Earnings Call: Q1 2014

May 1, 2014

Summary

Q1 net profit rose 91% YoY to DKK 2.8bn as costs and impairments fell. FY2014 profit guidance remained at the higher end of DKK 9bn–12bn, with low rates and subdued lending demand still pressuring NII.

Welcome to the interim report first quarter 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. You can now begin, sir. Thank you, operator, and thank you all for taking the time to listen in on this call today, also being on the first of May. Other participants today is the Chief Financial Officer, Henrik Ramlau-Hansen, its Head of Investor Relations, Julie Quist, and Chief Investor Relations Officer, Claus Jensen. Slide 2, please. The scope of today's call is to present the financial results for Q1 2014. We also have the intention to offer you additional insight into selected topics, including our capital and funding position. We will end with a wrap-up and an outlook for the current year 2014. Our aim is to keep this presentation for no more than 20 minutes. After the presentation, we will, as the operator said, open up for Q&A as usual. Afterwards, as always, you may feel free to contact our IR department for more questions. Slide 3, please. Danske Bank is continuing to move in the right direction. We are making progress towards fulfilling our ambitions. Our Q1 results shows that we have had an encouraging start to the year. It is good to see that, in particular, our costs and impairments are moving in the right direction. At the same time, we still have a long way to go to achieve our long-term target of a 12% return on equity. Let me take you through some key financial highlights for Q1. We reported a net profit for the quarter of DKK 2.8 billion, which was an increase of 46% from DKK 1.9 billion in the preceding quarter. Compared to the first quarter 2013, we saw a net profit increase of 91%. Our ROE for the quarter came in at 7.7% against the 5.3% in Q4 2013 and 4.3% in Q1 2013. I think that the current level marks another clear and positive step towards our 9% target for the full year 2015. Our total income for the first quarter came in at DKK 10.3 billion, which was a 3% increase over the first quarter 2013, driven by all income lines except NII. We reduced our expenses by 18% to DKK 5.4 billion compared to the previous quarter and 6% compared to the first quarter 2013. Thus, our cost income ratio came in at 50.26 percentage points. Impairments came in at DKK 641 million, again marking a decline. It was the result of improvements at all major business units. Our Non-core Ireland also benefited from low impairments. The divestment of our property portfolio is progressing according to plan. Outside Ireland, the credit quality of the portfolio is generally good. In addition, the impairments relating to our conduit portfolio, we took provisions for unfulfilled distribution agreement for life insurance products in the Baltics. Our capital remains strong with a Common Equity Tier 1 ratio of 14% and a total capital ratio of 18.1%. It also included the full effect of our repayment of the DKK 24 billion state hybrid we repaid in April. Finally, in terms of guidance for the full year, we now expect to report a net profit in the higher end of the DKK 9 billion to DKK 12 billion range that we previously communicated to you. That includes the expected gain from the Nets divestments that we announced in March this year. Slide 4, please. Let me take you through our income statement. Focusing on developments in Q1 against fourth quarter of 2013, we saw declines in net interest income, fee income, and insurance income while our net trading income was up. The small decline in NII came from fewer interest days in the first quarter and from changes to our internal funds transfer pricing model, what we call the FTP model, where the positive counter-entry will be in net trading income. The drop in fee income was due to seasonality in Danske Capital, where the annual performance fee is a fourth quarter item. Net trading income increased primarily due to improved results at Group Treasury. Income from market making was stable compared to Q4, whereas it came in around DKK 200 million below the level of Q1 2013. Our insurance income was down also due to seasonality as we booked a part of the postponed risk allowance from Danica in Q4 2013. Altogether, this led to a total income DKK 300 million below the level seen in Q4 last year. Meanwhile, if we compare our top line to that of Q1 last year, we were able to grow total income by 3%, despite a low interest rate environment and declining volumes. Expenses came in 18% lower than the preceding quarter as we continue to execute on our cost savings program. Please be aware that Q4 2013 was also impacted by restructuring costs and by the usual seasonality effects. Comparing Q1 with Q1 last year, expenses are down by six percentage points. As previously mentioned, impairments continued a positive traction. We saw a 30% drop over the previous quarter and are now 55% below the level seen a year ago. Slide 5, please. Our three main business units all had a positive start to the year. This was most significant in Personal Banking and in C&I, where our profit before tax were up 25% and 27%, respectively. Business Banking posted an increase of 5%. At both Personal and Business Banking, total income was 7% lower compared to last quarter. Net interest income was affected by fewer interest rates and a change to our FTP model, but also trading income was lower due to seasonality. Expenses in both business units were down 12% and loan impairment charges declined by more than 25%. Total income in C&I was in line with Q4, driven by slightly higher fee and trading income, whereas NII was lower mainly due to fewer interest rates. The increase in profit was driven by 18% lower expenses and impairments close to zero for the first quarter. Slide 6, please. Danske Capital continued to see a good net inflow of assets, both from new and existing clients. Growth came from domestic as well as international markets, especially Finland, thus further cementing our position as a leading Nordic asset manager. Furthermore, the securities market was positive. All in all, this resulted in assets under management reaching an all-time high of close to DKK 750 billion at the end of the quarter, up DKK 21 billion over the quarter. Danske Capital's total income came in at 1% above the level for the preceding quarter, excluding performance-based compensation. Please note that the lion's share of performance fees at Danske Capital is booked in Q4 each year, which is why you are seeing the sharp drop in fee income for the quarter. Expenses were down 29% against