Earnings Call: Q2 2012

Aug 7, 2012

Summary

H1 NII rose 9% YoY, but DKK 7bn of impairments kept return on equity at 4.7%. FY NII was expected to exceed 2011, while loan losses were forecast roughly in line with 2011.

Thank you, operator, and welcome everyone to this telephone conference. I am here accompanied by the CFO, Henrik Ramlau-Hansen, and also our Head of Investor Relations, Martin Gottlob. If we turn to page 2, our agenda for today, usual suspects, going through the accounts. We will talk a bit about rating issues and so on. We will keep it fairly high level, but you will have good opportunities to pose your questions after the presentation. Page 3, we have the highlights of our results. Our net interest income is up by 9% compared to last year, to DKK 12.4 billion. We also see a positive development on Danica on the income side, after having adjusted discounting rates across the board in Denmark. Our expenses are influenced by a lot of one-offs this half year as last, but underlying, and we will have a few details on that, it is a fairly flat development. Loan impairment charges are still the problem child, very high, DKK 7 billion. It is a fall from the top in Q4, and again a fall compared to Q1, but a fairly high level also compared to last year, but trending downwards. All in all, that leaves a net result of DKK 2.28 billion, which would be DKK 4.5 billion if we exclude Non-core Ireland. All in all, this result provides a 4.7% return on equity, so that means it is not a satisfactory level even though the trend is right, so we definitely have more to do. If we go to page 4. Net interest income, a lot of focus on that. A lot of work has been done on that part. This is also reflected in the results. We have seen an increase of 7% since Q2 2011. However, this development does not really reflect all the work that we have done because we have quite a headwind with the decrease in general interest levels. The sensitivity mentioned on the slide is that should the short-term interest rates go down by 25 basis points, that has everything else equal, a negative effect on our bottom line of DKK 800 million. So we need to recoup that and do even more in order to improve our profits. Still, this is one of our most important levers when it comes to getting our results back in line. Turn to page 5. Our net fee income is fairly stable, so even though activity levels might have been declining a bit, we have been able to keep it up around the DKK 2 billion level. If we go to page 6. Trading is more volatile, as you know, at least when we view it quarter by quarter. If we view it year by year, it is a more stable development. We had a very good Q1. Q2 is actually quite respectable still, but below Q1, with DKK 2.4 billion. We see that income has been derived from derivatives and securitised bond trading, but also solid customer activity and what we see in Denmark, some safe haven effects. We are happy that Prospera once again has placed Danske Bank as the most valued player in the Nordic bond and derivatives market. Go to page 7. Danica is another volatility in our results this time around, this Q2 turning positively with some technical changes in our discount curve, reducing our liabilities with DKK 1.3 billion and also increasing our bonus potential. That means that we have been able to book some risk allowance, and we also expect to be able to do that for the full year. We do note, however, in the market that we are facing intensified price competition, and of course, we need to meet that, but that could put a little bit of a lid on the results. If you go to page 8. The cost development, if you exclude one-offs, is basically flat. Some of you might expect and ask why is the level not decreasing because you have a cost program, which we are following. But most of the cost program hinges on reducing our headcount, and we have a target of 1,000 FTE this year that we will meet. But basically, the positive effects of that you will only see with a year's delay. That's why we this year mostly see the restriction cost. It should also be said that so far to date, we have only reduced headcount by around 300, so we still have quite a bit to do before year-end. One part of this, and that has been discussed quite a lot in the media, is that we are reducing the number of branches. We have reduced it by 49 in second quarter, and this is a development that will continue. Turn to page 9. Impairments. As you can see, after a level around DKK 2.8 billion, it shot up in Q4 to DKK 4.8 billion, and we're now since seeing a declining trend. The declining trend in this quarter is mostly originating from Denmark and also Northern Ireland, whereas Non-core Ireland still is quite high, actually slightly increasing to DKK 1.4 billion. Our guidance when it comes to Non-core Ireland or Ireland in total is unchanged. We said after Q1 that we expected impairments still to come in the range of DKK 5 billion-DKK 7 billion, and that is still our estimate. Now you can deduct DKK 1.4 billion from that number. Turning to page 10, more details on impairments. It speaks more or less for itself. You see low levels in many Scandinavian countries, declining in Denmark, still slightly above what we would describe as normalized level. Northern Ireland, good development, but measured in basis points, still pretty high. Then, of course, Ireland and Non-core Ireland taking a big chunk. Turning to page 11. Capital ratios moving not so fast. Based on the risk-weighted assets have more or less been stable around DKK 900 billion, a slight reduction. Based on that, we have a core tier one capital of quite respectable 12.1% and our overall capital ratio of 17.7%. We have in Q2 repaid DKK 2 billion of the state hybrid that was given to Realkredit Danmark. Page 12. There you see one of the major effects following our downgrade in Q2. Most of our deposit and our deposit base is