Earnings Call: Q1 2011

May 10, 2011

Summary

Q1 pre-tax profit was DKK 1.5bn, or DKK 2.4bn adjusted for the DKK 850m guarantee charge and other one-offs. Strong trading and lower impairments were offset by weak net interest income and ongoing Irish credit stress.

Welcome to the Danske Bank 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 CEO, Peter Frohm. You may begin. Thank you, operator. Welcome, and thank you for taking time to attend this presentation of Danske Bank's financial results for the first quarter of 2011. With me today are Chief Financial Officer, Henrik Ramlau-Hansen, and Head of Investor Relations, Martin Gottlob. Please go to slide 2. In today's presentation, we will focus on our financial results for the first quarter of 2011. We will also comment on some other noteworthy topics from this period, such as our funding and our capital position after the successful share offering that was completed at the beginning of April. I will conclude by considering the outlook for the remainder of 2011. After the presentation, as usual, we will be open for a Q&A session. Please go to slide 3. The profit for the first quarter came to DKK 1.5 billion before tax and DKK 700 million after tax. Adjusting for a contribution of DKK 850 million to the Danish Deposit Guarantee Scheme because of the collapse of Amagerbanken and other one-off items, pre-tax profits was DKK 2.4 billion, or 50% higher than in the first quarter of 2011, and three times as high as the fourth quarter last year. This is slightly ahead of our expectations owing to higher trading income. Our overall assessment of the result is that it is still somewhat below the group's earnings capacity, but it is another step in the right direction. The main positive items in the report are very strong trading income of almost DKK 3 billion and a reduction of our loan impairment charges. On the other hand, net interest income is a bit weak owing to low activity and a couple of technical factors. The insurance result is low because we postponed much of the risk allowance. Banking activities showed robust results, although the banks in Ireland and Northern Bank are still struggling. The share offering that we announced in February was completed in the beginning of April, and it has now given Danske Bank one of the strongest Core Tier 1 capital ratios in Europe. Please go to slide 4. Total income rose 7% above the level in the preceding quarter on the strength of solid trading income. Expenses increased 14% because of the payment to the Danish Guarantee Scheme. Excluding this charge, they were flat. Loan impairment charges fell to DKK 2.8 billion, or 59 basis points. This is still high, but they continue to decline. ROE came in at 5.7% before tax. Excluding the DKK 850 million for the guarantee scheme, it was almost 9%. This is still somewhat below normal. Please go to slide 5. Total income from banking activities was down 5% quarter-on-quarter owing to lower net interest income. This was partly offset by 4% lower expenses and 6% lower impairment charges, bringing the profit before tax to just about DKK 400 million, which is below the Q4 figure but higher than in Q3. Total lending declined 1%, and half of the change was due to a revaluation of fixed rate loans at Realkredit Danmark. While lending declined in Denmark, Ireland, Northern Ireland, and the Baltics, the other Nordic countries saw good growth, partly because of rising exchange rates. Deposit volume grew slightly, with the main contributions coming from Finland and Ireland. In Ireland, deposits rose a full 31% over the level last year, reducing the loan-to-deposit ratio from 2.3 to 1.6. Please go to slide 6. Net interest income came to DKK 5.6 billion, down DKK 500 million from Q4. The decline was caused mainly by technical factors, such as DKK 130 million because of the quarter had too few days than Q4. DKK 90 million because of a change in the model for allocating funding costs. Trading income rose by a similar amount, so the bottom line was not affected. DKK 116 million seasonally lower net interest income at Realkredit Danmark. Margin and volume changes also reduced net interest income by DKK 92 million. Net interest income has been weak for some time, mainly because of very low short-term interest rates. Several things indicate that this situation will end in the coming quarters. We have seen several rate hikes in Sweden and Norway, and in the beginning of April, the ECB and the Danish Central Bank announced their first 25 basis point hikes. According to most economists, more will follow in the quarters ahead. Danske Bank's economists expect a total increase of 100 basis points over the next year, including the hike in April. This will certainly have a positive effect on our net interest income. The return on the DKK 20 billion from the share offering will also add to net interest income in Q2. Our total sensitivity to the first 25 basis points hike in short-term rates across the board is now DKK 700 million. Please go to slide 7. Net fee income came in as expected at DKK 2.1 billion, which is unchanged from the level in Q4 when adjusted for performance