Earnings Call: Q1 2013

May 2, 2013

Summary

Q1 net profit rose 29% QoQ to DKK 1.5bn, but total income fell 14% YoY. Lower costs and impairments supported results; FY net profit guidance of DKK 7.5bn–DKK 10bn was maintained.

Welcome to the Danske Bank Interim Report First Quarter 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 all who listen in to this conference call. On my side, I have our CFO, Henrik Ramlau-Hansen, and from Investor Relations, Elisabeth Klintholm. You have a presentation, and I will turn immediately to page number three with some key messages. We have a result in net profit, which improved 29% over Q4 2012. Expenses are well contained and under control, 10% below Q4 2012. Impairments are also down as expected, but still a very good development. Our total income, however, is lower than our expectations, and that also impacts all the way down to the bottom line. Our capital has been further improved through Q1, now with a CT1 of 15.1%. Our return on equity, in line with the result, is slightly below what we expected at 4.3%. Finally, we maintain our guidance for the year despite a somewhat slower start in Q1 than we had hoped for. If we turn to page four, starting not on the P&L but on the other key parameter we are focusing on, that is customer satisfaction. Our target in 2015 is to be number one or two in segments that we focus most on. As you can see, we still have some way to go. Personal banking, we are only there in two markets, Sweden and the U.K., which is Northern Ireland. Business banking, Norway is also on target. In C&I in general, it is a slightly different measurement, but based on Prospera, we have all our areas and targets. Well, an okay position for Q1 2013, but obviously, we need to fulfill our targets on all markets as we move forward. On page five, we highlight a couple of things that we focus on in order to improve our satisfaction. A very important part of our initiatives have been the new customer program that we launched in Denmark for personal banking in January. It is a very transparent program, which clearly detail what the advantages that customers get for the business that they place with Danske Bank, the further advantages they get if we get more business, and also transparency on the cost structure. We see that more than 600,000 of our customers now assigned to the program, which only really take effect September 1st. We have also noted that we actually slightly have gained market share in Denmark in Q1, which also underscores that we are on the right track with this program, even though it is early times. In terms of number of customers, we have seen a slight reduction as expected in Denmark in Q1. On the business banking side, we highlight a couple of examples. One is our mobile solutions, which our personal customers have been becoming used to. Now it is also available for business customers, and we have a number of further product offerings as we go forward. We have quite a lot of focus on product development, on digitalization, and on enhancing our advisory service to our customers aligned with our new standard strategies. If we turn to page 6, now we go through the results for each business unit. That is a new way to present it, also new for us, but it makes much more sense compared to the previous one. Starting with personal banking, you see a good development on the bottom line, quite a lot helped by a dropping in loan impairment charges. We have a pre-tax ROE of 8%, an improvement by 6 percentage points over Q1 2012. Definitely not yet where we should be, but at least pointing in the right direction. This is probably the business unit that undergoes the most changes. One of them being reducing the number of branches that we have, and by that, also reducing the number of FTE, which has been coming down by almost 1,000 over the last year. What they are working on, already mentioned, the loyalty program that we implemented in Denmark. We are now preparing for introducing that in Finland as well. A lot of focus on digitalization. We will be the first in Denmark to launch a very easy mobile payment, person to person, hopefully in a few days. That is a product that can be offered also to non-customers and down the road, also in our other countries. Moving on to page 7, that is business banking. Quite a dramatic change also here on the bottom line. A pre-tax ROE of 9.6% and very much helped also here by a drop in impairment charges, and we are seeing normalized levels more or less in all our geographies now. Apart from the Business Direct and the mobile solutions I already mentioned, some of the initiatives they have in business banking is on our fees and the fee leakages. It is an area where we see opportunities where we can actually tighten our discipline, the rebating that we have, and also make sure that we actually charge the fees that we are entitled to. This is something that we will see improvements of going forward. We have a clear segmentation within the business banking, setting up sections with specific industry knowledge and expertise and so on, to provide the right advisory services to our clients. Moving on to page 8 and Corporates & Institutions. We see also here a result that is in our terms almost at the acceptable level. It is 12.3% pre-tax. However, this business unit has been affected by a relatively big decline in our net trading income based on lower activities in the market. It should be mentioned Q1 2012 was a particular good quarter. We are down to normalize maybe just not below normalized levels in trading income. The focus here on a number of things, what we highlight is our focus on transaction banking, the payment services for our clients, focus on capital markets, our debt capital market activities, where we see very good response and traction with our initiatives. Also here we have, these are just examples, a quite elaborate work program going forward. If we at page 9 look at our long-term view, this is the first quarter where we report in accordance with our new strategy and the organizational setup that we have. You see our targets as we detailed them at our capital markets day, and on the right, you see how much have we actually achieved so far in Q1. We have a high number of action plans on these items. A lot of actions have been initiated, more to come. It is a very busy organization at the moment, but we