Earnings Call: Q2 2013

Aug 1, 2013

Summary

H1 net profit rose 61% to DKK 3.6bn as impairments fell, but market and insurance volatility drove lower FY guidance of DKK 6.5bn–DKK 9bn. Capital and liquidity remained strong, while ROE was 5.2% for H1.

Welcome to the Danske Bank Interim Report first half of 2013 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 Eivind Kolding. Sir, you may begin. Thank you very much, and welcome to everybody having dialed in. I am here accompanied by the CFO, Henrik Ramlau, and also IR, Elisabeth Klintholm. We will, as usual, go through a few slides and then open for questions afterwards. Starting on page 3, the key messages for our second quarter result and our half year result. First of all, we see a net profit increase for the 6 months of 48% compared to last year. That implies that we actually had the best quarterly result for 5 years, just underscoring that the financial crisis is behind us and that our strategy is starting to work. We have stable income lines, but, and I will come back to all this, a huge drop in insurance. Expenses are well contained, and perhaps the most positive development in this quarter is the impairments coming down significantly to what we can describe as normalized levels. Helped very much, basically by all business units, but also very much seeing that in Denmark, where impairment levels have been higher, they are now down to a level which is basically what you should expect. Return on equity is now up 6.2%, a nice increase from Q1, but just underscoring that we still have some way to go until we achieve our 2015 targets, and we will come back to that. Last but not least, the outlook. We have revised that. We have seen that in particular, the jitters in the financial markets, the impact on our market making, and the impact on Danica has increased the risk on the downside. This is why we have chosen to revise our guidance, and the range of that downwards by DKK 1 billion. So now going forward, it is DKK 6.5 billion to DKK 9 billion. If we turn to the P&L page 4, some of the highlights. Net interest income is slightly declining. Margins are relatively flat, but there is a reflection here very much of a drop in demand, and not least in Denmark, because basically our market shares are unchanged. We have some good developments on the fee side. Net trading again, and we will mention that a few times, there is quite a negative development on the face of it, but I am sure you all recall that Q1 2012 was a fantastic quarter, and with very high trading income, which we cannot repeat. Insurance, we were not capable of putting to the account any risk allowance for Q2, basically because of the very negative development towards the end of the quarter. In fact, we had to reverse the risk allowances for Q1. That is why we basically come out with the zero results. Expenses, as already mentioned, they are slightly declining. That does contain that we actually do invest somewhat still in new products, that we invest in a lot of efficiencies and lean programs. So we have even room for investments and seeing a declining cost line. Impairments I have already mentioned, so let us go all the way to the bottom line, the 3.6 billion DKK for the half year is 61% increase. Turning to page 5 and personal banking, I will also turn over to Henrik Ramlau, who will take the next couple of pages, and I will be back for the strategy presentation later on. Thank you very much. I will take you through the various business units and also some specific topics we have selected to comment upon today. If you take personal banking, the total income was roughly flat for Q2 compared with Q1. We are continuing to do selected price initiatives, but again, the very low interest rates we have, and also to some degree, slightly lower volume offset the pricing initiatives. It is very positive that our fees are up and also the fact that impairments continue to move slightly downwards in personal banking. Also in personal banking, we continue to do reductions in number of staff, and we have more and more customers using the digital channels. Going forward, saying a little bit about the full year, we have the customer programme that come into effect September 1st, and there we expect some fees to start coming into the P&L in personal banking. If you then turn to slide 6, business banking. There also total income was roughly flat. Also there we have slightly weak loan demands, but are still doing pricing initiatives, and therefore total income was flat compared with Q1. It is also there very positive that loan impairment charges are coming down, and in business banking we have actually seen an improved customer satisfaction in three out of five of our main markets. In business banking, we launched iPad solutions for SME customers jointly in all our Nordic markets in Q2. Turning to corporate and institutions. Total income was slightly lower than in Q1 2013. We had a difficult trading environment, especially in June, but our net trading income was actually acceptable given the market conditions. We will give you a little bit more insight into that in a few slides. Also positive that NII, net interest income, rose by 11% in Corporates & Institutions. Also there we have a number of initiatives that going forward should lift income for the full year. Moving on to Danske Capital, slide 8. There are some one-offs, both on the expense side and also the impact of performance fees distorts the figures a little bit, but there's no doubt that Danske Capital is driving a very nice type of business. You can also see that net sales for the full first half of 2013 was DKK 80 billion additional assets under management. Over the last full year, from first half 2012 to first half 2013, they have actually increased assets under management by roughly DKK 70 billion, more than 10%. Taking half year against half year, Danske Capital is growing nicely. As you're aware of, it requires relatively little capital. Danica Pension was hit by the turbulence in June that led