fees at Danske Capital. Fees related to finance declined in the quarter, whereas investment fees, excluding Danske Capital performance fees, continued to improve. The improvement was due mainly to a 9% rise in fees from asset management, again adjusted for performance fees. Please go to slide 8. Trading income was particularly strong, reaching almost DKK 3 billion, the best quarterly result since third quarter 2009. All business areas, including treasury, performed better than in Q4, with the greatest contribution to the improvement coming from government bonds and derivatives. For some time, our guidance for trading income has been an average of DKK 1.5 billion-DKK 2 billion quarterly. But we have also emphasized that the item is volatile by nature. The first quarter of last year and this past quarter are clear confirmations of this. Combined, the two quarters are within the guidance, but individually they are both outside it. At the moment, we do not see any market conditions that will change this. We have often been asked how sensitive trading income is to changes in interest rates. Normally, we run Danske Markets and Treasury with a fairly low risk profile. At the end of March, a 100 basis point increase in the yield curve would have cost us DKK 525 million. Please go to slide nine. Income from insurance of DKK 67 million is clearly below normal. The reason is that we did not book the full risk allowance, but rather postponed part of it. This reduced the result by some DKK 175 million, including an adjustment to the expense for special allotments. The investment result for the quarter was actually high enough for us to book the full risk allowance, but our budget for the full year assumes higher long-term interest rates. This means that we expect to book only part of the risk allowance for the full year. We have therefore chosen to postpone a proportionate amount of the risk allowance in Q1. Danica's activity remained strong. Premiums increased 10% year-on-year. The Danish unit linked business was the most successful, rising 23%, whereas the conventional business declined 10%. Please go to slide 10. Total operating expenses of DKK 7.4 billion were higher than expected. The main reason was the charge of DKK 850 million from the Danish Deposit Guarantee Scheme because of the failure of Amagerbanken. Even adjusted for this factor, costs were on the high side, in line with the fourth quarter, but a bit higher than expected and also higher than the consensus estimate. If you adjust for higher severance payments and depreciation of cars sold on Nordania Leasing, which is offset by a matching increase in other income, then the underlying trend is a quarterly decline in expenses of 2%. Please note that as we announced earlier, IT expenses remained high. Please go to slide 11. Loan impairment charges declined once again from DKK 3 billion in Q4 to DKK 2.8 billion in the first quarter. Individual impairment charges fell from DKK 3.6 billion to DKK 3 billion, and there was thus a decline in reversal of collective charges. The decline came in Denmark and Northern Ireland, where Ireland stayed above DKK 1.2 billion. Only a few customers occasioned impairments in Norway, Corporate Banking, and Danske Markets. The loan loss ratio came in at 59 basis points. Excluding Ireland, it was 34 basis points. In the first quarter, an increasing portion of the impairments consisted of upwards adjustments of previously impaired loans. While the proportion of new impairments was lower than in previous quarters. Write-offs came to DKK 5.1 billion, with payments under the Danish Bank Package 1 accounting for DKK 3.3 billion. This means that the allowance account declined to DKK 41.45 billion. Please go to slide 12. Impairments on private individuals declined to around 15% of the total, while SMEs rose and now account for more than 50%. Total gross impaired loans declined DKK 3 billion to DKK 100 billion, while net exposure subject to individual impairment tests declined DKK 1 billion to DKK 63 billion. Of the DKK 63 billion, some DKK 30 billion or less than half was in default, which is unchanged compared to the previous quarter. Please go to slide 13. Loan impairment charges in Denmark continued to decline, but as expected, at a moderate pace. Denmark is gradually emerging from the crisis, but many business customers still have difficulties. In the first quarter, an increasing share of the impairments were increases on already impaired loans. We also saw a rise in impairments on private individuals at Realkredit Danmark, albeit from a very low level. Whereas impairments on agricultural loans declined somewhat. Consumer staples, including agriculture, media, commercial property, in that order, accounted for almost 50% of the impairments in the quarter. Of the other Nordic countries, Norway stands out as impairments rose DKK 124 million after a period of very low charges. The reason is a couple of isolated cases in commercial property and construction, but we do not see this as a new trend. Please go to slide 14. Impairments in Ireland amounted to DKK 1.3 billion, slightly higher than in the preceding