Earnings Call: Q1 2012

May 10, 2012

Summary

Q1 profit was DKK 800m as stronger net interest income and trading offset high impairments and weak Danica earnings. Full-year profit was expected to remain low, with major cost restructuring and further Irish losses ahead.

Welcome to the Danske Bank Q1 report conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to your host, CEO Eivind Kolding. Sir, you may begin. Thank you very much. My name is Eivind Kolding. Started as CEO in Danske Bank mid-February. I have been looking forward to this event, and even though it is an indirect way to address all the analysts, I certainly look forward to the interaction. With me here I have our CFO, Henrik Ramlau-Hansen, and Head of Investor Relations, Martin Gottlob. We have a small presentation that we would like to take you through, and after that, we will be open for some questions. The main points are that we want to present our financial results, talk about the timing and scope of our cost savings. Give some comments to our new organization, and also confirm our outlook for the rest of the year. If we first turn to the key points and the headline of our results. We Just do it. Okay. Now on page 3. We have a strong trend in our net interest income, increasing 11% over Q1 last year to DKK 6.2 billion. It is really our margin actions that we see taking effect here. A very strong trading income in this quarter as well, DKK 3.2 billion. Above what we normally see, but Q1 traditionally is a strong quarter, but not a level that we can sustain for the rest of the year. Danica's result remained quite low. We are not taking any risk allowance. The expenses are a bit higher, but that is primarily due to a one-off goodwill write-off in Sampo in Finland of close to half a billion Danish kroner. Otherwise, we are in line with guidance. Then, impairments still quite high, but a drop of DKK 850 million compared to Q4 last year. So all in all, we end up with a net profit of DKK 800 million, slightly above what we saw in Q1 last year. Turning to page 4, giving some details on our net interest income. We have an increase over year-on-year of 11%, and it is really a confirmation of that our increase in lending margin are taking effect. We have been quite aggressive in price hikes here in Denmark, but also in some other countries where we might still have a potential to do more. This is on the backdrop of a very low interest level in general, which of course, depress our deposit margins, meaning actually we are slightly swimming against the stream here. But all in all, that means that quarter-on-quarter, Q4 to Q1, that we actually more or less have unchanged net interest income. If we turn to page 5, there's detail on our net fee income. Slightly below what we saw in Q1 last year. A couple of reasons for that. We have slightly less activity on our lending, which is reflected here, but also a shift in investment patterns, more moving into fixed interest from fixed income from equity, which provide us a bit less income. That's the main reason, but it's more or less as we expected and in the area where it should be. Turning to page 6. Again, highlighting a very strong quarter for our trading income, Danske Markets, DKK 3.2 billion. Partly spurred by the ECB action LTRO program, which created some activity. Actually, in Q1, we didn't have a single day that was loss-making Danske Markets, which we were quite proud about, and we did not really take any significantly increased risks through that period. Our group treasury came down by DKK 500 million compared to Q1 last year due to increased costs. Turning now to page 7 and talking about our Danica business. Quite low net income, DKK 184 million. Underlying earnings came in at DKK 561 million, but we did postpone our risk allowances, as we're not sure exactly whether we can actually take it to the P&L through this year. We still have DKK 1.5 billion at the shadow account, so an income we definitely hope to take in at some point, but at which point will still be quite uncertain and definitely not all of it this year. Moving on to the expenses and page 8. You see at the graph development in the headcounts. We already have taken quite a significant reduction over the last 2-3 years. More than 2,000 positions have been eliminated, and as many of you know, we have a plan for another 2,000 positions to go, basically 1,000 this year and 1,000 next year. The reorganization that I will address later in this presentation allows us to accelerate the program, meaning that it's not a 3-year program anymore, but it's a 2-year program. Otherwise, expenses more or less in line with guidance. IT expenses came down DKK 100 million due to savings with our contract with IBM. Then we have some movements in our deposit guarantee schemes, where we pay our fees to the financial sector in Denmark, which are moving a little bit in the adverse direction this quarter compared to Q4 last year. Moving on page 9, that is a detail of our impairments. As you see, there's a drop from Q4 of DKK 850 million, but certainly an increase compared to Q1 in 2011. There's no doubt that the negative turn in the economies in the second half of last year did have an impact on our impairments. But we are now seeing again a declining trend, which we expect to continue. Ireland, of course, is a story of its own, where we are very much exposed to the commercial real estate. As part of what I will explain later on, we do expect still extraordinary impairments to the tune of DKK 5 billion-DKK 7 billion to take place over the next 2-3 years. After that, we should actually be at a normalized level. So still quite high impairments to happen in Ireland. The other outlier here, that's Denmark, improvement, but still the SME and the private segment are a little bit higher than we see in other Nordic countries. When we benchmark our performance in Denmark, relatively speaking, we are actually impairing a little less than our main competitors in this market. We move on to page 10. I'm talking a bit about our loan quality. In Denmark, we impairment 6% of our loan book, and we have made reservation of 31% of the impaired loans. In Ireland, we impairment 44% of our loan book, and we have made reservation of just over 50% of the impaired loans. But as mentioned, unfortunately, as we do expect further price drops in the Irish markets, we also expect more impairments to come over the next couple of