to the fact that it was very difficult to generate risk allowance in the life and pension business. Otherwise, it is moving in the right direction. Also given the market development since end of June, already at this point in time, the Danica business looks much better than it did at the half-year point. June 30th was a very unfortunate date to make accounts for Danica Pension, but of course we had to stick to that. If things develop as it looks like currently, we expect more income for Danica for the full year. Slide 10 is our expense columns and expense figures. As you may have noticed in our guidance for the full year, we are now guiding costs lower than for 2012, whereas we previously in connection with our full year accounts guided roughly equal level of expenses. There is a slightly positive guidance on the expense side. Otherwise, our expenses are roughly flat. We are spending money, as an example, on consultants in order to improve the efficiency of the bank going forward. We have a lean project that takes up some consultancy costs. Slide 11 is our capital, where we have very strong capital ratios. Core Tier 1 ratio of 15.6%, total capital ratio of 21.8%. We had to build up a little bit extra capital as we are still planning to repay the state hybrid in spring 2014. That would shave off roughly 3 percentage points of our total capital ratio. Therefore, we need to have strong capital ratios. We are currently discussing internally whether and we are going to issue additional capital, not equity capital, but supplementary capital for the remaining part of 2013 and into 2014 in order to offset some of the impact of the state hybrid being repaid in 2014. You can also on slide 11 see that our risk weight came down a little bit during the quarter. We have included three, four different topics. One is around our capital, where many of you are aware that we have got this order from the FSA that we need to increase our risk weights by roughly DKK 100 billion. If we do that, our Core Tier 1 ratio will, on a pro forma basis, drop to 13.8%. But it's very important to be aware that our minimum solvency requirement, our solvency need actually currently is unchanged because that's the transition rules. So it still stands at DKK 88 billion. So our excess capital is actually unchanged. Moving on to slide 13 is our liquidity position, which has improved quite a bit during the last year. We now have a 12-month liquidity curve of more than DKK 250 billion. We have liquidity buffers more than DKK 400 billion and LCR of 132. We have, for the rest of the year, a limited amount of funding. As you can see on the left part, we have this issue with the state hybrid we want to repay in 2014. On slide 14, we have in our dialogue with our analysts and investor community over the last year, got a couple of questions around our mortgage exposure, especially the interest-only mortgages where people, according to their agreements, have to start to repay principal in 2013, 2014, 2015, and so on. In order to illustrate that and give you some insight into that, we have made slide 14 that is a little bit busy, but it gives you an overview of our composition of our portfolio and how much we currently have set aside as impairments, but also give you an impression, at least that's the intention, that this issue is very manageable from the bank's point of view. The underlying risk for the bank is relatively limited given the figures you see on slide 14. I will take you through that quickly, but it says basically that if we take our Realkredit mortgage exposure, Danske Prioritet, the SDO mortgages we have issued out of the bank, and if we even also include other secured bank lending with the same houses, we have a total exposure of DKK 194 billion. If we then subtract the part where we can feel in most cases quite comfortable, namely the loans where the loan-to-value on the mortgage part is below 80%, and also the additional bank loan does not lead to more than 100%, then if we subtract that, end up with a, one could say, potential questionable loan portfolio of DKK 20.5 billion. If we open that up on the right side, and then take away, so to say, the customers with very good ratings, so the customers where there's no problem at all with their underlying finances, that is actually 18.4. Therefore, in that way, you end up with an exposure, a portfolio piece of portfolio, which is, so to say, the main risky part of DKK 2.1 billion. That's a 0.6 plus 1.5. For that portfolio, we have set aside DKK 1.5 billion. But of course, the DKK 1.5 billion should also cover any deterioration in the other parts of the pieces here on the slide. So it at least illustrates that it is a problem. First of all, we do not believe there is a problem, but it is of a size that we can easily deal with, and we feel definitely that it is adequate provision. Turning on to slide 15 is to give you a little bit more insight into this trading income that in the nature may fluctuate from quarter to quarter. The really positive part is that the part of the trading income that is directly related to the customers, that is fees, spreads, et cetera, is actually growing quite nicely over the last five quarters, DKK 903 million. But it is, so to say, the direct market making activity that fluctuates a little bit up and down. You can also see at the bottom where we have 2011, 2012, and 2013, that our trading income year-to-date in 2013 is roughly at the same level as it was in 2011. It was mainly 2012 that was an extraordinarily good year. You can also see to the right that in June we actually experienced quite heavy movements in 10-year interest swap rates. Then I will hand over to Eivind, who will talk about strategy and also comment on our full-year guidance. Thank you, Henrik. As some of you recall from the Capital Markets Day, we set out with a new strategy, New Standards. This is the strategy that we are now implementing really effectively from the 1st January of this year. The overlying goals, and you see those on page 16, are on