quarter, but generally in line with expectations. Almost 75% were in commercial property and more than DKK 1 billion was on loans that were already impaired. Thus, only a small fraction was new impairments. Another development is that impairments on personal customers are rising. Given the high unemployment rate, this was expected. We have also revised our model for valuing residential properties. The new model is more granular and reflects current market values more accurately. With the new model, the average loan-to-value ratio increased from 84% to 98%, and 12% of the portfolio now has a loan-to-value above 100%, against 7% at year-end 2010. Northern Bank came in somewhat below the level in the fourth quarter but is still on the high side. The decline was owing to lower impairments on commercial property, even though the segment still dominates the charges at more than 90% of the total. Impairments on personal customers remained low at less than DKK 10 million. At our new business unit, Corporate Banking, which covers the Nordic countries only, impairments declined almost 50% to DKK 150 million in Q1, and almost all of it came from a single private equity exposure. Please go to slide 15. Let us turn to the bank's funding position. In the first quarter, total new funding amounted to DKK 12 billion, DKK 11 billion of it from covered bonds with maturities from five to 17 years. In addition, we raised two senior loans in the U.S. market in April at reasonable prices. We have now raised DKK 43 billion of the DKK 70 billion that we need in 2011. Our CDS spreads have been elevated for several months now, but this is not fully reflected in the current prices. As shown in the funding curves on this slide, our funding costs for senior debt have increased only marginally. We are pleased that we are still able to get funding at attractive prices. Please go to slide 16. Our Tier 1 and capital ratios are almost unchanged in the first quarter. The Core Tier 1 ratio stood at 10%, which was before we raised DKK 20 billion from the share offering in the beginning of April. On a pro forma basis, including the capital increase at end March, our Core Tier 1 capital ratio rose to 12.4%. If we had repaid the hybrid capital to the Danish state at the end of March, the Tier 1 capital ratio would have been 13.9%. We continue negotiations with the government on the prepayment of the hybrid capital. The process is moving forward, we think, and we are still optimistic that we will reach a satisfactory agreement in due course. Please go to slide 17. The macroeconomic conditions for 2011 has become slightly more positive in the past few months. On the other hand, austerity still heads the agenda in many countries, and so far, the more optimistic outlook has only a marginal effect. In most countries where Danske Bank operates, we expect growth rates between 2% and 4%. Investment is expected to increase, although this is not yet visible in the business segments' demand for new loans. Ireland's difficulties are likely to continue for another year or two. We are fairly optimistic about our other markets. Please go to slide 18. In some respects, our expectations for Danske Bank in 2011 have become more optimistic. The share offering, and more importantly, the interest rate hike, will have a positive effect on net trading income. As mentioned earlier, a 25-basis-point increase across the board will lift net interest income by DKK 700 million annually. The sensitivity will decline with every hike, however. Lending volumes will probably grow in some of the Nordic countries but decline in other markets such as Ireland. Trading income had a very good first quarter, and we have not changed our estimate of DKK 1.5 billion to DKK 2 billion per quarter on average. We expect long-term interest rates to rise further in 2011. This will not necessarily have a large effect on trading, but Danica's result could suffer because it would probably prevent us from booking the full risk allowance for 2011. We will maintain our focus on cost management, but the charges related to Amagerbanken's collapse are likely to leave operating expenses in line with the level in 2010. We are also investing in improvements to our products, services, and competitiveness in several markets. We still expect loan impairment charges to decline from the level in 2010, but the total will remain above normal. After the capital increase, Danske Bank is ready to look ahead and recapture business in areas where we lost ground during the crisis. Hopefully, you will be able to see this in our results in a not-so-distant future. Please go to slide 19. That concludes our presentation of Danske Bank's financial results for the first quarter of 2011. We are now ready to take your questions. If you're listening to the conference call from our website, you're also welcome to ask questions by email. Please, operator, we're ready for the Q&A session. Thank you. We will now begin the question-and-answer session. If you have a question, please press star then one on your touchtone phone. If you wish to be removed from the queue, please press the hash key or the pound sign. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touchtone phone. Christian Hede from Jyske Bank is online with a question. Yes, good afternoon. This is Christian Hede from Jyske Bank. I have two questions. One is relating to page 6 in your presentation with the interest rate sensitivity of DKK 700 million on 25 basis points. I understand that this is basically a downgrade of your earlier outlook, where you said DKK 900 and then declining, adding up to DKK 3 billion for the first 100 points. Could you give some more words on this, and has this also got to do with the weak lending growth? That was the first question. The second question is a bit detailed on Bank Package 2. You mentioned after the yearly report that you would like to get out of the 50 basis point conversion option price on Bank Package 2 means. Have you got any closer to this? Because I expect that this doesn't have to be in May 2012. I guess you can get out of it anyway at the moment. Thank you. That last question I can answer first, and it's being dealt with in a combined package. We are not attempting at this point in time to remove the conversion factor. We're dealing with having an agreement to repay in a combined effort. Okay. Henrik Ramlau-Hansen here, and regarding the interest rate sensitivity of the 25 basis point where we have written that the impact is DKK 700 million, then you're right, it's lower than the DKK 900 previous mentioned. There are two points in that connection. One is that we have already had one raise of 25 basis point. This is from a higher level, and then we have also looked into to what extent an interest rate hike will be passed on to the customers. It's a combined effect of that. The major impact is that we already had one interest rise. It's from a higher level that we now communicate a DKK 700 million effect. Yes, I understand that. Could you give a new estimate on the first 100? Probably also including the one in April, because I assume it's not going to be DKK 3 billion anymore, is it? No, it will probably be lower. We cannot give you an exact figure, but we can come back on that. Okay. Thank you. Jacob Blank from Handelsbanken is online with a question. Yeah, I have three questions, please. The first one is regarding costs. I know you are saying that we should expect flat cost in 2011 from 2010. I see your cost bridge in the presentation, and I do understand that you have a cost of DKK 850 million to Amagerbanken, but also last year you had almost DKK 2 billion relating to Bank Package 1. What is the big gap here of almost DKK 1 billion? Is that the IT expenses, and should we expect those to come away fully in 2012? That is the first question. Just a bit more clarity on the cost. The second one is regarding lending margins. I see that lending margins are basically coming down through all business units in the group, also adjusting for the 10 basis points transfer pricing. Could you give us some clarity on lending margins compared to market share gains and loan growth? What are you thinking in that respect? My third question is regarding Ireland. We saw one of your competitors in Ireland increase provisions in Ireland last week with relation to, I think, 10% lower property price assumptions. Have you done any kind of new assumptions in Ireland? That was my three questions, please. Regarding costs, we are communicating that our cost for 2011 will be in line with 2010. As you correctly mentioned, a major contributing factor is that we now take into account that we have to pay the DKK 850 million relating to Amagerbanken. You also have to figure in that this change in our allocated funding, which is DKK 90 million for Q1, will accumulate to around DKK 400 million for a full year. That is two of the main contributing factors. Then we continue to invest in marketing, we continue to invest in IT, as we also communicated previously. That is broadly speaking, the reason that we have now increased our cost estimate for the full year. Can I add a couple of things? We also have around DKK 200 million in one-offs in the first quarter we have to add, and then we have introduced performance-related schemes to a wider part of the bank than we have in 2010. Got it. You asked about lending margins, and you are correct that there is margin pressure in a number of areas, and that's the reason for the margin pressure that you can see the figures. Regarding Ireland, I think there's nothing new, basically. Well, we have followed the developments in the markets. As mentioned in the presentation, we have adjusted the model a little bit so it more accurately reflects the conditions, and that has had us adjust downward the value of a number of personal properties. On other segments, commercial property, we have followed markets down. We've also looked at the BlackRock calculation that has been administered on behalf of the Irish government, and that has resulted in a downward pressure on property prices. So I think we are following the market down, as we say, including with our haircuts. It's not a pretty picture, and that's the reason why we have elevated impairment charges once again. You have