Q4. All in all, Danske Capital's profit before tax, excluding performance-related compensation, increased by 21% against Q4. Compared to Q1 of 2013, the increase was 26%. Danica Pension recorded a 16% increase in the result from insurance business and a 15% increase in premiums. Danica's financial results for the first quarter is in line with our expectations and made it possible to book the full risk allowance to income for three of the four interest rate groups. Please note that although Danica had a solid investment result for the quarter, it was lower than in the preceding quarter due to seasonality as the fourth quarter number benefit from booking of DKK 200 million of the postponed risk allowance. At the end of Q1, the shadow account balance stood at DKK 1.3 billion. We continued to benefit from cross-organizational sales between Danica Pension and the bank. Danske Bank sales of Danica products increased by 7%, totaling DKK 1.2 billion in Q1. Slide seven, please. Turning now to our non-core activities. First, let me remind you that as of 1st of January this year, all Personal and Business Banking activities in the Republic of Ireland were transferred to our non-core portfolio. In the first quarter 2014, we had a pre-tax loss of DKK 600 million. This marked an increase of DKK 200 million compared to Q4 2013. Around half of the loss was caused by loan impairment charges and provisions outside Ireland, namely in our conduit portfolio and in provisions for an unfulfilled distribution agreement for life insurance products in the Baltics. This was made in conjunction with the Sampo Bank acquisition. Meanwhile, our property divestments in Ireland are continuing according to our plan. We sold 181 properties in the first quarter of this year, and our credit exposure was reduced by more than DKK 3 billion. Due to the recent positive development of our winding-up process in Ireland, we now expect impairment charges of up to DKK 1.5 billion for the full year for non-core Ireland versus our previous estimate of up to DKK 2 billion. Slide eight, please. Let me now address our cost development in the first quarter. As I mentioned earlier, we reduced our expenses by 18% to DKK 5.4 billion compared to the previous quarter. Compared to the first quarter last year, expenses are down by 6%. Therefore, even taking seasonality and Q4 restructuring costs into account, it is clear that we are starting to see a solid impact from the part of our cost initiatives we announced in 2013. Compared to Q4 2013, we saw lower costs relating to a range of key expense items, including staff costs and IT. We also recorded lower costs relating to consultants and marketing, two items that we have previously identified as areas that we would focus on reducing. We also recorded lower severance payments. Although please note that Q1 levels should not be interpreted as a run rate for the coming quarters. Costs relating to the deposit guarantee scheme and the bank package were a significant expense item for us in the full year 2013, totaling more than DKK 900 million. In Q1 2014, this item was slightly above DKK 200 million. It is a key priority at Danske to bring our costs down year-over-year, both in 2014 and 2015, and we continue to work hard to make this happen and remain confident that we will achieve these targets. Slide 9, please. The positive impairment trend we witnessed in 2013 continued into the first quarter. Impairment charges in our core activities amounted to DKK 640 million against DKK 916 million in Q4 2013, equal to a decline of 30%. The reason for the low impairment level in our core market is improved credit quality, particularly in Denmark. The impairments in the first quarter corresponds to a loss loan ratio of 40 basis points in our core activities and driven, as said, by all main business units, not at least by Business Banking and C&I. The fall in impairments was also caused both by reversals and by less new impairments. Slide 10, please. We reported a Common Equity Tier 1 ratio of 14% and a total capital ratio of 18.1% for Q1. In the first quarter, our capital position was impacted by two major events. Firstly, we implemented CRD IV, and secondly, we called and repaid the state hybrid loan of DKK 24 billion. The implementation of CRD IV is having an impact of 0.9% on the Common Equity Tier 1 ratio coming from higher risk-weighted assets and a partial reduction of the exposure to Danica. The repayment of the state hybrid reduced our capital ratio by 2.7 percentage points, which was partly offset by the new additional Tier 1 which had an effect of 0.6%. The planned repayment in June this year of an old Tier 1 issue in dollars, which we recently called and is planned to be replaced by a lower Tier 2 capital. Our capital position therefore remains very solid. Slide 11, please. With DKK 7 billion of new funding in the first quarter, our funding activity clearly reflects our lower need for market funding in 2014. We have redeemed DKK 11 billion, mostly expensive senior debt, and we have issued approximately DKK 6 billion of additional Tier 1 as part of the replacement of the state hybrid. As you can see from the maturity profile over the coming years, the average cost for both secured as well as unsecured funding is relatively high. The combination of low funding need and the present low funding spread explains why we should expect lower funding costs going forward. As mentioned previously, the state hybrid was repaid in April, in other words, after the close of Q1. For that reason, it obviously had no impact on the redeemed funding in Q1, but will have a positive effect on the full year. Seen in isolation, we would expect our annual funding cost to come down by up to DKK 1 billion as a result of the AT1 issue and the state hybrid redemption. Slide 12, please. Let's have a look at Realkredit Danmark, which also was an area of focus in our presentation last year. There has been a substantial attention on the refinancing risk for short-dated mortgages, not just for Danske Bank, but for the domestic Danish market as a whole. As you are aware, we have launched initiatives in order to reduce the risk related to refinancing of the F1 loan. The demand from our customers is now clearly for loans with longer refinancing periods. As a result of the latest refinancing auction in February this year, the outstanding F1 and F2 loans has now more than halved since the end of 2011, and the share of the total stock has been reduced to 15%. We expect this trend will continue. Slide 13, please. While on the subject of capital funding, let me briefly draw your attention to the upgrade that Danske Bank received from S&P on Tuesday