Earnings Call: Q3 2014

Oct 30, 2014

Summary

9M net profit was DKK 10.1bn and annualized ROE reached 8.9%; expenses and impairments declined YoY. FY net profit guidance rose to DKK 11.5bn–13.5bn, while C&I targets a 50% return on allocated capital from 2015.

Welcome to the Interim Report the first nine months of 2014 conference call. At this time, all participants are in listen 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. Thank you all for taking time to listen in to this call today. Together with me in today's call, I have the CFO, Henrik Ramlau-Hansen, and the Head of Investor Relations, Claus Ingar Jensen. Slide 2, please. The main purpose of today's call is to present Danske Bank's financial results for the first nine months of 2014. We will also give you some insight into the AQR results for Danske Bank and our ongoing business review. We will then wrap up with an outlook for the full year of 2014. I aim to keep this presentation to around 20 minutes, and after the presentation, we will open up for a Q&A session as usual. Slide 3, please. Please note that we have gradually improved our financial performance in the first nine months of the year. Our results give good evidence that we are continuing to execute on our strategy and strengthen our position as a Nordic universal bank. For the first three quarters, our return on equity came in at the annualized rate of 8.9%. This is a notable improvement from the ROE of 4.9% in the same period last year. If we exclude the income from the sale of Nets, the return on equity was 8%. Net profit came to DKK 10.1 billion for the period. This is almost double the level from last year, and it was driven by improvements in all key areas. We lifted total income to DKK 32.6 billion, with good progress in all income lines except from other income, which was more or less stable. Expenses amounted to DKK 16.6 billion, as we continue to see positive effects from our cost savings initiatives. Impairments came in at DKK 1.9 billion for the period, which is a decline of 39%, as we have seen a general improvement in credit quality since last year. The result of our non-core activities was a loss before tax of DKK 1 billion, with Irish property divestments progressing well and according to plan. Our capital base remained very strong, with a common equity Tier 1 ratio of 15% and a total ratio of 19.3% at the end of September. Finally, on the basis of the satisfactory results for the first nine months, we are increasing our guidance for the profit for the full year from DKK 10 billion-DKK 13 billion to DKK 11.5 billion-DKK 13.5 billion. Slide 4, please. Now let me take you through our income statements item by item. Net interest income came in at DKK 17.2 billion. This was 5% above the level last year due to repricing of deposits, lower funding costs, and additional income from the investment of our liquidity bond portfolio. Fee income rose 12% and was split almost evenly between activity fees and portfolio fees. Net trading income was up 29%. Part of the improvement came from the gain of Nets of around DKK 1 billion in the second quarter. Excluding this one-off item, trading income improved by around DKK 250 million, primarily because of higher client-driven income from capital markets and transaction banking business. The result from Danica's insurance business amounted to DKK 1.3 billion, up from the poor 2013 results of DKK 0.5 billion, which reflected the adverse developments in the financial markets at that time. The result for the first nine months of 2014 made it possible to book the risk allowance to income for all four interest rate groups. Total income rose 13% from the level of the same period last year. If we look at expenses, they fell 4% as a result of our focus on costs and efficiency measures, and the cost-income ratio dropped 8.7 percentage points, now standing at 50.7%. Slide 5, please. All three banking units saw improvements in the first nine months of the year, particularly Personal Banking and C&I. At Personal Banking, pre-tax ROE rose 5.7% to 15.3% with improvements in four areas. Fee income was up 10%, primarily from increased customer activity. Trading income benefited from higher refinancing fees at Realkredit Danmark. Costs were reduced 11% as a result of tight cost control, and we saw declining impairments due to improved credit quality in Denmark in particular. At Business Banking, pre-tax ROE improved 2.5 percentage points to 13.3%. Total income was up slightly as increased business and high volumes compensated for lower trading income. Expenses were slightly lower as a result of cost control. Impairments were down a full 36%. Finally, at C&I, profits before tax increased 40%, while ROE improved a modest 1.8 percentage points to 12%, and this is due to a 20% increase in allocated capital. Total income grew 15% on improvements in all major income lines. Client-driven income from general banking, capital markets, and sales was up more than DKK 900 million, and this was the reason for the positive development in net interest income, fee income, and trading income. Income from market making was almost unchanged in an environment of very low rates, low volatility, and no clear trends. Slide 6, please. Let's have a look on our activities within asset management and insurance. Both business units continued to perform satisfactorily. Danske Capital posted a profit before tax that was 22% higher than in the same period last year. The gain came from an increase in assets under management and higher margins. Part of the rise in assets under management was the effect of positive financial markets, while the margin improvement came from better product mix with higher proportion of equities and alternative investments. Assets under management rose 11% to DKK 791 billion. Danica, our insurance subsidiary, saw a net income of more than DKK 1.3 billion as a result of higher premiums and improved market conditions. The same period last year was affected by adverse developments in the financial markets. We continue to see growing synergies between Danica and the banking units. In the first nine months, our cross-selling efforts produced a 25% increase in sale of pension products to personal customers through other business units. Because of the positive investment result, we were able to book the risk allowance to income in full for all four interest rate groups. Slide 7, please. Let's have a look at expenses. The positive trend we have seen in the preceding quarters continued. In the first 9 