Earnings Call: Q2 2014

Jul 24, 2014

Summary

H1 net profit rose 88% to DKK 6.9bn as income grew and impairments fell. FY14 net profit guidance increased to DKK 10bn–13bn, while low rates and market volatility weighed on trading income.

Welcome to the interim report first half of 2014 conference call. At this time, all participants are in a 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. Thomas, you may begin. Thank you, operator, and thank you all for taking time to listen in to this call today. Other participants with me today is Chief Financial Officer Henrik Ramlau-Hansen, Head of Investor Relations Julie Quist, and Chief Investor Relations Officer Claus Jensen. Slide 2, please. The main purpose of today's call is, of course, to present the financial results for the first half of 2014. We will also try to offer you insight into selected topics, including our ongoing business review. We will wrap up with an outlook for the full year 2014. We aim to keep this presentation to around 20 minutes, and after presentation, we will, as usually, open up for a Q&A session. Please go to slide 3. My overriding message today is that Danske Bank is continuing to move in the right direction. We are executing our strategy and making progress towards our financial targets. Our return on equity came in at 9.2% for the first half of 2014. Our net profit came in at DKK 6.9 billion for the period, marking an 88% increase against the same period last year, driven by improvements in most key areas. We listed our total income to DKK 21.7 billion on the back of good progress in all income lines except other income, which was flat. We continued to execute on our cost-savings program according to plan and closing the period with total expenses of some DKK 11 billion. Impairments came in at DKK 1.3 billion for the period, or 44% below the same period last year. We continue to benefit from better asset prices, a more favorable macroeconomic environment, and improved credit quality. The result from our non-core activities was negative close to DKK 800 million, with our Irish property divestments progressing well and all according to our plans. Our capital base remains strong after a string of successful issues this year, as well as the repayment of the state hybrid in April. At the end of the first half of 2014, our common equity Tier 1 ratio stood at 14.4%. On the strength of these developments, we are raising our net profit guidance for the full year to a range of DKK 10 billion-DKK 13 billion. Slide 4, please. Let me take you through our income statement for the first half of 2014. Net interest income came to DKK 11.3 billion. This was 3% ahead of the same period last year due to repricing of deposits, lower funding costs, and our optimization of our liquidity bond portfolio. Fee income was positively affected by stronger customer activity and rose 10% compared with the first half of 2013. Net trading income was up by 4% but primarily due to the gain from Nets. That was approximately DKK 1 billion. Our underlying trading income decreased as market making activities were lower compared to the first half of 2013, and this remains a key observation point for us. Our Danica insurance business performed better compared to the same period last year, when the result was impacted by adverse development in the financial markets. Altogether, total income rose by 9% against the same period last year. Expenses came in at 6% lower as a result of our cost savings program, and the cost/income ratio improved by 8.2 percentage points, now standing at 60.8%. Slide 5, please. All three business units saw improvements in the first half of the year, especially Personal Banking and Business Banking. Personal Banking lifted pre-tax ROE by 5.4 percentage points to 14.5% with improvements in four areas. One, fee income saw a positive effect from slightly better economic conditions in Denmark. Trading income benefited from high refinancing fees at Realkredit Danmark. Costs were reduced by 10% as a result of tight cost control, and we saw declining impairments charges based on better financial conditions for particularly our Danish households. Business Banking improved pre-tax ROE by 2.8 percentage points, now standing at 13.1%. Total income was in line with the same period last year, despite positive value adjustments in 2013 and the effect of funds transfer pricing model. Expenses were slightly lower as a result of tight cost control, while impairment charges almost halved. Finally, C&I saw profit before tax increasing 3%, while ROE came down to 10.5% from 12.1%, owing basically to higher allocated capital. Total income was unchanged, but client-driven income from general banking, capital markets, and sales was up by DKK 0.5 billion and explains the positive development in net interest income and fee income. On the other hand, trading income declined by a similar amount due to lower market-making income as we continue to operate in markets with low volatility and no clear trends. Slide 6, please. Let's have a look at our activities within asset management and insurance. Both business units posted a satisfactory result for the period. Danske Capital grew profit by 22%. It continued to execute its strategy, and this led to a good net inflow of assets from both new and existing clients, with a good balance between institutional and retail customers. Combined with the effect from positive financial markets, this led to an increase in assets under management of 9%, now standing at 770 billion Danish kroner. The result also reflected higher margins from a higher proportion of equity. Our insurance subsidiary, Danica, saw net income of more than DKK 800 million as a result of higher premiums and an improved result from the insurance business. The synergies between Danica and the banking units continue to develop positively. In the first half of the year, the sale of pension products to personal customers through other business units rose the whole of 43%, underlying our cross-selling abilities. Because of the positive results, the risk allowance could be booked to income in full for three out of four interest rate groups. Slide 7, please. Let's look at expenses. We are satisfied with the trend in our underlying cost base as we continue to execute our cost savings initiatives. We reduced our expenses by 6% compared to the first half of 2013, thereby supporting our efforts to improve our cost/income ratio and lift our returns. Key cost items such as staff costs, IT, and consultants were all reduced. Please recall my message in last quarter's release that expenses were particularly low in Q1 due to back-end loading and certain cost items over the year. That explains why if you look at the development in our costs on a quarter-by-quarter basis, our