years. On to page 11, talking about our capital ratios. They are still quite strong in a European context, with a core tier one of around 12%, obviously helped by the equity infusion we got last year. We are actually quite content with this level for now. We are monitoring what is happening on the regulatory front. What we will need to take action in 2014, where we need to do something about the state hybrid. We can keep it, but it's expensive. But we don't expect to have specific plans for how we will do away with it before in 2013, and we should be all right until then. Our funding for 2012 is in place. We have taken advantage of the various programs from ECB and the Danish National Bank. Overall, we see we have a very strong funding situation quite ahead of plans. Now turning to page 12 and our new organization as announced today. We will leave the traditional geographical setup that we have had, where each country, so to speak, has been its own business unit, and will now in the future organize around customer segments. By that, we achieve a number of quite clear advantages. First of all, being more focused on the customer segments enable us to be serving those segments faster at a common platform across our entire geographical scope, being able to launch new products simultaneously across the entire platform, and having much faster response time between the front line and other functions in the bank. So seen from a customer perspective, this really enables a much faster and more agile bank. At the same time, we will save some costs because we do not need to have full functioning head offices in all the countries. We can do it in a more simplified and more agile fashion. Some costs will be taken out, and that's why we can accelerate our cost program. We have, as you see on the slide, already appointed the business unit heads. Those three will all be part of the executive board. Two of them are here already, that's Tonny Thierry Andersen and Thomas Borgen. Lars Mørch will join the group from now presently heading up the Swedish activities. Then we have a number of support functions. We have our group credit where we are quite far now in the recruitment process. It will most likely be an external candidate. Of course we have our group CFO and those two are also members of the executive board. In connection with this reorganization, we have decided to go to one brand. Obviously, if we do not organize ourselves geographically, it doesn't make a lot of sense to have geographic brands. We will be called Danske Bank through our geographical scope as from towards the end of this year, meaning that the Sampo name will go away in Finland. That is why we had the impairment of the name right. Fokus Bank will disappear in Norway, and Northern Bank and National Irish Bank will go away in the Irish businesses. We can really brand ourselves and get the efficiencies out of that in the times to come. Page 13, just highlighting again a bit about the advantages which I already have mentioned. The customer focus, the opportunity to cut more cost, but also creating a basis for stronger financial results. What will happen more internally and not that transparent from the slide just shown is that we will have a more structured focus on our portfolio management and capital allocation, where we see that a more rigid structure actually will enable quite some opportunities for us to increase our return on capital invested and allocated. Page 14, highlighting again a few of the advantages of the reorganization that we can really get the best products out. We can benefit from good and harmonized customer distribution channels and utilize our competencies across the common platform. Shorter time in dealing with customers and a faster answer, either yes or no to their credit application. Again, we have a very good stronghold on the technological front, and we can really get that leveraged far better in the new structure. We already have all our businesses running at the same IT platform, but we have not been able to harvest all the advantages of that in the old structure. We will be able to do that in the new one. Turning to page 15. This is about restructuring and impairment outlook for Ireland. What will happen in Ireland is that we will separate our commercial real estate loan portfolio from the rest of the bank. It will be organized separately, meaning that we have a separate focus going forward on the non-core part, that is the commercial real estate portfolio, and the core part, which is the rest of the activities which are actually quite interesting and can be quite profitable over time. Today, where it is all in one organization, obviously we see that resources and focus only goes to the problematic part of the bank, and we miss the opportunities really to leverage what we have of positive things going for us. That will be one division that we will make, and the non-core bank will be, as mentioned, organized separately. The main focus here is actually to recover as much as possible, not necessarily as fast as possible now that it is a separate focus, and it will not interfere with the rest of the bank. At the same time, we will merge the organization in Northern Bank, Northern Ireland, and in Ireland gaining some further efficiencies, and this will be headed by the Northern Bank in Northern Ireland, which is the bigger one. They will all be, as mentioned before, rebranded to Danske Bank towards the end of the year. In addition, we have mentioned and made our estimates of further extraordinary impairments to come, and that is, as mentioned, DKK 5 billion-DKK 7 billion over the next 2-3 years. That is in addition to the almost DKK 20 billion that we already have impaired. It is quite a significant dent for the group, but now I think all this should hopefully create clarity about Ireland, about its future strategic role in the group, and what the losses still to come. Hopefully going forward, it will not be so much of a question mark. We know what we will build on. We know what we will wind up, and we will know what we will have of losses, primarily in the non-core part. Turning to page 16, the last before the questions. We still expect, obviously, the net results and the net profit for 2012 to be at a low level. We have higher net interest income compared to last year, as already guided, but obviously the very low interest level do depress our deposit margins a bit, so