months, total expenses amounted to DKK 16.6 billion, a reduction of 4% from the earlier year level. We continue to execute on our cost-saving initiatives. Expenses were down in almost all underlying cost lines. Expenses for staff, consultants, and our contribution to the bank packages especially were lower than the first 9 months of 2013. In the third quarter of 2014, however, expenses were affected by a write-down on property, whereas restructuring costs were in line with the level in the preceding quarter. As we have explained previously, certain cost items are back and loaded, and we therefore expect that expenses to be higher in the fourth quarter than in the first three. We expect total expenses for the full year to be below DKK 23 billion, and we will keep focusing on initiatives that ensure a good basis for further reductions in 2015. Slide 8, please. As a result of slightly improved macroeconomic conditions, particularly in Denmark, impairment charges in our core activities declined 39% in the first 9 months. Impairments were slightly higher in the third quarter, with varied development in the three banking units. At Personal Banking, impairments rose in the quarter, mainly due to collective charges we took against weak customers in Denmark. At Business Banking, impairments rose mainly due to collective charges against our exposure to agriculture because of pressure on earnings for pig and dairy producers. At C&I, where impairments usually fluctuate between quarters, we were able to make a small reversal of previous charges. The loan loss ratio for core activities was almost unchanged from the second quarter to the third quarter, and for the first 9 months, it was down 8 basis points from the level last year. Slide 9, please. Now turning to the result of the AQR and the stress test. In the interest of time, I will only comment on the major takeaways in the result. Danske Bank passed the stress test with a solid capital buffer. In the adverse scenario, we have a common equity Tier 1 capital ratio of 11.7% at the end of 2016. This gives us a substantial buffer of DKK 57 billion or 6.2%. The AQR adjustment to our common equity Tier 1 at the end of 2013 was determined by the Danish FSA, and it amounted to DKK 2.2 billion. This represents a 20-basis points reduction of the capital ratio, which was in the lower half compared to Nordic peers' AQR assessments. The treatment of the AQR adjustment in Denmark differs from the treatment of other banks, however. We were a little surprised that the Danish FSA has assessed that Danish banks must implement the AQR adjustment by the recognition of additional impairments. Of the DKK 1.6 billion we were asked to book, we have already recognized DKK 0.9 billion in the first 9 months of the year. This leaves DKK 0.7 billion to be taken into account in Q4. Slide 10, please. As said, our capital position is very solid. At the end of September, we had a common equity Tier 1 capital ratio of 15% and a total capital ratio of 19.3%. In the third quarter, our common equity Tier 1 ratio was positively affected by the removal of a temporary add-on of 3 percentage points to our corporate portfolio risk weight. The effect on the core tier one ratio was an increase of 0.4% and as expected. Our leverage ratio was unchanged in the third quarter at 4% according to transitional rules and at 3.5% when fully phased in. Slide 11, please. Turning now to our non-core activities. The winding up of our loan portfolio and other activities in non-core Ireland continues, and we are pleased with our progress in the first 9 months of 2014. We have completed the winding up of our retail operations and all personal and business accounts have been closed. We have outsourced the management of the performing personal mortgage portfolio to a loan service provider in non-core Ireland. Property sales also continue. In the second quarter, we made an agreement on a portfolio sale of almost 700 residential investment properties, and we booked it in the third quarter. This led to a reduction in total lending of DKK 1.2 billion, including other asset sales. At the end of the quarter, the remaining stock compromises approximately 2,100 properties, of which 938 properties are on the market and 954 are under offer or contract. In the third quarter, impairments rose DKK 237 million, which includes charges against the non-core conduit portfolio of DKK 77 million. We have reduced our guidance for impairments at non-core Ireland to around DKK 1 billion because conditions for disposing our remaining assets in non-core Ireland have improved. Slide 12, please. This year, we have been very determined to launch a number of initiatives across our business units with the aim of strengthening customer relations as well as our general market position. These initiatives have generally been well-received. We do not have time for a detailed follow-up, but let me update you on a couple of the recently launched initiatives. The MobilePay initiative is well-known by you now. With more than 1.6 million active users in Denmark, it has been a tremendous success and is the most widely used payment solution for smartphones. The rollout of MobilePay Business has also been very successful, with more than 2,500 businesses already using or about to start using the solution. The MobilePay universe is constantly changing, and we are committed to further develop as it holds great potential for extending our relationship with our customers. In May, we launched a new service model for small business customers, Danske Business One, Plus, and Pro, and it got off to a successful start. The new advisory organization and customer packages are tailored to the various needs of small businesses. Since the launch, customer inflow has increased 23% in Business Banking Denmark, and we have seen 20% more traffic on the website. Finally, Danske OneTrader, our FX trading and market information platform, has been well-received by C&I clients. More than 300 businesses have used the platform since the launch in May, and we continue to see higher activity. Danske OneTrader is an integral part of our Business Online platform and is thus accessible from a single logon, which enhances customers' easy banking experience. We are encouraged that our efforts to meet customer demands for digital banking solutions and flexible product offerings have led to increasing customer activity and business volumes in the recent months. Slide 13, please. About our ongoing business review, I have said previously that we