expenses increased by 3% in Q2 this year against the preceding quarter. Items such as severance payments and certain IT costs were higher in Q2 than Q1 and as expected. We also recorded items such as the repayment of financial employer tax. We remain confident that our focus on expenses will continue to reap benefits according to our plans. Slide 8, please. Impairment charges declined sharply in comparison with the first half of 2013. The positive development was owing to improved credit quality, particularly in Denmark. In our core activities, we continue to see positive development in Personal Banking and in Business Banking. In the second quarter, impairments charges at C&I rose DKK 200 million, but charges were unusually low in the same period last year. Remember that C&I impairments can often fluctuate between quarters. The loan loss ratio for core activities in the first half of the year was 14 basis points compared with 24 basis points, and for the whole group, 17 basis points, down from 32 basis points at the same period last year. Slide 9, please. We closed the period with a common equity Tier 1 ratio of 14.4% and a total capital ratio of 18.6%. We strengthened our capital position with retained earnings and a new Tier 2 issue. In May, we issued Tier 2 capital for EUR 500 million at the cost of 165 basis points. This was the lowest spread we have seen since the financial crisis. As part of our dialogue with the Danish FSA about our IRB models, we are now able to remove the current temporary add-on of 3 percentage points to the risk weights for the corporate portfolio, equal to an increase of 0.4% in the common Tier 1 ratio when fully implemented later this year. Our leverage ratio improved slightly by 0.1 of a percentage point to 4%, according to the definitional rules, and 3.5% fully phased in. Slide 10, please. As you may have noted, we have been active in the market for capital issues since late 2013. We have successfully issued an extensive series of both Additional Tier 1 and Tier 2 capital in order to partly replace the DKK 24 billion state hybrid as well as to adjust our capital structure to make it more efficient under CRD IV. The issues are denominated in a number of different currencies in order to have a diversified investor base, and we are satisfied with the strong investor interest we have seen in all the transactions. Slide 11, please. If we look at the non-core activities, we continued to focus on the controlled unwind of our loan portfolio and other activities on Ireland, and we are pleased with the developments in the first half of the year. Our risk-weighted assets amounted to DKK 42 billion, down from DKK 59 billion at the end of last year. The unwinding of retail operations continue and all Personal Banking accounts have now been closed. The management of the performing personal mortgage portfolio has been outsourced to a loan service provider in Ireland. Property sales continues, and in the second quarter, we made an agreement on a portfolio sale of almost 700 residential investment properties that will be booked in Q3. In the first half of 2014, sales equaled about 70% of the total sales in 2013. Loan impairment charges amounted to close to DKK 400 million, and we still see the risk of impairment charges for non-core Ireland of up to DKK 1.5 billion for the full year 2014. Slide 12, please. An important element of our strategy is to become more customer-driven by strengthening customer relations as well as our general market position. We have taken a number of initiatives across the group aimed at providing our customers with easier access to stronger competencies and in order to improve our service levels. Let me highlight three examples. With the launch of Danske Business One Plus and Pro packages, we now offer business customers a more relevant service model that gives access to specialist advisors with deep knowledge of their specific area of interest. This is part of our effort to satisfy our business customers' growing demand for specialist advisors and telematics solution, and it has been very well-received. We have expanded our highly successful MobilePay universe by enabling merchants to accept payments through MobilePay and by introducing an online solution that lets consumers use the app to pay for online purchases. Mobile payment is developing rapidly, and we are keen to pursue it further because we believe it holds strong commercial potential and strengthens our relations with both personal and business customers. Finally, as part of our pledge to make banking easy for our customers, C&I launched Danske Trader. This is a state-of-the-art electronic exchange platform that is fully customizable and covers everything from in-depth pre-trade analysis to post-trade functionalities. These initiatives are important in our effort to solidify and strengthen our market position and encourage more customers to do more business with us, and we are beginning to see results. Customer activity is increasing across the business. At C&I, client-driven income is up. At Business Banking, we have stabilized volume and can see an increase, particularly in the recent months. Slide 13, please. I would now like to address our ongoing business review. As you are aware, we are looking at all parts of our business, and in interest of transparency, we will keep you informed of our conclusions when this is relevant and when it is prudent from a business perspective. There was some media speculation in May regarding our presence in the Nordic region, so let me state clearly that Danske Bank is and will remain a Nordic universal bank. We have a solid footprint across the region, and we see an unquestionable strategic and economic rationale for being in all four markets, Denmark, Finland, Norway, and Sweden. The Nordic countries offer exposure to stable AAA-rated economies. Our presence across the region also gives us a number of opportunities in selected pockets of growth. In addition, geographical diversification brings lower earnings volatility. Many of our customers require that we operate in all the Nordic markets, and in some instances, also outside the region. There are clear intra-country interdependencies that should not be underestimated, for example, between Personal Banking and SME activities. We are thus able to meet our customers' needs through our Nordic universal bank strategy. Across our three main business units and between these units and our asset management and insurance business, we are able to deliver cross-border solutions and broad innovative product offerings. We also generate scale synergies from sharing expenses and investments, for example, within IT, knowledge sharing, product development, and overhead functions. As part of our business review, we zoomed