we are not getting the full effect to the bottom line of what we actually do of management actions. Low result for Danica, still uncertain whether we can book the risk allowances, and the cost-saving programs, as mentioned, will continue with a focus on completing it in 2 years. Impairments will be high for the remaining part of the year. I think it is also important to mention for what will happen during the year is that we will complete the strategy that we are making for the bank by the end of Q3. This reorganization that you have seen, you can consider as the first part of the strategy rollout, getting the organization in place. When we have our targets, objectives, our customer propositions, vision, missions, and so on, ready by the end of the Q3, we are really ready to move and will not be distracted by people have to move around and getting new position because at that point of time, it will already be behind us. I guess this is as much as I want to cover here. It has been a fairly brief review that we have had, but you can study the slides afterwards, and of course, as always, after the Q&A session, you can go to our investor relations with further question. With these words, we are ready to take the questions. Thank you. We will now begin the question and answer session. If you have a question, please press star then 1 on your touch tone phone. If you wish to be removed from the queue, please press the hash key or the pound sign. If you are using a speaker phone, 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 touch tone phone. Christian Hede from Jyske Bank is online with a question. Yes, good afternoon. This is Christian Hede from Jyske Bank. I have a couple of questions on both writedowns in Denmark and Ireland, and finally on your capital. First of all, the writedowns in Denmark, you are writing in your report that you do not expect any effect from the new rules from the Danish FSA. Could you give a few words on why that is? Have you been very conservative? On the Irish writedowns, I would like to get some more assumptions on the DKK 5 billion-DKK 7 billion figure. I can see there are a few assumptions on the slide, but could you give us a couple of words on that as well? On the allowance account, I would like to know when we should expect the allowance account to start dropping. That is, when should we expect losses to be booked? I assume that you cannot keep on building up the allowance account. Finally, on the core tier one equity ratio, what is your expectations for this? What would you like to have of the level? Now you have 12%, which I assume should be enough for any new rules coming about. Where do you see yourself in a couple of years? Is 12% where you want to be, or do you want to be even higher? Although the rules will probably be somewhere between 10% and 12%. Thank you. Okay. Let me go through them one by one. In Denmark, you are right that we actually do not expect to have to make extraordinary new writedowns, because we are, as we see it, already aligned with the policies laid out by the FSA. This is really something that should be hopefully, quite surely a non-event for us. In Ireland, the main driver for the impairments, that is the real estate prices. We still see that they are dropping. What we have put in the message that we see and what we anticipate is a drop from top to bottom around 70%. We still have around 15 percentage points to go on that trajectory. If that will happen, that is how we see that we will have these additional impairments. So it is very much to the real estate prices where we are still bearish about that. Overall, we do see signs in the Irish economy that are positives. Export industries are performing well. Real estate prices in the most attractive areas are apparently bottoming out. What we need to see is a bit more private consumption to happen before we can really be positive about the development. So a couple of tough years still ahead. I will jump the next question and go to the last one about the 12%. I think we have the liberty still to await the development of capital requirements coming from the regulators. It is our strong advocacy in Denmark that Denmark should follow the general EU path at the EU speed and not take any separate actions. I think that is at least understood by the politicians here. Only when we know what will be required, we will put out our targets. Of course, there are different forces here. Well, some would like to see high numbers to have a very solid bank. Others would like to see someone in the lower end in order to improve our returns. We will actually not commit anything before we know where we are, but the point right now is that we are quite well capitalized. Then you had a very technical question about allowance build up and build down, and I am just looking at Henrik Ramlau-Hansen who will comment on that part. I think it will still take some quarters before you will see a drop in the allowance account. I can just add that we do make some write-offs every quarter. This quarter we have written off DKK 1 billion. in Q4 it was almost DKK 4 billion, and this fluctuates quite a bit from quarter to quarter. But we are making write-offs every quarter. Okay. We are ready for the next questions. Thank you. Omar Keenan from Nomura is online with the question. Good afternoon. Thanks very much for taking the questions. Just two questions if I can, please. First, on net interest income. You have made good development on lending margins, but it looks like Denmark NII still fell quarter-on-quarter. You have announced another round of rate hikes recently. How should we think about developments going forward? Do you think that from here, lending margin increases that you are putting through outweigh any further deposit margin pressure to come? Can we expect a positive development there? Then just secondly, on Ireland and the DKK 5 billion-DKK 7 billion number that you gave for guidance for write-downs up to 2014. You made some comments that you wanted to dispose some of the non-core division assets from Ireland quite quickly. Should we think about that DKK 5 billion-DKK 7 billion as a risk budget for losses and does that mean that will be front-loaded quite heavily this year? Thank you very much. First, on the net interest income, we still see that the margins is trending upwards with the actions that we have already taken and the actions that we have planned. There's