feel that we are on track to reaching the targets that we have set out for 2015. Some of those you have detailed on page 10. Obviously, return on equity. We are trading a lot but still feel we are on the right track to reach the 12%. As I am sure most of you recall, we do have an assumption on short-term interest rate in 2015 of 2% for this ambition, and it might be a little bit optimistic as we see the world right now. Nevertheless, we will see quite a significant improvement on the ROE for the years to come. The ratings, we got a little bit of further encouragement from S&P in the quarter, where we saw an improved standalone credit profile supporting the positive outlook we have from S&P. As already mentioned, our capital is strong, that we more than live up to our capital targets for 2015, and we have easily room for paying back our state hybrid and still be safely above the targets we have set. On our liquidity, our LCR compliance, we are over-complying at the moment, 126%. As you might recall, these are only requirements that will be fully implemented by 2018. You might say we are well ahead of time here. On the cost part, nothing really to add here. A lot of this is driven by the headcounts, where we have a target of an FTE reduction of 2,000 over the coming years, and we are quite confident that we will reach those targets. For Q1, there is not a lot to say about dividends. All in all, before I hand over the presentation to Henrik, we have a result with some pluses and the minuses. The pluses that we see very much in impairment and costs, but the income is suffering from very low activities in the markets, not least in Denmark, with low demand for lending, but also in the trading area, low market activities. With these words, I will hand over to Henrik Odding Arnholt. Thank you very much, Eivind, and I will continue on page 11, where you can see our full P&L for Q1 2013 compared with Q1 2012. You can see that we have a significant improvement now of net profit of DKK 1.5 billion, of course, still unsatisfactory giving the size of the bank and the equity we have. Let me add that the fee income is actually progressing quite well. There is an increase of 13% on fee income, but as Eivind mentioned, of course, we had hoped for a slightly higher total income figure, which is down 14%. Let me turn to page 12, where you have the details of the development in our net interest income, which is dropping slightly in Q1 2013. If you compare with 2012, we have been doing quite a bit on pricing, as you know, during 2012, but that has been offset by the still very low and declining interest rates during 2012, and also the fact that the volumes have been slipping a little bit due to the lack of demand and due to the fact that people are actually saving more. As you may know, we earn much less on our deposits than we do on our lending. We have also had some funding costs, especially related to Realkredit Danmark, that has impacted negatively over the full year. For the quarter-to-quarter, Q4 versus Q1, there are fewer days, and there is also seasonality due to the accumulation of, so to say, cash within our mortgage division. On page 13, you can see the development of our net fee income, and that is actually quite a little bit of a success story, especially underlying the figures. Danske Capital is doing extremely well. They have accumulated asset under management of DKK 90 billion over the full year. You can see also from year to year, there is a 13% increase, and the drop from Q4 is also, so to say, seasonality due to the fact that Danske Capital get their large element of performance fee in the Q4 quarter, whereas there is a minor impact in Q1. So net and fees is something we continue to work on, as also Eivind mentioned. On slide 14, you have the development of trading income, which was slightly lower than anticipated. But given the market conditions and also the nervousness that was in the market around the situation in Italy, Cyprus, and so on during the quarter, it is okay result for the quarter. Page 15 is insurance. Danica has recovered in terms of earnings, and we have been able to book risk allowance for most of the interest rate groups. In that way, we are satisfied with the result for Q1, and we still have a shadow account which may be booked when the investment return is good. At a later stage, we have that shadow account of DKK 800 million to book in the future. Slide 16, you have the development in our expenses, and there we have guided roughly flat expenses. You can see by the light blue columns that our, so to say, adjusted expenses are roughly flat, or it is basically declining slightly also because the 5.6 light blue column also includes some you could call one-off items. We are very satisfied actually with the development of our costs during the quarter. Slide 17 shows also that our impairments are now gradually coming further down. 41 basis points is still too high, but it is still also the 41 basis points includes our impairments in Ireland, Northern Ireland, which is at a very high level. You have more details on slide 18, where you can see that we are now down to quarterly impairments of DKK 2 billion. If you look at the box to the right, the loan loss rate, you can see in personal banking, business banking, C&I banking, and so on, we are down to more reasonable impairments levels if we disregard the non-core. We are very pleased also with the fact that our non-core impairments are now down to the DKK 500 million-DKK 600 million range. As we have communicated previously, we stick with our guidance for Irish impairments of DKK 2.5 billion for 2013 and 2014. So we are now financially putting Ireland behind us, and we are also looking forward to further improvements in the coming quarters. On slide 19, you have our capital ratio, 21.6%, as Eivind mentioned, has increased during the quarter, both due to the profit but also due to continuous use of our capital efficiency program. To the right, we have listed what could be, it is still a proposal, but as you may know, there has been a Danish government committee that has come out with specific proposals for the biggest banks and institutions in Denmark, including Danske Bank, where there is in the proposal a requirement of having 3.5 percentage points more equity and 1.5 percentage points more supplementary capital. Added all together, that