in on our Personal Banking business in Sweden and in Norway. In both areas, we have a sizable customer base. Together, the two business areas serve around 400,000 customers. The market share of Personal Banking in these two markets are very similar, at around 4%. Our Swedish Personal Banking business has not been profitable enough. In contrast, the Norwegian unit is generating healthy returns. Before commenting on these two markets in turn, let me mention that in this morning's release, we have provided a preliminary financial disclosure on Personal Banking for each of our Nordic markets, as well as in other markets. We have previously communicated to you our ambitions to further enhance transparency, providing full level 3 geographical disclosure in the beginning in 2015. As we now take a further look at those markets, please note that Personal Banking operations in Sweden and in Norway are moderate size, each with around 70 billion kroner in lending. Slide 14, please. In Sweden, we have a fairly focused footprint in terms of both geography and customer segmentation, with a bias towards high net worth clients. We have key areas of strength such as private banking and a strong virtual banking platform. We are challenged by scale, by need for further development in part of our digital offering, and also partly by low awareness. Over the past 18 months, we have lost some mortgage market share as a consequence of pricing above peers. We will address this through more competitive pricing going forward. Our overall value proposition for existing and future customers will be based on more transparent advisory service with enhanced digital offering and fair pricing in all key areas. This will involve further investments in marketing and people, as well as leveraging on our strong digital offering elsewhere in the organization in order to provide the best possible product offering. Slide 15, please. In Norway, we are looking to leverage and fine-tune an already profitable bank. Our approach to this market is thus also different from the one in Sweden. The Norwegian Personal Banking market is consolidated. Danske has a somewhat concentrated geographical footprint and is skewed towards the higher end of the client scale. These are attractive features, and from a market structure perspective, we have also benefited from a favorable pricing environment in Norway. We need also to secure profitability in a potentially more challenging market condition. We will therefore invest to strengthen our product offering in Norway, not the least by leveraging our digital platform and expanding our geographical footprint. We will also invest in marketing in order to enhance awareness, and we will be targeting further opportunities for further value creation through a more structured approach to cross-selling. For competitive reasons, I will refrain from providing specific breakdowns of our investments by area or geography. I can tell you, however, that we are looking at a total of between 200 and 300 million kroner for Personal Banking in Sweden and Norway combined. Let me add that both areas will benefit from the many cost reduction initiatives we are implementing across the group. To conclude, I am confident that both markets will make positive contributions to the enhancement of the group's profitability and will succeed in capturing the innovative challenging position. These businesses will therefore remain an integrated part of our Nordic universal bank strategy. Slide 16, please. Finally, before taking a question, let me address our financial outlook for the full year. As I stated in the beginning of today's call, we are moving in the right direction. We've had an encouraging start of the year in Q1, and the positive trend continued in most areas in Q2. We continue to operate in a slow growth, low interest rate environment, and this will continue to affect demand. However, we expect lower funding costs to more than compensate for weak loan demand in the NII line. We continue to expect total trade income above the level in 2013, and insurance should also increase in comparison with last year. Overall, we therefore continue to expect total income to exceed the level in 2013. We continued the positive development in our expenses and means also that we today are lowering our full year guidance to below DKK 23 billion for 2014 from the previous guidance of around DKK 23 billion. We are maintaining our guidance for impairments. For core activities, this means we will expect level to be below 2013, while for non-core Ireland, we expect impairments of up to DKK 1.5 billion. Altogether, we are increasing our net profit outlook for 2014 to a range of DKK 10 billion-DKK 13 billion, whereas previously we expected to land in the high end of the range of DKK 9 billion-DKK 10 billion. Slide 17, please. These are my or our initial comments and messages. We are now ready for your questions. As usually, please limit yourself to two questions, and if you are listening to the conference call from our website, you are welcome to ask questions by emails. Operator, we're now ready for a Q&A session. Thank you. We will now begin the question and answer session. If you've a question, please press star then one on your touchtone phone. If you wish to be removed from the queue, please press the hash key or the pound sign. Once again, if you've a question, please press star then one on your touchtone phone. The first question comes from Mads Thinggaard from Handelsbanken. Your line is open. Please go ahead. Yes, hello, this is Mads from Handelsbanken. I have a question regarding the trading income, if I may touch upon that. Could you perhaps shed a bit of light on the trading income guidance going forward? I have the impression that you are still guiding DKK 8 billion yearly at last quarter. Perhaps you could elaborate a bit about that and if you are still seeing DKK 8 billion going forward. Also on the cost side, when you lower the cost to below DKK 23 billion, is there an element of that coming from lower variable pay due to lower trading income? Thank you. Lower. Okay. Let me take the first one first. Where we have seen that we have been challenged on the trading is particular market making and particular in Q2. That is related to a very low interest rate environment and extremely low volatility, which has made it difficult for market makers to really make any activities as our trade volumes has come down. It is highly unlikely that we will reach the DKK 8 billion for 2014 as we should prepare us for also Q3 to have low rates and low volatility. That may change. Your call as good as my call when it comes to volatility, but we are preparing for it. That is also why we have adjusted the resources in our FICC business in Q2 to adjust for this