a positive uplift in that. I still think, that's my personal belief, we can do even more, but now it's not things that we have actually initiated at this point of time. I do see in our markets, not least outside Denmark, that there is some further work to be done there. It's too early to book it, but we will certainly press forward to see how we can do even more in this area. Even the actions already taken will actually lead to an upwards trend in the margins. On the write-down or the impairments to come in Ireland, I think it's important to stress that what we do now is just to separate organizationally the bad loans, so to speak. We have no plans of selling it. Yes, we would like to, but it's not really feasible at the moment and probably will not be so for some time. We expect to sit and recover on that portfolio for quite some time. So those DKK 5 billion-DKK 7 billion is actually what we expect to be true impairments still hitting our books on that portfolio. Thank you, and next question. Claire Kane from RBC is online with a question. Hi, good afternoon. I have another question on Ireland and also on net interest income guidance. In Ireland, can you talk to us about some of the trends you're seeing on the residential mortgage book and what your assumption are in terms of arrears rather than just price declines? And whether or not where you see ultimate provision coverage going, because I think you're about 6% covered on your residential mortgage book now versus someone like Lloyds who's already at 15%. So there are still some quite differential in views, I would say, on where you're guiding to on future loan losses. Secondly, on the NII, you've guided to a DKK 3.5 billion increase growth from the repricing efforts you've done. Can you give us some indication of what the net will be, what your assumptions are on how much of that will be defeated by the rate cuts, please? Thank you. First, your question in terms of our guidance, where we are writing that the price initiatives we are taking are increasing other things equal our NII by DKK 3.5 billion. I think we have also mentioned that you should take into account also the rate cuts that took place at the end of last year, where the ECB lowered their rates by 50 basis points and where also the Danish Central Bank actually lowered their rates a little bit more. It's difficult to give an exact figure, but there's no doubt that we have headwind from these rate decreases up to around, let's say, DKK 2 billion. That will be a reduction. You should not expect our NII to increase by DKK 3.5 billion, but they should for the full year still increase, and that's also what we guide for the full year. We talk about the arrears in Ireland. Our arrears at the end of Q1 is 3.1% measured as numbers. If you take the volume, it's 5.1%, and that is compared to the market, which is above 10%. That's Q4 numbers. We haven't got the Q1 numbers yet for the market, and they will probably tend to be higher. So we still have arrears, which is much lower than the market. But of course, we expect them to continue to increase, as we have seen now for a number of quarters. As we just mentioned, when we gave the guidance on the future impairments in Ireland, we also said that we expect that the housing prices will decline from peak to trough by 60% compared to 70% on the commercial property side. That of course, will lead to the arrears going up further from the current level. I believe that the market right now is down close to 50%. Okay, thank you. Okay. Welcome. Next question. Simon Christensen from Nordea Markets is online with a question. Yes, good afternoon. I heard you say that there is still potential for further, let's say, margin expansion outside Denmark. Does it mean that the potential in Denmark is gone? Secondly, I have a few questions on credit quality. You see very significant rise in NPLs in Ireland and Northern Ireland, roughly 3 percentage points Q and Q. Also we see in Realkredit Danmark that their arrears rise by 12 basis points from a low level. But I think still it is a high Q and Q movement. Could you please comment on that and also give some flavor on how you see the personal insolvency bill in Ireland? Lastly, could you comment on the Danish agri book? I can see you have 64% reserves on pig farming and 28% on agri in total. It seems quite high. Thanks. First on the margins. There is still more to do in Denmark on a selective basis, but I think that we have probably been the most aggressive bank in driving that. Other banks are following, but there is more to be done in Denmark as well. It is my personal opinion that we have not seen the market leaders being as active in the other Scandinavian and Nordic markets as we have been in Denmark. We might see whether we need to take a lead in some of the other markets as well. There is a difference, but there is still more to be done. On the Danish agri sector, we are not that exposed relatively to that. I think we have a fairly good credit quality. I think we are quite well-bolstered when it comes to that. It is not a major concern for Danske Bank. Your second question, I think I will leave to Henrik Ramlau-Hansen. You also had a question on Realkredit Danmark, where the impairments is picking up a little bit, and that is not based on any specific issues rather than house prices are still going down, and that puts pressure on some disposable income from any households, et cetera. But it is not at any alarming effect, and we still have very low arrears, although they are picking up a little bit. We more treat that as a reflection that house prices gradually continue to decrease a little bit. You should also expect impairments at that level or at an elevated level in some of the coming quarters, but nothing alarmingly. Can I add that we already last year made some collective impairments to cover increases of the impairment of Realkredit Danmark, and that is actually what is happening now that we have now moved these reservation we made to become specific. The net number is relatively low. We did also that in the Q4, and we have now done it again here in Q1. Was that all your questions? I actually have one follow-up. I saw in the Danish press that Mr. Kolding stated that the remaining DKK 5 billion-DKK 7 billion in Ireland should be viewed as a worst-case scenario. Is that correct, or is the journalist wrong here? It is slightly wrong. Of course, we can