would lead to, but first in 2022 and first, if it becomes a real law of a capital minimum requirement of 17.6% for the bank. We are very well prepared for living up to that. Some of the details in that are illustrated on page 20. What is going to happen in practice is there is going to be discussions between the political parties here during May and June. It has to be almost a full agreement within Parliament because it is basically all the parties except one that are supporting the various types of bank regulation. Then it is the government's intention to have these rules put into place will start the 1st of January 2014, together with the CRD IV rules. But it will be a gradual, slow phasing-in period ending in 2022. On slide 21, there is an overview of our liquidity, which is really strong. As you may be aware, we have improved our liquidity position significantly during 2012, and we will continue to run the bank on a safe level of liquidity. Our funding program is also on track. We have issued DKK 15 billion during the first part of 2013, and basically that is on track. Slide 22 just illustrates that our strategy to a large degree is working. We have got our spreads down. They need to come down further. Long term, we are working on getting them down further. As you may be aware of, one of our short-term goals is to get an upgrade by improving our earnings, improving our capital position. We have a strong impression that our capital is in place. Capital and S&P were out here in early 2013 and actually, so to say, raised our standalone ratings, meaning that now our subordinated debt is actually investment grade. We still need, so to say, to get a full upgrading from S&P, and we are looking forward to it. Our guidance for the full year is unchanged. We still expect a net profit in the range of DKK 7.5 billion to DKK 10 billion. We have started with a slow start. Four times Q1 is not DKK 7.5 billion or DKK 10 billion, but we are quite confident that by the actions we have in place and are working on will be sufficient to mitigate the slow start we have had here in the beginning of the year. Thank you very much for listening. Operator, I think then we will be open and ready 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. Press nine. 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. Omar Keenan from Nomura is on the line with a question. Good afternoon. Thanks very much for taking the questions. I just had a question on your net interest income guidance for the full year. You expect NII to be flat for 2013 on 2012. If I adjust the first quarter for the seasonality and I annualize that, I get just below the 2012 level, perhaps about 2%. In addition to that, it feels like volume growth is trending more negatively than you expect. With a potential impact on Finland of the rate cut announced today, how would you expect to meet the flat NII guidance this year? I just have one more for this question as well. Thank you. Thank you very much. Regarding the NII guidance, you are right, that is flat. You are also right that if you multiply and so on, you come up a little bit lower. But our aim is to some extent grow the business, and we are not ruling out that in selected areas, perhaps in the foreign countries, we may do some price increases. That is something we are looking into, and we are quite comfortable that we will be able to reach the flat guidance on the NII. Then you are right that then there is a rate cut today, and then we will have to look into the impact of that, but probably it will not be very significant. It also depends on what the Danish Central Bank does, whether they are adjusting the lending rates and/or the deposit rate. Would you expect volume growth to stop being negative after this quarter then? You spoke about the possible growth in investments in other area, but if group level lending is still coming down in the following quarters, I do not see how repricing in Norway can offset for that. We do not expect the volume to come down with the same speed or rate as we have seen here in Q1. Okay. I am just struggling to see how, with volume coming down and a rate cut in Finland, you can offset with lending rate hikes in other areas, because if I annualize Q1, then it is already below the 2012 level, and you have got further headwinds coming through. Can you detail what lending rate, lending rate increases you are planning on making through and why you believe that should offset negative volume growth? We can't go into the details of what level of interest rate hikes we may considering doing, but we are very concerned to improve our net interest income. We will look into that, and you should also be aware that the rate cuts will probably not affect our deposits. My second question on trading revenues. You mentioned the first quarter was soft on activity, but perhaps more normal than the year-on-year sort of comparison last year. If I think about the run rate for the next three quarters, how do you think trading will develop for the rest of the year? Because if I think that Q1 was more normalized, then it's potentially the strongest quarter of the year, then it's difficult to see how you won't come at the very bottom of the profit guidance of DKK 7.5 billion to DKK 10 billion for 2013. Generally speaking, we would expect our trading for the next three quarters on average to be higher than what we experienced here in Q1. Also, as an example, there was a one-off effect that we had some write-downs on some infrastructure, private equity investments we have that has also impacted the trading figure. Going forward for the full year, we expect more than four times Q1. What was the one-off effect? How much was that? Around DKK 100 million. Okay. Thank you very much. We take the next. Andreas Håkansson from Exane BNP Paribas is online with a question. Yes, hi. A few questions, if I may. First one is on, in the Danish mortgage division, you saw that loan loss provisions increased by 53% in Q1 over Q4. Could you just tell us what drove that and how you are looking at that division at the moment? Related to that, could you tell us where can I find Realkredit in the new divisions? Is that in personal or is it split up? Last question, just following up on the previous questions that if you get the rate cut now also from the Danish Central Bank, how is that going to impact your net interest income? Thank