lower activity. This is an area we are keeping a high attention on to see if this is beyond a cyclical tendency of a more structural nature. We have to remind ourselves that Danske is the leading provider of FICC business to our clients in the Nordic region. It is an area which has been very profitable for us, but it has been challenged due to this very low volatility and rates, as I said. We think it is too early to make a call that there has been a structural change. But if we can see that this will stay beyond 2014, we will of course adjust the business model accordingly, both on resources to capital and cost. So this will remain a profitable operation for our shareholders, but also taking care of our clients. Okay. Just to clarify, does that mean for 2015, you are not really seeing anything right now? No, we think it's too early to make the call on the FICC business at the time. We need to get back to you as we see some clearer trends in the latter half of 2014 before we can guide on '15. That's again based on what we think could happen to market making activities. What we can see, which is very positive, is the customer income and customer activity on the traditional business is going very well and increasing at a rapid rate. But it is not able to compensate fully for lower market making income. Then your question about the costs. No, it's not mainly related to lower bonus payments to our trading operations. Our bonus to markets operation is not going to change dramatically because the quality of the earnings are increasing and also the bonus percentage-wise is also increasing as the quality is increasing. So that's not a major reason for the cost reduction or guidance in 2014. Okay. That's very clear. Thank you. The next question comes from Omar Keenan from Deutsche Bank. Please go ahead. Your line is open. Good afternoon. Thanks very much for taking the questions. I just have one net interest income question and then one question on the part of the business review that you disclosed today around Personal Banking. Just on net interest income, you discussed that for 2014 as a whole, the cheaper funding costs will offset the weaker volume outlook. But going forward from here into the second half of 2014 and then from next year, if I look at slide 35, which very helpfully gives us a lot of color around back book funding costs and shows where you've been able to issue funding. It looks like if we do a mark to market on funding costs for 2015, 2016, and 2017, that there's something like a 700 million DKK uplift from NII to come through. Is your message that from here that we'll continue to see group margin increase on the back of cheaper funding costs? Could you just highlight where there could be potential headwinds? We've had some of your peers earlier on in the earnings season talking about corporate lending margins under pressure and the competitive environment, at least on the lending side, getting tougher. Then I just had a second question on your business review. Thank you. Yeah. I think we should be cautious to look at just one part of the funding to then make conclusions on the total NII. But you are right if you look at the senior funding in isolation and the repayment of the state hybrid with the replacement we've done. We have, of course, some tailwind, which we are benefiting now, and we will have some benefits going forward. However, we also need to look at the deposit side, the classic deposits. We have seen that we've been able to optimize the pricing structure, and we've been able to gain some positive NII on that level. How much more we can extract from that side, we need to see, but that's an area we keep a constant focus on. On the lending side, first take the volume. We can see that in this quarter, lending has flattened or even actually improved slightly, and it's particularly within Business Banking and in Denmark. Personal Banking is still slightly sluggish, but I would not be surprised if volume would stabilize late 2014 and may have a slight positive development in 2015. Margin on the lending side, I think overall in Personal Banking, we may have reached a peak. We can still see that we're able to reprice and need to reprice some of the commercial property on the business side, but otherwise, I think the margins are more or less at the peak as the competitive pressures are coming in. So far, we've been able to keep the margins very well. If you bundle all this together, I would say basically that we still should have some good developments on NII, even though the volume will be flattish. But it's too early to make final calls for '15. I'm slightly positive for what we've seen in Q2. But remind ourselves that it's only one quarter, and that's why we still are cautious, but it looks slightly positive. Okay, great. That's very clear. The second question just on the business review, and you've given us a flavor of what your strategy is going to be in banking in Sweden and Norway. How do you go about increasing your market share? Is it primarily going to be around pricing strategy, and what does that mean in terms of competing on price versus peers? Thank you. Prior to the financial crisis, we had a very good growth strategy in Sweden. It's no doubt in my mind that we have lost some focus on Swedish Personal Banking. We will regain that position by utilizing the strength of the group, particular our Personal Banking offering, and not least our strong virtual or online banking abilities. We think we can develop this further and be the agile bank and the challenger bank to the four incumbents. We will not start a pricing war, but we cannot, as we have done during the last couple of years, price above the incumbents, and we will adjust the pricing accordingly. Based on fair pricing or on our peers' level being more agile and really giving our customers a good value proposition as we've done historically, we have a very good customer satisfaction, particularly on Personal Banking. We can see that we can grow Sweden slowly and surely to make it a good bank for our clients and not least for our shareholders over the next couple of years. Philosophically, though the ROEs on Swedish and Norwegian mortgages are pretty good. The marginal lending that you do in these areas is accretive to group ROE. So it helps you to achieve your targets even if you underprice versus peers. If we think about the last player that tried to take market share in Sweden, it's a pretty competitive price-sensitive market that for them to have increased their market share by three percentage points, they basically had to underprice their peers by 20 to 30 basis points for about a two-year period. Is it realistic that you'll be able to materially increase market share without being better on price than the four