night, in case it slipped your attention. S&P increased the group's rating to A from A- and changed our risk position from moderate to adequate. Our standalone rating credit profile was raised from BBB+ to A-. At the same time, S&P have attached a negative outlook to Danske Bank. We are encouraged by S&P's upgrade on Danske, which is another step towards fulfilling our strategic ambitions. Achieving a rating upgrade is among our key targets. Slide 14, please. In the first quarter of 2014, we took further steps to strengthen our position in the market and our products offering in line with our strategy. Let me just highlight a few examples. We have introduced a new post-trade setup for our C&I customers. This full-service solution includes client clearing, custody services, cash management, and regulatory reporting. As a result, our customers will benefit from more streamlined operations and a lower cost when dealing with Danske Bank. Other initiatives aimed at supporting simplification and efficiency in our organization, including our new international banking unit that will be serving Business and Corporate Institution customers through a single entry point. We also elaborated on our unique offering towards our younger customers, our so-called Young Direct Advisory Service. As you know, our MobilePay app is already an unprecedented success in Denmark. In order to leverage on this success, we introduced MobilePay Business for our business customers in Q1. This facilitates fast and convenient payments from consumers to business and organizations. We see new initiatives such as these as necessary steps towards improving customer satisfaction, which, as you know, is one of our overriding strategic objectives. We have started seeing good results from some of the initiatives that I mentioned in connection with our previous announcements. For example, Personal Banking's online meeting concept has been very well received by our customers and the demand for easy banking continues. The share of online meetings is continuing to increase in all our Nordic markets. Business Banking is succeeding in notably shortening the response time to credit applications in Denmark. In fact, our property loan response time was reduced by nearly 80% and the disbursement time for property loans by 46%. C&I continues to further strengthen their already strong customer satisfaction levels. For example, according to Prospera, C&I holds a Nordic number one position, both in cash management and in trade finance. These are all encouraging steps in the direction of improving customer satisfaction. Slide 15, please. Finally, let me look ahead towards the rest of the year in some detail. Firstly, let me remind you that we continue to operate in a fragile growth environment with low interest rates. This is not unique to Danske Bank, but it means that demand is likely to remain subdued. Balance sheet growth is therefore unlikely to become a key growth driver in the immediate future. We expect NII to be adversely affected by a continuation of low demand for loans and possible margin compression. However, we do expect lower capital and funding costs to more than compensate for this. Total income is likely to exceed the level in 2013. Income from market making remains low. However, we still expect to see increase in trading and insurance income. Expenses should come in around DKK 23 billion in 2014. But also remember that our costs are somewhat back-end loaded. We expect impairments to come in below the 2013 level, which was DKK 4.1 billion. For Non-core Ireland, we expect impairments of up to DKK 1.5 billion for 2014, where we previously expected impairments of up to DKK 2 billion. We expect a positive impact from the planned divestment of our stake in Nets of around DKK 1 billion in the second quarter of this year. This is, of course, pending regulatory approval of the Nets transaction. This leads us to expect a net profit for 2014 in the higher end of the range of DKK 9 billion to DKK 10 billion that we guided at the time of our full year results. I started off this presentation by stating that we had a good start to the current financial year. I am encouraged by this development and remain confident that we are taking the right actions to bring the performance and results of Danske Bank to the levels where they should be. Slide 16, please. These were my initial comments and messages. We are, of course, now ready to take your questions. For practicalities, please limit yourself to 2 questions. If you are listening to the conference call from our website, you are more than welcome to ask questions by email. Operator, we are now ready for Q&A session. Thank you. We will now begin the question and answer session. If you have a question, please press star and then 1 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, I remind you, if you have a question, please press star and then 1 on your touch tone phone. Our first question will come from Mr. Matthew Klopp from Nomura. You can now begin, sir. Hi. Good afternoon. A few questions. Firstly, could you just clarify with respect to the transfer pricing model impact, what you expect the development to be from this effect in the second quarter compared to the first quarter, and if you could quantify the burden in the first quarter again? Second question is on repo funding. This went up quite a lot for first quarter versus fourth quarter. Could you just let us know what that is for? Also in terms of terming out your liquidity portfolio, could you tell us what impact that had on the first quarter and whether this is now complete? Final question on loan growth, that was solidly positive in the first quarter, which might be a bit of a surprise. Do you expect that to continue? Do you expect to show positive loan growth through the rest of the year? Thank you. Yeah, that was four questions, by the way. Okay. I'll do them quickly. I'll answer two of them, and Henrik will answer two of them. We saw a decline in the demand for loans in 2013, and that's why we had a reduction, including currency effects, which was negative of approximately DKK 70 billion. We have seen that the reduction has stopped up. It's actually slightly picking up. We can see that Denmark is stabilizing, but particularly Norway and Sweden for us is picking up. But we have to be cautious on this. We have no intention to take market share because that would just create margin compression, but we'd like to keep our market share. With the underlying growth still subdued, we are planning for more flattish development on the loan growth. As I have told all of you before, it's easy to grow volume, but that will always have a cost, and