very, very stable. But in particular, our deposits in Danske Markets originating from financial institutions have dropped as expected. Many of those customers have hard rating triggers, so it's not really something that we can discuss with the customers. But there are other opportunities, so we will be working on getting that number up a bit again. But overall, we have a liquidity buffer well above DKK 300 billion. So this slightly negative development in the deposits could easily be resolved. Moving on to page 13, showing the liquidity in the 12-month point. It is still healthy by DKK 125 billion. I think it is important to note that we have taken the stance in the management that we will strive to be LCR compliant already by the end of this year. Even though LCR, which of course is the implementation of Basel III in Europe, will probably only be effective, let us say in 2014, 2015, we think we should be there already by the end of the year. This we believe we can achieve. Turning to page 14, talking just a little bit about the strategy process. It is on track. As you know, it will be concluded in Q3. We plan to give some guidance on this simultaneously with our announcement of the Q3 results. A number of elements in the strategy. We have a corporate strategy, which comprises portfolio strategy, capital strategy, rating strategy, and so on and so forth. The softer parts, vision and missions, corporate story, and then each of the business units will develop their own operating model and go-to-market approach, strategy, segmentation, and so on, based on fairly strict capital and income measures. A lot of work here, and we strive to have it all come together by the end of Q3. Page 15. It is a bit of the outlook, not a lot has changed. Of course, the sluggish economy recovery is still what prevails in our markets, with a few positive exceptions like Sweden and Norway. NII, we expect the repricing to continue. Of course, it is not that we can do it all in isolation. We are, of course, due to market conditions. What we see right now is other banks are moving in the same direction. I think we have some more things to do there, and of course, we will follow that up very closely. We talked about the cost program, the 2,000 FTEs, which translate into a cost reduction over 2 years of DKK 2 billion. Then still high loan losses, but basically at the same level of 2011. That means all in all that it will not be a very good result for 2012. Hopefully also we will see that we end the year on a positive note. This is basically what I have intended to go through if you turn to page 16 now. We will now open for questions. Thank you. Thank you. We will now begin the question and answer session. If you have a question, please press star, then 1 on your touchtone phone. If you wish to be removed from the queue, please press the hash key or the pound sign. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then 1 on your touchtone phone. Omar Keenan from Nomura is online with a question. Good afternoon. Thanks very much for taking the questions. Could I start just by asking a little bit on net interest income? I guess just thinking about the sequential quarter-on-quarter development. It seems like for the second half, there's less to come through on lending margins unless there's a further round of rate hike increases announced. Deposit margin pressure seems to be higher in Q3 than Q2 in Denmark. Are we thinking about that correctly? Just the positive DKK 57 million impact on slide 19 in other, is that repayment of the DKK 2 billion state hybrids from Realkredit Danmark, or is there something else? Then just on expenses, what should we expect for restructuring costs later in the year? Thank you. In terms of your question relating to net interest income, then you are correct that the central banks, both in Denmark and EU, ECB has lowered their short-term rates, and that will have a negative impact in our second part of the year. But on the other hand, we have taken some price initiatives, and we also have some price initiatives that takes place from the 15th of August and the 1st of October. So we have some price initiatives in our banking units, including Realkredit Danmark, which have not impacted our net interest income yet. So if you take the price increases that is to come in the second half and combine that with the negative impact of the lower central bank rates, it's still our expectations, as we state, that our net interest income for the full year will come up compared with last year. Then you asked in terms of expenses, you are right. There will be some restructuring charges also in the second half of the year, but they will, as previously, also in the second half, they will be taken, let's say, as a pay-as-you-go way. So they will be put aside in Q3 and Q4, and they are included in our total expense guidance. Then you had a question around 75. I didn't fully get that. Where was that page? It was just page 19 on your NII ladder, the positive DKK 57 million impact in other. Yeah, that is other. It is other. Miscellaneous, lots of minor items. Yeah. It is not the uplift from repayment of 2 billion DKK of state hybrids then? Or is that somewhere else? No, that took place in RD, there's a repayment of the state hybrid in RD, but RD has also taken up junior covered bonds that going forward will roughly offset what they are saving on that. But we have repaid our DKK 37 billion we had in state-guaranteed bonds issued with state guarantee, and they will contribute positive, but that will be in the fee income side with around DKK 70 million per quarter. No, the DKK 57, that is other. Sorry. Okay, that's very clear. Thank you very much. Claire Kane from RBC is online with a question. Oh, hello there. I have a couple of questions on the guidance as well. Just to follow up from Omar's question on NII, I noticed you said the growth impact from your