will inform you of our conclusions as we complete the process for the various business units and when we find it prudent from a business perspective. We have now completed the review of Corporates and Institutions. With 26% of the group's profit before tax, Corporates and Institutions is a very important part of the group and plays a vital role in our positioning as a Nordic universal bank. Our project to set a new agenda for C&I is not new. The business model has been challenged, and in the past couple quarters, we have begun to focus on four key areas as the cornerstone for our efforts. One, customer attention, as we have designed an organizational framework to support a more strategic mindset towards the customers. Two, a better balance in income streams by further diversification of our income base. Three, a sustainable FIG business, which will remain an important part of our offering, but which need to adapt to new market conditions. Finally, a strong focus on cost efficiency and capital consumption. On this basis, it is our ambition to target the return on allocated capital of 50% in the years ahead, and the years ahead start already in 2015. Slide 14, please. Let me give you some background on how we see the underlying conditions for our C&I business. First of all, we have a solid starting point that to some extent differentiates us from other European banks. For example, our core Nordic markets include two countries with floating currency, two of the world's largest bond markets, and a large institutional sector. We have been very successful in exploiting our competitive advantage. For a number of years, surveys of the Nordic markets has shown high customer satisfaction with our C&I services, which reflects our strong market position. Slide 15, please. We have faced a number of challenges over the past couple of years, however. These challenges are coming from a change in the both underlying structural conditions and cyclical conditions. We are operating in an environment of persistently low interest rates, low volatility, and new regulatory requirements. New regulation entails increased capital consumption. The implementation of CRD IV, in particular, has increased allocated capital at C&I by 20% in 2014. The combination of challenging market conditions and new capital requirements has put pressure on our profitability, and from 2012 to 2013, it cut our return on allocated capital almost in half. Our FIG business, in particular, has been challenged by new market and regulatory conditions. Our focus on client-driven income has paid off as we have seen increasing income from capital markets and transaction banking business. The return on allocated capital at C&I rose to 15.1% in the latest quarter. Slide 16, please. As I mentioned previously, we are already in the process of adapting our business, but we still have work to do. Our overriding ambition is to maintain and develop the new C&I as a large wholesale bank with strong competencies and a unique offering that benefits our customers. We will continue to diversify our business mix in order to take advantages of the different return dynamics of a FIG and capital markets business. A more diversified business mix will not only create more balanced income streams, it will also lower income volatility and put greater focus on capital-light income with areas where we see good growth potential. Our FIG business will remain a vital part of our business model, but we will adjust both our cost base and risk profile in order to create a sustainable business model that also will meet our customers' expectations. In addition, we will enhance customer attention by linking C&I's product offering together. This entails a significant change in our mindset, a shift from an individual product approach to strategic dialogue. Taking a holistic view of our customers' financial situation is a prerequisite for increasing client-driven income. Cost efficiency is just as important at C&I for achieving our profitability target as it is at our other business units. We expect C&I's cost base for 2015 to be as much as 10% below the level in 2013. Capital consumption is another key element in our effort to increase profitability. Besides reducing limits, we will increase business in capital-light areas and by other means. On this slide, we have highlighted the likely ranges for the relevant profitability drivers. Please note, this should not be seen as a specific guidance. We are convinced that the new C&I, adapted to new regulatory conditions and continuing the focus on client-driven income, will have the right strategy to achieve our target for return on allocated capital of 50% from already 2015. Slide 17, please. Finally, before taking your questions, let me turn to our guidance for the full year. We are now through most of 2014. We are pleased that we have been able to improve our results. We recognize, however, that in order to meet our targets, we must continue our efforts. We expect economic growth to remain slow and fragile in a low interest rate environment. We continue to expect total income to be above the 2013 level with improvements in most income lines. Lending volume is expected to be marginally higher as we continue to see low demand for loans. We expect expenses to be below DKK 23 billion. We expect expenses in the fourth quarter to be higher than in the first three quarters, however. On the basis of improved, though slow, macroeconomic conditions, we are revising our guidance for impairments. For core activities, we now expect impairments to be around DKK 3 billion. For non-core Ireland, we expect impairments to be around DKK 1 billion against our earlier guidance of up to DKK 1.5 billion. Altogether, we expect net profit for the full year to be in the range of DKK 11.5 billion-DKK 13.5 billion, an increase from our previous guidance of DKK 10 billion-DKK 13 billion. Slide 18, please. Those were my initial comments and messages. We are now ready for your questions. Please limit yourself to two questions. If you're listening to the conference call from our website, you are more than welcome to ask questions by email. Operator, we're now ready for the Q&A session. Okay, thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touch tone phone. If you wish to be removed from the queue, please press the hash key or the pound sign. Once again, if you have a question, please press star then one on your touch tone phone. Okay, and we have our first question coming in from Omar Keenan from Deutsche Bank. Your