customer satisfaction and financial results. These are still valid. We want to be number one or two in customer satisfaction in our focus segments, and we want to deliver an ROE amongst the top three in our Nordic peer group. On page 17, we have said how will we do that, and that is by setting New Standards in financial services. This is really where we want to distinguish ourselves, the competitive advantages that we are building up across the business units in two main areas. One, that is advisory services. The second one, that is digitalization. The first part, advisory services, is very much about making sure that we have the best and most competent advisors, those who understand our customers' business well, approachable, and capable of giving a 360-degree advice, taking in all the aspects of the clients, customers' financial needs, and developing the right solutions. This is something that we focus a lot on, but this is also, you can say, a softer issue. It is very much about upscaling our organization and putting it right. But we are seeing good traction. One thing, and that is highlighted also in the accounts, is that the feedback we get in personal banking from customers is that when they rank the services that we provide on a 10-point scale, we actually score an average above nine. So it does actually prove that we provide a very good advisory service to our customers. The other area, digitalization, is very much about making the bank simpler. Simpler for our customers to make financial transactions, automate where possible, but also enable them to do the banking where they are and whenever they want to through the channel they prefer. We have made a lot of products that support that. I will cover that in a second. But it is also about internally to make the bank more simpler, more leaner, making sure that we have a keen focus on end-to-end processes as simple and straight through as we can make them. Turning to page 18, it is just a number of the initiatives that we have launched, and you might know some of them. The spending overview we provide to personal customers, give them basically on a current basis an overview how they spend their money. We can see customers like it very much. They are very active using it. Other things are our mobile platform, where we have a housing wheel, giving further insight into the housing markets. In fact, which I think is a quite interesting development, is that for the first time in this Q2, we saw that the logons to our mobile platforms actually exceeded the number of logons to our PC platform, just underscoring that our customers are not only going digital, they are going mobile, and we have the products there to meet them. Our customer programme in Denmark was launched with quite some negative press in January. Fortunately, we can say that the customers, they like it very much. 750,000 customers have already signed up, and these customers actually is the equivalent of 92%-93% of the business volume we have in the segment. There is no doubt that the customers confirm this is a program for them. They like it. They like the advantages, the simplicity of it. There is a focus on also customers leaving, and as we detail, we have 40,000 customers who have left since the beginning of the year. That is of course not the desired development, but it is to some extent the expected development. Most of these customers are inactive customers. There are very few, if any, transactions. So they are main customers of other banks, and they consolidate with that other bank, which is okay. If we look at it overall, actually our volumes are not coming down, and we are not losing market share. So we are compensated by the existing customers bringing in more volume for the customers who leave us. If we turn to page 19, highlighting some of our latest products. We are focusing a lot on online meetings, enabling customers, private customers, to get full advice from their home or from their iPad, wherever they actually want to get it. So they can get everything that we could otherwise shown them in the bank in a very well-designed, intuitive way on the screen, talking live with the advisor, showing various scenarios, projections, and so on. Already customers are taking that in quite positively. Finland is the lead here, where we see that the pickup is very high. We have launched in Denmark, and soon in other markets, a MobilePay solution, making it as simple to send money person to person as it is to send a text message. Already 300,000 have downloaded this application. Half of them are actually not customers of the bank. It's turned out to be a very popular and highly rated application, which we expect a lot of. Turning to page 20, talking a bit about our business customers, especially the SMEs, those that are covered by our business banking segment. Our value proposition for those are concentrating about providing the services, the products, the advice that we actually should provide also to the big corporates. If an SME has a need, for instance, an investment or in bond financing or in cash management, trade finance, whatever, we can pull in the expertise that we offer to also the largest corporations. At the same time, we organize more on customer lines, so our customers will meet advisors that understand their business, that understand the industry, and can provide deeper and faster advice than you otherwise would see. We also here try to be simpler to do business with, faster, more agile, and our Business Direct is a solution for that, where our customers, through a call center and online, can do a lot of the banking businesses in a very efficient manner. Page 21. That's a new thing that we are launching now first in Denmark. The mobile development that we see in the private segment is actually also as clear in the business segment. Business customers also need mobile solutions. They need to look up the statements, do look simple transactions, making the hedges and so on, and do that online and mobile. That's why we have developed