Earnings Call: Q3 2012

Oct 30, 2012

Summary

Nine-month net profit reached DKK 3.6bn, while a new 2015 plan targets ROE above 12% and costs below DKK 26bn. A planned DKK 7bn equity raise aims to accelerate a rating upgrade; Irish losses and weak rates remain key headwinds.

Conference is now being recorded. 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. Good afternoon. This is Eivind Kolding. I am happy to welcome you to this investor call where we have quite a lot on the agenda. I am accompanied by our CFO, Henrik Ramlau-Hansen, our head of investor relation, Martin Gottlob, and we are ready to take you through our presentation. A brief agenda on page 2, I will talk about our new strategy, then we will dive into the financial results, capital funding, liquidity, the outlook for 2012, and then we will definitely have some time for Q&A. First of all, let me just give you some highlights for the strategy that we announced externally today. Obviously, we intend to go much more into the details of that in our Capital Market Day in a week's time. For this, it is just primarily the headlines you will get. On page 3, you can see we call it the New Standards for Danske Bank. It is a strategy that we have been working on now for the most of six months. We have already started executing the strategy. As you know, we did earlier this year, the change in our organization, dividing our business into three customer-focused business units, expanding the geographical structure we had, making a clear cut what we wanted to do in Ireland, carving out the Non-core Ireland part, continuing with the other parts, and making some other internal things. New Standards is a three-year plan. It is intended to take us from where we are through 2015. If you turn to page 4, just to take outset in the environment that we are in, we see this as a new normal. Things have changed permanently in a number of areas important for the bank. We see that customer behavior is quite different. Far more utilizing digital channels and other automatic and mobile products. We also see that customers know more, they are more demanding, expect more of the banks, which we need to address. Secondly, there's a lack of trust, which is quite critical, especially being in banking. There's no doubt that the financial crisis and the many incidents that happened as a course of that has led to that a lot of trust has been lost for the banking sector and also for Danske Bank. We see that we cannot really run a prudent business if we do not get the trust back, but a very core element of that is that we deliver satisfactory results. No one can really prefer to have a weak financial sector. It needs to be strong to fulfill its role in society. Complexity is increasing everywhere. Financial products are far more complex than they were before. They are complex because we want to serve our customers' needs better, but that also requires more advisory services, stronger financial partners. We see regulation coming in maybe as a result of the lack of trust in the banking that more regulations come. A lot of it we could be definitely without, but we do support actually the requirements for the banks to have stronger capital and stronger liquidity. We are already meeting requirements, and I'll come back to that. Finally, we are living in an economic uncertainty that might not be a new normal. Hopefully not. That will change, but at least for the next 2 to 3 years, we do expect that we'll be in a quite difficult environment. The Euro area has its challenges, even though I think a lot of good things are being done at the moment, but it's going to be a bumpy road for the next couple of years. Definitely we'll have very low growth in the Euro area, also in Scandinavia for the coming years, and we are suffering in the sector a lot from the extreme low interest levels, which put a lot of pressure on the earning powers of the bank. If you turn to page 5, our overall vision is to actually to recognize Danske Bank as the most trusted financial partner. We have some specific targets that goes with that, which I'll come back to. On page 6, we conclude here on our portfolio analysis. When it comes to the geographical scope, we already communicated earlier this year that we see us primarily as a Nordic universal bank, but we still have some activities we keep in Ireland and in other places. What of course has been discussed a lot also by ourselves is the future of Danica. Danica is in itself a good business, returning its cost of capital over the cycle. There's a lot of strong synergies between Danica and the bank. Finally, seen from a customer perspective, it does make a lot of logic to talk about pension and life insurance together with other financial products. Nevertheless, we did actually investigate whether it would be beneficial to find another owner of Danica, but we have now satisfied ourselves that by far the most value-creating option is to continue the ownership of Danica. It remains a core part of the group, but we will obviously work for getting even more out of this common ownership and pursue the synergies that are available for us. Page number 7 is our New Standards in financial services. We really see that we could take a role in creating the bank of the future in the environments in which we are operating. Really taking the outset in the new normal that demands New Standards, which we feel that we are the right bank to set. We will do that particular in four areas, as you see on page 8, and I will go through each of these areas in some more details. If you take a look at page 9, sorry, I will stay a bit on page 8, and to put a little more meat to some of the things that we are trying to do. Customer focus. We are very keen on making sure that we meet customers' individual demands and make sure that it is not one size fit all. Where we see we have a real advantage is to serve customers' more complex needs. We can do that better than most. We have the products, the competencies to do that. That would be more value-creating for both us and the customers. But still, we feel it is right for us to have a fair proposition for all. But of course, that requires that income and costs has the right relationship. To get there, we need to make a number of steps to reduce our costs so it makes sense for us to serve all the segments that we have. That again entails that we need to take a clear and close look at our branch structure, which is still quite cost-heavy, and progress and even accelerate the closure of the branches in order to make sure that transactions that might as well happen on the net or automatically does so and do not require a lot of manual interface. Where we also need to set New Standards, that is the second part, advisory services, because even though that a lot can be done automatic these days, there is no doubt that at some point of times, customers need deeper and more broad financial advice. And there we need to be extremely well-equipped to meet that requirements of our customers. We will focus far more on that part when it comes to the retail banking. We will develop state-of-the-art advisory centers to replace the old branch structure, where we have all the experts the customers will need. There might be fewer of them, but then again, customers might only need to get there maybe once a year, maybe even less frequently, and there we will have the expertise needed. But it also goes to developing excellent products in wealth planning, in scenario planning for companies and so on. We see a lot that we can do here, much more than I can cover in this conversation here. Third point