question, please. Good afternoon. Thanks very much for the questions. Firstly, thanks for the helpful slides for the Corporates and Institutions division. If we assume that the capital drops to the midpoint of the range that you've given of about DKK 34.5 billion from the current level, then is that fairly equivalent with a risk-weighted asset reduction of DKK 20 billion? Have we thought about that the right way? I was just wondering if you could perhaps make some comment around what the mix between efficiency measures will be and what will be real asset reduction, and what kind of timeline you're thinking about in terms of delivering the 15% target. Is something like a 2-year time horizon what you have in mind? I just have a second question on Group ROE. Thanks. I can take the overall answer, and then Henrik will go into the detail on capital allocation. It is our ambition, and it's highly likely that C&I already in 2015 will achieve a return of 50% on allocated capital with measures already being taken and those which will be taken in this quarter. Henrik Aamund speaking here. As you can see in the report, C&I is already in Q3 at a capital level of 36.6, and we think that we can go a couple of billions lower. Some of the means to that will be the type of business we do with the customer, that will be the limits we impose on our FICC business, as an example. It will be the type and duration of derivatives, the way we treat counterparty risk, et cetera. So it'll be a number of measures taken all together. We believe that we can bring the allocated capital slightly below the current level. In addition, it's a detailed question, but I know some of you are interested. We will also exit certain European business, which is not a natural part for us to be a part of. It's concentrating around primarily the Nordic FICC business. Okay, that's great. Then my second question. I guess you've given now a helpful color on the C&I division, the Personal Banking division. Can we expect with the full year results, we'll get some sort of new picture as to how everything fits together and helps you to get to the long-term targets and ROE ambition? Or is it going to take a bit longer and some other measures? Okay. No, I think it's fair for you to assume that we will try to describe the bridge from nine to 12 in connection with the full year results. Said, we will not be finished with all the various business units reviews. That is an ongoing business for us. That will continue as we move along. But yes, from nine to 12 you should expect us to be clear on that. Okay. That's very clear. Thank you. One more question, please. The next question comes from Asbjørn Nicholas from Carnegie. Your question, please. First of all, on your C&I and the slides you provide you say that costs should come down 10% in 2015 over 2013. As I see it, that would basically bring you to DKK 4 billion already from next year, and then your range from DKK 4 billion to DKK 4.5 billion. Does that mean that this is the maximum you can take out of cost in C&I and that you are able to reinvest going forward in this business unit? Or how should we see that range? Second of all, if you can just guide a bit on your risk-weighted assets. Obviously, they dropped this quarter, but the two FSA orders you have the foundation IRB in Finland mitigation impact there, and then of course, the sale of your Irish portfolio. How should that move your risk-weighted assets in Q4 and Q1 and Q2 next year? Thank you. I will take your first question, then Henrik Domner will take your second question. Yes, you are fairly on the ball when it comes to the cost. All things being equal, that we should get close to the DKK 4 billion based on the mathematics you just laid out. Your second part of the question, can we adjust the cost further? Of course, we can. We will do that if something happens to the market beyond what we are predicting now. This is not a static thing, but I think with, and I try to describe a very strong position in the FICC market in the Nordics with that adjusted business model and taking down risk and capital tremendously and cost. We think we have the right mix, but if for whatever reason that it becomes not satisfactory, we will adjust this going forward. But for the time being, we feel we're very comfortable with it. Then you had a question regarding our development, our risk-weighted assets, and you are correct. We have a number of moving parts. We have not finished the implementation of the orders from the Danish FSA. We are in the current dialogue with them, especially regarding our order 2 and 3 about the counterparty risk and our banking model. We also have work going on in Finland with our foundation model work, and we have also other discussions going on in other areas also. We have an application for specific market risk, et cetera. I think taking it all together, it would be fair to say that we're expecting the coming quarters roughly flat risk-weighted assets as we see no significant growth in lending due to the weak macroeconomic situation. Okay. If I can just follow up on that, does it mean that the foundation IRB should mitigate the full impact from the two FSA orders? If you can just also on the Irish division, what kind of RWA do you see that releasing in the next couple of quarters? Yeah. Roughly speaking, yes, they would so to say offset each other, but it's too early to come with a final conclusion on that. Okay. Thank you. Okay, there is our next question coming in from Andreas Håkansson from Exane. Your question, please. Yes. I have two questions, please. First one, I was going through or skimming through, I should rather say, the financial crisis committee report from Kraka that came out today, and that report talked about less focus on risk weightings and saying that safer banks probably needed more capital. Then I am looking at your quarter 1 ratio fully loaded with 13.8% and your leverage of 3.5%, which is then the lowest among the larger Nordic banks. So first question is, do you believe that increasing your payout today is a prudent thing to do? Next question, just quickly on after you made the changes in the C&I division, what do you consider to be the normalized trade in the one that used to be DKK 8 billion? Thanks. First of all, when it comes to your first question, we have not seen the report you have skimmed through. I think that came out around 12 noon today. We are very well-capitalized bank. We have a quarter 1 at 50%. We have a minimum target of 30%, but we have