a new solution for iPads. Our business customers actually are quite independent on where they are in terms of doing their banking businesses. Then page 22. This is just a check mark on where are we on the various targets we set out. Return on equity. First half, 5.2%, but that covers 4.2% in first quarter, 6.2% in second, so pointing in the right direction, but obviously still a way to go to 12%. It's important to emphasize that when we made that target more than a year ago, we did highlight that was under the assumption of somewhat higher, not normalized, but still higher short-term interest rates of 2 percentage point. Of course, we can have a long discussion whether this assumption is likely or not. It's not as likely today as it was previously, but I think the important part to stress the things that we are in control of, the income, cost, the impairments, actually all these things are developing. We are absolutely sure that should we see a 2% short-term interest rate, we should also be capable of meeting the 12% target. Ratings. Yes, we had a step back and some of you might put questions to that with S&P. Their concerns about the Danish real estate market led to us being taken from a positive to a stable outlook. Capital-wise, liquidity-wise, we are already meeting our long-term targets. Costs are on track in actual terms, but our cost-income ratio is not where it should be, but it more relates to the income than the cost side. We have the target of reducing headcount by 2,000, 2013 to 2015, and we are following our goals there. Then finally, yes, we definitely have the desire to pay dividends to our shareholders, and you have our medium-term target there. Some of you might ask, what about dividend for 2013? I should say that upfront, dividend for 2013 is something that the board will decide when we know the full-year result. But obviously things are pointing in the right direction, so hopefully we should be able to declare dividends, but nothing is certain about that. Page 23, the last page is about the outlook. Based on the latest jitters in the financial markets, the insurances, and the volatility, we have seen that there is some enhanced risk on the downside. So we have found it prudent to adjust our guidance to the level or to the range of DKK 6.5 billion-DKK 9 billion. The underlying business is performing more or less as we expected. We do not get a lot of help from the low interest levels and the slow-growing economies. But at least now we feel that with the new guidance, we have a more prudent view also taking into account the enhanced or increased downside risk that we see. I guess with these words, we will end our part of the presentation and open up for questions. Thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touch-tone phone. If you wish to be removed from the queue, please press the hash key or the pound sign. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touch-tone phone. Alvaro Serrano from Morgan Stanley is in line with a question. Hi. Thank you for taking the question. I had a question on the provisions, obviously a very good quarter, but I was wondering what could be the expectations. You have talked at a normalized level now, but what could be expectations of the next few quarters considering there is, for example, in business banking, Baltics, there is some write-backs and in Finland, so what could we expect there in Denmark specifically, and also in Corporates & Institutions, and non-core, please? Yeah. Our expectations are that the level that you see now is actually sustainable, so it means that we have brought it down to a quite acceptable level. That basically goes for all business units and geographies. There will be from quarter to quarter, small deviations as always, but we find actually that we can more or less keep the level we are at. You mentioned in particular C&I, and that is a difficult one to forecast because in some quarters it is basically no impairments, but if we have a critical credit, actually it might shoot up in that given quarter. So it is not as stable as such, but underlying, we have a very good credit quality in C&I. So in average, we should definitely be able to keep up to the level that you see here. Thank you. In non-core, despite the very good quarter, you have kept the DKK 2.5 billion losses. Yeah. It follows our long-term guidance of DKK 2.5 billion and of course a declining trend as you have seen. Nothing has done anything but to confirm that we have the right view on this. Then we have a question from the internet by email. It is from Puja Putara. From credit side, Puja Putara says she has three questions please. Do you have any updates on the DKK 1 billion, 7.125 Tier 2 bonds in which you stated you would consider exercising an option to insert an earlier call date? The second question, please can you give me a little bit more color on supplementary capital issuance? You said you would consider doing this ahead of the state hybrid repayment in spring 2014. Lastly, just to clarify some numbers please. The impact of the RWA debate with the regulator has a 220 basis points negative impact on your Core Tier 1 ratio. The impact of Basel III, your estimating is 180 basis points please. Thank you. I can cover the first couple of questions. On our existing hybrid capital, the one that does not longer comply with the guidelines set up by S&P, we have not a lot to add. We are obviously considering the options but have not come to any decision yet. We will be quite short on that because if we are more exact, then we obviously need to set out a specific stock exchange message on the reg part. As mentioned by Henrik, we do need some supplementary capital, and we will try to raise that before we pay back the state hybrid. Again, we are considering both Tier 1 and Tier 2 instruments. It might be a combination of those and a couple of issuance. As soon as we make a decision, obviously we will make a more firm announcement around that. I guess this is as far as we can take it today. You asked about