we have no intention to grow for the growth for sake as we have the size we need. When it comes to the FTP, what we have done, the big principle is that the liquidity cost of carrying an LCR buffer, which had previously been carried and costly and be expensed at the Group Treasury unit, we have now allocated out to the business units. The P&L effect, Henrik will just comment on now, and he will also comment on the liquidity portfolio. Regarding the FTP, we have, as you may know, many of you, a detailed model for pricing deposits and lending, which go through our treasury account, and we have changed the parameters. We've not changed the concept, but we changed the parameters starting January 1, 2014, and the net change effect when you compare Q4 with Q1 is roughly speaking DKK 250 million, which would have taken down the NII and similarly increased our trading income. Just to add to that, if you at the same time adjust for the fact that Q1 has two fewer interest days, which is roughly DKK 100 million, and adjust for risk total DKK 350 million, then actually our NII, our adjusted net interest income, is slightly higher in Q1 compared with Q4. Then you ask for the full year effect of the FTP system. That will be slightly higher than the DKK 250 million, perhaps in the area of around DKK 400 million, but it depends on the development of deposits and lending and margins and so on over the year. Also for your information, we are on a continuous basis each month, slightly, slowly adjusting our FTP model on a monthly basis. When you evaluate our net interest income for the full year, please also take into account the redemption of the state hybrid. Sure. For the full year DKK 400 million, that is full year DKK 400 million, not DKK 400 million annualized, just to be absolutely clear. 400 for full year effect, yes. Full year effect, yes. Thank you. We have taken 250 hits in the first quarter, which is fully taken, and then it may be 150 over the next three quarters. Altogether, maybe 400. Okay. But a positive impact as second quarter versus first quarter. There might be also a slight positive effect in Q2, but the main impact in Q2 will actually be from the development in volumes and the repayment of state hybrid. Yeah. For your calculation, especially the one-off from Q4 to Q1, which is an important one. Yeah. Thank you. Then you asked about repo funding. I don't think we can answer. So that we need to take bilaterally with you. And you also asked about our liquidity portfolio, which is now built up to around DKK 90 billion, and will have an annual run rate of around DKK 400 million. Yes. Our next question will come from Mr. Omar Keenan from Deutsche Bank. You can now go ahead, sir. Good afternoon. Thanks very much for taking the questions. I will keep it to two. Firstly, just on costs. Staff numbers now are 5% lower year-on-year at 18,900. Just asking, what has driven the sort of perhaps faster reduction in staff numbers in the near term relative to your expectations? Because we have not seen any kind of headlines on any big new staff reductions yet. And just sticking on the point on staff costs, if we look at where staff costs have now come down to on a kind of quarterly run rate, they imply full year staff costs of something like DKK 12.5 billion. So it probably feels like a DKK 0.5 billion improvement on costs relative to perhaps where we were thinking before. I was just wondering why you have not got more positive when thinking about your full year cost target or even the 2015 cost target as well. Is there anything else we should be thinking about? Then I just have one more question on Northern Ireland. Thanks. No, we have communicated clearly our ambitions for 2015, which is cost below DKK 23 billion, and guided that we should be around DKK 23 billion in 2014. It is my and the team's ambition to deliver on that. We are very confident we deliver on that. When we have some more information, if we need to adjust that, we will inform you accordingly. When you focus quite a lot on FTE, that is a number which I do not guide on anymore. It is the total cost and that the underlying run rate is good. We need to be very cost competitive going forward. As we can see, there will continue to be margin compression probably, and that is what we are very diligent on. We have been fairly successful in execution our cost program, and we will continue to execute on costs also going into 2015. Okay. Just thinking about the costs for a second. I am just trying to figure out what I have missed here. Because if we think about that run rate in terms of staff costs rather than full-time employees, then that is getting us to something like DKK 12.5 billion. Other clean costs, as we have discussed, something like DKK 8.6 billion. It is getting us to a figure that is much closer to DKK 22 billion than DKK 23 billion in 2015. I am just trying to figure out if outside of staff costs, if there is something that I have not thought about that should come up. Thanks. Yeah. One should always be cautious just to add up the quarterly run rate. Also, some costs may be backloaded. We are at the present time of no information beyond what I have given you on the cost side. Henrik will now go at it. I can just add that it will not be unnatural if our severance pay, if our IT cost, if our property cost will gradually go up through the quarters, just as another example. Okay, understood. Thanks very much. My second question on Northern Ireland, I was just wondering if you could give us some simple kind of P&L figures for 2013 and allocated equity associated with Northern Ireland, and just your thinking around that business and potential cost savings there. Thanks. No, we actually don't have it here. We can probably give you some more insight if you call directly to the IR department. But I don't have anything with me because we don't report it by country-wise. We have been asked a number of times of more disclosure at what we could call level 3, one step below the big business units, and we are considering coming out with that at the latest at Q4. But actually, please also have a look at our fact book where there are additional information at level 3. Okay. Thank you very much. Yes, our next question will come from Mr. Anton Kryachok from UBS. You can now go ahead, sir. Good afternoon. Thank you very much for taking my questions. Just two questions, please. One is on Non-core, and the other one is on hybrids repayment, please. Starting with Non-core. In Q1 this year, your pre-tax loss in Non-core was around DKK 300 million. I understand that maybe a part of it is driven by one-off expenses, which will disappear. But what kind of