you. Regarding our mortgage division, you are right. There is an increase in our impairments. It is mainly related, I think, to our business area, and you should also be aware of that in our mortgage division, we have set aside collectively DKK 100 million to cover interest rate-only loans, and that is part of the explanation for the increase in the mortgage division in terms of impairments in our mortgage divisions. Maybe could you repeat your second question? I think we missed that part. Yeah, just from a reporting point of view, when you now split the divisions up differently. If I look at personal banking, does personal banking include Realkredit Danmark now, or is Realkredit split up in different divisions? Realkredit is split up to where the customers belong. It is split up between our personal banking and our business banking, and I think roughly it's DKK 450 million personal banking, DKK 250 billion in business banking. Okay. There's no Realkredit in C&I. Okay, thanks. Then the rate impact, the last question. The rate impact of what Andreas, sorry? If the Danish Central Bank cuts as well, following ECB today, what would be the impact from your NII? Well, we do not expect the Danish Central Bank to cut their deposit rates. Having said that, we do probably expect them to cut the lending rate of between 15 and 25 basis points. They actually increased their deposit rate from minus 20 basis points to minus 10 basis points a couple of months ago. At that time, we said that would be a slight positive. If they keep that rate unchanged, but maybe cut the lending rates, that would probably be a slight negative. As Henrik said a little earlier, we need to go back and look into the figures also for what happens for Finland with the ECB. Overall, I think so far it is only a slight negative. Okay. Thank you. You are welcome. Next question, please. Johan Ekblom from Bank of America is online with a question. Thank you. Two questions from my side. Firstly, on the cost side. You had a good cost performance in the quarter, and I think you showed that net of the variable compensation, it is flat, but you also had some other one-offs, I guess, that has impacted your cost line. When we look forward, the full year guidance seems to me to be a bit on the high side. Is the cost performance in Q1 better than you expected, and is there scope for you to do better on the full year, or should we fully expect investments to come through in the next couple of quarters and end up broadly in line with the guidance? The second thing is just thinking of the repayment of the state hybrids for next year. You raised some Tier 2 already. You had the accelerated book build. What type of capital and what amount are you thinking you need to replace to be comfortably above the Danish SIFI requirement? Do you have any indication of what cost that would be? If I take the first on your cost question. Yes, you are right. We actually do see a positive cost development. On the other hand, we are launching a very big lean program. We call it Think Simple, which is quite extensive in terms of ambition, automation, offshoring, and leaning our bank. We see a lot of potential in that. We also need to invest in that upfront in consultancy and not least in IT, where we might need as much as 500 additional employees to do that. We will still remain within our guidance. It is just to say that some of the savings we get from making the bank more efficient, we will invest with a fairly rapid payback in order to really be extremely efficient when we reach 2015. We do invest a bit going forward in further efficiencies. In terms of the state hybrid that we intend to pay back in April next year, you are right that we need to raise a bit of hybrid capital. We have, of course, not fixed the amount yet, but probably in the area of DKK 10 billion. We have not decided yet how it should be. We are looking very closely now to the regulation that are under development in terms of CoCos and CRR and CRD IV and so on. That is one of the reasons that we wait. One is, of course, also that we expect our spreads to come down further as the year goes. Before we know exactly what kind of capital we need, how should the documentation be, it will also be difficult for us to give you an indication of the price expectation. Thank you. Maybe just one final question, if I may. I guess you said before that you have the new pricing structures coming in September of this year. Have you given any guidance on how much impact that will have on income? We have guided in terms of the customer program we have in Denmark, where you are right, it first takes effect from September 1st with the new changed fee structure. Our guidance has been given that it first starts in September, that the financial impact will be roughly zero in 2013, and in 2014 it will be a plus of some hundred million kroner. Thank you. Next question, please. Nick Davey from UBS is on the line with a question. Yes. Good afternoon, everyone. Nick Davey from UBS. Two questions, please, from my side. The first around Irish provisions. If I could just ask you to focus a little bit around slide 38 and the guidance you give there. If I read the slide correctly, you are saying you still think you have got about DKK 1.9 billion of provisions to come in the next seven quarters or so. And I guess that means you are going to be hitting towards the top end of your previously guided DKK 5 billion-DKK 7 billion range. So I guess the question for me is, I am a little bit confused because this quarter I was quite positively surprised by the provision fall in Ireland, which you have been quick to flag. And I am just wondering why as provisions are falling that dramatically, you are still guiding us to the top end of the range? Or maybe to flip the question on its head, if you still think there are nearly 2 billion DKK of provisions still to come, why not upfront them through the P&L so that you can get through this problem more rapidly? That's the first question. The second question, please, just to follow up on this interest-only mortgage point that you made around Realkredit. If I understood you correctly, you said you've made 100 million DKK provision. Could I just please better understand the size of the total book against which you've made that provision, and whether these are specific instances you think which are running