the DKK 100 billion, the FSA orders where we on slide 12 in the presentation have shown that other things being equal, it will impact our Core Tier 1 ratio negatively by 1.8 percentage points. I think you mentioned 220 basis points. It's not 2.2%, but 1.8%. The currently estimated impact of fully phased in CRD IV effect is another 1.8 percentage points. All this is so to say it happens tomorrow, and it does not happen tomorrow. There will also be earnings in between and the FSA orders of the DKK 100 billion is something we'll need to have implemented before the end of 2013. Next question, please. Next question. Johan Ekblom from Bank of America is online with a question. Thank you. If we can just go to the Corporates & Institutions business for a while. We saw a very, very strong net interest income progression quarter-on-quarter despite a sizable reduction in volumes. Can you talk a little bit about what's going on there? Is this something we should expect to be a sustainable level? Then just also to clarify in terms of the lower guidance, because I understand that clearly the insurance was a big deviation from what you had previously expected, but you are now talking about roughly DKK 900 million of loan losses being sustainable for the next couple of quarters, which clearly is materially better than at least what consensus had in their numbers. If I just plug in the weak insurance and the guidance on provisions, you still end up with upgrades to consensus, which is already at DKK 8 billion. Why change the net income guidance? It seems to me like it is more just a shift with the lower insurance offset by better provisions. To your last point, I think that the market making part is also a quite volatile one, and this is also where we see some risks on the downside. So that beside the insurance is some of the things that influence our changed guidance. On the C&I part, perhaps Henrik has something to add here. Yeah, just the fact that you are stressing about the net interest income, the increase of 11%, and that is due to some origination fees that are amortized over the term of the loan. So you should not expect that to continue to increase. But if it's amortized, presumably it's sustainable. It's not the one-off. Yeah, but other things being equal, the growth rate of 11% does not necessarily prevail also in the coming quarters. Of course. But the level in the quarter should be sustainable. Yeah, we hope so. Just on the guidance, are you effectively making a forecast as to market making revenues or have you had a poor start to Q3? We normally build in a kind of scenario because we cannot forecast market making. So we have sort of a range internally. Of course, we can also be positively surprised on the market making, but we can also be negatively surprised. This is also partly why we have such a big range in our guidance still even though there's only six months left of the year. We definitely have a real uncertainty out there around the insurance issue, which easily could be DKK 1 billion compared with what we would have in a normal year. That is why we have changed the guidance. Okay. Then just finally on trading overall, do you still stick with what you, I think before we sort of did the math and it was between DKK 1.9 billion and DKK 2.2 billion or DKK 2.3 billion is a normal quarter, so to speak. Is that still a valid expectation in the medium to longer term? That is still a valid expectation in the normal environment, trading income on average over a full year should be roughly DKK 2 billion for Danske Bank as a whole. Remember, there are also trading income outside of C&I. The fees we are charging when we are renewing the one-year mortgage loans are also booked as trading income, and they usually come in in Q4 and Q1. Excellent. Thank you very much. Next question, please. Håkon Fure from DNB is online with a question. Yeah. Hi. Thanks for taking the questions. I have a few questions on the insurance part. Firstly, which interest rate group did you book a risk allowance for in Q1 or Q2? Secondly, how much underwater, so to say, are you in the other interest rate groups? Finally, am I correct in assuming that in your updated guidance you are assuming no risk allowance booking in the second half of 2013? Thanks. Okay. That was a couple of questions. In our guidance, we have some income from the insurance business. So we assume that they recover to some extent, that we will be able for the full year to book some risk allowance for the Danica business. Then I think you asked about that there was for the half year we could book risk allowance for- One interest rate group for one interest rate group. I think that was That is it. group number three. That was group number three. It is a minor group. Yeah. Therefore, we ended up with transferring roughly DKK 600 million to the shadow account. And then you also asked, Håkon, this is Elisabeth here, about how much underwater we were. We needed to use about DKK 100 million of equity to strengthen the high group in this quarter. But other than that, we haven't used any equity. Okay. Finally, how much do you need in terms of return on investment in order to be able to reverse? The estimate for the full year, which leads to some risk allowance on Danica, is based on an assumption that interest rates will remain level, and that shares generate roughly 3.75% for the half year, 7.5% for full year. So ordinary share income, equity income, and then assuming roughly level interest rates, level interest curves, then we'll be able to book some risk allowance for the full year for the Danica business. As I mentioned, at this point in time, it looks to move in the right direction. But that's far away from the end of the year. Sure. Yeah. Excellent. Thank you. Next question, please. Andreas Håkansson from Exane BNP Paribas is online with a question. Yes. Hi. Thanks. I have, let's say, two questions. The first one is on provisions again. I am looking at the provisions in Realkredit, and we saw that apart from the DKK 100 million