pre-provision profitability level do you envisage for this business unit maybe in the next few quarters? Also, just a quick question with regards to your guidance on loan losses in Non-core. You say that you expect loan losses in Non-core Ireland to be below DKK 1.5 billion. But does it mean that overall loan losses in Non-core unit will be higher? Take the last one first. It could be higher, but we have no guidance on that particular point, because Non-core today consists of two major blocks. It is the new Non-core Ireland and our conduits portfolio in London. We have no indications at the present time that we should have any impairments further in the conduits portfolio, which is on the runoff. That's why I can't guide that any further. That's why we are firm on Non-core Ireland, which we now expect below the DKK 1.5 billion down from the DKK 2 billion. Then you had another question. Yes. One question on pre-provision profitability outlook in Non-core. Whether- We don't give guidance on that, but basically the income is relatively limited, and also the associated expenses are relatively limited, so we don't give any specific guidance on that. We have given the guidance on the impairment part because that will also in the coming quarters, the development of that be the predominant force in determining the bottom line for the Non-core part. But what is important for you is that the unwinding of the old core is now as Non-core is going according to plan. We will probably have outsourced and closed down all operation already in late Q2. Then we'll need to see the top line and cost, but that will be marginal effect. So it's all about the impairments in the last half, because in 2015 it basically had no impact on the accounts. Okay. That's very clear. Thank you very much. Can I ask one question please on hybrid repayments, just to understand how it will work on the divisional level, which divisions will benefit the most from hybrid being repaid? From the repayment of the hybrid, where you know we have paid roughly DKK 1.5 billion per annum, have had as an expense that is now falling away, and our hybrid costs are allocated to or has been allocated to the business units according to the allocated capital, which you can see in the reports. That's very helpful. Thank you. Yes, our next question will come from Mr. Asbjørn Mørk from Carnegie. You can now go ahead, sir. Yes, good afternoon. I have two questions. First of all, back to your top line. If I understood you correctly, Henrik, you said that if we adjust for the transfer pricing model changes and for the interest days, that your NII is basically flat Q on Q. I know there's some repricing in Finland, and I guess you also have some increased liquidity portfolio or maturity on the liquidity portfolio, so some positive effects there, but could you maybe give us a little bit further details on Denmark and how you see the income base there? That was my first question. The second question, if you could give me some awesome details on the S&P and the upgrade lately and the deposit rate increase from the Danish Central Bank, what kind of tailwind do you expect to get from this going forward? Okay. I can do Asbjorn. I'll do the last one, and then Henrik will come back to you on the FTP. The S&P upgrade all things being equal will have probably a positive effect up to DKK 400 million to DKK 500 million. We have previously guided a higher number, but that was based on that our spreads in the funding market were substantially higher compared to our peers. But the market has, during the last couple of months implied that the spreads were coming down. But it has definitely a positive effect, and the final outcome will depend how much market funding we will do, particularly in the end of 2014 and into 2015. The second part of that positive effect is that we will able to do more counterparty derivatives business with certain sovereigns going forward, which we've been excluded from during the latter part of our downgrade. Thirdly, we can start also issuing commercial paper if we feel that is right. The other part was your question about the Danish Central Bank's increase of 50 basis points. All things being equal, it has a positive effect annually of some DKK 200 million to DKK 250 million. Marginal effect this year. I am getting whispered in my ear marginal effect is probably more effect next year. You had a question for me. We continue the deep dive into the FTP. As I mentioned previously, the one-off effect from Q4 to Q1 was roughly 250. You have roughly DKK 100 million from the two fewer days. You asked about the building up of our liquidity portfolio. You are right, that has contributed, let us say, DKK 50 million to DKK 75 million. So taken all together, we are then roughly flat, and the development in the lending is roughly flat. So we have very little effect from the actual margins. You should also be aware of that also going forward, we are both, as we are all the time, looking into our pricing flow and our lending side, but also on the deposit side. Okay. If I can just follow up on the rating upgrade from S&P. Moody's seems to be quite of an outlier. Would an upgrade from Moody's have any further impact on your income? Probably marginal. Everything which post action has a positive effect, of course, but it's always difficult to isolate it out. There is certain counterparty who takes the lower off or do the average. But it's our hope, but it's of course Moody's final decision how they would adjust the rating going forward. Yeah. Moody's came out, as you know, with a positive outlook late last year, and we'll of course now continue the dialogue with Moody's. Okay. Thank you. Yes, our next question will come from Mr. Haakon Fjer from DNB. You can now go ahead, sir. Yeah. Hi, good afternoon. Just two quick questions left from me. First, I noticed that you strip out the consultancy costs and that in Q1 they're about half the level on an annualised basis than what they were in 2013. Is this a sustainable level going forward, or is this one of the cost items you expect to increase during the year? Secondly, on Danica, the fourth interest rate group, where you continue to book or increase your shadow accounts. How much underwater are you on this interest rate group? Consultancy is just one of many items we are looking into continuously. Consultancy can come down, it can come slightly up. But of course, we have no need for a lot of consultants who work in the traditional sense going forward. Our strategy is clear. It's about execution, so you shouldn't expect any major deviation on this line going forward. We are very committed and very firm on cost control. That's