reprice initiatives are now DKK 4 billion year-on-year, and it was DKK 3.5 billion at the Q1 stage. You indicated at Q1 that you felt rate cuts would probably negate this by about DKK 2 billion. So at Q1, we were looking for a kind of net of 1.5 year-on-year increase in NII. So I was just wondering if you could update us on whether the net effect is up or down relative to Q1. Then my second question is then on your Irish impairment guidance. I thought from Q1 that your guidance for DKK 5 billion-DKK 7 billion related to Ireland overall, so core plus non-core. Are you saying that this is just going to be the non-core guidance, and we should exclude whatever we think for core going forward? Thank you. In terms of your net interest income question, we guided in Q1 an impact from pricing on DKK 3.5 billion, then there was a negative impact from lower short-term rates, which you mentioned could be treated as roughly DKK 2 billion, giving a plus of DKK 1.5 billion. That is roughly correct. I would state that given our now DKK 4 billion, the net effect will probably be DKK 1.5 billion or perhaps a little bit lower than that. But still, as I mentioned previously, we expect our total net interest income in 2012 to be higher compared with 2011. Of course, there can be some minor deviations in relationship to that. Just to put clear our guidance on impairments in Ireland is DKK 5 billion-DKK 7 billion for Ireland in total, meaning Ireland and also Non-core Ireland taken together, taken from the second quarter going forward until the end of 2014. So you are right. It is a guidance for the full Irish impairments until end 2014, DKK 5 billion-DKK 7 billion. Thank you. Thank you. Thank you. That's very clear. I've got a question here from the website. They're saying, please can you give a little more color behind the lower impairment this quarter, especially with regards to the drop in Denmark and Northern Ireland. Also a bit color on the new Danish FSA rules on classifying impaired loans. One of your and then the question stops, but we can answer these questions. Okay. Impairments, I guess. Well, if you look at the impairments, it's true that the impact from the Danish FSA, the clarifications of the Danish rules was very little in our results, around DKK 100 million here in the second quarter. The reason for that is that we have been following pretty much the same rules for some time. When it comes to Denmark, I think that the drop we have seen now is partly due to the low interest rates we have in Denmark, and areas we can see that the SME impairments is down. We can see agriculture is down this quarter, but also impairments to private individuals has been reduced. As I said, the main reason is the low interest rates in Denmark. On Northern Ireland, we had a general trend in the first quarter coming from the fact that the change of our model back in Q3 2011, which increased the LGD, that had an impact on ratings of our customers, and that influenced our impairment in the first quarter. That was something that hit our book in Northern Ireland. This has not been repeated this time. If we haven't had that change in Q1, the impairments in this first quarter would have been pretty much the same as we see now in the second quarter. It's still dominated in Northern Ireland by commercial property including land bank. In terms of the Danish FSA's new impairment rules, they deal with both when you should make an impairment, and given that you are going to make an impairment, how you make the assessment of the impairment. As we have stated, it does not have any material impact on our impairments here in Q2. For the first half year, it's roughly estimated to be around DKK 100 million, and none of our big impairments have been affected by the new rules because we have on a continuous basis been, I wouldn't say conservative, but realistic in terms of how we value collateral, et cetera. The Danish FSA rules are perhaps strengthened, especially in relationship that if you have commercial property, you have to have valued a fair market price you can achieve within a sale, within a six-month period. We have already been doing that, and we are using substantial haircuts in our impairment calculations. As we also stated by Q1, we did not expect the Danish FSA new rules to have any significant impact, and that is also the case now. That is it. Thank you. Please, operator. Yeah. Simon Christensen from Nordea Markets is online with a question. Yes, good afternoon. I have three questions. You are right, and I cannot remember what page it is. But you are right that a capital efficiency program has benefited your RWAs by DKK 10 billion Q and Q. Could you comment on what is the full potential of this program? I know that Nordea has actually stated that their efficiency program could mitigate the entire Basel III impact. Should we expect the same for you? Secondly, on the LCR target, do you expect to be compliant also including or, sorry, excluding the liquidity that you raised in the two rounds of LTRO? Lastly, what do you consider to be a prudent solvency ratio in Danica? Would you pay dividends into the parent company down to that? Thanks. Your first question was in relation to our capital efficiency program. We still expect that there are some benefits to be achieved in that respect. As you may know, as an example, our Finnish subsidiary is not on advanced IRB, but on standard method. That is something we are looking into and working on to see if and when we can get our Finnish subsidiary Sampo Bank on advanced IRB. I will not give you any specific figure on the potential, but it is in the double-digit billions Danish kroner area where we feel that we can get improvements in our RWA. But it will take some time and will not come, so to say, overnight. Just like other banks, we are on a continuous basis working on capital efficiency program in order to be able