the 896 as the starting point. There, we have mentioned a couple of times that we have a number of outstanding issues. We are working on getting our Finnish business, our corporate business on IRB. We have outstanding orders 2 and 3 with the Danish FSA, which is still, so to say, pending. We have a couple of applications, one on counterparty risk, another one on specific market risk. Then we have also mentioned that still the run-off of non-core will have an impact in From Q2 and onwards, also we are working further on bringing the risk down in C&I. If you take it all together, it is our expectation that full year we will come in below the 896. Let me mention as an example, we expect the run-off of non-core, the sale of the SME portfolio, to have an effect of roughly DKK 9 billion in Q2. Right. That is very clear. So below 896, but 866 is probably a stretch too far. Probably, but it also depends on the volume growth. Yeah, I think that's the run rate. I think it depends on the lending growth. To all of you, of course, this has positively surprised us that there is so keen interest in our products and services. As long as it is profitable, we will need to manage this within the guidance we always give you. Great. Thank you. Our next question comes from Jan Wolter from Credit Suisse. Please go ahead. Yes. Hi, Jan Wolter here, Credit Suisse. I think you mentioned earlier in the call over and above the SME portfolio, there are another 950 properties being sold. Is that correct? If so, what kind of RWA does these properties represent, if that is an additional help in lowering the RWA going forward? Second question, cost of risk, especially in Denmark, came in at a fairly low level. Does this reflect an underlying improvement in credit quality? Is a new lower level reached, or how do you see the development here in the coming year? Thank you. I will ask Claus to respond to those two questions. Yeah. Hi, Jan. To take your last question first. Yes, credit quality continues to improve, and I would say an additional factor that is contributing is, of course, the very low interest rates, which has made the Danish economy gain a little more momentum than what we have seen previously. We are already at a very low level, also compared to what we have alluded to before as a normal loan loss ratio level. We do not anticipate any significant improvement going forward on our loan loss ratio. But we, on the other hand, cannot see a move in the opposite direction. I think it's fair to say that it will probably remain stable at a low level. When it comes to the number that Thomas mentioned during his speech on the property divestment in the non-core Ireland, this number was a combination of what we have agreed to sell and what we actually have sold in the first quarter. So the remaining part is around 429 properties. That will also have an effect in our risk exposure amount in non-core, and you will continue to see that number drop during 2015. Many thanks. That's very helpful. Our next question comes from Omar Keenan from Deutsche Bank. Please go ahead. Hi, good afternoon. Thanks very much for taking the questions. I have just got two questions. One on mortgages, and the other on the current level of fee income. Firstly, on Danish mortgages, Denmark still has the lowest margins in Europe, or in the case of Denmark, contribution margins rather than spreads. The head of the FSA recently spoke of guarding against the risk of early bubbles in Denmark. Just conceptually, if we move towards 25% risk weights, can you envisage that there will be further margin increases on mortgages in response to that? My second question is on fee income. Very strong performance in fee income this quarter. How much do you think of it is sustainable going forward? Can we expect the same level to be maintained in the coming quarters? Thank you. Okay. Let me take your last one first. The fee income is a combination of, let us call it, very high refinance activity, particularly in the mortgage side. It is the combination of good fee development in Danske Capital, and not at least good fee development in C&I and business activity in general. I think it very much depends on economic activity in general. I still expect a relatively high refinancing fees in Q2, but again, it depends on how many remortgages which will take place. But it seems to be still at the high activity. When it comes to Danske Capital, they continue to perform well, and we continue to see switches from lower yielding asset management fees to slightly higher. Yes, positive there. The final thing, it depends on the development of the capital markets and the economic activity in general. I think it is too early to call that one. But if the economy bites its kind of Fall through, we can continue to see strong activity, but there is where we always need to be cautious going forward. But we have to say that it was a very strong Q1, and we need to work very hard to keep that at the same level going forward. Going back to your first question, if the FSA, for whatever reason, adjusts the framework or risk-weighted assets or other adjustments to the way we treat mortgages, we, of course, need to look into how we price it and the market dynamics going from there. But that is pure speculation. But we are living in a market where market dynamics usually work well, but it is too early to call that now. Okay, thank you. Our next question comes from Christoffer Rosquist from Barclays. Please go ahead. Yes, thank you for taking the questions. I have two follow-up questions. The first one on the execution of the strategy for C&I that you announced in the third quarter last year. If you just could provide just a little bit more clarity or color on the progress. Should I understand that you have reevaluated opportunity in the various segments that you are active, that they have improved? Or is it simply a postponement that you have done to take part of the activity level that increased in the first quarter? Also, we have seen capital, over the last two, three