underlying costs, and it's also what I call discretionary expense. Regarding the Danica question, it is interest rate group 2 where we have not been able to book a risk allowance. We can give you an exact figure, but my recollection is that the discrepancy is 1-2 percentage points. So the underlying value of the assets is 98% or 99% of the policy holder's account. So we're not so far away from actually being able to generate also a risk allowance for that interest rate group. Excellent. That's very clear. Yes. Our next question will come from Alvaro Serrano from Morgan Stanley. You can now go ahead. Hi. Thank you very much. Two questions from me. First of all, on the provisions in Denmark in Personal Banking, it looks like they've basically halved in the quarter. I don't know if you can give us a bit more color into what's driving that such a sharp slowdown versus your previous expectations of a gradual reduction, and is that a run rate going forward? The second question is on your guidance. You've maintained the nine to 12. I realize you're now talking about towards the higher range, but given you've got DKK 1 billion of Nets disposal now and you're more optimistic on Ireland, it seems like, at least to me, it feels like you should have increased the range and you haven't. Is there anything that's gone worse than you expected and hence led you to keep it where it is? Thank you. Okay. Let's take the last question first. There's one thing which we are having a very firm eye on and which we're very cautious on. That's the whole market making area. We can see that within our trading operation, customer activity and the capital markets area is going very well and is increasing quarter on quarter. But market making is still slightly sluggish. That's the main reason why we keep it within the interval of nine to 12, but in the higher end. Secondly, we're also cautious on Danica because that could also be a swing factor. When it comes to Denmark, we can see that there are fewer new impairments taking place. Our take is that the Danish households seems to be improving faster than we expected going into the year. Also because house pricing has stabilized or even increasing in several urban areas. The disposable income and the saving rates are also going in the right direction. That is the key reasons for a lower impairment and a lower run rate going forward. I do not think one should expect a continuous fall, but there should not be any reason for not expect, particularly in Personal Banking, to keep approximately this run rate going forward. Thank you very much. Our next question will come from Mr. Jacob Bang from ABG. You can now begin, sir. I just have two questions, please. The first one is regarding your capital allocation per business unit. I see that the corporate business is up DKK 7 billion quarter on quarter. Could you maybe talk a bit on what exactly is going on here? Secondly, I missed you, Thomas, before you said, I am not sure what you said, but something about when we should expect you to be done running off the Non-core book. I do not know if you said that, but if you did not, I would like to know. Also regarding the Non-core, I see that the conduit exposure, the exposure at default is down around DKK 1 billion, but the risk-weighted assets are down DKK 10 billion quarter on quarter. Could you maybe give us some details on why the RWA decline is so big? Thank you. Let's do the non-core. The non-core unwinding should be closed by the end of the year. However, closing off the previous core, in other words, closing all accounts, will probably be finished by the second half. But for your purposes and for your thinking, basically it will be unwind. That is why it should have no P&L effect in 2015. Okay? Okay. So no capital impact either at the end of this year? Well, we will have performing assets in Ireland being mortgages. Everything else will basically be sold, which we will keep, which is no reason for us to sell because they are performing and giving return to shareholders. That will be run off slowly and surely, and I think we have guided during the annual report of approximately DKK 2 billion a year. So I think that is what you should take into account. So that would just slowly unwind. We are outsourcing the management of that portfolio, so that would just slowly take the NII in and run off the portfolio. How big a share of the DKK 44 billion of risk-weighted assets will then be left? I need to come back to you on that specific, but you ask another question which Claus can answer for you actually on why the RWA fell so much. Yeah. It's because we have the ability to change the capital charge for part of our securitizations and to take them away from the RWA and instead have a deduction in the Common Equity Tier 1. That is what we have done in this quarter, and it is having a deduction in our Common Equity Tier 1 of 0.1%. Regarding the capital allocation, I think the simple version of that is, and we can take that in more details bilaterally, that the majority of the increase we have in risk-weighted assets from end Q4 to end Q1 is actually related to our C&I, and that's the reason for the jump in capital allocation for that business unit. That's introduction of the CRD IV and the FSA order, basically. Yeah. The counterparty risk and- There's also an increase in market risk from Q4 to Q1. Okay. Thank you. Welcome. Our next question will come from Mr. Andreas Håkansson from Exane Sweden. You can now go ahead, sir. Yes. Hi. Thanks for taking the question. Two ones really, we've covered most areas, but one was if you look at the loan-to-value in Denmark, it went up to 73.7, up from 72.5 in Q4. Could you just explain us that increase given that you say house price has been rising? Secondly, on your AT1s that you raised, how are you going to account for them? Since they seem to be moving directly to equity, how will you treat that in your 9% return on equity target? Thanks. Yes. Good. Claus will answer your first one. Yeah, the slight increase in LTVs is due to a technical change in the property valuation model we are using, especially in RD. It is only reflecting a technical change and not a change in the market. Okay. Regarding the AT1, our target for 9% is still 9% on the shareholders' equity. The AT1 is an expense that is taken in the balance sheet on the equity part. There is no change in that. It will still be 9% on the shareholders' equity. But you will not include the cost of the AT1s in your- That will be expensed adjusted for your profits or so on. That will be expensed in that account, in that respect, of course. Okay. Sorry, just very short follow-up on the non-core. You had a