is the digitalization. There we have a good starting point. I already see that this bank is a leader in this area, but with the strategy we want to make us even stronger. There is still a lot we can do in order to make it more simple to be a customer in the bank. We have talked about the digital solutions, but there are also opportunities to automate far more than we do. For instance, we have a target to automate 90% of credit decisions in the private segment by the end of 2015. That would be seen as a huge improvement for customers who might self-serve through our overdraft facility or car loan on the net in 10 minutes without human interface and so on, but that will also take a lot of cost out of our system. We see a number of other opportunities for new products, how we can advance this further, simply to make sure that it's much easier to be a customer of Danske Bank. Finally, we will look at setting New Standards in openness and responsibility. We see we have a very important role in society. We are proud of that. Of course, we need to gain the necessary trust to do that part. That means that we need to be open about what we are doing, but also helping parts of society which somehow is squeezed by the new banking model. So we have an area of initiatives to help elderly people, younger people, and so on, to cope in the new normal. Going on to page 9. It's about some of the key measurements point we have for our strategy. As mentioned before, our vision is to become the most trusted financial partner, and we will measure that by being number 1 or 2, that's our aim, in customer satisfaction in our prioritized customer segments. Secondly, that we bring ourselves to a financial performance in the better half of our Nordic peer group, measured on ROE. So this is overall where we need to take it, and of course, these general targets will be cascaded out through the organization, so every bit of part of the organization will contribute and help us to get there. On page 10, you see some of our financial targets. We see that we can definitely meet above 12% ROE target in 2015. We also have set our capital targets on our best expectation on what regulation will bring. Based on that, we have set the target so that even in the most severe stress scenario, we will not come into trouble with regulatory requirements. For that, we need a Core Tier 1 ratio of 13% and a total capital ratio of 17%. At the same time, as already mentioned in previous announcements, we will, by the end of this year, meet the 2015 requirements for liquidity. So when it comes to capital and liquidity, we are actually quite strong already. When it comes to rating, it's very important for us that we get our rating up by at least one notch, and I'll come back to how we want to get there. But there's no doubt that today it is a disadvantage to the bank. Not to the extent that we are not competitive. I think we can still put sharp prices to our customers, even in competition with the other Nordic banks. But obviously, having higher funding costs, we will suffer on our profitability. It is important for us to get the rating back by one notch, then we will be in the same league as the others, and we will close the gap at least quite a lot when it comes to funding costs. There is also maybe a more subtle element than that we can simply not accept to be seen as a bank which rating-wise is not in the same league as the other Nordic banks. We have some cost targets. We do have a hard target on actual cost, which we will see decrease slightly over the three-year periods and stay below a level of DKK 26 billion. To get there, we need to do more on the organization. As you already know, we are reducing by 1,000 position this year, another 1,000 next year, and what is new now, that beyond 2013, we will reduce by another 1,000. All that should mean that we will see a cost-income ratio below 48% in 2015. Finally, when it comes to dividends, we aim for a 40% payout ratio when we have established our capital ratios. That will take a little while, so we are not expecting to pay dividends for 2012. Just to give a little bit of flavor of what we are trying to do to get there, you have on page 11 the three core elements of it. Again, these are obviously things that we will dwell into much more on the Capital Market Day. We see own initiatives. That is cost reductions, that is margin initiatives, that is cross-selling. That will bring us a plus of 4 to 6 percentage points. Declining loan losses, which is also more or less in our control. We see that that will come down, and only a very severe turn of the economy can put this part in danger. Finally, we need a little bit of help. That is on the rising interest rate levels. At the moment, we hover around 0% short-term interest rates. To get up to where we would like to be, we expect, well, this the other way around. We do expect a 2% increase in interest levels by 2015, and that will bring another 4 to 5 percentage points. Opposite to that works regulation and requirements for capital and so on, inflation and other things. All in all, we have actually a very robust plan for getting to our 12% ROE target with a little but not a lot help from the general economy. Finally, and that is page 12, we will move from being multi-branded to one brand November 15. That will be followed by quite a lot of market campaigns for not only the name change but also for the New Standards strategy. The main external launch to our customers for the New Standards strategy will be only November 15, coinciding with the name change. Finally, to sum it up on page 13. Yes, we do realize that we are operating in a new normal that demands New Standards. We feel we are the right company to set the New Standards in financial services. Overall, we need to regain the trust. We can only do that, we can only serve our role if we have prudent results. That's very important for us. To get there, we focus on some specific areas, but in particular, seamless day-to-day banking, utilizing all the opportunities within digitalization and automation, and having leading competencies in advisory services. Underneath that, we have a quite detailed business unit strategies for each of our main business units, with a high number of actions and so on, which it would be too much to go into details of here, but we reserve that for the Capital Market Day. Hopefully there you would see that we actually can substantiate our case quite well. Of course, some might be disappointed that we this time around did not find the one silver bullet that could solve all our problems. On the other hand, we have hundreds of small silver bullets that will all bring us there, and we have the plan to make use of them. With these words, I think I will leave the word to Henrik Ramlau-Hansen to take us through the Q3 result. Thank you. We are now on page 14, and I will take you through our 9 months and Q3 results, and we will also elaborate at the end on the capital raising issue that is currently going on. If you look at page 14, we're very pleased with a net profit of DKK 3.6 billion. That's an increase of DKK 2.1 billion compared to the 9 months last year. It's driven by a 14% growth in our total income, and that is mainly attributed to an increase in our net interest income that continues to increase. We have had also very good net trading income for the first 9 months, and there's also been an improvement in the insurance results. Impairments are still a little bit higher than they were last year, but that's mainly due to the fact that impairment started to increase by the end of last year, but they are now gradually