construct a case that is worse, but we think it's a conservative case. Okay, thanks. Okay, next question. Jakob Brink from Handelsbanken is online with a question. Yeah. Hi, it's Jakob from Handelsbanken with a few questions regarding the restructuring. Now you've pushed forward the cost cutting one year. I think you've also stated somewhere in the press, Eivind Kolding, that you think there would be more to do. If I put those 2 billion DKK into my estimates, I find it hard to get above 10% return on equity, even on a normalized loan loss ratio. So should we expect more, or is this really all there is? I don't know if you can maybe give us a bit more flavor, even though the strategy is not finalized. Then also, you mentioned in your presentation that the new organizational structure would give the IT platform better possibility to actually harvest some of the potential. Could you maybe give us a bit more detail on why that is? Thank you. First, in terms of the costs part, you're right that I would be surprised if when we make the new strategy, we do not identify further opportunities to be more efficient. But when we compare to peers, that is actually not perhaps where we are lacking the most, but that should not prevent us to take the lead. It's obviously not the only way to improve your results. I think we have great opportunities still on the income side, but we also have in terms of further margin increases, working more sophisticated on our pricing structures. I mentioned also during the presentation, I see opportunities in a more structured capital allocation growing more in some segments compared to others. So fortunately, there's quite a lot, and probably a bit more than mentioned here, that we can work on when we complete the strategy. But being more specific on targets and objectives at this stage would be premature. On the IT platform, yes, we have one platform, but still in the old structure, we have seen that individual countries have sort of tried to develop their own solutions. As an example, we have seen three or four different organizations working on solutions where we do webcasting to customers. And obviously, if you have a more disciplined one-platform approach, you can now develop one uniquely good solution and roll it out consistently across the platform. So you can say we have actually had this inherent advantage in the organization but have not taken the full benefit of it yet. We have benefited from it, but we can do even more now we sort of take the geographical independence out of it. Just one follow-up, if I may. Regarding the IT, from an outside at least, I know you have cut a lot of branches already, but it seems like you are investing a lot in this new sales channel through IT, all kinds of web banking and so forth. But all your old sales channels are not really being closed. I know that you have cut branches, but still you have quite a lot of branches, not only in Denmark but also in Norway and Finland especially. Isn't that something that you should be looking at? Yes, I fully agree. I have noted we have slightly less branches than Handelsbanken, but it's still too much. Of course, part of the 2,000 position that we are reducing, quite a part of that is closing branches. Even though it's, I think, sort of in the old regime, a fairly aggressive move. Personally, we will test whether we cannot go far further in that direction. So that is also for the strategy to look at, but that will be already in the present plan a quite significant reduction of branches, but perhaps the potential is even higher. Thank you. Thank you. Next question. Johan Ekblom from Bank of America is online with a question. Thank you. Just a couple of questions from me. First of all, just coming back to Ireland, can you give us some indication of how much capital or risk-weighted assets is tied up in the non-core versus the core business? You said it is difficult to sell these businesses, but what is the maturity profile of that core book, and how quickly should we— sorry, the non-core book, and how quickly should we expect that to run off? Then secondly, just coming back to the impairments, if I understand it correctly, some of the impairments this quarter are related to some of the model changes introduced at the end of last year, and I guess in that sense should be non-recurring. Can you quantify that just so we can get an idea of what was sort of driven by that model change? Finally, if you can just update us on, I couldn't see it in the text, but if you have an estimate of what your fully phased in Basel III ratio is as of the end of Q1. If we take your questions relating to Ireland risk-weighted assets divided into core and non-core, we are not able to disclose that yet. We have mentioned that we will provide more disclosure in relationship to the core and non-core at a later stage, either during this year or at the latest at the beginning of next year. We are not able to provide that information at this point in time. Then you asked whether we have in our impairments and in our collective impairments, we have increased some of the collective impairments, some of the mathematically calculated collective impairments, and that is related to the revised IRB models, especially our loss given default parameters we introduced and revised at the end of last year. That has had a one-time impact of around DKK 800 million as a one-off effect in that respect. All of those DKK 800 million came in this quarter? Yeah. They came in this quarter. Then you had a question relating to Basel III? Yeah, it's just if you can update us on what you estimate your fully phased in Basel III ratio is as of today. It's difficult to give you an exact number, but our guidance is basically unchanged compared with our annual results, where we stated that there would be from a market risk and counterparty risk, et cetera, there will be an impact of roughly 0.7 percentage point from the Basel III impact. Then we have an outstanding issue how our insurance subsidiary should be treated within the new rules, whether that should be in the Basel III framework or based on the Financial Conglomerates Directive. That could be up to one percentage point. That would probably be down the road and probably also be phased in gradually. Otherwise, the purely Basel III impact will be 0.7 percentage point. Okay, then maybe just follow up, just a very quick. On the Ireland, is it fair to assume