into trouble, if it's a collective provision based on some assumptions. If you could just give us a little bit more clarity. Thank you. If I can reply to some of it. I follow you on your thought, why don't we just simply write off what we need in Ireland and get it behind us, and from a personal perspective, I could be tempted to do so. But we have to follow the rules, basically, and the impairments follow quite closely the development in the real estate prices. So when they come down, our LTV values go up, and that means we have it in to impair accordingly. So this is how it's been done until now, and we'll continue doing so. You are right, we probably will end up in the upper end of our previous guidance as we still see it, but within that guidance. Then in terms of the mortgage, let me give you a more rounded explanation. You will get the right one from Henrik in a second. But when you take a collective impairment, it's normally quite subjective. And it's to be a little bit cautious about a development. When it's 100 million DKK on the loan book, it means that we are not very nervous on this one, but we just see small signals that we need to take care of, and we would rather be upfront with that than taking it at a later stage. So sometimes, not always, but sometimes collective impairments are not very scientific, because if we could do it scientifically, we'll not do it as a collective impairment, then we will actually do it straight on. But you'll probably get a more correct answer now from Henrik. Well, I don't know whether it's more correct. But just to give you some kind of illustration, in 2013, we have roughly 5 billion DKK loan exposure, where now the customers need to repay principal. They have not been repaying principal for the first 10 years. Now they need to repay principal. Of those roughly 5 billion DKK, 2.5 billion DKK of those loans have a loan to value exceeding 80%, as an example. And the piece exceeding 80% is 370 million DKK. So here starting from 2013 and also into 2014, 2015, it's actually a minor problem. And we have been looking into the portfolio. We have also been through a lot of individual customers, and it is our assessment by taking a provision of around 100 million DKK, that is for the time being what is needed in order to cover some of the uncertainty. Many of those customers have previously paid as interest 3% or 4% or 5%. Now when they have to repay principal and the underlying interest rate is 1%, they can in many cases afford to also repay the principal, which they would have to amortize over a 20-year period. Or they can convert the loan into another 30-year loan where they also repay principal. We feel that we are quite comfortable. But given that we have cohorts that also have to start to repay principal starting in 2017, 2018 and so on, it is something we will continue to monitor very closely. Okay. That is very clear. Thank you. Next question, please. Jacob Bank from ABG is online with a question. Yeah. Thank you. I have two questions, maybe actually three. The first one is regarding net interest income. I have seen your net interest income bridge in the presentation that you have the DKK 75 million relating to the transfer pricing model. I understand that you have done some modifications to this, but this is almost the entire deviation compared to consensus estimates in Q1. Should we expect more modifications, and would they be negative or positive, or are you feeling that the model is correct now? That is the first question. The second one, there was a few weeks ago this article in Irish press, I believe, that you had been a lot to Ireland recently trying to sell the Irish book. Now you are so kind to give us the capital allocated to Ireland on the internal model, and it is some DKK 7 billion I see. Could you maybe give us some update on whether you are actually thinking about selling Ireland? Because of course it is quite a significant capital relief. Then my third question is also actually regarding this interest-only loans you just talked about. This sounds pretty much like the new impairment rules from Denmark. I thought you were actually supposed to have taken those losses already last year, or has this nothing to do with the new rules? Thank you. Let me take the Irish question first. Since we decided a year ago to carve out the non-core and run the book off, we will sort of follow the same strategy and direction. I have heard about these press descriptions. Well, nothing dramatic, it is just what we have been doing all the time. The plan is to have a big part of the book, as much as we can, reduced by the end of 2014. But we will do it in an orderly fashion, so we can also keep the guidance we have done on impairment. We do not think it is likely that we could sell the book as a whole. There will be no buyers for that. It will be quite a number of transactions that will need to take place, and we will not do it as a fire sale because I think with sufficient patience, we can actually get it off within the guidance that we have given within the majority within the next couple of years. We do see that there is an increasing interest for the assets that we have been, real estate or our lending book. We do a lot of transactions already today, but when you sum it up, it is not significant yet, but it does underscore that actually there is a market now which we will take advantage of. Regarding your question, Jacob, regarding the NII bridge, I think you're referring to page 26. 27. 