coming down. If we compare then quarter by quarter, Q3 against Q2, you can see that our net interest income have kept up with what it was in the second quarter. We are of course being impacted by the very low level of interest impacting our deposit margins and our equity income. But it is in practice being offset by the margin increases we have been doing and is continued to do. It is positive that our loan impairment charges are slightly down. It's positive that impairments are dropping in Denmark and other areas also, although we have some increases, especially in our CIB area related to shipping. The net profit for Q3 was DKK 1.3 billion. But if you, so to say, strip out our Non-core Ireland, it was actually DKK 2.6 billion corresponding to a return on equity of around 8%. So also that indicates that we are gradually moving in the right direction. I think it's fair to say that our Q3 result is very much in line with the consensus estimate by the analyst and perhaps even slightly a little bit up. If you move to page 15, you have an overview of the development of our net interest income. It's impacted by the low and then declining and even in some cases negative interest rates. They are part of our price increases are not included in the figures yet. As an example, our mortgage division, Realkredit Danmark, has made some margin increases that takes effect from October the 1st, and they're obviously not part of the results yet, but will be when we come to Q4. If you move on to 16, you can see our net fee income that is up quarter by quarter by 4%, but otherwise actually being quite stable. We are pleased that we have a large proportion of our fees is attributable to portfolio fees that can, so to say, be expected to recur also in the quarters to come. On page 17, you have an overview of our trading income, which is down from Q2 to Q3, but our trading income is still very good and healthy, and it's within the usual guidance of DKK 1.5 billion to DKK 2 billion per quarter. It's mainly driven by bonds and derivatives and debt capital market activities. You should also bear in mind that in Q2 we had a one time pension gain from a change of one of our foreign pension plans that contributed DKK 400 million in Q2, and that's part of the reason for the decline. Taken over nine months period, the results is much better than in 2011, where there was a lot of financial turbulence in Q3. Let's move on to 18. That is our insurance results, where the quarterly results of DKK 427 million is very much a normal result for our insurance business. It is impacted by this system with a shadow account, but DKK 427 million is in line with what is usually expected. We still have a shadow account of DKK 1.3 billion, meaning money we can regain and re-earn in the future when investments income allow it. Otherwise, with the insurance result is in line with our own expectations. Good result for our unit link business. Premium income is down by 8%, partly because of a decline in Sweden and also due to the fact that Danica has withdrawn from some loss-making businesses. Page 19 is an illustration of the development of our expenses. We have communicated that we will reduce our number of employees, FTEs, by roughly 1,000 this year, and we are in line with that. You can see that there's a decline from Q2 to Q3 in total cost of around DKK 500 million. Part of it is due to seasonality. But if you look at the light blue or the light gray columns, you can see there is a slight declining trend, and we expect that to continue, and that is also part of the 2015 guidance Eivind Kolding just mentioned. You can also see that we have reduced the branches, 86 branches for the first 9 months, 50 in Denmark, and that will be a trend that would also continue in the coming quarters. Page 20 gives an overview of our impairments that is slightly down due to less impairments in Denmark and Finland, and also to some degree Northern Ireland. It is still the Irish business that takes up almost half of our impairments. When that, so to say, disappears or are reduced in some of the coming quarters, there will actually be a substantial improvement in our results due to the Irish impairments getting down. And we are still sticking to our previous guidance that the Irish business will, or there will be a need for provisions of DKK 5 billion to DKK 7 billion until the end of 2014. And we are still committed to that. Page 21 gives an overview of the impairment or loan loss ratios in terms of basis points. And there it's important to mention that overall group level, it's at 57 basis points. But again, you can see that in Denmark, we actually now down to around 30 basis points. So there's no doubt that we are moving in the right direction. And when the Irish impairments decline, then also the group level impairments will drop significantly. To the left part, you can see how our impairments are distributed in the various countries. Page 22 gives our capital ratios, where we have a very good capital ratio, Core Tier 1 of 12.7% at the end of Q3, partly attributed to the fact that our Risk-Weighted Assets actually fell to DKK 851 billion. And the main reason here is that we have sold off some of our securitized assets that have actually reduced our risk weight, and we have sold them with virtually no profit and loss impairment, and they are not part of our, so to say, core business. So that's why we have got rid of them. And we have also, during the quarter in September, raised additional Tier 2 capital, and that's the reason for our total capital ratio of 19.4%. You can see also to the right that we estimate that our S&P RAC ratio, all other things being equal, stands at roughly 6.9% by the end of Q3, given the uncertainty related to this type of calculation. Then we have announced this morning that we are going to plan to raise approximately DKK 7 billion through an accelerated book building, which is currently taking place. And the main purpose is to accelerate rating improvements. As Eivind Kolding mentioned, we have a rating that is below what we would like it to be and below our peer partners. So therefore, we will try to accelerate our rating improvement. If we do this capital issue, then our RAC ratio will increase by approximately 0.4 percentage points, which will raise our RAC ratio above the 7 percentage points, and that should have a positive impact on our rating going forward. It's also important to mention that if we succeed in improving our rating, then it will improve and enhance our short-term market access. It will probably lower our term funding cost, and it will, in more general terms, improve our institutional business, including getting more institutional deposits. So it's our firm belief that there will be a positive earnings impact from such an initiative. So although there will be some upfront dilutive impact of the share issue, there will definitely be a substantial positive earnings impact that will mitigate any earnings-diluting effect from the offering. But we will, of course, be pleased to take additional questions in this area. Page 24 is about our deposits, funding, and liquidity, and we have already finished our funding for 2012 and funded additionally DKK 25 billion for 2013. We are still on plan and targeting to be LCR compliant by the end of 2012. Our funding plan for 2013 is roughly DKK 40 billion to DKK 70 billion. As you may know, we have the state hybrid capital, which we would like to repay in 2014. Therefore, that is part of our funding plan for 2013. You can also see from page 24 that our deposits have actually performed fine from Q2 to Q3 after we lost roughly