pre-provision loss of some 329, so annualizing at DKK 1.3 billion roughly. Do I understand it right that you expect that to fall out quite soon, or what type of pre-provision losses should we expect for this year? I indicated it could be up to DKK 1.5 billion for 2014. No, pre-provision profit. Oh, pre-provision profit. Which was minus DKK 329 billion in the quarter. No. Yeah, but that includes the DKK 393 in pre-provision negative result in the quarter includes that provision for our distribution agreement in the Baltics. Okay. What's the underlying loss of profit that you're making in this business, which will come on top of your provisioning guidance? Marginal. Marginal, okay. Because it has been, the run rate has been 115 in Q3, 236 in Q4, 329 in Q1, all losses. Yeah. Going forward, as you know, we are unwinding completely what we call the previous core into non-core. Those termination of the employees are taking place as we speak. That's why it just has a marginal effect going forward. May I add here that we have got a question from the internet, an email question. Sounds like this. Many banks are seeing issues with IT and compete to develop solutions. How can Danske Bank reassure us of the robustness of our IT platform and mobile offering? Okay. That was a very wide question. But I think we have a very good platform and a very robust IT platform, and according to our clients, we are a leading digital bank with very good customer service and innovation. So here is really one area where we are a key change agent in the industry and will continue to be that. Next question, please. Yes. Our next question will come from Mr. Johan Ekblom from Bank of America. You can now go ahead, sir. Thank you. If we can come back to the non-core, just so that I can understand. Can you first of all say how much was the charge related to the canceled distribution agreement, and also, I presume that was booked as part of expenses and, I guess related, did that impact Q4 as well? Because if I look at the cost development, it was pretty stable for the first three quarters of last year, and then we had all of a sudden an incremental DKK 200-plus million costs both in Q4 and Q1. What drove that, and, I guess, should we expect all of that to fall out immediately in Q2? I guess the second point is on the revenue side, net interest income in the non-core business was down sharply in Q1. At the same time, you report higher lending margins and pretty stable deposit margins. I'm assuming that that's been whacked by the change to the FTP model. But realistically, on a consolidated basis, your funding cost doesn't improve magically because the non-core gets smaller. As that shrinks, should we expect that very high funding cost that's now allocated below the line to migrate back up to NII on a group level? Or how should we think about that? Okay. With that kind of question, I'll ask Henrik. Yeah, and we can take part of it bilaterally also, but to keep it high level, we have a non-core profit before tax of a loss of DKK 632 million. We are writing on the following page in the report that more than half of that loss is attributable to the conduit impairments we have talked about in our London portfolio and this distribution agreement. So more than half of the loss of the DKK 632 million are related to these two items. That illustrates that the loss or the impairment in non-core Ireland and the associated expenses is of a relatively limited amount. The high level of expenses we had in Q4 2013 was restructuring charges related to the winding down of the non-core part, including the fact that we moved Personal Banking and Business Banking to non-core. I think that answers the majority of the major part of your question. Yeah. Maybe can you just comment on the funding? Will we see a flow back of a very high charge due to the FTP model? No. Not at all. How can margins be going up and NII halving in a quarter? We will come back to you on that. Okay? Okay. Thank you. Yeah. But I think maybe we made it too complicated, but Non-core is very simple for us, actually. It is basically, if you take the top line with its cost, it is a slight deficit going forward. Then it is about the loan losses, which we now will keep guiding below 1.5. And then you have this particular one quarter effect, which we have discussed in length. There is no more surprises in this, and it should be pretty easy to identify it. And if there is any techniques we need to clarify, I recommend that you call the IR department for that. Thank you. Okay. Our next question will come from Mr. John Waltjer from Credit Suisse. You can now go ahead, sir. Yes. Hi, John Waltjer from Credit Suisse. Two questions. First, the parameter update that you have previously discussed which will have impact on risk-weighted assets. How much of that, if any, is left going forward? That is the first question, please. Parameter, are you talking about the order from the FSA? Yeah. Both that and previously you have discussed other parameter updates. I will- So if you take the whole potential impact together, please Two aspects of this. We have previously communicated that we have, so to say, set aside DKK 100 billion in risk-weighted assets, but that we were in the process of finalizing the detailed parameters, taking into account how it should be allocated to individual facilities. That amount of work is not finished yet. Then we have two other orders with the Danish FSA, and they are not finalized yet either. Okay. But should we expect then some further risk-weighted asset inflation from this? Not necessarily. No. Okay. The second question regarding the cost side here. What kind of upward cost pressure do you see in terms of salary inflation and potential investments in your businesses, please? Well, the underlying inflation pressure should, all things being equal, be around 2 percentage points. All things being equal, if we don't adjust the base, of course. So that's like for like. Thank you. Investments that you foresee you want to do in the business there? Yeah, but of course we will adjust the workforce and our cost structure continuously. We will always invest, we will always adjust where we are too expensive. It's the overall cost structure which is important. We will invest cautiously where we can see opportunities. We will reduce where we are seeing that we need to become more efficient. I think what you should put or have in mind is that we're very firm on the costs. We will come below the DKK 23 billion in 2015. We're working diligently to make sure that we achieve that. Okay. Many thanks for your help. Our next question will come from Ronit Ghose from Citi. You can now go