main Swedish banks? Or do you think there's other avenues to do it as you hinted? Ultimately, is it going to be about price? Price will always be an element in the mortgage market. I was, as you may recall, the CEO in Norway, and the way we grew our position in the Norwegian market by being two basis points below the main competitor, and then you can grow slowly every quarter. We have no ambition to be very aggressive, but we need to be competitive. The Norwegian market, to put that first, is very profitable for us, and we would like to grow that going forward. We see Sweden as a great potential. It's four incumbents, and we can really play the challenge in that market. We will price competitively, but we will not be overly aggressive. We don't think that's prudent. Personal Banking is nothing you grow fast. It's something you do quarter by quarter slowly to make a sustainable, healthy business model, and that's basically what we will do. Okay. Thank you. That's very clear. Thanks very much. The next question comes from Christian Hede from Nordea. Please go ahead. Yes, good afternoon. This is Christian from Nordea in Copenhagen. I have two questions, one on Denmark and one on Ireland. If I start with Ireland, I just want to clarify the slide you have with the number of properties for sale. Do you have any more for sale, or is it all now on the market and therefore ready to ship? That's basically the first question. The second question is a more possibly positive and long-term question in Denmark. We see macro trends going in the right direction. We're now seeing consumer confidence figures also pointing in the right direction. If we just for a second assume that this will actually end up with consumers also spending more, how do you see this playing out for Danske Bank? Looking at loan losses being as low as they are, can we expect them to go lower when and if we see consumption coming up, or how do you see this playing out? Thank you. On your first question, I think that the majority, and we need to get back to you on exact fact, is that you have all basically on the markets when it comes to volume. We have a small portfolio left, which is SMEs, which is not a part of this commercial property, which we are looking to dispose of in second half. What you see is basically it. So everything is going according to plan to close it down, and we dispose of it by the end of the year. Personal Banking, we have basically closed all the accounts, and we are in the midst of closing all the business accounts. So I think Ireland is, as I said, at or ahead of the plan. So there should be no surprises for you there. But be aware, as I said in my introductory remarks, that if or when we sell particularly the SME portfolio, we may see impairments up to this DKK 1.5 billion we are giving you as a guidance. Yes. If I may interrupt there, I guess if we do see 1.5 billion, and I realize that you are saying up to, but if 1.5 billion is there, I guess that would be a negative surprise to at least my estimates and consensus as well. Is it fair to say that 1.5 billion is the worst-case scenario? I have been very clear on when we started the year and in Q1 and also now that the impairments can come up to DKK 1.5 billion. It depends on when and if we sell the remaining portfolio. Christian, I cannot tell you more than that. I give you my best guidance on this one. Then you had your question on the macro. I think you are right in your assumptions that we can see that the consumer confidence is also starting to have small positive real effects on the economy, but we can see it even more in the business. During fourth quarter last year and first quarter this year, we saw businesses more requesting and asking about investment proposal or lending proposals. We can see that these are now materializing, and that is also why we see lending slightly picking up. We can also see that some of our corporates are pulling out deposits to use it for investments, which we see is very positive. It is low growth, but it is a positive growth. The area will impact also mortgages when and if this continues, but it is too early to make the call when that turnaround will happen. We think that Q2 is a positive sign, but Denmark and Danish economy is very an open economy, is dependent on Europe. If you believe in Europe, Denmark should do well, and we have no belief in that Europe should not be able to show the growth of approximately 1.2%, which is our base forecast for our growth of Denmark of 1.5%. We will be a mirror of the Danish economy, and if and when the Danish economy picks up, it will be positive also for Danske. No question about it. Thank you. The next question comes from Hauke Frue from DNB. Please go ahead. Yeah. Hi, good afternoon. Hauke from DNB. Two questions, one on dividend outlook and one on the Personal Banking in Norway. In terms of dividends, your Basel III common equity Tier 1 ratio is ahead of your 13% capital target. Your profitability is improving, your rating is improving, and I assume your risk-weighted asset growth will be low for a long time going forward. Adding all that together, is there any reason why you would not pay out significantly more than 40% in the coming years? That's the first question. Second, on Personal Banking in Norway, even taking into account size, the cost/income ratio seems relatively high when comparing to similar-sized banks in Norway. But I note that the other income share of income is very high in Personal Banking in Norway. Could you give some details on what this other income is and whether that explains part of the cost/income ratio? Thanks. Yeah. I can do Norway and Henrik will answer you on the dividend. It is no question that Norway is a very profitable area for us. It is actually one of the most profitable segments of a very favorable business environment, particularly for personal mortgages. But we have to also plan for a less benign or less positive environment going forward. The cost/income is still high. A reason for that is that we own, as you know, a real estate broker called Krogsveen, which had a very high cost/income. It is a sizable operation in comparison with the total operation, and that is why both fees and the costs are very high. If you strip that out, you have much lower other incomes and lower costs. The ROE of that real estate broker is of course high, but absolute number is net around DKK 40 million to DKK 50 million. That is basically the effect of that real estate broker. That is why the numbers are as they are. Henrik Aamund speaking. In terms of dividends, you are right that we are Core Tier 1 at 14.4%. It is too early to say how we will end by the end of the year. It also depends on how the volumes are going to develop for the remaining part of this year, including