DKK 40 billion due to the downgrade. That is also the reason why we are now actually targeting an upgrade as soon as possible. On page 25, it's just a quick overview of our liquidity, which is still very strong. So I will conclude by moving on to page 26, where you have our outlook statement for 2012, which is very much in line with what we communicated after Q2. From a shareholder perspective, the result will still be low, although we feel that we are taking the right steps. Things are moving in the right direction, but impairments will still be at a higher level around what it was in 2011. The macroeconomic environment out there is still challenging. But we are taking a number of steps moving the bank in the right directions. But for the time being, we feel that the right decision is also already to mention now that we do not expect a dividend for 2012. But otherwise, we think that the bank is moving in the right direction. Then I think we move on to taking questions, and you should press one. Sorry. This is the operator. I'm ready to advise people. Sorry. Yeah, thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touchtone phone. If you wish to be removed from the queue, please press the hash key or the pound sign. If you're 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. Claire Kane from RBC Capital Markets is online with a question. Hi. Good afternoon, everyone. I just have a quick question. Well, two questions, please. The first one is regarding your 2015 targets, and you've given us your cost number and your cost income ratio. If you compare that income target, which seems to be around DKK 54 billion, to where consensus is for 2014, which is DKK 49 billion, you have a 10% year-on-year increase. I was just wondering if you could talk us through if that's fair and where we think most of that will come from, and also where you see the driver of short-term rate increases, because I think the three-month EURIBOR futures for 2015 is currently 70 basis points, so some way off your 2% assumption. My second question is on your RWA guidance. Just backing out some of your guidance, can we assume the market risk impact for 2013 is around about DKK 70 billion? And you've said you'd like to see flat RWA through to 2014. Is that included or excluded in this uplift to market risk RWA? Also, can you tell us how that compares to your expectations for overall asset growth and loan growth, if we should expect that to remain flattish as well? Thank you. Okay. I'm now here. I can try to start, and then some of my friends may help a little bit. First of all, you asked about our cost guidance and our income guidance. To put it simply here, also for the other people on the call, if we guide a cost income ratio, let's just say for simplicity, 50, and the cost is 26, then you are right that implies a total income of 52. We feel that we will be able to achieve that, and the building blocks will be the ones that Eivind went through on page 11. This will fit together where there will be an elevation of income from our own initiatives, as Eivind mentioned, cost, pricing, cross-selling, Danske Capital, et cetera. There will also be an impact from the rising interest rates. Whether rising interest rate is going to happen or not, we don't know, but it is at least how we have modeled it. We think it's important to communicate to you and the market that even though if interest rates just go up to around 2%, we'll be able to deliver above 12% on ROE. Then you had a question on our RWA guidance, and that is a guidance for the entire period. There will of course be ups and downs in the individual quarters as we move through the period. You may be right that we previously have mentioned that the impact from CRD4 market risk could be in the area of DKK 70 billion RWA, but we have various plans of mitigating that, making sure that we will still be able to keep our Core Tier 1 of around or above the 13% we have guided. Overall, we expect our lending to be roughly flat or perhaps a little bit up, but it will vary between the various business segments. Can I just get a- I hope I have answered most of your questions. Sorry. Can I just get a quick follow-up just on the last part then? Should we look at flat RWA overall, including the DKK 70 billion uplift? You should roughly look at flat RWAs over the entire period, perhaps slightly increasing, but there will be ups and downs in the individual quarters. Okay. Just on my first question, your 48% cost income guidance, I took it to be DKK 54 billion for income in 2015. Is that right? Yeah, that's right. I just tried to make it even simpler. Okay. Yeah. That's right. That's a 48, then it will be probably 54. Okay. Thank you very much. Andreas Håkansson from Exane is online with a question. Yes. Hi. Thank you. I actually have two questions. First is a follow-up on the NII and the impact from high short rates. Could you tell us, let's assume that short rates aren't going up for a number of reasons in Europe, do you feel that you can then do more on the cost side to make sure that you remain on the right side of cost of equity, or should we then assume that you're going to be quite a bit below cost of equity? Second question, I was listening to Mr. Kolding's introductory speech, and he talked about risks in the Euro area, and the Euro area having problems, and he talked about slow growth in Scandinavia, but he didn't mention any specific problems that Denmark is facing. Does that mean that you guys don't look at mortgage liquidity, LTVs and leverage and all of that as any meaningful risks, or what's your view on Denmark specifically at the moment? Thank you. Right. The first question was regarding- The NII, what happens if short-term rates do not go up. Well, this is not the end of the game of efficiency, and we can do more. We might do more, and maybe not directly related to how the NII evolves or not. We always have the responsibility to run the bank as efficient as possible, and that game does not stop in 2015. Of course, if the NII does not go up, we will have a lower ROE than otherwise. On the other hand, maybe the cost of capital will also be lower if you have an interest level which hovers around 0%. So maybe it is not so bad after all. But obviously, it is not that we have a fantastic profit improvement plan in our pockets as a plan B. We will absolutely initiate it now if we have those thoughts. On Denmark, we are actually seeing still a very sound development as indicated over the last few quarters, stabilizing real estate prices, people are paying their mortgages and so on. The unemployment is in a respectable level, not increasing. So we are actually quite comfortable about the Danish situation as it looks right now. Of course, our main issue in Denmark, that is the low growth, and we do not see that changing a lot. Of course, we might see slightly positive growth next year, but not any spectacular thing. But for our business, it is actually getting more and more normalized. On loan-to-value mortgage system itself, we are actually doing a lot, both on pricing and also in order to encourage customers to select the right type of mortgages. We can already see some impact that people are taking more fixed interest rate loans, and people are taking more loans with repayment in principle. This discussion that has to some degree been initiated by Moody's and others, I think we are also in that area moving in the right direction. There are some figures on that in the fact book. Can I just follow up then? If interest rates do go up, so you get the revenue uptick. Mr. Bernstein, the Central Bank governor, was out, was it