said in numerous occasions that we think it should be proven to be around 14% due to finding a balance between where our peers are and where we should be with regard to rating agencies. Any excess capital we will distribute as far as possible to our shareholders. We have no intention to accumulate surplus capital. When it comes to the leverage, we are well-positioned. Leverage has not been imposed which is a restriction to us today. We can adjust our leverage ratio quite substantially, quite fast as we have a substantial repo which is very short maturity, which we can adjust within a quarter. Leverage for us is not a major concern. We adjust the part as other institution which need to take that into account if or when it becomes an issue for us to run our bank. Henrik would like to comment on the other questions. Sorry, just on the first one. Given that we still don't have clarity on new regulations either on leverage or on the more risk-weighted ratios, do you think it's prudent to pay out more already today? I don't know what you think about paying out more. What I'm telling clearly to investors, that we have a target to be today at a quarter 1 around 40%. Okay. Excess capital, we will distribute back to the shareholders. And I think also the AQR stress test, where we were subject to a stress test similar to what we have been through in the financial crisis with impairment losses up to almost DKK 50 billion illustrates that we are really strongly capitalized. Then you had a question On normalized trading trading. Yes. It is fair to assume that we will not guide forward on trading as an absolute number, as this is not how we measure shareholder value creation. So trading will not be guided fixed at DKK 8 billion, and it will be an integral part of C&I, and therefore that will not go on going forward. Okay. Thank you. Okay, there is a next question coming in from Anton Kryachok from UBS. Your question, please. Thank you very much, and congratulations on good set of numbers. I have two questions, please. One on Ireland and one on lending growth. Starting with Ireland, can you please help us a little bit to understand your thinking on the provisioning line in the non-core Ireland? I remember at Q2 you were guiding quite cautiously on pickup in provisions in the second half of this year, but this quarter you felt enough confidence to actually improve the guidance and provisions despite the fact that you have additional 400 million DKK of provisions coming from the AQR. My question is, whether this additional 400 million DKK of provisions was already in a way reflected in your thinking or whether you have seen macroeconomic picture, which is much better than you thought is going to be the case a quarter ago. Then the second question, please, on lending growth. I remember again at the start of the year, your rhetoric on lending growth was quite cautious. But actually, in most of the business divisions this quarter, we've seen growth, which perhaps was better than expected. Can you please quantify what's your outlook on lending volumes going forward? Thank you. Yeah. Two good questions. When it comes to Ireland, we have to say, first of all, the market has stabilized or even picked up. We can see that the investor appetite is slightly better than we expected in the beginning of the year. As we have been more confident when we see the trades taking place, we have been able to adjust the impairments forecast for the year. With regards to AQR, yes, I can say it's a part of the possibly can't seen by isolation, but we can clearly absorb it in the guidance. Part of that impairments we will have identified regardless in our Q4 guidance. So it's a combination of several things. But if you're going to have one simple answer, it is that the Irish property market and our portfolio seems to be being accepted at a better level than we could have hoped for. Lending growth, I'm still very cautious. I'm happy to see small growth, but remember, it is small growth. I think we will be cautious, as there is subdued demand to grow any fast, it will pressure pricing. We have no interest in pressure margin or have a margin compression. So we'll be cautious, except in Norway and Sweden, where we see a great potential as a challenger to grow slightly faster. We will not stress the bank's credit book, so we also grow with a very strong credit book. So that's why I think you should continue to assume in such environment that we will grow but grow slowly. Very clear. Thank you. Okay, and there is a next question coming in from Christian Hede from Nordea. Your question, please. Yes, good afternoon. It's Christian from Nordea in Copenhagen. I have a couple of questions on mortgage lending. One on Sweden. Can you give us a bit of an update on your ambitions volume wise in the Swedish mortgage market? The second one in the Danish mortgage system or the Danish mortgage market, where we see that the FSA is coming out with a supervisory diamond possibly later this year. Do you think that this supervisory diamond will force you to increase prices on certain products to move clients? I guess those are my two questions. Thank you. Why don't Claus take the last question first? Yes. In respect to the new regulatory diamond for specialized mortgage banks in Denmark, to our knowledge, it hasn't been approved. It's still a proposal. When we are looking into the different components, there is one component which relates to the share of interest-only loan in a certain LTV bracket that could be an issue for some of the banks by the end of the implementation period in 2020. When we are looking into the behavior among our customers for the time being, we can see that almost 60% is starting to amortize when the loan is coming up for renegotiation. If we model that into our portfolio, we will not have an issue around the 55% limit in 2020. You can also get additional information on page 36 in the presentation. 