that the capital allocation to the non-core part would be higher given it would tend to be higher-risk lending than the core part? Yeah. On a relative basis, it would of course be much higher, and the major part of the allocated capital will of course be to the non-core because of the poor performance, et cetera. Yeah, that's correct. But we'll be able to give you more detailed figures at a later point. Excellent. Thank you very much. Can I just add one thing, Johan? Regarding the collective impairments and the impact from the LGD changes, you also have to remember that some of the other changes that we have had on the collective impairments could be seen as something that will not be repeated in coming quarters. The net of that means actually that the collective impairment this quarter increased by around DKK 120 million. There are some pluses and minuses here. It is right that the impact from the change of LGD has cost us DKK 800 million. Other things are going the other way. Next question, please. Andreas Håkansson from Exane is online with a question. Yes. Hi. I have a couple of questions on follow-up. If we can just go back to the DKK 5 billion-DKK 7 billion in Ireland. You were talking about this 70% decline in commercial real estate, and I was just reading in your risk report from end of last year where you said that the commercial real estate prices have fallen then by more than 60%. In the quarterly report you talked about a continued decline in this quarter. It seems like we are quite close to the 70% already. Could you just clarify that, please? If I look at, for example, Sweden, you come in with quite much higher loan loss provisions than what we see for the Swedish banks. When I look at your loan to value, you are probably 15-20 percentage points higher than most of the Swedish banks. Could you just tell us what's driving what it seems worse quality of the loan book? Then finally, a different topic. In Realkredit Danmark, Nykredit gave a very nice sensitivity saying that if house prices fall by 10% from the end of last year, their need for additional collateral would move from DKK 35 billion to DKK 69 billion. Given that you're currently at DKK 35 billion, could you tell us the similar sensitivity you have? Thank you. I can start with the Irish prices on the commercial property. That was the one you were talking about, not the mortgages. Is that right? Yes, exactly. Well, I think that the current drop we've seen in the market, the market statistics show a price drop around 60%. But the problem is that there's very little trading going on, so the statistics is not very reliable. But what we're referring to is that we expect that these market statistics will go down to a drop of 70%. That is how we have communicated. So another around 10 percentage point drop in prices is what we expect. Percentage point, I should say. Then you had a question relating to Realkredit Danmark, if house prices went down further. We are fully satisfied with that we can cope with a further drop in house prices of, let's say, 15% on Realkredit Danmark. Then we will still be able to provide the needed collateral, given the fact that we have an equity in Realkredit Danmark of around DKK 45 billion. Also Realkredit Danmark has issued junior covered bonds of around DKK 12 billion. There is also Danske Bank is providing a guarantee on the top 20 percentage points. So we should be able to cope in Realkredit Danmark with a drop of house prices of further 15% compared with the current level. Before you go to the last question, could we just follow up on that? Do rating agencies have a view on that you are consuming such a large portion of the group equity at DKK 45 billion just as a backup for your covered bond investors, or are they not focusing on that? Sorry, please repeat again. What did you ask? Yes, we have DKK 45 billion. I was wondering if the rating agencies have a view on you tying up as much as DKK 45 billion of group equity, basically just to the covered bond investors rather than as loss-absorbing capital on a group level. They are fully aware of that, and they are full transparency on that issue. Yeah, they do not have a problem with that? No. Okay. Coming back to the impairments in Sweden. For both Sweden, Finland, and Norway, it actually goes that way that the LGD changes I talked about hit our impairments in these three countries relatively hard. On top of that, we had one similar impairment in Sweden that cost us the biggest part of the impairments there. Otherwise, we do not see any general deterioration of the asset quality in our Swedish book. Okay, thanks very much. You are welcome. Next question. Claus Jensen from ABG Sundal Collier is online with a question. Yes. Good afternoon, gentlemen. Just two follow-up questions, actually. Eivind Kolding, you mentioned in your initial presentation that the new group organization should be able to improve the return on invested capital or allocated capital. I was just wondering, is that purely driven from the incoming costs or do you also expect that the new organization will make your risk-weighted assets go down? Is there any scope for that from the new organization? That is the first thing. The second thing is you mentioned as an answer to one of the questions, you gave some examples of further things you could do or still looking at. You mentioned margins and structure of capital allocation, et cetera. To me, it sounds like that is still quite focused on the banking operations. Does that mean that we should expect the core of the strategy changes that are still to be done to be on the banking operations, or is there also more to do on the operations which you do not classify as banking operations, but like markets, the insurance company, et cetera? To take your questions. Yes, we can do more, as you say, on the cost income side, doing the even more deliberate proactive capital allocation. We can certainly also optimize our loan book according to the risk-weighted assets calculations. We are already working on some optimization in that area. I am sure there will be quite a lot more to be done there. Yes, but of course, it is partly what you would say, well, this is basically what we need to do as managing a bank. But I do see that we have some upside in those areas. On the other activities, the market activities are in the new structure, part of what we call Corporates & Institutions. It is really