extra you took in Q1, you see a continued increase in loan loss provisions in Realkredit, and I think the outlook statement in Realkredit now says that you are going to have higher provisions in 2013, while at the time of the Q1 numbers said that you are going to be in the same level as last year. Then if we are now at the DKK 433 level in this quarter, and if DKK 900 is the run rate, do you really expect that the rest of the group is only going to be at the same level as Realkredit, and if that not normally is quite far away from where we used to see it? Second question on your outlook and your targets. When you raised your DKK 7 billion of equity last year, you said that the main reason for that was the funding difficulties and the rating disadvantage you had. Then you got quite excited about the S&P up or the increase the outlook. S&P took it down, and you got the FSA change of course. Maybe you do not look at raising equity in the near term, but how likely is it really that you are going to pay a dividend given that the rating is not likely to go up in the near term? If I will cover the last question first, then yes, it is a dynamic and a moving world, and then dealing with rating bureaus is just underscoring that, and we have a few examples of that lately. So it is one step forward, one step backwards. We still believe that our underlying business is improving to the extent that we can get an upgrade also from S&P, even with a view on the mortgage sector in Denmark. But obviously that point is now further out than we expected just a month or so ago. There was one part more on this question, the second part, what was that, Andreas? Or just back to that question. If you weigh the two targets of paying a smaller dividend this year or getting a rating increase, what is the key focus for you? I would not say that this Change of outlook should impact our dividend decision to any significance. Of course, again, the dividend is something that the board will consider when we know the full year result. But the numbers we potentially could talk about will not have this great impact on the rating. I do not see any sort of direct link between this change and our appetite for dividends. In terms of Realkredit Danmark, I think we would say that we are quite comfortable with the provisioning there, and there may be a tendency that towards the end of financial crisis, there is a slight uptick impairments in Realkredit Danmark. But otherwise we are quite satisfied with the development there, and the provisions there will also eventually come down. Otherwise, if you have more detailed questions related to the provisioning in Realkredit Danmark, I suggest we take it bilaterally. Okay, thanks. Next question, please. Jacob Brink from ABG Sundal Collier is online with a question. Hi. It's Jacob Brink from ABG. I have three questions, please. The first one is relating to your slide 26 in the presentation on the net interest income bridge. Could you maybe just split up the lending effect and the deposit effect? I'm especially thinking about the lending effect, where you have DKK 88 million negative. I expect that's mainly driven by volumes. How much, if you look at the decline in volumes in the second quarter, it seems to be bigger than the impact on net interest income. Does that mean that a lot of this happened towards the end of the quarter, and hence you have it left for the third quarter? If you could give a split up on that one, it would be good. The second question is coming back to capital. Now, you made this bridge on page 17 in the report where you state all the different subparts of the 1.8% hit from CRD IV. I think you used to have a pension deficit in here as well, but you don't any longer. Does that come on top of it? Secondly, does it include the SME exposure reduction of nearly 4%, or is that something that might be added on top as well? That was the second one. Thirdly, could you just maybe explain what exactly happened in the Danish business on loan losses in the second quarter? I'm just thinking it's almost a 40% reduction quarter-on-quarter, and last quarter, I think you took DKK 100 million extra provision or group provision due to cover some risks on the mortgage book, and now it drops 40%. So what exactly has happened in the second quarter? Thank you. If I just cover the last part on the provisions. What you see in second quarter is this underlying very positive thing that actually we do see Danish SMEs becoming stronger, especially the better part of the book is becoming even stronger and having rating upgrades. So it's just a fundamental positive development that reflects that, and it is a way that we have to compare and leading then to this significantly reduced impairment. As mentioned before, we don't see that this portfolio will deteriorate again. Hence, we believe it's a sustainable level. And- Yeah, please. Regarding your first question, the lending effect volume, where you are referring to the negative impact of DKK 88 million on page 26, then I can tell you that there is a margin effect of DKK 64 and a volume effect of DKK 24, which adds to the minus DKK 88. Then you had some. Maybe just adding on this, when we sat here exactly three months ago, we had the ECB rate cut, which obviously gives some margin pressure. Going into Q3, which was also part of your question, we do not necessarily expect this to continue. Jacob, then you had some detailed questions relating to the 1.8 percentage points CRD IV effect pension deficit. I suggest we take that bilaterally. If you please call us, then we will dig into that. Okay. But just please, your volumes dropped 3% in the quarter, and the volume impact is DKK 24 million, which is, I guess, half a percent or something in the quarter. So why is the impact so low? How can volumes in the core businesses come down to 3% and net interest income only being impacted by, I guess, half a percent? A very good part of our volume decline comes from the declining exchange rate between Sweden and Norway and Denmark, and