to forecast and control the development in our RWA risk-weighted assets. You asked about our LCR compliance, which we are working on being by the end of the year. That will, of course, include the impact of what we have taken in the Danish and ECB LCRO. So that will be included there. You had some questions around Danica and the solvency ratio. The capitalization of Danica and any potential dividends from Danica is part of our capital strategy. I would prefer to come back to that in connection with our Q3, Q4 communication around our strategy. But you are right, Danica looks a little bit over-capitalized. Just to maybe add to the LCR question. Yes, it includes the LTRO, but should we exclude it, then we have collateral for other purposes. So it is not really relevant as such whether the LTRO is there or not. We can easily substitute that. Just for your guidance. Okay, thanks. Maybe just a quick follow-up. The U.K. banks have provisioned quite a lot for PPI compensation, and also this new case with the mis-selling of hedging products, which I believe Northern Bank is also involved in. They are looking into the smaller banks as well. Do you expect any charges from this in the second half? We have already made provisions for PPI, and I think we have added DKK 10 million here in the recent Q2 quarter. All right. Thanks. Andreas Håkansson from Exane is online with a question. Yes. Hi, thanks. I have a few questions. If we take the first one, you wrote in your RD report that you might see a downgrade from Fitch on your Capital Center T. Could you tell us if we would see a downgrade also from the loss rating agency, what would you expect the impact from that to be? Second question, somewhat related, I saw that you've been increasing your holding of covered bonds in the quarter, you're now DKK 224 billion. Could you tell us how much of these bonds are your own covered bonds, and also if you bought any of your own junior covered bonds? Then on the last question, when Nordea reported a few weeks ago, they said that a main driver of the Danish provisioning was the change from the Danish FSA relating to that they had to classify loans with above 100% loan-to-value as impaired. If I look at you seem to have close to DKK 50 billion of above 100% LTV in Denmark. I just wonder why we haven't seen a similar impact from you. Thank you. First, your questions relating to RD. I understood that you had a question, what would happen if the AAA we have got in RD on our Capital Center T, if that gets a downgrade, and whether there was a spillover effect to S&P and Moody's. Yes. It's right, we communicated that we have got this AAA rating from Fitch, and it's right, and we wrote that there is a possibility that Fitch, they are in the process of changing their models, may downgrade Capital Center T, so we'll not have a AAA rating from Fitch on the adjustable rate one year mortgages. That's right, that could happen in the fall, and we are prepared to deal with that. We would then accept a downgrade on that Capital Center from Fitch. In terms of S&P, we do not expect in the immediate future, any downgrade from S&P. Yeah. My question was more just to understand the implication of a downgrade. Let's say Standard & Poor's would downgrade their flex loans as well. What would be the impact if that would happen? Then either we would post more collateral, or we would accept the downgrade. Okay It's not in the horizon. Okay. What was then your second or third question? DKK 24 billion. Geoff Dawes from SG is online with a question. Sorry, we're not completely finished with our answers. We'll get back to the last questions. Our understanding is that you had a question in relation to the new Danish FSA rules and impairments and high loan-to-value issues. It is our understanding from the new Danish FSA rules that if you have a customer, and if you have a loan-to-value of more than 100, you do not necessarily need to make a write-down if the customer's financial situation is prudent. Next question, please. Jeff Dawes here from SocGen. Yeah. A couple of questions from me. First of all, if we look at the Irish division, now that we have separated non-core from core, does that change the way you are able to book provisions and impairments in that division, i.e., can you front-load things more now that we have a non-core division and it is not part of your ongoing operations? Second question would be on the Danish CRE book. You mentioned in the press release that the credit quality has stabilized somewhat. Is that down to lower rates, or is that an early sign of the improved house price outlook that you mentioned in the presentation? Those are the two questions. Thank you. The Irish non-core, no, that will be treated according to our standard accounting practice. It does not imply any kind of front-loading of the impairments. Of course, we hope very much that within a couple of quarters we can see impairments coming down, but that has nothing to do with front-loading of the impairments. Okay, the accounting treatment is exactly the same even though it is non-core now. Yes. Yep. Then you ask about Danish commercial real estate, and we are seeing a gradual flatting out of real estate prices in Denmark. We hope that there will be a gradual improvement in the coming quarters. But the stabilization in credit quality, is that down to that improvement in house price outlook that you have, or is that purely a function of rates? You are talking about interest rates? Yes. Yeah. It is a combination. Of course, the low interest rates in a way puts a floor on the prices. But we expect very much that prices will stay flat or roughly flat in the coming quarters. Great. Very clear. That is it from me. Thank you. Andreas Håkansson from Exane is online again. Yeah, fine. Sorry, I'm back. I think something happened, so I didn't quite get the answers I was looking for. Could you just