years, allocated capital has increased in that division. So I think Henrik mentioned that division as a contribution to the RWA decrease. Could you give us a number for how much capital you expect to release from that division? My second question is a follow-up on the credit quality in Denmark. I wanted to ask, what is the stock of provisions against the Danish book specifically, and what is preventing you from Or actually, if I look then at the reversals and inflows of provisions, if there is still something coming from Denmark, because there seems to be quite a lot of inflows actually of provisions, or what is preventing you from releasing more of the Danish provisions? Okay, thanks. Claus will take your last question. Yes. We continue to see reversals as we have seen over the last couple of quarters. I think the numbers we saw in the last quarter of 2014, repeats itself here in the first quarter. Of course, we cannot rule out that there can be more reversals coming if the credit quality continues to improve. That is specifically for Denmark, and since this is a very dynamic process, we believe that input from other business areas, we know that C&I can fluctuate from quarter to quarter, will make the impairment level or the loan loss ratio quite stable. You are right, we cannot rule out that there could be a further increase in reversals in the Danish part of the business. Can I just on the, I think you had DKK 1 billion of reversals in the fourth quarter and DKK 2.3 billion in the first. Is that mainly due to improvement in Denmark and everything else equal, that is what we could continue to see if there is an economic improvement in Denmark? We have already seen quite a substantial improvement in Business Banking. That is one of the areas where we could expect things to continue, as Business Banking is the area taking up the major part of our allowance account. Okay, thank you. I think overall, if you take the big picture on loan losses, it is alluded to a previous answer which was given is that we will expect impairments to remain low. But of course, there is a risk that it can get even lower. There is no change to the strategy in C&I. We are progressing according to plan. We are de-risking the FICC, taking down cost, and taking down capital. But due to the very exceptional circumstances into Q1 and being sure that we capture the opportunity in the FICC business, the capital consumption has been slightly higher, basically due to counterparty risk and market risk. But the movement of the bond portfolio and also taking down the risk mandates is going according to plan, and the buildup of capital market products is also going according to plan. However, the downsizing of some of the functions has been postponed due to some more cyclical adjustments, but the structural changes has not changed and will not change. That is why we will continue with the strategy as announced in Q3. So the improvement in profitability in the division and in investment banking particularly, is that sort of a one-off gain in your inventory in FIG that you are holding, or is that customer-driven but then not sustainable, that you do not It is. We have reduced, as we have announced several times, the market making and inventory. This is basically based on extremely keen customer interest in Q1 due to the very strong interest in Danish interest rates and the Danish kroner. How we will perform in FICC business going forward will depend on several items, among other things, the volatility and the customer activity in that market. But we have, as you probably know, a very good platform. We are one of the leading institutions in the Nordics, in the FICC business, but as capital has become expensive and this business line has been very capital heavy on the new regulation, we have decided to bring that down and that is going according to plan, but maybe with a slight delay due to the volatility and opportunities we seized in Q1. Okay. Thank you. Is that clear enough for you, or? Well, I suppose, would you expect capital to revert to the, that you exit the specific segments that then have absorbed capital and you go back to the, let's say 2012 levels of allocated capital to C&I? Or how specific do you dare to be? In Q3, when we announced the strategy, we are very clear on where we expected capital consumption, cost consumption, and top line, and there is no change to that except that this quarter's volatility consumed some more capital than we expected, and the top line is substantially higher than expected. I think that is the only change I can comment on. I think overall, no change in strategy, but I think it is to the benefit of all stakeholders that we utilize the very good platform to service our clients and make a healthy profit for the bank in this quarter. Thanks so much. Our next question comes from Matthew Clark from Nomura. Please go ahead. Hi. Two questions, please. One, could you give us the component of the first quarter RWA growth that came from FX translation? Then secondly, on bonus costs, it is up year-on-year. I guess we would expect that with the strong trading revenues, but last year it was pretty flat through the year. I am just wondering whether the bonuses associated with the strong first quarter trading are fully reflected in the first quarter cost base, and we should expect some tailwind as the year progresses or whether you have to accrue that over a service period over the full year or several years. So whether that bonus component of the cost is going to stay high for the rest of the year. Thanks. Okay. I'll leave it to Henrik to answer those two questions. In terms of your question regarding bonus cost, yes, that's included in our Q1 figure to an amount of around 50 million kroner. In terms of the impact of the foreign exchange on the risk exposure amount, which I don't have here a specific number, I can mention for you that especially the rise of the dollar has had a substantial effect on our counterparty risk. Okay. Thank you. Our next question comes from Riccardo