ahead, sir. Great. Thank you. I have two questions. One is a specific question on costs, and second is a question on strategy. On costs, can you just remind me of your guidance on severance costs for the year, and are there any non-severance costs related to restructuring? That's the first question. The second question is there anything you can tell us in terms of your thinking or your group executives' thinking in terms of the couple of dozen different business units and geographic units you're looking at in terms of assessing where to invest and where to divest? Thank you. Ronald, thanks for asking the last question. Thanks for all your good advice in your report. But I have to disappoint you. We have no news to tell you about the strategic work, but on a serious note, we will guide you when we have something new to announce. That, as I've said previously, at latest in relation to our annual accounts for 2014. When it comes to your cost about restructuring or what do you call- Severance severance payments. We have guided, and we did that in connection with the full-year guidance we did in relation to presenting the full-year results for 2013, that it should be around the same level as in 2013, which is around this DKK 700 million. Right. Last year you had about, yeah, DKK 700 million, DKK 694 million of severance costs. I guess there were a couple of hundred million on top of that of branch-related closure costs, right? If I think of restructuring costs altogether, I'd say, what, DKK 700 million plus a couple of hundred million more last year? So similar this year? Yeah. But you're right, there were some costs on the property part, money set aside to cover leases and so on. There might be a little bit on that also, but it is all within our guidance of around DKK 23 billion. Great. All within that amount. No change to that. Can I just have a quick follow-on? Given that one of my questions obviously I cheekily tried to ask, but you can't answer that for a while, which I totally accept. But just a big-picture question about the Danish covered bond market. One of your colleagues from Nordea yesterday seems to be quoted in the press saying that they're expecting under LCR CRD IV that Danish covered bond, all covered bonds will be Level 2 assets. Do you have any update on that? And if it is Level 2 assets, do you have any sense of how much extra cost that's going to be, either in terms of a hit to your liquidity portfolio holdings or how much extra cost you're going to have to pass on to your clients? Yeah, we have absolutely no indication that we are moving in that direction. Actually, our signal from the political side, including the Danish government, is that it is moving toward Level 1. And we are planning for that. If, for whatever reason, this is not being taking place, which is in my view, highly unlikely- we will be put in place alternatives which the national regulatory authorities have the possibility to do. So there's a lot of mitigating actions which can be done if, against my belief, they will take place. So to be very honest, this is not my biggest worry, because I have high trust that the politicians are working with the right agenda on this one. Great. Thank you. More questions? Okay, we are starting to get an end here, so one or two more questions? Yes. So next question will come from Mr. Christian Houde from Nordea. You can now go ahead, sir. Thank you. This is Christian from Nordea in Copenhagen. I have two, I guess, brief questions. One is on additional Tier 1. What are your thoughts on the size of that in a steady state? Now you have 0.6% relating to additional Tier 1. The second question is basically, possibly touching upon your strategic review, but I will try my luck anyway. Just looking at Sweden in this Q1, you can see that the total income on Personal Banking is DKK 226 million, and the expenses are DKK 181 million, meaning that there is not much income, especially not after loan impairment charges. Could you give me a couple of words on Sweden and what you can do to bring that back to normal income levels? Thank you. Sweden is a very interesting market for us, and we have the ambition to grow in Sweden. Beyond that, I will not comment on that strategic review for Sweden particular, but it is highly likely that Sweden is a growth opportunity for us. Then Henrik will like to comment on the AT1. Okay. We have done the AT1, and you said 0.6% of our total Tier 1 capital, and that is right. We do not have any immediate plans for doing anything further in that space. We are quite well capitalized, of course. Over the years, we might do more, but for the time being, we have no additional plans in that direction. Okay, that is fine. Thank you. Okay, the last question. Your last question will come from Ms. Sofie Peterzens from JPM. You can now go ahead, miss. Yeah, thank you very much. Here is Sofie Peterzens from JP Morgan. Just a quick follow-up question on the costs. The around DKK 23 billion cost guidance for 2014, could you just confirm that that doesn't include the non-core costs? Because it seems like you're moving a little bit of cost that maybe traditionally would have been in the core division in the non-core division. Secondly, now that you have 13% Basel III Common Equity Tier 1 fully loaded, you have the rating upgrade from S&P, how should we think about your dividend going forward? Can we assume that you're going to pay 40% for 2014? Thank you. I can confirm that the DKK 23 billion cost guidance and below DKK 23 billion in 2015 is excluding the cost of non-core. Then you should take into account that the cost of non-core going forward is going to be marginal. Then on dividend, that is something which the board and the AGM needs to decide going forward. It's our intention to move to 40% as soon as possible. Secondly, there is no ambitions for management or neither the board to accumulate more capital than what is needed. So if we accumulate more capital than we need, then we need to look at that at that time. Just a final follow-up question. So if you accumulate more capital than you need, which you should with a 9% ROE target, what's your preferred way of giving back capital to shareholders? So far we haven't discussed with the board. When and if that is the case, we will guide you in that respect. Great. Thank you very much. Well, thanks all of you for the keen interest in Danske Bank and for your good questions. As always, you're more than welcome to contact us on our IR department, and we are ready to sit there the whole night if needed. A transcript of this conference call, including a Q&A session, will be added to our website within the next few days. Thank you very much.