come back to the 100% LTV loans? Nordea quite clearly stated that they view that it's no longer the cash flow of the households, it's actually the collateral value that has an impact, but you haven't done any such changes in the quarter. If we can just follow up on that one. Yes, okay. First to put things clear, just because you have a loan-to-value of above 100 does not necessarily mean that you need to put aside impairments. If the customer has sufficient cash flow, if the customer has proven financials, then you do not need to put aside impairments if the customer is in proven financial condition. But of course, if you have a loan-to-value of more than 100%, and if the customer has a weak economy and is not able, as an example, to cope with rising interest rates, then we'll be look into the case, and it may be subject to impairments. I think in that respect, from what you are saying, I think we are in agreement with Nordea, but you should also bear in mind that over the last previous quarters, we have been through these type of customers and made impairments in a number of cases for weak customers with high loan-to-value houses as an example. Is DKK 50 billion roughly the right number in how much high LTV retail loans you have in Denmark? Pardon? Is 50 billion roughly the right number in high LTV retail loans in Denmark? You can see on slide 25 as an example in our RD, where we have the major part of our mortgages and real estate loans on page 25 on the supplementary pages. You can see that we have, as an example, we have 1.5 percentage points, that is roughly DKK 10 billion with a loan-to-value of more than 100, and we have in total DKK 10 billion with loan-to-value more than 100, and we have a couple of billion with loan-to-value for with customers with high or weak ratings. That is just the portion above 100, right? The entire loans, is that DKK 50 billion or? We have not got that number here with us. Okay. The last question I did not get an answer to either was you said that you have 224 billion of covered bonds in your portfolio today. How much of that are your own covered bonds, and did you buy your own junior covered bonds? We have not bought any of our own junior covered bonds issued by Realkredit Danmark. The number of outstanding covered bonds, I have them in a second, if you just will let me be, that is around 153 billion. We have stated that in the presentation on slide 33. Thank you. Johan Wolter from Deutsche Bank is online with a question. Yes, good afternoon. Johan Wolter, Deutsche Bank. A couple of questions from my side. First, the strategic overview that you mentioned you will announce or finish in Q3 and I guess announce in Q4. Will that include new financial targets? That is my first question. The second one is, I think you mentioned even today on Reuters in an interview that the improved rating is one of your top priorities, and also that looking at the capital of the bank and other issues around the loan book are important in that process. If it is possible, if you could elaborate a little bit about what that means, looking at the bank's capital. My third question is the loan loss guidance imply basically flat loan losses rest of 2012 compared to the second quarter, and that is possibly somewhat more negative than in the first quarter. Is this the way to read the new guidance, or are you just trying to be conservative here? Thank you. In terms of financial targets, this is of course something that we will discuss carefully with the board and also discuss exactly how we want to communicate this externally. Personally, I do think that fixing and ensuring a just single number is oversimplifying what it is to actually run a bank successfully. Obviously we will consider coming out with a range or some other guidance because basically, it should be as attractive to invest in Danske Bank as in one of our peers. Improved ratings, you are right, that there are a couple of other things that we can do. First and foremost, obviously, we need to get our results up. We will try to do that in any case. Considering rating bureau, there are a number of other levels, and you have just mentioned a few of them, but with Standard & Poor's, we actually have a low capital or RAC ratio, as they call it. Interestingly, because regulatory and in terms of other rating bureaus, actually our capital is strong, but S&P has another model. We are looking into how we can come out better in their model, and that is going to be, for instance, how we in the future will design our T1 or T2 capital so it is compliant with S&P's RAC model. So that will be one thing. Moody's, of course, we have the very political issue about systemic support. We think still this is very wrong, and we are discussing that with them, but we also see whether we politically in Denmark could get some more clarity exactly how you deal with the SIFIs in Denmark, which may give us some help there, but this is more a qualitative kind of assessment, so no guarantees here. We also see that the way that Moody's view loans at risk and view the loan book, the way we are treated is a little bit different than our peers. The way we account for our loan book is more conservative and maybe too conservative compared to how others do. So this is something that we need to study a little bit further because it's good to be conservative. On the other hand, if you're conservative to extent that it hurts your rating and others are not that conservative, we need to look at that. So that you can say is a technical accounting treatment. There will be other smaller and bigger things that we need to look into. So there's a number of things. It is important for us that we get, especially our short-term rating back, which also mean that we have to have our long-term rating back with at least one to two notches. I think you would- Then you asked about our guidance on loan losses for the