incorporated into that. The markets are very much a part, well integrated into the new organization and will continue to be so. You are right that I have not really addressed a lot at this stage, for instance, our asset management in Danske Capital or Danica, and these will be something that we will consider in our new strategy. So it will be too early for me to comment on the view here. Okay, thanks. You can actually this quarter also see some impact of us trying to limit the growth of our risk-weighted assets that we actually have a drop in total of our risk-weighted assets by DKK 6 billion over the quarter. Yeah. Actually, can you quantify that a bit more for us? Looking just from a top-down perspective, it seems like your risk weights are already, let's say, in the low end relative to your peers. But obviously, we don't have much insight into this. So could you maybe give us some insight into what you believe the scope is for reducing your risk-weighted assets from here? The scope, it's difficult to quantify, but we do not agree with that we are in the low end compared with our colleagues. It depends very much. You have to compare like for like, and we have perhaps a slightly larger part of our portfolio that is on advanced IRB, whereas some of our colleagues are perhaps on standard or foundation. So you have to compare like for like. But we still feel that there are some potential here, and as an example, our lending book in Sampo Bank is on standard and not on foundation or IRB. So there is still some potential in the bank to say all things being equal, lower risk-weighted assets, but we'll have to take that gradually. Okay, thanks. Next question, please. Jacob Kose from Otto Nominos is online with a question. Hi, thanks. Just three questions. Firstly, on the discussions on Moody's, the potential downgrade, could you talk a bit about what the potential effects would be, both on your trading book, on maybe your collateral and short-term funding if you were to get the downgrades that have been flagged? Secondly, on the insurance treatment of capital, is there a way you could go with the Danish Compromise here, given that that seems to be backed by Danish regulators to start with? Lastly, just looking at the restructuring. When you look at the bank taking over a CEO, would you consider changing what you have, for example, disposing of Norwegian or Finnish operations or part of the Danish operations? Or is it more a question of just incrementally improving the efficiency of the existing businesses as they stand? Thank you. If I start with the last question. There's no doubt with this further integration that we do with the new organization that we really see that the geographical scope for this bank has been fixed. Yes, we will definitely continue our businesses in the other Nordic areas, including Finland, and it makes a lot of sense for us to do so. We do have the products, we have the platform, and we certainly have critical mass in all those markets because we really pull from one platform and not for a local platform. It will be strategically quite a wrong move for us even to consider disposing some of these businesses. Which, by the way, would be extremely difficult as it also well integrated into our platform. It's very certain already now what is the geographical platform for our strategy going forward. On the Moody's part, at least some initial comments. It's coming into the bank here for me, quite a paradox to see this negative review from Moody's at a point of time where things are actually all pointing in a positive direction. One particular issue that we debate with Moody's quite a lot is systemic support in Denmark. There's no question that Danske Bank is a SIFI in Denmark, and there's no doubt that Danish politicians will support Danske Bank as much as the Swedish politicians will support any of the four Swedish banks. It's really something in my mind that Moody's have got wrong, and we have some other quite significant outstanding with Moody's. As you can imagine, we have quite a close dialogue with them at the moment. But of course, we have to anticipate that this still will end up with a downgrade of some sort from Moody's. What we have done so far is, of course, made our scenario planning even in a worst case in terms of what Moody's could do, and actually, of course, see that we can definitely manage our bank well, even if that should happen. There will be a slightly higher funding cost to us. It is manageable. But overall it is not a major thing for us, but of course, a negative one. But we still reserve our position vis-à-vis Moody's until we see how they come out and conclude on this part, which is quite an outlier compared to how S&P and Fitch see our situation. Then you had a question on insurance and capital. Yes. You asked about the Basel III rules and the insurance, and I think I commented on that previously that the impact could be up to one percentage point on our core Tier 1 ratio, but it will probably be phased in over a period of time. And we could also, other things being equal, lower the impact by taking some dividends out of Danica. But we will have to look at that gradually as we know more about the rules. Sorry, but that 1% is on the financial consolidated company method, if I understand you correctly. Yes. And you could not just use what has been known as the Danish Compromise, where you have a 370% risk weighting for the capital to end up somewhere in between the two extremes. That could also be a solution, yeah. As it is right now, the Danish FSA is saying that we use the financial conglomerate method. Whether that will change going forward, we don't know. Okay. Thank you. You're welcome. Next question, please. Sofie Peterzens from JP Morgan is online with a question. Yeah. Hi. Thanks very much for taking my question. I had a couple of questions. One question was just to clarify the Irish provisions. Given that you're merging Ireland, Northern Ireland, the $5 billion to $7 billion is purely for Ireland, I assume. Could you also give us an estimate how you see the impairments in Northern Ireland trending, and how we should view those? My second question is on the cost side. With the DKK 2 billion of costs that you have brought forward, could you also just discuss what kind of one-off items in terms of reorganization costs that we should expect in 2012? Because now we saw DKK 500 million from Sampo in the first