27. It may be your version page 27. You're right, there is an additional liquidity charge of DKK 75 million to the Q4 figures. That is, to be frank, an adjustment we found needed in connection with preparing our Q1 figures. Now it is in the run figures, but it will also in a way impact the following quarters. For now it is adjusted and built into the figures. It's a high-level adjustment we have made to our funds transfer pricing, and we will going forward now and then adjust the model because it's a more general, more detailed model. We would of course, hopefully when our funding costs further come down, we would of course also adjust the prices. It will be adjusted now and then. As a basis, it will be adjusted once a year. Then you ask about the interest-only loans, and we have taken this provision because we find it relevant as a cautious way of doing a thing. We do not expect it to create any problems at all with the Danish FSA's rules. It is complicated issues, and we are continuously monitoring that. Regarding the last one, I just thought that banks were supposed to actually make those provisions if a client was not able to pay on a fixed rate mortgage with amortization. I thought that was part of the new rules. We are definitely complying to the rules. That is on. All being done. When you make a collective provision like this, it is because you have a signal that there might be a further deterioration. Maybe it is not the case, you will not keep it for long, but then you will individualize it. It is not because we are behind in any way, to the contrary, in implementing the guidelines from the FSA. Also maybe adding, I think there has been a lot of different takes on these Danish FSA rules for the last couple of quarters. First misunderstanding was that you have to compare loans that are above 100. That one only goes for corporate customers whose LTV levels exceed 100. For a mortgage client with an LTV above 100, that is not an impairment trigger. If that LTV level is in combination with weak financials, then we need to look at if it is needed to do an impairment on that individual customer. We do not do a credit assessment as if the customer should be able to service a 30-year fixed rate mortgage with installment. That is what we do when we originate the mortgage. We look at the customer, we look at the LTV and the financials, but we do not do credit assessment as if we were to originate a new loan. Okay, next question. Ronnie Rein from KBW is online with a question. Yes, it is Ronnie Rein here from KBW. Ronald. The two questions I had were basically one on Ireland, conceptually. There was a lot of noise in the market about the changed repossession rules and the impact this might have. I just want to get a feeling how your experience with repossessed properties was and what is the plan and the outlook for the number of repossessions in Ireland. Secondly, on the trading income. The old guidance used to be DKK 1.5 billion-DKK 2 billion a quarter. Now you have changed your allocation or your accounting a bit, adding essentially DKK 400 million per quarter to trading. Is the updated guidance something like DKK 1.9 billion-DKK 2.3 billion now, or DKK 2.4 billion now? Thank you. Ronnie, with the mentioned takeovers in Ireland for mortgages, I think if what you are asking about is that insolvency bill in Ireland. Just to be clear on that. Okay. What we hear from our colleagues there is that the effect hasn't really been seen yet. There are two changes that we are monitoring the effects of, but again, we haven't really seen a lot of noise yet. One of them is that the period in which you can go after a customer has been shortened from 12 years to 3 years. Obviously, that minimize or it lowers the amount that we could get out of a bad customer. That would be one adverse effect of this. But if a customer came into default, let's say in 2009 or 2008, that would mean previously we would have until 2020 to go after that customer, and with the new rules, we wouldn't have any more time. But I think with the current situation in Ireland, it's very difficult to predict if in 2020 there would be anything to recover. We don't expect that to be a very big negative. Second factor is that it will be the majority of banks a customer bank with who decides if the customer will go into this insolvency bill. As a lot of our, especially personal customers, have us as their bank, and they had very low LTVs going into the crisis and had a lot of equity. We don't expect that they necessarily have a lot of business with other banks. But obviously, it's not something that we have clarity on. Summing these two things up and also using the lessons from the U.K. insolvency, what we learn is that probably there won't be very big impact. Okay. Then maybe there is one more thing that I would like to ask on Ireland. There was this IMF report just in beginning of April, a follow-up from the same stuff in December or November last year. They were talking specifically about repossessions, that the previous kind of regulation made it very difficult to repossess. Basically, they requested this to be changed. Now, I understand this has been changed in Ireland, and we should expect the number of repossessed properties to rise. I just wanted to see whether this is the case and what impact this might have on the property valuations, essentially. I think we need to get back to you on that. Okay. A very overall comment is our lessons from the housing crisis we had in Denmark in the '90s is from late '80s, beginning of '90s, is that we try to work with customers not to repossess properties. We have very few properties, for instance, in Denmark on our books. Again, we try to do the same in Ireland. Okay. We will get back to you with more specifics. Clear. Regarding your second question, guidance on trading, then you are right. Mathematically, previously we guided trading DKK 1.5 billion-DKK 2 billion. Given the changes we have made, and mathematically speaking as you referred to, our guidance would now be around plus or minus DKK 2 billion. But you have to take into account it can fluctuate from quarter to quarter, and our trading also includes the result in our treasury where we have some unlisted equities. It also depends on the speed by which funding cost moves between treasury and the more traditional banking units. But roughly speaking, plus or minus DKK 2 billion, you are right. Okay. Just quickly, I do not know whether you can or will disclose it, but you have seen April now in terms of trading. When you look at the run rate versus the first quarter run rate, are we up? Are we somewhat better? I think it is too early. Good. Comment on that. Thank you so much. You one first. Yeah. Okay, excellent. Thanks. Okay. More questions? Sofie Peterzens from J.P. Morgan is online with a question. Yeah. Hi, here is Sofie Peterzens from J.P. Morgan. I also had a couple of questions. First of all, with your annual report, you guided that you see a flat pre-provision operating profit in 2013 and 2012. Does this guidance still hold? My second question is around Ireland. Given that you already have in the non-core book 72% impaired, you have coverage of over 50%. Why do you want to sell it? Aren't you almost fully provisioned