full year, where we have guided that it would be approximately at the same level as last year, and you're right. If you just do the numbers, it implies that our impairments in Q3 and Q4 could be exactly the same as they have been in Q2. As you of course, is fully aware of course, it may deviate from that, both on the upside and downside. But it is right, our guidance is roughly that Q3 and Q4 could be on average equal to Q2, but of course, we hope that it can be a little bit better than that. But we have also seen that there can come minor surprises as we saw in Q4 last year. You can't take the numbers just very specifically, but we hope very much that we can perhaps do a little bit better than that. But our guidance is that the impairments will be roughly the same as last year. I have Thank you. I have another question from the website, a follow-up on that. This question is, I can see that impairments within transportation and shipping rose in second quarter. Can you give any guidance for the rest of the year? Do you see these increasing? We cannot give guidance in such a very specific narrow area. No, sorry. Okay, operator. Nick Davey from UBS is online with a question. Yes, good afternoon, everyone. Nick Davey from UBS. Just three questions please from my side. First, if I could follow up on the liquidity point, you talk about aiming for LCR compliance by year-end. Could you maybe just expand a little bit around that? You talk about having DKK 300 billion or so of eligible collateral today. Could you talk us through a little bit around what you deem as eligible collateral? I also note from your balance sheet that the balances of cash are around 1% of Gross assets. Do you think there needs to be a bit of a mix shift in how you hold your liquidity to meet LCR? Could you give us some sense as to whether or not this is baked into your net interest income guidance, any efforts to build up on liquidity? The second question would be on funding and the balkanization of deposits, which has become a bit of a European theme. I just wondered if you could talk in general terms, please, about how you view the funding of your various divisions and whether you have any conversations with your domestic regulator about any perception of, let's say, transfer of Danish deposits funding other Nordic businesses. The third question is around capital, just around the absolute level of core capital, which is stable on the quarter. There has been quite a big swing in your pension obligations at fair value, I think around DKK 1.2 billion or DKK 1.3 billion negative this quarter relative to last quarter. If you could just talk us through the drivers of that and any sensitivity, please, on interest rates or other drivers that can help us forecast that in the future. Thank you. In terms of liquidity and your LCR question, we will work on that during the second part of the year. We are not so far away from being LCR compliant. It will include our own issued RD, Realkredit Danmark bonds. We will also consider, when possible, issuing more funding during the second part of the year. Then we will also work on our balance sheet in order to get us to a little bit longer liquidity and hence move us in the direction of being more LCR compliant. We are quite confident that will be that by the end of the year. In terms of funding and deposits, we are on a continuous basis having conversations with our regulator, the Danish FSA. They are, as all regulators should do, asking questions on our deposit and lending both in Denmark but also in Norway and Sweden and the other countries. We are having, on a continuous basis, a constructive dialogue with the Danish FSA. Then you asked about our capital core tier one. You are right that there is a deduction in our capital ratio from a movement in our pension obligations to some of the defined benefit schemes that we have. Also historically, this impact on the core tier one has moved in the range of DKK 500 million-DKK 1 billion. It is mainly the very, very low interest rates we have experienced that have given rise to a deduction in our core tier one. Of course, it is something we are aware of and continuously looking into whether we should hedge it more or less, how much we should have in equities, and so on. Unfortunately, I cannot give you any specific sensitivity figures you asked about, but it is a focus point. This quarter's change in value is not outside what we have seen previously. Thanks very much. Three very clear answers. Could I ask just one follow-up, please? Do you think it is realistic that you would get regulated on LCR in each of your major currencies in time? We do not expect that in the short term. Thank you. Riccardo Rovere from Mediobanca is online with a question. Good afternoon to everybody. Just a couple of questions. The first one is on NII. You indicated that this year you expect NII to be somehow higher than last year. But with regard to 2013, if the situation remains what it is today, you are going to be operating for the whole of 2013 with much lower short-term rates in basically all the regions where Danske is operating right now, especially Denmark, Finland, and I would say Ireland, too. Do you think is it the right way to look at it? Would this generate a lot of pressure on the deposits? Do you think there would be any way for Danske to compensate for this? This is my first question. The second question is on Danske Markets. On your report, you mentioned that there was a good customer-driven activity in this quarter. Would you be able to quantify somehow what portion of the amount of revenues we have seen from that division could be related to customer-driven activity? If I may, a final question. Would you expect the Danish regulator one day to collaborate and comply with the so-called Swedish FSA mostly on the capital liquidity and funding side? Thank you. You asked about our net interest