quarter. Should we expect to see anything similar from National Irish Bank in the second or third quarter? Thank you. Starting with your last question first. In relation to our cost program, and you ask what should be the one-off items. Usually we take severance payments gradually over the quarters, and you'll be able to follow those. We do not expect any similar charges like the one-off which we took this quarter with the name rights of almost DKK 500 million. So you should stick to what we write in the report, namely that if you disregard the DKK 500 million and disregard some additional reorganization cost, which will not be big numbers, then our cost guidance is still that we'll be for 2012 in line with 2011. Of course you will always have minor one-offs during the quarters. But basically, our cost guidance is still 2012 in line with 2011 when you disregard the name write-down and some additional reorganization costs. Then you asked about the Irish provision. You're right, they are only related to Ireland. The $5 billion to $7 billion is only related to Ireland and not Northern Ireland. In Northern Ireland, we still have impairments in commercial properties, and we should still expect for some quarters elevated impairments in Northern Ireland. We have not given any additional total guidance on Northern Ireland or some of the other remaining part of our operations. We have mainly given on Ireland because we understood and had a feeling that there was some uncertainty around Ireland, and therefore we wanted to give more guidance on it. Okay. Thank you very much. You are welcome. I think we can take one or two more questions. Next one, please. That was Chad from SEB. Eskild is online with a question. Yes. Hello, and thank you for taking my question. It is regarding Danica. When you presented your full year result, you seemed fairly cautious on Danica and expressed that there were a risk that Danica came out of 2012 with a deficit. You seemed a little bit more positively muted towards Danica. Could you elaborate a little bit more on Danica's profitability for the full year? The second question goes towards the hybrid capital. In your presentation, I interpreted your comments on the hybrid capital as we may see when we reach 2014, what you would do with the hybrid capital. Should this be interpreted as you are considering not repaying it or is that a misinterpretation? That was all. We definitely intend to repay it. It is an expensive capital. The only thing is that we do not have specific plans on how to do it. We would like to see the development both in regulation but also in what kind of market instruments actually will be available as we go. But theoretically, we can keep the hybrid. That is not a problem, but it has become quite costly, so not a likely outcome. On Danica, please. Relating to Danica. Yes, we were a little bit cautious in connection with our Q4 communication, because there was this change in the discount curve and where we mentioned that if Danish rates remained below German rates for an extended period throughout 2012, we could be hit by a one-off impact, I think of DKK 1.6 billion. We ended in connection with Q4 here at the end of Q1. There has been a change from this 16 basis point to 11 basis point. Therefore, we have taken a negative impact of DKK 500 million in the Danica results, but still we have been able to come up with a positive result for Q1 due to good investment results in Danica. Therefore, our outlook now for the rest of the year is a little bit more positive, although we still expect that we will not be able to book risk allowance for 2012. Okay. Thank you very much. You are welcome. Then I think we just have time for the last question. Riccardo Rovere from Mediobanca is online with a question. Thank you for taking my question. I have just one final curiosity. What is your idea about the level of cooperation of the Danish regulator with the other Scandinavian regulator and the European regulator, especially talking about the EBA, when it is time to set the level of the countercyclical buffer or the local SIFI buffers, and when it is time to talk about the risk weight. Do you think all these regulators are talking together and kind of cooperating, or in your view, are they all going in different ways? Thank you. Let me give you some examples. SIFI buffers. There is a Danish committee that has been set up to come up with the proposals how Danish SIFI banks should be treated, and they have got a deadline at the end of this year, and we are waiting for that. In that committee there are participants from the Danish FSA, and we also understand that this committee is inviting ideas from the other Nordic FSA organization. Then I think they are even also communicating with the Swiss FSA. So there is a dialogue between the various authorities, and we also have a good dialogue with the Danish FSA. So there will probably first come out some guidance from the Danish FSA in terms of SIFI later this year or early next year, and then we will take it from there. But of course, it is very important from our position that it will all be based on a common platform so that we propose that the Danish, Swedish, European authorities try to come with common assumptions regarding what should be the additional capital requirements so we do not get a lot of differences between the various FSAs. And we have also mentioned for the Danish FSA that one thing is capital, the other thing is what you have in the numerator and denominator. So they should also look into different treatments of risk-weighted assets. And do you think they are cooperating also on trying to figure out a kind of common, let us say, common numbers for risk-weighted assets too? Risk weighting, sorry. Yes. We have that kind of feeling that they are in a dialogue, but we also have a feeling that it is not moving very fast. Okay. Very helpful. Thank you very much. You're welcome. We know there's probably a few more questions on the queue which we will not unfortunately be able to take. But there will as always be the opportunity to call our Investor Relations and Martin Gottlob after this conversation. Let me take the opportunity to thank all of you listening in and for your interest in Danske Bank, and also thank for quite a number of also very good questions that we got time to address. So thank you very much and look forward to take up the dialogue after Q2. Thank you.