said before that we should be expecting a run rate in Ireland of around DKK 1 billion, and that it could be front-loaded, so it could be above DKK 1 billion in the first half of this year. Is that still so? Or should we maybe expect it to have increased above DKK 1 billion throughout the year? Well, I would hope that they peak in this first quarter. So far we have managed to live up to the first part of that prognosis. But it is a market in which there is precious little turnover, so it is very difficult to ascertain what property values really are. But we have hope. I think that is as far as I would push it. Okay, great. Andreas Håkansson from Exane BNP Paribas is online with a question. Yes. Hi. Let us start with two questions. First one is on the tax charge. It is quite high in the quarter, and if you could just clarify, over the last couple of days, I have been reading in Danish papers about a discussion how you have been paying taxes in Denmark and how you have not been paying taxes in Denmark. I think you have been telling that some taxes have been delayed. I think I saw a number of DKK 3 billion. Could you just clarify what that is about, and when are we going to see that, and if we are going to see it? Second is back to Ireland again. I see that when I look at your book in Ireland, you seem to be providing very aggressively and classifying things as non-performing quite aggressively on the corporate side and on the commercial real estate, probably in line with the stress tests even. Then on your retail side and retail mortgages, you seem to be having provided quite, not at all as much as the stress test, a little bit less than some of your competitors as well. Did you just say that your average loan to value is 98% in Ireland, or was that somewhere else? Could you just tell about how you're thinking about the collateral at the moment and the need for more provisions on the retail side? Thanks. Regarding the taxes, first the tax rate we have in our published account, you can roughly calculate that by taking our profit before tax and then so to say, net out the impact of our loss in Ireland, and then use a tax rate of 25% or 26%. Then you get the tax rate that we have communicated in our account. So it's based on an assumption that we do not activate the loss we have in Ireland. So that gives the tax rate you see in our account. What has been in the Danish newspapers is that we have offset our Danish tax with the losses in Ireland, but we expect that we'll come to pay the relevant tax for the Danish businesses, and therefore we also have roughly DKK 3 billion as a tax liability, deferred tax liability in our accounts, and we expect to pay that. Exactly when that will happen, we cannot say. Of course, we need to earn the money first, but we expect it to be that we shall pay it in the coming years. So that's about the newspaper story. You did hear that we had a loan to value of 98% on personal properties in the Irish market. That's with the inclusion of the model reconfiguration, which has adjusted downwards the pricing, especially in more remote areas, which is also in line with the developments in pricing. Our retail mortgages have a lower arrears structure than peers. Also because initially our loan to value was actually down to about 50%. So the portfolio is behaving better than I think our peer groups are. Now we'll have to see what happens in the market. But so far we feel that with the values we have taken and the haircuts we take when we do valuation, that it's fair enough. But let's see. I can add about. Can I just follow up on that? Because in previous quarter, I think it was Q4, I think the coverage ratio you had on the retail mortgages in Ireland was 33%. If you have 98% LTV in a market where houses does not really trade at the moment, that seems a bit low. Has that moved up in a quarter? What did you say that we had of 33%? Coverage ratio, NPL coverage ratio. We have today impairment of DKK 2 billion out of impaired loan of DKK 1.22 billion. More importantly is if you look at the arrears that Peter was talking about, our arrears at the end of Q4 was 2.7% based on volumes against the market, 7.4%. We have not got any new numbers for the market for the first quarter, but our number has increased to 3.3% only, and we assume that the market has increased at least as much as ours has. So we are still well below when it comes to the arrears compared to the market. Okay. Thank you. Claus Holmok from ABG is online with a question. Yes. Good afternoon. Two questions here. One is regarding loan growth in Denmark. You had a Danish peer report a week ago who said that they were beginning to see deleveraging pick up a bit, both amongst corporates and amongst households. Could you maybe comment on what you see there, what your feeling is regarding loan growth or loan decline Denmark going forward? Secondly, you several times reiterated your guidance on trading income, but you have also allocated DKK 100 million from net interest income down to trading income per quarter. Could you please comment on why you reiterate your trading income on that basis? As I assume the DKK 100 