income and the impact of lower short-term rates, and that creates headwind, definitely. But as I mentioned to one of the previous questions, we have introduced price increases where the full impact is not included yet, and we have also more price increases to come, which is not at all included in the Q or in the first half-year results. So we have some positive contributions to our net interest income in the horizon, which we, according to our own estimates, should more than offset the negative impact from the very low rates you are referring to. So our guidance is still higher net interest income for the full For the full year. Sorry to interrupt. Is this valid for 2013 too? Not the guidance, I mean, in general terms, repricing offsetting the margin, the pressure on the deposits. We have not provided any guidance for 2013. That will come later. Some of the price increases we are now doing will also have impact in 2013. But what will be the short-term interest in 2013, we don't know. So guidance for 2013 will come later. Okay. I was only talking about 2012. Then you asked about Danske Markets, and your question was, how was customer income compared with, so to say, more risk income, and we do not give any specific guidance on that, and it varies very much from quarter to quarter. But roughly speaking, it's 50/50. Okay. It varies from quarter to quarter. Then you asked about our capital, whether we could expect something like what the Swedish authorities are proposing, and the simple answer, we don't know. We have a SIFI committee in Denmark, which is currently working and has been asked to come with a proposal later this year, and that is where we currently are. We are waiting for this SIFI committee to come out with their proposals, and then we'll take it from there in a dialogue also with the Danish FSA, and if there will be some changes of the law, we'll take it from there. Basically, we don't know what will be our capital requirements going forward. Sorry to cut in. When we discussed this subject with Danish politicians, our view is that they should follow the EU track, being both in terms of levels and speed. Whether we'll be successful in that or not, we don't know. If I may, and then I will stop, I promise. Whatever the number you will be given one day, is it fair to assume that this number will be enforced probably by the end of 2013 and not the end of this year? The longer it takes, the more good arguments we get for that any additional charge should be phased in over a period of time. But if your question is whether we should expect any hard requirements by the end of this year on capital, I find this quite unlikely. Okay. Very clear. Thank you very much. Jacob Kruse from Autonomous is online with a question. Hi, it's Jacob from Autonomous. I guess I just have one or two questions. Firstly, on the restructuring. There was some talk in the press this morning that you were cutting 100 branches, and I think you said on the press conference 65 to 70 branches in Denmark to be cut in 2012. I just wanted to confirm if that's correct. Also, are these branch reductions which will also come with staff reductions, or is it more of what we've seen so far, which is a reduction of the number of branches but no real change to the number of staff in Denmark? Then just a technical one on the non-core portfolio. Is that a static portfolio in Denmark, or could you move further stuff from the core portfolio into the non-core if the core portfolio were to deteriorate? Thank you. On the branches, there has been some very thick numbers reflected in the Danish press, but what we have confirmed is that this year in Denmark, we expect to close 65 to 70 branches. That is what we have planned for now, but also indicating that this development will continue. This reduction plays into our saving targets, both in terms of reducing number of headcount and the DKK 2 billion saving target that we have. It's an element of that. Non-core. In terms of the core/non-core portfolio, as for now we see the non-core portfolio quite fixed as it is. We do not plan to move more business into that line. You should expect it to be as it is right now. Okay. Thank you. Just on the branch closures, that is roughly 25%, I think, of your branch network in Denmark. Does that have any impact on your revenues? Is there any kind of losses from reducing your distribution network that aggressively? Basically, no. It will be very limited. You will not really see it in the accounts. Our experience is that we maintain the customer relationship because the customers are transferred to the closest branch, and they generally accept that. So there should not be really any significant effect on the top line in terms of closing branches. Okay. Thank you. Okay. Claes Tert from SEB Enskilda is online with a question. Yes, good afternoon. Just to follow up on the last question. Should it be understood that the Danish branch closure is already included in your DKK 2 billion cost-saving targets? That's the first question. The second question is relating to the very large fall in deposits in Ireland. From around DKK 30 billion by first quarter 2011, down to DKK 10 billion. This is only on corporate deposits, DKK 10 billion in the second quarter 2012. Could you elaborate how come that you have seen this? Because even though price competition, as you elaborate, has been tough, it seems as a very steep decrease in the Irish deposits. Your first question was about the closure of branches. As I think Kolding mentioned, that's an ongoing process. The impact of the closure of branches and the cost savings that lead to is part of our cost guide, is part of our DKK 2 billion, 2,000 FTE program running for 2012 and 2013. So that is part of that. It's not something extra on top of that. It is part of the program. Then you're right, and I also think that we have mentioned in the report that we have