Rovere from Mediobanca. Please go ahead. Good afternoon to everybody. First question is, I just want to try to understand how you think about your capital and your RWA density. Your capital of 14.1% is actually 13.1%, if I am not mistaken, with the fully phased. You have, let's say, a RWA density of roughly 25%, even including the spike of risk exposure in this quarter, which is well below the European average. In light of what new regulation may prepare for banks in the coming quarters, I am talking about the TLAC RWA harmonization. How do you think about how do you see your capital? How do you think about all these possible threats on your level of RWA? This is the first question. The second question I wanted, just a clarification. If I am not mistaken you consider the results reached by Danica in this quarter as, let's say, above normal. The results of especially trading to be above normal. If I am not mistaken, also fee income is somehow considered to be above normal. Is that correct? Is that correct reading from your previous wording? In this context, is it possible to have a number for fees related to the mortgages refinancing? Last thing, is it possible to have an idea of the Basel III fully loaded leverage ratio, please? Okay. I can take the last one first. Fully loaded 3.7% on the leverage. I will take your second question first. There is no doubt that the first quarter was a very active quarter for Danske Bank, and that it exceeded our expectations. In that sense, you can say that some of the activity-based fees, which you alluded to, are higher than what we can expect if you call something a normal market conditions. I think what we can say is that we have been able to compensate with our business model some of the negative effects of negative rates by having a very good business model on those units. Yes, we did not expect a 13.2% ROE in this quarter, and we did not expect all this activity. We will be as usually, a reflection of the economic activity. Then we need to see how that develops going forward, and that relates to some of the answers I have given to your previous questions. When it comes to new regulation, as everybody on the call knows, it is a moving target. That said, the regulation of Denmark is actually pretty firm for the time being, and we believe that we operate in a very robust environment. If new regulation will change the game, we will also change the way we need to price or adjust the portfolio. So far, we believe we have a very strong position with very strong capital, as you alluded to, 14.1% Q1, and we have acceptable total leverage that we can also adjust if, and it is not expected, but if there comes any high leverage ratios. Because as you know, it is an adjustment we can do on our derivatives portfolio or on the repo book. So overall, we are comfortable on the position, and we'll look into any changes as they come along. Thank you very much. May I have the number of the fees related to the mortgage refinancing, please? The mortgage refinancing is approximately 200 million. Thank you very much. Thanks. Thank you. Our next question comes from Jacob Kruse, Autonomous. Please go ahead. Hi, Jacob from Autonomous. Two questions. The first one on your net interest income. You say in your presentation that the drop in the quarter on the deposit, I guess, was minus DKK 415 million. I suppose that's what, two months of lower interest rate of DKK 425 million. That's two months of lower interest rates. If I were to annualize that would be about DKK 2.6 billion on a full year basis, which seems like a lot more than you talked about, I think previously DKK 1.4 billion or so of negative NII effect on a full year basis for the rate cuts that were seen. I just wanted to clarify what the impact of the deposit rate really is pre-mitigation. Then just to be clear, the mitigation you still say is about DKK 700 million that you've done during the quarter, which we don't see yet in Q1. That's net interest income effect rather than fee effect. Secondly, you get about DKK 300 million from the wider current account limit, assuming you use that limitation or that allowance. If I could just clarify those points. My second question was just on your Personal Banking division. You have now cut your branches over the past two years by almost 40%, from 215 to 138. You've cut your cost by only 7% and your staff by about 11%. Is that some sort of lag effect there? Can we expect to see your cost come down closer to your reduction in distribution network, or is that all getting reinvested? I guess especially given that your revenues do not really grow, I am not quite sure what the reinvestment goes to. Thank you. I will take your last question. We will continue to be very diligent on costs as we have been during the last couple of years. As we have guided you in connection with Q4 and continue to guide you now, the cost will come below DKK 22 billion. We are also giving you the guidance on the ROE bridge to 2018 that we will look at costs going forward. We do not guide on FTE because I think FTE is a number we should be cautious about. It is basically how we set up an efficient bank for our customers. We will always look at opportunities to reinvest if you find it profitable, but overall, you should expect costs to come down. Then you allude to Personal Banking by itself. Personal Banking has been very diligent on cost for the last couple of years, and they will continue to be very diligent also going forward. You ask specifically if it is backloaded. No, what we are doing is when we merge branches, we actually do not take out all the FTEs in one branch. Actually, we increase the total staff in the new branch to make it even a more competent place for our customers to be advised. So there will always be a lag on the FTE in relation to the number of branches. But I think you need to take a step back and look at overall cost development of the bank, where we will remain to be ambitious towards both this year, but not least towards 2018. Then NII, Claus will