33. Thank you. But then maybe I could follow up with just noting that Nykredit and BRF have hiked margins here in Q4 with effect from January 1, and you haven't followed. Could you give an indication to how you see that? Do you think you can gain market share by not increasing your margins, or would it be a free lunch to basically just take up a bit more margin and then get more income? We have for the time, or for a while, we have been, so to say, if you look at the pure margins, been the most expensive of the mortgage banks in Denmark, and they are coming up to our level now. It doesn't give us any good ideas on the pricing side for the time being. To put it a different way, Christian, we will always try to be very competitive in the market to protect our position, both from the customer and shareholder perspective. We will always need to optimize the pricing. Some pricing may go up, some may come down, but it's nothing called a free lunch as it used to. I think the market conditions are good for us to continue to take a good position of the new mortgage processes which will take place. Then to your first question, mortgage lending in Sweden. We will, slowly but surely, in 2015, look into how we will grow that market. I think we are very well-placed. We are looking into several investments, both in management, in technology, and in customer packages. You can expect something to happen early 2015. Okay. Thank you very much. Okay, we have our next question coming from Jakob Brink from ABG. Your question, please. Thank you. Sorry to go back to C&I, but I was just wondering, you want to increase revenues around 7% from the annualized level of the nine months of this year. At the same time, we need to take down costs but focus more on high-cost income ratio business, client-driven. I was just thinking if you could maybe give us some details on how that should be done. Also, in connection with that, I am seeing that your allocated capital to C&I have gone up a whole 37% since Q1 2012, where Nordea and SEB in similar businesses have actually managed to reduce the allocated capital. I am thinking, is it more on the capital side you should be working instead of the profit. The second question, if you are actually reducing capital spent in C&I this quarter, you are also reducing it in Personal and Business Banking, but it just ends up in the unallocated capital. I was thinking, it is a record high number of unallocated capital in this quarter. What should we expect with this going forward? Is it just going to be stuck there or what exactly will happen? Thank you. Okay. I appreciate all recommendations, and you are very right. Of course, we will work on capital. We are, as Henrik alluded to early in the conference, working with a lot of initiatives to reduce the capital and the capital usage, everything from risk reduction to mitigating factors and even stopping certain business lines. The costs, we will also be prudent, and we can reallocate resources within the framework we just discussed. So it is not either/or, it is both. So you are right in that sense that we also will work on capital, of course. When it comes to the top line, if you look at underlying development from 2012 into 2013 into 2014, it is pretty impressive what C&I has been able to do on bigger capital markets products. We see no reason with the buildup of capacity, the buildup of products, and the buildup of expertise that it should not continue at the rate as we have alluded to in this presentation. So C&I and I are comfortable both on the cost side, on the top line for 2015. But of course, if something dramatic happens in the markets, it will be challenging. If it is more structurally, we will also need to look structurally into the business if more needs to be done. But I would like to remind you and your colleagues that we have a very strong business model, which has shown very resilient historically, but that has changed and we are adapting to the new world. That is basically, I think it is prudent management we need to do. When it comes to allocating capital, I think Henrik has a couple of comments. I can just mention that we have a capital allocation model, and we are continuously looking into how to do that. But for the time being, we are satisfied with the model we have. We might at a future point in time when we have more clarity on the various orders, capital allocation models, and so on, look into it once more. But for the time being, we are satisfied with the way we allocate capital to the various business units, including C&I. But I think the key issue for you and investors are that any excess capital, which will be the consequence of unused capital, will be distributed back to the shareholders. I think that's the key message we would like to give you. Can I just follow up on that last specific point? Because then you have a slide yourself showing the rating agencies on page 37. And as far as I understand from S&P, they're looking into potentially removing the government support as of next year due to bail-in. In that case, I guess you will have to build your capital to reg ratio above 10%, which is somewhat above a 14% quarter one ratio. How are you looking at that potential risk? We will make sure that we are a strong A bank with the rating agencies. But the way you build capital, we can use various instruments. And as you may recall, we had a very successful AT1 during the year. That's also something we can look into going forward. So there's various means which we'll do, and if you want to go in more detail, Henrik Ramlau-Hansen can take that with you bilaterally. But I think we are well-positioned. We are well aware of how to balance the, let's call it the rating agencies or particularly S&P's needs for capital. Okay. Thank you. There is a next question coming in from Johan Ekblom from Bank of America. Your question, please. Thank you. Two questions, if I may. Firstly, on fee income. We have seen a very strong performance, and I guess this is a continuation of a trend we have seen for quite some time now. In particular, I guess looking at the C&I strong fee income, is there anything of a one-off nature, or is this the realignment of the business and a trend we should expect to continue also in quarters to come? If I may, just a clarification on the cost and the cost guidance. You have been crystal clear that C&I cost should be down up to 10% from the DKK 4.5 billion level we saw in 2013. You also have the group cost guidance for next year, which is below this year. We now have one part of that puzzle, but should we expect costs ex C&I to be down 15% on 2014 as well, please? I think I would be cautious now to guide business lines by business lines, because then we're fragmenting the overall picture. It's no doubt in our mind, and which we will tell the market that the cost will come down year-on-year. You can assume that we will be very focused on costs. We have a target cost income below 50, and we have a target to be below 23. We will be below 23 in 2014. When I say we will continue to be focused on cost, the cost will come down any further. I don't