for? Wouldn't it make sense to just sit back with the Irish book and wait for things to improve? Thanks. If I start with the latter question. Well, it is a strategic decision when we carved out as non-core that we don't really want to sit on it and speculate, and wait if maybe we see a good appreciation in five or six years' time. It is really our strategy to get it out of the books within the guidance that we have given. I think that the capital we tie up there, we can use better in our core businesses. This is why we are focusing on divesting our non-core, obviously without a fire sale. I think my colleagues are ready for the first question. Could you please repeat the first question? Yeah. In your annual report, you guided for a flat year-on-year pre-provision operating profit. I was wondering if that still holds given the revenues were a bit weaker in the first quarter. If it holds, how will you achieve it? Is it through the cost line or is there something in the revenue line that will significantly improve? Also actually, how should we look at treasury going forward? It was minus DKK 200 million in the first quarter versus plus DKK 133 million in the fourth quarter last year. Thanks. I think we struggle a little bit. You are talking about operating profit. In the annual report- Yes. You said that the pre-provision operating profit, so like in revenues minus cost, is going to be flat year-on-year in 2013. Do you think this will still hold? Yes. Yes, Rasmus. Do you think Yes, we do. Sorry for being slow here. What is going to drive it, given that I think if you look at the pre-provision operating profit and you annualize the first quarter level, you only get DKK 17 billion versus DKK 21 billion you had in 2012. Yeah. Of course, we are quite well aware that Q1 times four will not bring us to our guidance. As we all see the NII flat, we expect that to come up a bit. You also have to take into consideration the low number of days that we have in Q1 just from one point. The trading income we expect to be higher on average than we saw in Q1. The cost is flattish, but there might be some small movement there. So it is a little bit of each to bring us there. Of course, the actions we have is basically to get us there. We also, of course, take the fee income where we also have initiatives to see further improvement. I guess it's a little bit across the accounts that you would see that we should lift it up compared to what we had in Q1. What about then the treasury income? It was DKK -200 million in the first quarter versus DKK 130 million in the fourth quarter. What's the normalized run rate? It has been quite volatile over the last year. In treasury, the run rate should be plus or minus zero going forward. We do not run treasury as a profit center. It is a funding center with some income and some cost, and then it also has a small infrastructure private equity portfolio. Roughly speaking, treasury should be a plus or minus zero. The profit before credit losses should be roughly as last year, but may fluctuate a little bit. We will stick to our guidance of the DKK 7.5 billion and DKK 10 billion. Okay, great. Thanks. Ricardo Rovira from Mediobanca is online with a question. Good afternoon to everybody. I have a couple of questions. The first one is still again on the guidance. Can you explain to us why you are sticking to the net profit guidance when, if I take your guidance of DKK 7.5 billion to DKK 10 billion and forget the DKK 10 billion, let's stick to the DKK 7.5 billion. If I deduct DKK 1.5 billion that you have generated in Q1, basically you should generate DKK 6 billion in the residual three quarters. Divided by three you get to DKK 2 billion of profit per quarter, which is something like 40% above what you have delivered in Q1. Now, if you are sticking to the guidance, you must see something that maybe we don't see. Can you please explain what should be the driver of this jump, considering that you are already kind of benefiting from a decent turnaround improvement in loan losses in non-core operations? The second question I have is, risk-weighted assets are down again by something like DKK 20 billion, DKK 22 billion. Risk-weighted assets are down in 15 months by DKK 110 billion. The risk-weighted asset to asset ratio now is slightly below 23%. Are the regulators happy with the leverage of the bank? Probably they are on the core Tier 1 capital, but are they happy with the leverage of the bank, and are you happy with the leverage of the bank? Thank you. Maybe we are repeating ourselves here a bit, but we are absolutely clear that four times Q1 does not bring us into our guidance. But where we see relative improvements are basically on most of the lines we have discussed NII, the fee income. We have discussed the trading income. Of course, impairments are also one where we will see a further improvement compared to Q1. So we are definitely aware of that when we made our guidance. In terms of, wasn't there a question on leverage ratio? The second question you had. Yes. If you are happy with the leverage of the bank. In terms of if you say sort of the basic leverage ratio, I think only as we speak, concepts, ideas are developing about where should banks be and where should they be in 2018. We have a relative high leverage. You could call a low leverage ratio, that is. We are not so concerned about that at the moment. We have different ways to operate the bank. Our derivative portfolio actually takes up a lot of space on the balance sheet on both sides and so on. So it's probably too early to call exactly where things will end up. It's not a specific problem for Danske Bank. I think you have that problem across Europe, where European banks need to discuss what is relevant, what is the relevant measurement and so on, and we'll be prepared for that. I have no doubt that we will be able to manage without any value destruction. Just- Where the regulation then stop. Okay. Just to conclude on this topic. Is leverage ratio a matter of discussion with the Danish FSA? The discussion, yes, but on a very preliminary basis. It is not at any point where we sort of have an idea of where should the levels be, where could they be, at what time, and so on. But you are right in the way that this is now on the agenda, and I think it will creep up the agenda in our coming meetings over the next year with the FSA. Then you had