answer. Yeah. The number we have alluded to a number of times, the gross effect of DKK 1.4 billion, is based on our guidance for interest rate sensitivity, which we have confirmed a number of times, which is around DKK 800 million plus or minus for each 25 basis points change in interest rates. Then you can look at the share we have in Denmark. So it is quite easy to calculate the DKK 1.4 billion. That is a combination of many moving parts. The deposit effect is one of the parts, but also lending, and our equity, and also our hold-to-maturity portfolio is a part of the total interest rate sensitivity that we provide. That is why you cannot compare the DKK 425 million we have disclosed on slide 20 to the guidance that we have given to the market. I suggest that if it leaves any questions, please call us in IR afterwards, and then we can take it from there. Okay. Just to confirm, the mitigation that you have for Q2 onwards is still about DKK 1 billion, including the current account allowance. We have said that we were able to mitigate around DKK 700 million out of the DKK 1.4 billion. We have not given any guidance on the effect from the current account with the central bank since the development in the balance of that account is uncertain, and since this will be a split between both net interest income and also net trading income. Okay. Thank you very much. Our next question comes from Andreas Håkansson from Exane. Please go ahead. Yes. Hi. First question on, also on page 20 on the NII bridge. There is DKK 189 million positive from lending effect. Could you split it up a little bit? Tell us about what volumes and what margins doing, and if you can tell us a little bit about margins by products. Then coming back to questions early in the call about capital allocation. Could you just remind us, how is the Realkredit Danmark? How is that split between the divisions, please? Okay. Claus to the first question. Yeah. Andreas, we have a breakdown of the movements in the fact book on page 11, where you can have a breakdown on lending volume margin, deposit volume, deposit margin per business unit. I think I will allow myself to refer to this page, instead of going through the numbers here on the call. But could we get something, because we had Nordea yesterday saying that the only country where they see real margin pressure on the asset side is in Denmark. Do you have the same feeling or do you have a different view that's more by country rather than by division? I think as we have alluded to in a number of conference calls, we confirm that there is a fierce competition, especially for SME lending in Denmark, and that's still the picture we see here. Okay. And in terms of Realkredit Danmark, it's roughly 50/50 that belongs to Business Banking and 50% to Personal Banking. There's only very small proportion in C&I. And you can also see in the fact book on page 74 and 75, there's a split up of Realkredit Danmark into the various business units. Can I just ask, because the combined capital allocation to Personal Banking and Business Banking is DKK 63 billion, right? Realkredit Danmark has DKK 46 billion. That leaves us DKK 17 billion for all non-Realkredit Danmark banking, which is quite a lot of Danish banking and all the foreign banking. How should we think about that? In the legal capital in Realkredit Danmark, from a group perspective, there is a lot of excess capital. I suggest we take it bilaterally how we split that out into the various business units. Yeah, because it is quite interesting if it is just DKK 17 billion for all the international businesses. That looks quite thin, I would say. Okay. I propose, as Henrik said, that you take the capital allocation on RD bilaterally. We need the last question. Our last question comes from Christian Hede from Nordea. Please go ahead. Yes. Good afternoon. I start by apologizing, I came in a bit late, so maybe the questions have been answered. So two questions. One is a rather detailed one, or it's a question on deposit guarantee scheme and the Common Resolution Fund. Do you have any more knowledge about the timing of these things? The second one probably goes back to something you talked about before in terms of the RWA. I just want to confirm, or may want you to confirm that are we talking about unchanged levels for 2015 except for the fact that we will see that there might be higher lending growth. So i.e., if lending growth is not higher than you expect, then you should end up at the DKK 865, DKK 66. Thank you. I can take the last one as you are late to the party. You can have a look at the transcript. Basically I confirm that we will probably have a higher RWA end of Q4 than we are having at the end of Q4 2014, but lower than the Q1 we have now. Again, it depends on the growth and the profit growth we're seeing. But as you know, there is a lot of technical issues, so we have been through this in detail previously. Okay. Thank you. Henrik will answer the first one. In terms of the deposit guarantee scheme, where we currently are paying DKK 600 million-DKK 700 million per annum, we expect that to expire during 2015. So we will not pay for that in 2016. It will be, so to say, be substituted by this resolution fund we need to pay too, where we are going to pay a full amount, DKK 300 million-DKK 400 million starting from 2016. There will probably be a payment of DKK 130 million to DKK 150 million this year. Okay. Do you have any timing on the guarantee scheme when it is going to stop? Because I think we heard at some point that it might stop already in August, or is that too early to say? I think that is too early to say, but as I was saying, it stops by the end of this year. Okay. Thank you. Okay. Thank you very much to all of you for this keen interest. As always, you are more than welcome to contact our IR department if you have any more questions after you have time to look at the accounts in more detail. As usual, a transcript of this conference call will be added to our website within the next few days. Thank you very much.