million you allocate is fairly stable income. Okay. First the question of loan growth. Of course they will differ by markets. If we look at our largest market, we have seen relatively muted loan growth, but this deleveraging our market shares for corporate lending has held up relatively well. If you look ahead, there is some indication that loan growth will pick up a bit. But it is going to be pick up a bit. I do not really expect any stellar development within the next 6 months. Regarding your question about trading income, it is correct, as you mentioned, that all things being equal, they will be increased by roughly DKK 100 million per quarter, as you mentioned, because of this transfer from the banking activities to trading income. That is an amount which is not so big compared with the guidance of DKK 1.5 billion to DKK 2 billion per quarter. Given the size of the numbers, we stay with our guidance of DKK 1.5 billion to DKK 2 billion, and we do not change it to DKK 1.6 billion to DKK 2.1 billion. So we stay with the round figures. Okay, thanks. We have got a question from the website. It is coming from Chintan Joshi from Nomura. He is asking three questions. One, where is the weakness in net interest from Realkredit coming from? Do you expect further weaknesses here? Two, is the lower lending margins a function of lower interest rates you charge to customers or higher funding cost for you? Three, could you give us some guidance on the timeline of the negotiation process with the government? Thanks. Regarding the weakness in the net interest income relating to Realkredit Danmark, it is based on the fact that the earnings on Realkredit Danmark's own funds was higher in 2010 compared with 2011. The lower lending margins, they are mainly coming from competition and not from funding expenses. The funding expenses is dealt with the DKK 90 million or DKK 100 million we have talked about here a couple of times. So it is margins pressure from competition. Regarding timeline with the negotiations with the government, we would be pleased to have an agreement sooner rather than later. Of course, we also appreciate that the government needs to do its, so to say, homework. As you know, it also needs a political agreement between different political parties. It may still take some time, but of course, we're interested in having it finalized as fast as possible so that we can communicate it to you and other investors. Can I just add one thing about the interest margins? As you may know, we've also changed our transfer pricing. So we have increased the reference rate by 10 basis points, both on the lending and the deposit side. So the first 10 basis point in margin squeeze on lending and the first 10 basis point of margin widening on the deposit side is due to that change. Yes, please operator, you can go on. Ronny Rehn from KBW is online with a question. Yeah. Again, hello together. Thanks for doing the call. A few questions from my end. The first one, again on Denmark, how strong is the competition on the deposit side, and particular with regards to the smaller banks, which probably find it a bit more troublesome to raise money in the markets? Second, you had an upward revision on your risk-weighted assets from internal models. What was the main driver behind that? Thirdly, in your outlook statement, you raised the issue of rising interest rates, basically likely leading to falling property prices in Denmark. What would be the magnitude of that you expect, and what sort of sensitivities on asset quality should we look for? Thank you. Could we just get the last question again? Could you repeat the last question, please? I will repeat. Okay. In your outlook statement, you mentioned that rising interest rates in Denmark could lead to falling property prices in Denmark in 2011. I just want to see whether you have any magnitude for that. Okay. Sure. At the end, maybe any sort of implications this may have for the asset quality recovery process, et cetera. Should I take the last two questions? We expect a slight, very small decline in housing prices, but not very much, 1% or 2% down on the housing prices. As we mentioned in the presentation, interest rates could go up, or the central rates could go up by 100 basis points. But part of that is probably already factored into the interest rates people are paying. So although house prices may go flat or decline a little bit, we don't expect it to have any material impact on our customers or on our impairments. Regarding the increase of our risk-weighted assets, there's an increase of around DKK 20 billion, and that is mainly the result of an update of loss-given default parameters and mainly relating to real estate and mortgages. That is an impact we can see now and then when we adjust the parameter values based on the most recent information we have. Then there was a question about- There's a question about the competition on deposits, and we do see some competition. It's not as massive as one could have feared. One reason I would think is that a lot of long-term funding was issued just before the expiry of Bank Package 2, and many banks for that