two weeks ago now, saying that he believes that house prices are just below equilibrium with current mortgage rates. I assume that if mortgage rates go up from the exceptionally low levels in line with your rate increases at the same time as the interest-onlys are rolling off, do you then see an increased risk that house prices will again move down, or is something else going to support it? No, it is not really what we see. The main risk is on the unemployment. This is what you need to follow. If interest levels come up with a couple of percentage point, that will not destabilize the Danish real estate market. If interest rates come up, it could also be because the economy is doing better and things are much more positive and employment is growing and so on. It is not a one-to-one with the interest rates going up and we getting more losses. Okay. Thank you. Jacob Frank from ABG SC is online with a question. Hi, it's Jacob from ABG. I have just a few follow-up questions, actually. Regarding the costs, I know we already discussed this, but could you just give us some, it's not only interest rates that you're talking about as revenue improvers. You also talked about cross-selling. Just to come back to the question before, what can you do if you realize that it's not really working according to your plan? How would you monitor this so that you can maybe do something extra on the costs? Also, just to understand, Eivind Kolding, you spoke about a lot of digitalizations and stuff that you could do, which could also lower costs. Is that included in your 48% cost income ratio and DKK 26 billion, or is that extra, or how should we look at that? So that was my first question. My second one is just regarding the sensitivity between all the stuff you have on page 11 in your presentation. If short interest rates go up, like you said yourself, that is probably because growth or inflation have picked up. Are you assuming higher inflation as well, or what kind of inflation levels are you using in this red part of the bar? Finally, on risk-weighted assets, you have some securitizations which you sell off. Should we expect more along those lines, or is that just a one-off, basically? Thank you. I think that the first question related to initiatives when it comes to cost and cross-selling, and the way it really works is that each of the business units have quite comprehensive plans of initiatives, and I am sure that we will succeed on some of them. Actually, some of them actually probably overshoot compared to what we have hoped for. Others will not. We will have a very close follow-up monthly how we work according to the targets we have. And obviously, if we are seeing a gap development, we will make the necessary measures to close the gap. So I think this is well built in or being built into our management structure. So we are quite close to knowing how we are doing compared to the targets that we set out. Jakob, I would actually like to dig into more of the details of slide 11 on the Capital Market Day. So this is actually a prelude to the Capital Market Day, but we are aware of the issues you have raised, and we have also inflation assumptions, tax assumptions, and so on. So I think we would dig into more details on slide 11 and similar slides on the Capital Market Day. Regarding the Risk-Weighted Assets and securitizations. Your question there was? I'm just thinking, was this just a one-off that you could release? Was it DKK 29 billion? Yeah. Okay. That was a one-off. Unfortunately, we can't do that each quarter. That was a sizable asset we had. We got rid of because it didn't serve any useful purpose. And we have some minor things we can do, but nothing of this magnitude, which we can be repeated each quarter. If your question was whether this happened due to securitization, no, that was not the case. No. Okay. It was assets that we got rid of. Assets. Okay. Thank you. Johan Ekblom from BAML is online with a question. Thank you very much. It is Johan Ekblom from Bank of America. Just two questions. Coming back to your interest rate assumptions. If we sort of just look at the 45% increase on the nine-month equity base, that implies that your interest rate sensitivity is materially higher than I think you have talked about in the past. I guess to something like DKK 3.5 billion-DKK 4 billion per percentage point increase. Is this the right way to look at it? Have you changed anything in your positioning towards interest rates? Then secondly, you make a comment that, I guess two comments about ROE. One is it should be above 12% and the second is that it should be in the top three of your peer group. Judging by what your peers have announced as ROE targets, I can draw one of two conclusions, either that you think you will get well above 12%, or that you think that the other banks have unrealistic ROE targets. Can you please comment on that? If I take the interest rate sensitivity first, it's Martin here. We have stated in the report that the sensitivity for the first 25 basis points is DKK 800 million, and this will probably stay at this level for at least for the second 25 basis points. But you're right that gradually this number will come down as interest rates are moving up, as it went up when interest rates were declining in the last couple of years. But there's no big changes here other than an increased capital, of course, create a higher sensitivity because we also have return on the increased capital. Having said that, just want to say that the assumption is that the average short-term interest rates across the board should go up not far away from 2%, slightly below that, and then you should be able to come up with the percentage point we have given you on slide 11. In terms of the 12% and comparison with other colleagues, we cannot comment on that in details. But you have to be aware of that, as an example, we issue short-term rates around 2% and also a capital or Core Tier 1 of around 13%. Some of our colleagues have used other assumptions when they have stated their equity targets. But as you mentioned, of course, we hope that we can do more than 12%, but it depends on how things develop, and yeah. I think that for us, the critical point is really to make the relative target because we will all be subject to market conditions, interest levels, growth criteria, regulation, competitive situation, so on and so forth. If we take these specific targets far too literally, then we oversimplify the reality. For us, the most important part is obviously that we do well, and we see that we have a structure, we have capability, which should bring us to the better half, and that is what we are going to work on. Then we have put certain assumptions which can be debated whether they are right or wrong, especially about interest levels. But then we have put them forward, and based on that, we come to a specific number, which is above the 12%. I don't think anybody these days take these numbers very literally, at least as far as I can see in this industry, the numbers are adjusted upwards, downwards, sidewards, assumptions are changed, and more things are added to it. The relative target is really what we want to achieve first and foremost. Another way of putting it would be to say that by 2015 you should be in the top three. Exactly. That's the important, our return target. Exactly my point. Thank you. Perfect. Thank you very much. Sofie Peterzens from J.P. Morgan is online with a question. Thanks very much for taking the question. I had a couple of questions. First of all, it is around your accelerated book build and the timing of the rights issue. How confident