the income we have from those business units are hedged. So it does not hit the P&L necessarily just right now. Okay. Okay. Next question, please. Asbjørn Nicholas Mørk from Carnegie is online with a question. Yes, good afternoon. Asbjørn from Carnegie here. I have a couple of questions. First of all, on your mortgage business, you had your competitor out repricing in May, your main competitor. Considering that you just make around 5% ROE in this business, and you are targeting 12% for the group, should we expect anything here on repricing from your side? Is it something that you are looking into? Also considering that we should expect probably slightly higher loan loss in the mortgage business as well. That was my first question. Second question is regarding your LCR, which increases from 126% in Q1 to, I think, 132% this quarter. I think I remember you said something about bringing this down from Q2 because it was a drain on your net interest income in the current environment. What is going on here, and should we expect you to decrease this level going forward? Thirdly, on your cost income in your personal banking business is around 75%. Is this where you see the most potential for cutting costs? What is the level that you think the cost-income ratio could go to going forward? Thank you. Okay. You had a question about mortgage and mortgage repricing. I think the 5% you are referring to is the return on equity in RD as a legal entity. You have to be aware of at a group level, RD does not, so to say, tie up its full equity as capital. There, the allocated capital to RD is much smaller. So treated that way, the earnings is actually much better. We are continuously considering opportunities to reprice. Of course, it is very important also to stay competitive. On a look-through basis, where you allocate the right amount of capital to RD, the earnings are much better than the 5% in the legal entity. Going to your liquidity part on the LCR, you are right, it is definitely our ambitions to operate with a smaller buffer than the one we have today. We have now set in place a system that can monitor the LCR development basically on a daily basis. When we are comfortable about that instrument and that we can manage it, we can also bring the buffers down. So it is just maybe a matter of process and technique. Cost income ratio, personal banking. What should be the long-term target? My ambition is obviously we should down at 50%. This is where we have the biggest potential. This is where we have the high cost on the branch structure that we are revising. This is also where we have huge opportunities in process improvement, automation of credit approvals and so on. There's a lot to do, but this is not something that we do in one or two quarters. We are talking a couple of years at least to trim and optimize that business. But with all the opportunities that we have provided by banking becoming digital, I think we should aim at something ambitious. And for me, 50 sounds like a very nice figure to shoot for. Very clear. Thank you. Thank you. Next question, please. Mads Fenger from Handelsbanken is online with a question. Hi, this is Mads Fenger from Handelsbanken. I have two questions left if I may, and one of them is I have to go back to the decline in the loan volume of 3%, which you say won't affect P&L because it is hedged. It may at some point, can you shed some light on when that will have a full effect on P&L? Will it be in 2014, or do we have to go further ahead? Could you also give a loan growth outlook as you see it right now? The second question is on your possibility of meeting your individual solvency need alternative capital instruments. Is that set in stone now that you will be able to issue alternative Tier 1 and Tier 2 instruments to meet your individual solvency need instead of equity? Thank you. On the last part, I believe we now have an understanding what is required for hybrid capital for it to count against our Pillar 2 requirements. It does mean that we should have a write down part of the instrument at a level of 7% solvency. This is clear if we want to design for that. Of course, it didn't change the cost, but we know what we can do if we want to use hybrid instruments for that. On the loan volume. To follow up on what I said before, and I'm sorry if I did not make myself exactly clear, but the DKK 24 million that NII declined due to declining volumes is a number that is not very high, which was what we discussed due to the fact that when volumes fall throughout a quarter, the currency effect on the balance is not hedged, whereas the currency effect on the P&L is hedged for at least one month. So for the quarterly result, that did not have a very large effect on the P&L. That is not to say that the volumes we have in Sweden and Norway could going forward not be impacted a little bit, or sorry, the income from these from the lower currency, but it didn't have a large effect this quarter. Okay, and the outlook? Sorry- Your question to the outlook was? Just how you see possibilities of the loan growth. Okay. Our expectation is roughly flat volumes for the full year. Roughly flat volumes. Okay. Thank you. But of course, we cannot give any guarantee, but we do not expect the similar decline as we've seen in the first part. Okay. Next question, please. Anton Kryachok from UBS is online with a question. Good afternoon. Just one question from my side, please, on pre-provision profitability trends in the non-core division. This quarter, we saw quite a substantial decline in revenues in the quarter, and an uptick in costs, which led to a pre-provision profitability loss. I was wondering how should we think about pre-provision trends for that division going forward? Could you treat the line is a little bit unclear or could you try to repeat once again? Sorry, is it any better? Yeah, now it's a little bit better. Yeah. Just a question on pre-provision trends in the non-core division, specifically on revenue outlook and cost outlook. Shall we expect negative