want to give any more firm guidance on it, but we will do that in connection with the Q4 results. You had a question about our fee income. That is developing fine, and that is broadly across basically all the business units. Danske Capital is doing fine. There's also additional fee income in C&I, corporate finance, and other activities also in the other business units contribute to additional fee income. Your question one more then, could we expect the same growth rate? I think we want to be cautious to extrapolate all of it, but I think we have a good underlying run rate with investments we've been doing continuously. Thank you. Maybe just to follow up on the previous question, because I didn't quite understand your answer on the allocated capital. Because you're saying that unallocated capital should be returned to shareholders. So this sort of DKK 15 billion or whatever it is that we now have in the other result, are you saying that capital that's free to be distributed, or how should we think about that and the payout going forward? Exactly. It was slightly not an answer directly to the question. I think we are always trying to optimize internally how we allocate capital, and I think that was what Henrik responded to. Regardless of how we allocate capital internally, it is no issue for us to sit with excess capital regardless of where we put the allocated capital. That was my response back to Jakob's question or challenge. But it is two different perspectives on it. Finally, to try to answer a different way, it is no point to put unallocated capital to an unallocated bucket. We try to put it to the business units. But as we get wiser in the modeling, that is what we are trying to do, constantly improve it. Thank you. There is a next question in the queue coming from Jan Walter from Credit Suisse. Your question, please. Yes. Hi, all. Jan Walter here, Credit Suisse. Two questions from my side. When we look at the loan loss level so far this year, including non-core, it seems to be around DKK 2.5 billion in loan losses the first nine months. I think you seem to suggest that DKK 900 million or so is AQR driven. Is this the way we should see the numbers? If so, the underlying loan loss level going into next year should be meaningfully lower then, all else equal, naturally. That is the first question. The second one is if you see it as likely that the Danish Pillar 2 buffers will require quarter one financing, which we have seen in the Swedish market, please. Yeah, Henrik will take the second question. I think you should be cautious to assume that AQR is just something which comes on top of it, because we have big movements in allowance account, which now stands at approximately DKK 45 billion. We have, let's call it large gross movements. We are at low levels impairments-wise. How the impairments will move into 2015 will depend on the economic conditions. If we assume an economic conditions around today's level, you should not expect any major deviations of today's impairments levels. I think that's how far we can guide at the present stage. As we get wiser and in connection with Q4 numbers, we will see if we can guide you any closer to that number. Maybe I should add, Jan, to some of your numbers you alluded to in the beginning. You put the DKK 2 billion impairments this year over to the DKK 900 million. Please be aware that the DKK 900 million we have recognized so far, actually a major part of that is non-core. I think the numbers are getting mixed up a little bit here. The non-core part of the DKK 900 million is by far the biggest chunk of the DKK 900 million. You should actually put approximately DKK 300 million over the impairments you are alluding to so far. Regarding your question on Pillar 2 add-ons, we have no indication that the Danish FSA have any thoughts about changing the current setup, where that can be covered by either core Tier 1 or subordinated debt with high trigger levels. We are quite comfortable still with our capital position. Thank you. Just a quick follow-up then on the way you said that in Q4 there will be a DKK 700 million impairment again for the AQR adjustment. I believe there was DKK 100 million or so impairment this quarter for the AQR. Does that mean that we will see rather DKK 600 million in the fourth? No, we haven't said exactly what it is quarter by quarter. I don't think we should complicate it too much. I think we have given you a guidance for the impairments for core this year are around DKK 3 billion. We have taken DKK 1.9 billion so far and including the guidance is the full effect of the AQR adjustments. Then I think I was pretty firm on what we were expecting for 2015. Okay. Many thanks for that. Next question comes from Mads Thinggaard from Handelsbanken. Your question, please. Hi, this is Mats from Handelsbanken. I am sorry, but I have to go back to slide 16 of your presentation regarding C&I and return on allocated capital. I was kind of wondering if you could help me explain the delta on income versus the delta on capital. I realize it is probably not the way you meant the slide to be read, but it looks like a delta on allocated capital of DKK 5 billion is associated with a loss of income of DKK 2 billion. That is a rather high return. That is probably not how you mean it, but how much income should we expect to be lost on cutting the capital consumption? That was the first question. The second question is, I was a bit surprised to see reversal in Finland, where we have an economy in a severe depression. I do not know if you could elaborate a little on where these reversals are coming from. Thank you. First of all, we apologize if the slide is not good enough, but of course it's not meant to be either or. It just gives you the range of the various levers which could go in various directions. It doesn't mean that if you go down from DKK 37 billion to DKK 32 billion, that you will go from an income down from 11 to 9. That's not at all what it's meant to be. It's just try to give you indication of how we work with capital in the range and how we work on the top line and the cost side. Our apologies for not being clear on that one. Yeah. But no problem with that, but how much do you think it would cost if, let's say, if you take it down DKK 5 billion, how much income would you lose on that? Yeah, marginally. And the reason is, it's the areas where we can see the return on capital is low or other business areas. And it's not marginal, which is worthwhile discussing through the conference. If you want more