are you that you are going to get the credit rating upgrade? Because if I look at some of your peers, when they were downgraded, and even if they did two rights issues, it took over three years for them to actually get the credit rating upgrade. Why do you do it now? Because if you were downgraded back in May, would it not have been better to have done the rights issue pre the downgrade rather than now that you have just very recently been downgraded? Then my second question relates to page 11, where you talk about the regulation, inflation, and taxes that has around 67% negative impact on your ROE. Could you just talk a little bit more in detail around what these regulatory changes are that you are foreseeing and also what higher taxes you are expecting given that you already have a very high group tax level? Thank you. Yeah. First question about the rating. It is our best estimate that by doing this raise of capital, we will shorten the period to upgrade with 1-2 years, and that is obviously a very positive thing for the bank. Then you ask why now. I think this is actually the most perfect point to do it. Trying to do it, should have done it at an earlier point, investors would rightly ask, "Well, yes, but what is your strategy? What is your targets?" And so on. Or doing it later, it will be strange that we did not talk about it now that we have made our strategy. So at least for us, it is a very logical time to do it. Of course, it has been discussed a lot. It is not something you do easily, but getting faster to the upgrade is actually quite important. As we see, it is something that hugely will benefit shareholders. So that is why we concluded with the board to go in that direction. But have you discussed it with the rating agencies, though? Are you certain that they will fast-track the rating upgrade? Because if I look at Swedbank, when they were downgraded back in October 2008, they only got the rating upgrade after two rights issues and recoveries from the Baltics, and that the rating upgrade only came in 2011, December. Unfortunately, it's not so that you get a handshake from the rating bureau. This is based on our best assumptions that we have. That's also why we give a range of 1-2 years. There's no doubt that with the earning power that we have and the way we see the bank develop with the targets we had, we would eventually get the upgrade for sure. We want to accelerate that process. It's based on our own best estimates, obviously qualified with what we know through the many dialogues we've had with the bureaus over time. Then you had a question relating to the now famous page 11. The red block also includes tax on the previous improvements. You should bear in mind that the first column, the 3.8, is after column tax, and the 12% and 15% is also after tax. So there's a tax element there in the red bar. Also regulation and funding is part of it. Until 2015, we're going to take on more funding, wanting to be LCR compliant. Also when you go down towards 2015, we will need to take on also additional, as an example, Tier 2 capital to have a more capital-efficient structure when CRD IV comes into play. So there are also funding costs related to additional capital we need to take on down the road. Again, there are also other one-off elements, but we'll go through that in more details at the Capital Market Day. Okay. Thank you very much. Actually, could I squeeze in one final question? Could you just talk a little bit about your shipping loss, about fees that were very high this quarter. Should we view them as one-off or should we expect higher level of shipping losses going forward? Martin is doing the shipping. Eivind is moving out of shipping. I will do that. You are right that our shipping exposure is a sector where we see some issues at the moment. It is pretty much across the board that many of the different sub-sectors has issued with overcapacity and low rates. Caused, for instance, by the lower growth in the world. The problem is that this will probably continue for a while. It will not be just over in six months' time. It could last for another couple of years. In this quarter, we have seen really no new big incident coming up. It has been a handful of old exposures where we needed to strengthen our impairments. We can say that of these DKK 650 million we have impaired in the CIB book here in the third quarter, 500 of those are to five individual customers, of which four are shipping companies. It is not that it is one single sector or one single company that is causing all the issues. Okay. Thank you very much. You're welcome. Thank you. Nick Davey from UBS is online with a question. Yes. Good afternoon, everyone. Two questions, please, from my side. The first on the dividend policy, please. I am interested to see that you have included the rating agency upgrades as one of the precursors to returning to this dividend payout policy. Could you just please be a little bit more specific about exactly what we are looking for here, at least one upgrade from each of the rating agencies? Again, I suppose a bit of a follow-up from the previous questions really, as far as whether you think this is the most sensible way of governing the dividend policy in the next 2 to 3 years, if this may take some years to see the upgrades coming through. The second question, please, back on slide 11, this declining loan loss is adding 6 percentage points of ROE. If I read that correctly, it means some sort of underlying guidance of loan losses around 25 basis points. Could I please ask you just to elaborate a little bit on that number? I think you have spoken in the past of Danish loan losses being 20 to 30 basis points. I guess they might have to be even lower than that to offset some of the numbers in Northern Ireland and the international businesses. So please, just a little bit more color around the normalized loan loss number you expect when governing this ROE. Thank you. The first one on dividends. We think given the situation the bank is, given the fact that we want to fast-track a rating improvement, given that we ask shareholders to contribute around DKK 7 billion, we actually think the right decision is also this year to declare no dividends. Then we have had a five-year period with no dividends from the bank if we do not pay a dividend for the financial year 2012. It is not written in stone that there should be no dividends for 2013. If the results continue to improve, we could consider a dividend for 2013, perhaps not at the full amount of the 40%. So it could be in our base case that there will be paid a dividend for 2013. Then you asked about our loan loss ratios. Again, we would like to dig a little bit more into details at the Capital Market Day, but you are not completely off with the 25 to 30 basis point long-term loss assumptions. But we will come back to that at the Capital Market Day. Okay. Thank you. Jacob Kruse from Autonomous is on the line with a question. Hi. Yeah, just a couple of quick ones. Firstly, on your capital, you have now a target of 13% 2013. If the number of DKK 70 billion of potential RWA increase would be correct, or if you have some other type of adverse effect in 2013, should we then expect you to again look to raise to hit that target? Or is that a target that you could comfortably miss for a period of time without the FSA getting on your case? The second question, just your cost guidance for this year is 4% up. Should we look for something above DKK 7 billion for Q4 cost? Lastly, just from the morning presentation, you said you expect Irish losses to normalize in Q2. I just wanted to confirm that that's