lost due to the rating, and some customers are very rating sensitive. We have lost some deposits. From Q1 to Q2, we have lost roughly DKK 40 billion deposits, quite rating and price sensitive deposits, and that also includes Ireland. But in terms of Ireland, it has also been a fact that there's been growing price competition from the other Irish banks, and that is part of the reason for the drop in the Irish deposit you are referring to. Just one follow-up. Do you think you are almost discriminated in the Irish market? Because it seems as a very large drop, also based on the fact that you have chosen to close all of your branches up there. No, we do not feel that we are being discriminated in Ireland, no. Okay. It could be added that we had a huge inflow when the crisis in Ireland peaked for the Irish bank sector back at the end of 2010 and beginning of 2011. Some of this money is now disappearing again, and that is not a complete surprise to us. Okay. Thank you very much. Brijesh Barot from Arctic Securities is now online with a question. Yes, thank you. Four questions, if I may. Related to insurance, I find it interesting that you see intensified price competition in Denmark now. Could you just elaborate a little if you see that within both traditional insurance schemes, unit-linked schemes, and what have triggered this price competition? Second question relates to a statement previous on the call that you find Danica probably slightly overcapitalized. Is that based on expected Solvency II rules as you see it? The third question is also related to the previous question on the call regarding the swing factor on pension obligations at fair value in your capital statement. How do you see the current valuation related to possible IAS 19 effects with the fair value on if this includes the low rates as you see them now in that respect? The fourth question is just regarding the repayment of the high state hybrid in Realkredit Danmark, if that was paid back on face value, are there any fees or anything involved there? Thank you. You had four questions. The first one was regarding the price competition in the pension business, and that has been ongoing for some time, and it has intensified quite a bit. Most recently, it's both in the unit-linked and traditional business, but it's also on risk products, prices for death coverage and disability. So it is a general price competition where Danica then in some very few cases have said that here we are on an unhealthy territory. So they have refrained from, so to say, making some quotation. So that is both in unit-linked and traditional business, but also on the risk products. Then you asked about Danica. When I stated that Danica looks a little bit overcapitalized, then it's based on the observation that the official solvency requirement in Danica is around DKK 8 billion-DKK 9 billion, whereas the capital we have in Danica is around DKK 20 billion. So that is why we say that Danica may look a little bit overcapitalized. Then you had a question relating to our deduction for defined benefit pension, and I couldn't 100% follow your question, but I think perhaps Martin can add something perhaps. I want to clarify as well. What was your question regarding that? Previously, one has given some estimates regarding potential IAS 19 effects when one discounts the liability side with the lower market rate than a potential corridor rate that was previously done for pension obligations. With this deduction here, you see you have lowered the interest rates for your pension liabilities and increased the liabilities in that respect. Is this including an IAS 19 effect or would it reduce the possible IAS 19 effect having stated the capital like you have today? Let me come back to that question to you bilaterally. Is that okay? Yeah, no problem. We will do that. Your fourth question was the state hybrid of DKK 2 billion repaid in Realkredit Danmark. That was repaid at face value. Okay, thank you. Okay. We will take one more question. Christopher Rosquist from Barclays is online with a question. Hello. If I can just follow up a little bit on the outflow of corporate deposits. Is that trend still ongoing? Also secondly, if you would be downgraded further, would you foresee that the outflow and course, any interaction to that would be of a similar scale, or would it be more material? Then also on deposits, I think in Denmark and Norway, you've had a positive trend, markets which, given what's happened to some of your competitors, who have been quite aggressive on deposits in those geographies. Is this a new level of plateau, or is it more of a trend where you would expect further growth in deposits going forward? Then if I just may, on two more detailed questions on costs in Ireland and Finland, on other costs in Ireland, if that's just a restructuring thing, and on personnel costs in Finland, if something special has been going on there because it looks like it's been going up this quarter. Thank you. Okay. In terms of outflow of deposits, it's our impression that most of the rating-sensitive deposits we have had has left the bank. It's our impression that is something we have behind us. Then you had some questions relating to cost. Yes, there are some restructuring costs we have put aside in Ireland, I think it's roughly around DKK 200 million. You're right, in Finland, there are also some restructuring charges, and Finland have been closing branches and let some people go. There are also severance payments in Finland. That's part of the reasons for the higher cost in Ireland and Finland. So those will normalize in the next quarter? Sorry? The cost level in those two geographies will then normalize in the following quarters? Yeah. Roughly speaking, yeah. Okay. Thank you. Well, thank you very much for listening in here and then some very good and insightful questions. Have a good day. Thanks. Thank you.