pre-provision profits in this division to continue going forward? Oh, yes. Yeah. Absolutely. Yeah. Sure. It costs something to handle the non-core business, basically. What would- Income from those assets are very limited, and the impairments are not. And- But of course, as the loan portfolio decline and then get amortized and sold off, et cetera, we will also try to take costs down in the non-core part, but it will be a negative drag for some quarters to come. Thank you. Shall we expect to see declining revenues in the second half of this year still from the Q2 levels? On the non-core, it's probably so small, I'm not sure that we even have a view on it. But anything else the equal it should come down because we are actually selling off of the portfolio. But it must be in the picture of everything very insignificant. Thanks a lot. You are welcome. Do we have more questions? Simon Christensen from Nordea Markets is online with a question. Yes, thank you. Two questions. First of all, regarding the cut of the outlook from Standard & Poor's. Do you still see it as realistic with a rating upgrade before, let's say, the end of 2014, even if you don't improve your liquidity and funding profile? My second question goes also on Danica, and I was wondering if you wanted to pay dividends into the parent company, how much could you do that? How big would the amount be, do you think? If I recall, there's some solvency ratios from the Danish FSA, which you have to be aligned with. Your view on that would be appreciated. Thank you. If I should take the rating issue first, of course, we will continue our dialogue with S&P to understand better how much their view on the mortgage sector actually weigh in to the overall view on Danske Bank. Also, of course, discuss with them the improvements that we are doing otherwise in our business and our strong capital levels, what all this will sum up to. We cannot have a clear opinion on that, but obviously it is our aim to have an upgrade also with S&P and maybe by the end of 2014 would be something to aim for. I think it's not unrealistic, but it's a little bit speculation on our side. Regarding the Danica question, I cannot remember the exact figures, but I think there is a potential to take further dividends out of Danica, and we can come back to that bilaterally. Of course, we also want to have Danica as well as solid life insurance company. Given the size of the bank, it's a minor issue. Okay. Maybe I can follow up on the answer by Eivind. If you approach 2014 and you think that a rating upgrade is not very likely, but you also feel that a rating upgrade is not very capital sensitive, would you still say that you will not pay out a full 40% in that case? Or would you begin to discuss whether such a requirement is useful to continue with? I probably counted three or four ifs there. If not, I think it would be too speculative. We will, of course, and this is our clear commitment, trying to get to this 40% level in 2015, and this is what we will be working for. Then we need to work our way around to get there. But there is many scenarios that we can put up in between. It is probably too difficult for us to comment on. But we know that this is, of course, something that is on top of your minds. But do you feel that the rating is capital sensitive at the moment? It is just one of many elements. It is not the only deciding factor. There is a lot of things going into that equation. Okay. Thank you. Okay. We'll take the last question. Ronny Rehn from KBW is online with a question. Good afternoon. Two questions, I think left or three. First one, the Basel III leverage ratio, where do we stand at the moment, roughly? The second question on the loan loss charges, you say we have now reached a sustainable run rate in the second quarter. We are at 23 basis points, yet your 2015 guidance assumed 30 basis points. Why is that? Lastly, on Ireland, any kind of near-term disposals of bigger size that we should expect? I believe there was some press speculation. Thank you. Ireland, no, we stick to the strategy that we have, and it's basically to run down our non-core portfolio. We don't expect that we can do it in a different manner. It is not sensible. It will be bit by bit, but hopefully, when we talk again by the end of 2014, you will see quite a handsome reduction on that. Why is that? Sorry to interrupt. Is your price different to what investors are offering or why? Oh, yes. If we want to sell everything in a bulk deal, the loss that we have to take and our shareholders have to suffer is far too big. How big? Far too big. But if we run it off the way we do, we believe we can do it within the guidance that we have given. If we want to get everything out tomorrow, it will be a huge loss compared to that. Okay. That will not be sensible. The other part, well, yes, run rate at 23, 25 now, 30 in 2015. I do not think we should be too scientific about it. What is the normal level in an economy that will be moving forward and so on? I do not think we should put too much into that relatively small difference. Again, 2015, when we put targets out, it is not that we sit and adjust them each day. We stick to what we have. We might adjust them at one point. We also have some macro assumptions that probably are not completely valid anymore. This is 2015, so it is too early to be very accurate about the details. It is more directional. Okay. Then something about leverage ratio. We have not provided any figures on that, but we feel that we are on the right side of 3%. Well, now is your chance. We will need to come back to that at a later point. Okay. Thank you so much. Good question. Okay. We will end our session here. Thank you very much for your interest and some very good questions. I will be on the phones answering questions until 8:00 P.M. tonight. You are most welcome to call in with any questions that we did not have a chance to discuss now. Then again, thank you very much, and we will end here. Bye-bye. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.