earnings, changes in risk rates, and so on. But as we have stated previously, of course, we aim to increase our payout rate to up to around 40% when it is prudent. You are also right that things are moving in the right direction. It will of course be decided early 2015 what the dividend will be, but things are moving in the right direction. Just if I could follow up, I was thinking more longer term than just the dividends for this year. I was thinking if you go forward by 12 months your Core Tier 1 ratio can, say, add by another 100 basis points. You are still probably not seeing that much of risk-weighted asset growth. Your profitability has improved further. Mathematically, you would need to raise your payout ratio well above the 40% unless you wanted to continue to build capital. Is there anything I am missing here? No. Your assumptions on that we may accumulate capital is on your account, but we have no intention to accumulate more capital than we need to run the business, and we will distribute excess capital to the shareholders in one way or another. I think what Henrik alluded to is we need to take this stepwise. We have a target of Core Tier 1 of 30%. I've said to many of you many times that I think we will probably lie slightly above that, but any excess capital we will not use for acquisitions, and we'll distribute that back to shareholders in one way or another. What that means in practice, we need to come back to you with, and the board will need to look into this going forward. Excellent. That's very clear. The next question comes from Asbjørn Nicholas Mørk from Carnegie. Please go ahead. Yes, good afternoon. Asbjørn from Carnegie here. I have two questions. First of all, on your business strategy. If I understood you correctly, you said that you want to remain within all your business units within Sweden, Norway, and Finland. Does this also mean that you see yourself making 12% ROE within the reasonable future in these markets? And does it also mean that the Baltics and Northern Ireland will not be part of your future cost set up looking ahead? That was my first question. My second question relates to loan loss provisions. Obviously, the group provisions continue down in Q2, but I also see that your individual impairment charges are quite high for Q2, and especially Business Banking in Denmark, there seems to be a little bit of an uptick here. So just wondering whether this is you can say the end of a long decline in provisions, and this is the fair level to assume going forward, or how do you see the trends moving there? Thank you. I think we should take your last question first. I think we should be careful to read too much into the quarterly movements and the movements between individual and collective or reversal or new impairments. What I think one can read into is that it appears that the macroeconomic environment is turning to the better, is even stabilizing, and that has a direct impact on our impairment line. We are guiding that impairments will stay below the level of 2013, and we're also increasing our guidance for 2014 because we can see that impairments are stabilizing at low levels. So said, we are now at 14 basis points for the core, 17 basis points including non-core. These are low numbers. It can fluctuate, but I think we can say that things are stabilizing in all our markets and particularly in our Danish market. I don't want to be more specific on that because I think it's very hard to be more specific for the present time. We need some more quarters to confirm that trend. Then comes your business strategy. All units should be able to deliver cost of capital for the unit. Overall, the bank shall return at least 12% to its shareholders. That's something, of course, we are looking into to make sure it will do. Norway, for the time being, is making much more than the cost of capital. Sweden is making below, and we need to make sure that we adjust the Swedish business model accordingly. It will take some time, but I'm very confident that this will be a very good franchise for both customers and you as a shareholder. We've been very clear on the Nordic strategy, the Nordic universal bank. That means we will be present in Norway, Sweden, Denmark, and Finland. We are saying that the Baltics and Northern Ireland are core. Everything is core until it's non-core, and they are performing well. Our operation in Northern Ireland is a well-performing bank, it's a market leader. You will probably also see when you go through the details that they have turned a corner when it also comes to impairments. So we think that we have good operations. But so far, we've been focusing on the Nordic operations and are making a very clear statement to you as analysts and your investors that that's our focus. If I can just follow up, could you elaborate a little bit on the cost of capital then? You do not need to give me an exact number, but just saying how far below 12% would that be? Henrik will respond to that. Just to make things clear here. When we say cost of capital, we are referring to 12% before tax. I think perhaps your question was related to longer-term 12%. Was that correctly understood? Yeah, I was talking about the ROE target of 12% for the group, and then I was assuming that you would be able to make that in all your business units. Yeah. That's the ambition. I see no reason why Danske in Sweden should make 12% on activities. The Swedish peers seems to be making 12% on their operation in Sweden, and there's no reason why we shouldn't be able to do that also. If it exactly is going to be 12% for Personal Banking or slightly above or slightly below, I don't know. But the level of profitability today is too low, and that's why we're putting a particular effort to make sure that that return will increase over time. Okay. That's very clear. Thank you. The next question comes from Matthew Clark for Nomura. Please go ahead. Your line is open. Good afternoon. Two questions, please. One is in terms of future moves in risk-weighted assets. Could you just give us some commentary on if there are any lumpy positive or negative items remaining before the end of the year on either bank orders, regulatory changes on the negative side or model approvals on the positive side? The second question was on restructuring costs. These look quite low so far year to date. I just want to check that there's nothing in there beyond the severance costs that are highlighted on the cost slide and whether we should still expect a chunky restructuring cost later on in the year, and any commentary around what that would be related to. Thank you. Okay, good. I think it's useful if Henrik answers those two questions. Okay. First, you had a question on risk-weighted assets. I'll give you the highlights. If you