correct, and if you could just say what that roughly means in terms of loss levels. Thank you. If I could take the first question around the capital and capital ratios. First of all, we do not have the FSA on our back on capital in a regulatory context. Actually, we are looking pretty good. We feel that 13% is a right level, of course, taking in expected requirements to come on SIFI banks and so on. This is why it's somewhat higher than it actually strictly needs to be at this point of time. But we need to be in place for the regulations to come. You are right that there will be some movements on the RWA next year due to the new regulation, but we also have a number of measures that will work in the other direction when we refine our models. We also have ways to direct our business, which will ease the RWA consumption. We are quite comfortable that we can stick to the 13% target by the end of 2013. If I could elaborate a little bit further. We have currently Core Tier 1 of 12.7%. The capital increase will increase that to roughly 13.5%, and we have previously communicated that the impact from market risk will be minus 0.7%, and then you are down to actually 12.8%, which is comfortable in order to reach 13% by the end of 2013. Then please repeat your question related to Ireland. Just from this morning- Yeah press conference, I think you said, I may be wrong, that you expected Irish losses to normalize from Q2 next year. I guess my question is just if that was indeed what you said, and also what a normalized level is. Right. I think the intention was to say in the morning that we expect the Irish losses to come down during 2013. Given the fact that we stick to our guides of DKK 5 billion-DKK 7 billion, and we have roughly now consumed DKK 3 billion, there is DKK 2 billion-DKK 4 billion left of that guidance. So there is room for, let's call it one to two quarters more with elevated losses in Ireland, and then hopefully they should start coming down. Right. Okay. Just on the cost for Q4 2012, if I just take 4% growth on 11, that's DKK 27 billion, which would leave about DKK 7.5 billion of cost for Q4. Is that correct? Martin? Yeah, I think that's true. We can do the math as well, and it's right. It's a relatively high number compared to the third quarter. Please remember there's three things, please go into this. First thing is that the Q3 is a low-cost quarter. We have the holiday payment issue that will have a swing factor of close to DKK 200 million between Q3 and Q4. Secondly, historically, Q4 is a high-cost quarter where the expenses normally will be quite high. Thirdly and last, we also have this rebranding issue and other restructuring costs we have to take here in the fourth quarter. That will bring costs up above what we have seen in previous years. Whether we will reach the full DKK 7.4 billion, of course, is uncertain. We can always hope we can do a little bit better. But when we look at the numbers, we've decided to stick to our guidance for the full year, which is this +4% against 2011. Is that okay? Anybody there? Riccardo Rovere from Mediobanca is online with a question. Good afternoon to everybody. I have just one follow-up question. Did I get it right that the amount that you intend that you think you can mitigate all the CRD4 impact on risk-weighted assets? So when we have to think about your 13% Core Tier 1 capital ratio, the number of risk-weighted assets that we need to use is more or less the number that you released today with regard to September 2012. And when you calculate, when you give us the guidance of a kind of 15% return on equity, what kind of equity are you thinking about? Is the Basel III core capital? Is the normal equity? What kind of number is this? Thank you. If I take the CRD4 rules first, what we have said is that we expect to keep our 13% Core Tier 1 capital ratio and more or less unchanged RWA for the next couple of years. But this 13% is on the reported basis, which means that the rules that applies whatever we are reporting is the one that we are going for. This also means that part of the CRD4 is including the transition rules when it comes to the insurance business, and that will take a number of years before they're fully phased in, and that you have to take into account. So that's how you should think about this. But we also said that as these rules can come in not in a straight line, there could be ups and downs down the road when it comes to risk-weighted assets, and thereby also our Core Tier 1 capital ratio. But we also have some measurement we can do. I think we have previous time talked about that we are looking at, for instance, moving Sampo Bank into advanced models and these things, and this is something that we will look into in the coming quarters. So we have a number of things that we can do here. And the equity is the equity, the booked equity in the company, including goodwill, et cetera. So it's a booked equity, as you can see in our report. Yeah. Okay, perfect. Yeah. Okay. Klaus Brandster from Exane is online with a question. Yes. Good afternoon. Just one question. I have a couple of questions. First of all, the new capital that is coming in, could you elaborate whether there's any outlook that will be invested in new actual business opportunity or will it be passively placed on the balance sheet with a very low return, basically only to please rating agencies and hopefully trigger a rating upgrade? That's the first question. The second question goes in relation to these SIFI banks. You elaborate during your breakfast launch in August that you have asked the Danish regulators and the Danish committee not to follow the Swedish procedure but look at the European procedures. It comes a little bit as a surprise to me that you now seem to be more concerned on the capital level and need to go significantly above the Swedish initial guidelines, which was 12% from the Swedish regulator. The last question in terms of hybrid capital. You talked about paying back the DKK 24 billion you have of hybrid capital. You have recently issued $1 billion. Does this right issue you are making or accelerated book building you are making today, does this limit or lower your need for taking new capital instruments like the $1 billion you have recently raised? Thank you. If I should go one by one. Of course, if we get a new capital, it sort of goes into the entire pot. We have a balance sheet of DKK 3,000 billion. So you cannot sort of earmark the money after it's went into the bank. I think for us, it's important that we preserve the capital ratios that we have, and this will obviously be part of that. But we cannot say exactly how we'll then spend and utilize the capital. It will be a mix with the entire economy of the bank. On new ventures. Yeah, I suppose if you had the thought that we had any sort of specific plan in terms of investments and so on, that will not be the case. This is, as mentioned previously, predominantly driven by our rating ambitions. Then about what kind of capital do we require. I understand your question well, and we've definitely not changed our minds that Denmark should follow the European path. There might be a difference in the buffer that the banks feel they need to operate with. We are quite clear that we will have a sufficient buffer above the regulatory requirements so we can sustain even the most severe stress scenario without getting to the regulatory limits. Even though the new regulation built into the requirements certain buffers, we don't really in real terms think that those are buffers that we can use. If we go into some of those regulatory buffers, we are