a question on our risk weights, and we are in a constant dialogue with the Danish FSA on our risk weights. We are running a capital efficiency program, as you know, and as the Danish FSA know, we are applying for getting Sampo Bank on foundation IRB. We have mentioned that to you, and the Danish FSA is aware of that. As you know, a couple of years ago, in 2011, we had a discussion that led to an increase in our risk weights. So we are in a constant dialogue, and the Danish FSA and the EBA are conducting various types of benchmark studies, and we are having a constructive dialogue with the Danish FSA, and changes may happen down the road in both going upwards and downwards in terms of our RWA. So that is an ongoing process. Just, then I conclude, I promise. But the risk-weighted asset. The asset base of the bank is flat over the past 15 months. It was DKK 3.4 trillion in December 2011, is now DKK 3.5 trillion, basically the same number. Risk-weighted assets in the meantime are down more than DKK 100 billion. So you are not deleveraging. So I understand mitigation, modeling, and so on. But at the end of the day, should we expect much further mitigation effort in risk-weighted assets? Because I struggle to see how the risk-weighted assets to asset ratio can go below the current level, which is less than 43%. Is the mitigation effort lower? Should we expect more risk assets down in the next few quarters despite the assets being basically flattish? I think we already guided how we saw our risk weights develop at our capital market day, and that we are actually at a level, keeping flat, but a level higher than what you see here in Q1. I would generally caution all of us to be, again, very scientific on risk-weighted asset because I really see this as an art that is developing both on the side of the banks and the FSA. It is quite immature yet. Of course, we see opportunities, the FSA sees opportunities. It does hop up and down a little bit unpredictably, and I am sure it will do so for a year to come. Hopefully by then, people are more confident about models, and the FSA is more confident about how to treat this. Our risk-weighted assets came down a bit more than we actually guided. We keep our original guidance because we need that headroom for perhaps new guidelines from the FSA and so on. It is difficult for us here to be very exact, but in broad terms to say that the level that we have right now is probably a little bit on the low end. Our basic direction is not to increase it, but sort of to keep it at the level that we have right now. Okay. Thank you very much. Then, as you know, we are a very efficient bank. Our colleagues in Dublin, they have gotten back to us with some more information about the repossession question that Ronnie from KBW asked, and Ronnie, I will get back to you with more details, but I just wanted briefly to say that the restrictions for repossessions does not apply for commercial property or buy-to-let loans, which is the majority of our non-core portfolio. In our core portfolio, as you are all very well aware, we have loans with arrears that are very much lower than on the market level. We do not expect that this will be a major issue for us. I think we have time for one or two more questions. Next question, please. Jan Walda from Deutsche Bank is online with a question. Yes. Hello all. Jan Walda here, Deutsche Bank. Two questions from my side. First, if the Irish non-core portfolio is sold, will that have a positive NII impact in your world? When we look at the current disclosure of the non-core operation, it has a positive NII, a small one, but still. I am just wondering here, is that a true representation of the situation? It would appear that this portfolio has a negative carry. That is my first question. The second one is really the Basel III Q1 level. I could not find it anywhere, where that is right now, and if it includes the CVA exemptions and lower risk weights on SMEs. Thanks. Could you repeat the last part of your second question, Jan? You said quarter- Yes. I wondered what the full Basel III Q1 level is end of Q1, and if that level includes the CVA exemptions and lower risk weights on SMEs that we saw in the latest CRD IV agreement here from March. Regarding the first question, if we sell Irish non-core, we do not plan to sell it outright. We have guided that towards end 2014, we expect the size of the non-core to be reduced significantly, and that is still our aim, to take these around DKK 2.5 billion provisions on non-core and core Ireland and run it down to much smaller size end 2014. If we could get rid of it tomorrow, then it would free up a significant amount of capital, the DKK 7.5 billion we have currently allocated, and then the NII element would disappear. Our core Tier 1 ratio of 15.1%, we have not included in the Q1 report the full Basel III CRD IV effect. We guided 2 percentage point in our annual report, and it is roughly that, perhaps a little bit less than that. Okay, perfect. Thank you very much. Thanks. We will take the last question. Simon Christensen from Nordea Markets is online with a question. Yes, good afternoon. Most of my questions have actually been answered, so I only have one on the, actually two, one on the Sampo foundation IRB in terms of the timing of that. Secondly, maybe just a confirmation of the reversals you do on the conduit portfolio, whether that is around DKK 100 million. Thanks. On the Sampo, we are working very hard to get the approval and still believe we are in shape to get it by the end of this year. It does require the approval of the Finnish FSA. We have a very constructive dialogue, but a lot of paperwork has to be done, has been done already. So far we are cautiously optimistic that we will complete it by the end of the year. On our London non-core conduit portfolio, you are right that we have been able to reverse around DKK 100 million. Okay. Can you be more specific about your, let's say, hopes for capital relief on the approval of the Sampo IRB. We have previously communicated on the Sampo foundation IRB application that it's double-digit billion kroner amount we're talking about. I think at the time being we'll not be more specific. Okay. Thank you. Well, thank you everyone for listening in, and thank you for some very relevant and good questions. We'll be back in a quarter's time. Thank you very much. Thank you.