need more, I suggest we take it bilaterally. For the remaining part of the year, we need to implement what is called FSA orders 2 and 3 we got last year, which have not been implemented in terms of risk-weighted assets. Work is going on on that. We need to adjust for the 3 percentage points Thomas mentioned on the corporate portfolio. That will be also an impact. We are also implementing a model for specific market risk, and we are also having dialogue with the authorities about IRB models in Finland and for counterparty risk weights. It's a number of movements in both increasing risk weights and reducing risk weights. Overall, it will be roughly neutral over the second part of the year. In addition to that, of course, there will be the impact of portfolio changes in terms of lending market risk, et cetera. We can give you some indication of the level of the various elements that are impacting risk-weighted assets for the remaining part of the year. Can I just- Sorry. Can I just very quickly follow up? When you say overall roughly neutral, is that including the 0.4 percentage points Yes, it does. corporate portfolio? Okay. Thank you. Yes, it does. As an example, FSA orders two and three will increase risk weights, whereas the 0.4 will reduce risk weights. Yeah. Okay. Then you asked about restructuring costs. We have taken some severance pay in the first half, but roughly speaking, we expect our severance pay to be larger, higher in the second half of the year, although we still expect for the full year severance pay to be a little bit below what it was last year. Great. Should we expect additional cost saves to show through next year as a result of those restructuring costs? Yes. These severance payment we expect for the second half of the year, of course, are taken with the aim of reducing costs into '15. Thank you. Next question, please. Next question comes from Jakob Brink from ABG Sundal Collier. Please go ahead. Two questions from my side as well. The first one is going back to costs. Now you have stated just now that the severance pay will be lower this year than last year. Is that the reason for the lower cost guidance or what exactly lies behind? Secondly, you touched upon it some regarding the corporate business and the profitability. You said that if you could not make it profitable, you would have to do something on the capital level. Could you maybe touch a bit more on that? What exactly are you looking at? Thank you. When it comes to your first question, no, the major adjustment in the cost guidance is not related to any major reduction in our guidance on the severance. However, it may be slightly lower than our 2013 number, but it is too early to see where it will end up. That is not the major reason because of our adjustment on the cost side. I think it is fair to say that we will remain very diligent on cost. We will make sure that we are a very cost-efficient bank as we move into 2015. Any other question on that? Jakob, please repeat your second question. That's just, I think you mentioned earlier that to question that if you could not make trading income as high as the DKK 8 billion, you would look later on in what you could do with the allocation of capital to that unit. If you do look at this quarter, it was sort of a return on equity in the corporate business around 10 before tax, but quite a long way up to 12. So I was just wondering what exactly you're planning to do. I think if you look at what a trading division requires of capital, it's basically based on the gross stressed VaR. The way you bring down the capital is to bring down the gross positions or the VaR. You can see that the value at risk of VaR was brought down tremendously in Q2, both due to lower volatility, but also due to lower positioning. At the same time, we are moving more and more clients to CCPs. We also are netting more and more exposures, so a lot of initiatives we can do. In addition, we can take down resources. I have been to this topic before. I think we should be cautious to be too sure of what needs to be done in the short term, because this has been a very profitable area for the bank. It's been a real value creating for our clients, and we have a very good position. But if, and I repeat what I said previously, if it shows that it's more structurally than seasonal in its nature, we can see that we can play on several levers. You will probably also see already in Q4 or maybe even in Q3 that the capital allocation to our markets operations are falling. But of course, it falls in a sliding path, and that's something we're working on continuously. So this is something we're keeping a very focused eye on. Okay. Thanks for that. Next question, please. The next question comes from Andreas Håkansson from Exane. Please go ahead. Your line is now open. Yes. Hi. We've gone through a lot of things, but I have one question first on non-core. I guess the first half provisions or impairments in Ireland was EUR 191 million. Then you've had pre-provision losses and you had non-core conduit losses. So all in all, you're up to some around EUR 794 million loss in that division. I'm just wondering if, and that's of course if, you're going to go towards EUR 1.5 billion of provisions just in Northern Ireland, should we then expect that the non-core line overall, including pre-provision losses and conduit losses, to be closer to EUR 2 billion negative? Or what's the view there? Andreas, I'm not sure I follow, because you also mentioned Northern Ireland. Northern Ireland is not a part of this at all. No, non-core Ireland, I mean, of course. Okay. Non-core Ireland has, as you alluded to, inclusion of both the impairments we did on the conduits in London in Q1, which we do not expect to be repeated going forward. We see that as a one-off. The impairments we see in Ireland non-core are the numbers you referred to, which are small by itself, which was first half of DKK 190 million or close to DKK 200 million. I do not can make the math of DKK 2 billion, but we said we may see the risk that impairments in non-core Ireland may come up to DKK 1.5 billion. That means if we see that you need to add the non-core conduits of DKK 189 million. That is what it could be. We are at low levels now, but it depends on how we see the book developing in Q3 and Q4. I do not think that adds up to DKK 2 billion, but more to approximately DKK 1.7 billion. You also need to add some losses that you have done pre-provision. If you look in the first half, you made profit before loan losses of minus DKK 414 million, which comes through in the non-core line as well, right? Are you talking about that line? Okay. That is right. A combination of it all. I am just thinking about the non-core line. Okay. Non-core line. I was talking about impairments. Okay. Yeah. Andreas