already in trouble. So we need a buffer on top of the buffer to make sure that we always have the keys to drive the bank. That's how we see it. Hopefully, and I still believe that will be the case, that the Danes will be following the EU track. That's at least the indication I hear, but nothing is certain about that path. We still of course, have the intention to repay the state hybrid of DKK 24 billion in 2014. You're right, the fact that we are now doing an equity issue will postpone any further issue of Tier 2 or Tier 1 additional instruments. When you take the long view down to 50, we need to do extra subordinated debt in order to have an optimal capital structure. By doing the equity issue, we are very close to actually being able to repay the state hybrid without any additional capital on the book. Okay. Thank you very much. Donal O'Donovan from Irish Independent is online with a question. I'll see the big button. Hello. Hi, how are you? I have two questions. One is, can you just explain why you're continuing to see impairments in the core Irish business, and how long you think that situation will persist? Then, again, in relation to Ireland, what the avenues are for exiting from the non-core business, and whether any advisors have been engaged to look at potential sales? Your first question on why we didn't have any further losses in our core Irish business, is that right, understand? No. Why you are continuing to see impairment charges on the core Irish business. We have- Having split the business into core and non-core. I think we have said quite clearly that we do expect that there will be losses in our Irish business as such for one or two quarters more of elevated. Yeah. Jan Wolter from Deutsche Bank is online with a question. Yes, hi, Jan Wolter here, Deutsche Bank. A couple of questions. The first, a number of Danish peers have flagged that the period repricing is coming to an end there. Is that your view as well, that the majority of repricing we've seen over the past year or so is coming to an end? Or can you see a lot more of lifting rates in Denmark specifically? Secondly, you aim for 17% total capital ratio. Were we to understand correctly that with this rights issue, you don't really need to raise any new Tier 1, Tier 2 debt, or just small amounts of that when you pay back the hybrid in 2014? Thank you. If I should start with the repricing, you are right, it's been signaled, but I have to say that the signal from the peers of not doing repricing is probably exaggerated a bit by the media. If you read the finer lines, there are something about, well, we might not do general rate increases and so on. I'm not so sure that it's a full stop at this stage. This is not how we see it. All that being said, there's no doubt that the Danish market has been quite marketly repriced on the lending side. We probably do not see a lot of potential to do more at that level at this point of time. But selectively, you can always do that on certain products and so on. But I'm not so sure actually our peers would not also like to do more to improve their profitability. Let's see whether it's actually more than just a news story. You are roughly right that by doing the equity issue, and if you look at page 22, you can see that we will, on a pro forma basis, come above the total capital ratio of 20%. But when we repay the state hybrid, that is reduced by 2.8 percentage point. You are right that when doing the equity issue, we do not need to do very much more Tier 1 and Tier 2. But again, when we move into 2014 and 2015, we may do additional issues in order to optimize our capital structure, but it will also depend on the profit generation during the period. Of course, we have to fill the gap between the 13% Core Tier 1 and the same total capital ratio of 17%. All we have on board, except for the new one we made in September, will have to be repaid over the next few years and to some extent, be replaced with some new loans. Yeah. Because the existing Tier 1 and Tier 2 are phased out. Yeah. Some of this will be repaid already in 2014. Yeah. in 2014. Understood. Thank you. One very quick follow-up, if I may. Have you recently sounded the market for buyers of the Non-core Ireland portfolio, please? We note some slight interest and some transactions have happened, but it's probably just the first signs of spring here. In reality, we do not expect to see serious interest before next year. Then we will have to see whether this is the optimal time to start our divestment, or we should postpone it a little bit longer, depending on how prices are developing. At least we see the first transactions, and this is a very good sign. Thank you. Just on that follow on there, I'm pushing my luck here, I know. But you've guided for $5 billion-$7 billion in loan losses in Ireland, of which we've seen a couple of billions already. But given that, you have the optionality here just to sell the book with that kind of markdown, then you would basically stick to your guidance. How is your reasoning there, though? Yeah. Can't you see a situation where you take the losses more upfront than having them over the next two and a half years? Thank you. I'm afraid it's a good logic, but I'm afraid there's not really buyers, even at the impaired values at this point of time. We do not expect to recoup our impairments, but obviously, we don't need to make a fire sale if we think it's realistic that waiting another six months will bring better prices in. But we could not just offload it now without further P&L impact, unfortunately. We have to be a little more patient, probably a year, maybe two, and then hopefully it's all history. Okay. Thanks a lot for your time. You're welcome. We're coming to a time where we have other obligations, so we have room for one more question if we have any. Ronny Rehn from KBW is online with a question. Yeah. Well, let's keep it brief. First on the rating impact, can you give us any sort of quantitative guidance what a rating upgrade could do to help your funding cost and with that your earnings? The first question. The second question is on the Irish book. Could you give us a little insight as to how much of the mortgage book has been restructured, and what the success rates have been? Lastly, it's 10 to 3:00 London time. Could you give us a little update on how the books look and what the demand has been? Also whether we should expect an additional discount for the placing on top of this price decline that we've seen today? Thank you. First of all, we cannot give you any insight into the book building. not. Sorry for that. In terms of targeting a rating upgrade, it is our internal estimate that if we can accelerate the rating upgrade and taking into account that that could imply lower funding cost, it could imply better access to short-term funding, more institutional business, et cetera. We have an internal estimate that is in the several hundred million DKK area before tax, and that is why we mentioned that it would have a significant mitigating effect on any earnings dilution you could calculate theoretically from the share issue. Clear. Then there was a third question. Then we have the question about the restructuring of the mortgage business in Ireland. I do not have the number exactly with me. As I remember, it is around 2% of the book that has been restructured at this point. Okay. Very good. I can come back to you on that. Fair enough. Thank you. Okay. Thank you very much for listening in. Thank you very much for some good questions, and we obviously look very much forward to see you in London at our Capital Market Day. Have a good day.