detail, you can call Claus, and we go into certain business lines, but I think that's in the details. The reversal is in Finland. It is a collective impairment. We've had it for a while, which were basically reversed. We are aware of very much the macroeconomic situation in Finland. It has not been strengthened due to the Russian, Ukraine situation. But we actually have a very good position in Finland. We have a strong portfolio. One should be cautious quarter on quarter, but we couldn't justify to have that collected charge any longer because we didn't see it come through on the individual clients, and that's why we had to reverse it, actually. Okay. Thank you. There is the next question coming in from Daniel Dutoit. Please go ahead. Hi, good afternoon. Just one question that I have remaining, and it's regarding Norway and Sweden, where I know it's only been a quarter, but perhaps you could share with us some of your initial experiences post strategic review, and also the outlook here for loan growth going forward. Then related to that, you mentioned this new agreement with Akademikerne in Norway. Could you just give us a few more details on the nature of that deal and perhaps how we should think of this from a financial point of view? Thank you. As you allude to in your question, I think it's too early after a quarter in Personal Banking to have a major change in Norway, Sweden. So said, I think there's a very positive momentum going on, particularly in Norway. We have recruited a whole new management team, starting actually on Monday. We have been able to land some very strategic, what I call strategic alliances with Akademikerne as you alluded to, which gives us access to 80,000 highly paid individuals in Norway. How successful we'll be, how fast we will go, it's too early to say, but I can say so much that the interest from these potential clients are very high, and we actually have to recruit people to take care of this customer inflow. Personal Banking is a business which is slow, but it's good. I do not expect any explosion, but slowly we will grow that business quarter by quarter. Sweden, we have more or less stabilized the situation, and I kind of alluded to it. We have not really started any big, let us call it offensive actions yet. But I think you should expect something to happen in the beginning of 2015. Yeah. Great. Thank you. We have our next question coming in from Ronit Ghose from Citi. Your question, please. Great. Thank you. I had two questions. One is on severance costs, and one is on the balance sheet. You have booked just under about DKK 400 million of costs so far year to date. Now, I was wondering if your previous guidance or suggestion of around DKK 700 million ballpark, i.e. similar to 2013, was still intact for 2014. The second question is a small one on the balance sheet. The line borrowings from credit institutions has been going up quite substantially quarter on quarter for the last two quarters, from DKK 137 in Q1 to DKK 325 in the third quarter. Just wondering what is driving that and what the outlook for that line is. Thank you. Henrik will answer the first question. Regarding severance costs, you are right. We previously guided up to around, I think, DKK 700 million or something like that, and that will probably end somewhat lower now. As you know, it is an ongoing process, optimizing Danske Bank, bringing costs down and so on. So there will also be severance cost in Q4. But finally, the end figure will probably be lower than previously communicated. Henrik, should I assume DKK 100 million, that kind of run rate continues? Or is there a kind of seasonal pickup in Q4? I think it will be roughly at the same run rate as we have currently, but it may go up or a little bit up or down. It is an ongoing process, but it will be probably lower than previously communicated as you alluded to. Okay. Roddy, can you read sorry. I did not try to catch your question. Which line did you ask about? Borrowings from credit institutions. On the liability side, it has gone DKK 137 billion, and then it has gone up to DKK 300 in Q1, and it has gone up roughly DKK 100 billion per quarter to DKK 325 billion now in Q3. I was wondering why that is growing so fast. Which line is this? Sorry, I cannot even find it in my own figures, so why do we not go offline with you? For me, it is not any strategic, it may be some technical explanation. My apologies, Ronnie, I cannot answer it. We will take it offline. No problem. I will follow up with Aya. Thank you. Yeah. Okay, can we do the final questions, if any? Okay then. The final question comes from Alice Timperley from Morgan Stanley. Please go ahead. Hi there. Thanks very much for taking our questions today. Just one question from us, and it is on NII in the regions. Obviously, you have had good development in Norway and Finland. But could you perhaps just expand on the competitive pressures that you are seeing there, particularly in Norway, and whether these competitive pressures could dampen the growth outlook going forward? In Finland, could you perhaps just expand on what the differential is between the front book and back book margins, please? Thank you. I think maybe Claus will try to answer your last question about the front book and the back book in Finland. Alice, as we have alluded to, this is an ongoing process because we are not able to reprice the backbook in Finland. Only to the extent that we see expiring loans on our front book, then we are able to reprice. That's a process which will take some years. I think we previously have stated five, six, seven years, and we are probably into year three of that process right now. Then it comes to your question about NII in a wider sense in the region, but you looked at Norway in particular. I think in most markets there is keen competition, and I would be cautious to expect any margin expansion. So said, the margins in most markets are holding well up actually. But we are very cautious of that, and that's why we continuously need to be very efficient. So, so far holding up, but we're cautious on this line going forward. Thank you very much. Very clear. Okay. Thank you very much for your keen interest in Danske. As always, you're welcome to contact our Investor Relations department if you have any more questions after you've had time to look at the accounts in more detail. A transcript of this conference call will be added to our website within the next few days. Thank you very much. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.