Håkansson, if your starting point is the minus DKK 794 for the first half, then you are right that if we end up with DKK 1.5 billion in non-core Ireland impairments, then you are close to DKK 2 billion. In that way, you are correct. Yeah. But remember we said up to DKK 1.5 billion. Sure. And what's the outlook on pre-provision losses? Because you remember at the time of the Q1 result, you said that the DKK 329 million was exceptionally high. Now you came in at DKK 85 million in Q2. Is that more the run rate we should expect in Q3 and Q4? Yes, because please remember that in Q1 we had this extra provision for an insurance contract of DKK 200 million, which have- In the Baltics, right? In the Baltics, which have impacted the expense line extraordinary negatively in the first half. Yeah. You're right. If you add DKK 1.3 billion to minus DKK 800 million, you are up to minus DKK 2 billion, plus/minus. You are correct in that respect. Yeah. That's fine. Just a detailed question. Just in RD, the mortgage division, there was a pickup in provisions in Q2 over Q1, and we're now at the highest level for quite many quarters. You said it was an improvement in Personal Banking, so what's driving that increase? I think you should not put too much into that. There are fluctuations within the quarters. Generally speaking, our mortgage division, RD division, is developing very nicely. Okay. It's not retail. It's rather farmers or SMEs or- Part of the provision was related to Business Banking in the RD book in Q2. Thank you. Okay. Thank you. Okay. I think we have time for two more questions. The next question comes from Anton Kryachok from UBS. Please go ahead. Thank you very much for taking my questions. Just two questions, please. One on revenues and one on costs. Firstly, on revenues. Previously you have mentioned that you see some benefit to the overall NII line from reinvesting your liquidity portfolio into slightly higher-yielding securities. I think in the first couple of quarters this year we have seen a pickup in treasury NII. I just wanted to confirm whether this benefit has played out fully in the first two quarters, or shall we expect some more improvement to come through? The second question please, on costs. I remember that at Q4 presentation you have guided that your cost base in 2014 will be around DKK 23 billion, and in '15 it will be below DKK 23 billion, implicitly guiding for an overall decline in costs in '15 on 2014. Now that you have changed your guidance for 2014 on costs, are you also changing your guidance on 2015 costs, and is it reasonable to expect a decrease in the overall cost base in '15? Thank you. Okay. I'll do the last question, and Henrik will come back to you on the first question. No, we have not adjusted our ambitions on the absolute cost level for 2015. Remember that we also have another measurement or ambition, that's keep the cost/income below 50. As also we have discussed in this conference, that we are very diligent on cost, and we will make sure that we have the right cost base moving into 2015, and that means that we will continue to do adjustments in the second half to make sure that those costs are coming lower. Where they will come down we will need to come back to you with, but we need to stay very competitive, both to develop products towards our clients and to stay competitive for our shareholders. The cost sides we should have a good traction on. Is that okay? Yes, that's very clear. Thank you. And then- Regarding the liquidity portfolio in our treasury department, yes, we have been building that up, starting very late last year and into mainly Q1. It is now around 90 billion kroner, and it will have a net interest, NII effect in 2014 of around 400 million to 450 million. It's booked in the net interest income line in other activities, where you can see a figure for 250 for first half and a significant improvement compared with the first half 2013. So that is where it is, net interest income, other activities, and it's currently 90 kroner. Thank you. The first half of this year already has the full benefit of your actions. Yes, you will get full benefit in the second half. Yes. Excellent. Thank you very much. Thank you. Okay, the last question. The final question comes from Jan Wolter from Credit Suisse. Please go ahead. Yes, good afternoon. Thanks for taking the questions. Jan Wolter here, Credit Suisse. First, you briefly discussed Norway and Swedish retail business on the call and in the report. You refrained from commenting on Finland, at least in the report today. How do you think about that? You mentioned growth opportunities in Sweden and Norway, and that you were about to invest DKK 200 million to DKK 300 million there. How do you think about Finland? That's my first question. Finland is a core, as I said in my remarks, together with Denmark. In Finland we have a very good position, and we are improving in all the business areas, and we will continue to develop Finland. In the very short period, we need to be cautious on Finland due to the macroeconomic challenges we can see in Finland as a consequence of the Russian issues. Long term, Finland is a core market for us and a market we would like to develop also going forward. Thank you. The second one related to that is how much equity is allocated to Finland, roughly? If you could give us that, please. We will come back on that. The CFO says he will come back to you on that one. Sure. Thank you. The final question is, what do you think is the most likely requirement regarding interest-only loans in Denmark in regards to the discussion that politicians have currently to reduce the interest-only loans? Thank you. I hope that the sector will find a solution like we see in Sweden, and that is our priority route. We as a bank have, during the last 12 months, incentivized our clients strongly to do either installments or lower LTVs, and we can see that it is really working well, both on the tenant side and that we have very few interest rates only loans back. If this sector by itself cannot find any solution, it may happen that the regulators will impose some soft rules or some kind of soft what I call regulatory demands. But that we need to deal with at that time. But for Danske, I do not see this as a problem at all, as we are very well prepared for these measures, as we have worked with these ourselves for the last 12, 18 months. Okay. Very clear. Thanks for that. Okay. Then I would thank you all for your keen interest and good questions on Danske Bank. As always, you are welcome to contact our investor relations department if you have any more questions after you have time to look at accounts in more detail. A transcript of this conference call will be added to our website within the next few days.