reason are liquid at this point in time. Danske Bank has also not been heavily into that market. We have raised quite a number of funds in the longer term in order to smooth our maturities structure. So I would think that competition would intensify in the coming years. But at this point in time, it's there, but it's not massive. May I add two sort of sub-questions, basically. The regulator was out recently saying that there are certain government-guaranteed funding facilities that are rolling over, and because they kind of drop below a one-year residual maturity, they don't qualify for the liquidity buffer calculations anymore. Is that going to drive some banks basically to go out and raise more other funding in 2011? Second- Well, here you are alluding to the new Basel III regulations on liquidity that we have not seen, and I can only speculate on that. It is true that the present structure of Danish mortgage funds have some conflict with some of the texts, but it is too early to speculate on that, and there will be a number of years to phase that in. Yeah, I thought it sounded more like this was related to an existing regulation, but I can cross-check and check with Martin afterwards. No, I think what that is, sorry, then I might have misunderstood. That is the fact that the Danish Central Bank has pointed out that they think that these one-year auctions of flex loans are very large. There is a very large auction in the month of December, and the accumulation of bonds that have to be redeemed and new bonds that have to be sold there, in the opinion of the Danish Central Bank, is too high. I see. Therefore, the banks have been requested to spread the auctions over the year. Now, these flex loans, which are short-term loans that are funded by one-year bonds, have been very successful. So the volume is large. So it will take a while before we get it spread, but good progress has already been made on that, and that's something we will handle. Then just one last question on the risk-weighted asset and the upward revision of risk weight, and default assumptions on real estate and mortgages. Was this in Denmark or was this in other regions? It was mainly in Denmark. Mainly in Denmark. Okay. Thank you. Was the result because your realized losses were above the expected ones in the model? Is that fair? It relates to risk-weighted assets. We have slightly down-revised our loss-given defaults in the downturn scenario. We have increased the loss-given default in a downturn scenario based on our most recent information, slightly downwards. That's from this aspect you get the impact, as I mentioned. Thank you very much. Jacob Kruse from Autonomous Research is online with a question. Hi, thank you. Just first a question on the risk weight calibration. Is that the full calibration? I know there was a letter from the FSA discussing some of your assumptions earlier this year. Or do you still need to calibrate the Corporate Banking books? If so, could you kind of guide what the impact might be there? Secondly, just on the DKK 20 billion of capital, could you tell us something about how that has been invested, what kind of net interest impact we could expect for 2011 until you get to repay the hybrid? Lastly, just on the negotiations with the hybrid, do you think it's likely that you can reach an agreement prior to the election, or do you think you need to wait until the elections have passed? Thank you. I can take the two last ones. The negotiations with the government on the hybrid obviously will have to be negotiated by many political parties because it is a whole parliament, save one party that went into this. This will depend on when the election will be. Right now, the Danish parliament is busy with negotiations in other directions and our little matter if you want a straight answer on that. I cannot answer that question. What we are talking about, of course, is repayment next year. The liquidity from the issue is part of our general funding for the coming year. Of course, we manage the liquidity in such a fashion that there will be liquidity to repay the government without jeopardizing our curves, our one-year Moody's curve. Regarding the increase in the risk-weighted assets, it is part of our IRB work, but that is not finished yet. With reference to that FSA letter you mentioned, this is work in progress, and we are working on it. There may be some additional increases in our risk-weighted assets in the next quarters, but we cannot say anything explicit currently. Okay. We will come back to that. Thank you. Simon Christensen from Nordea Markets is online with a question. Yes, good afternoon. I have a couple of questions. On the NII side, is it fair to assume that the margin squeeze you are talking about is a continued squeeze on large corporates, and how big a portion of your corporate loan book is related to these entities? That was my first question. Also, on the cost side, you are taking roughly a DKK 90 million impact from Nordania. What kind of assets is it that you are related to, and should we treat this as an ongoing process, or are we done here at Q1? Also lastly, on the capital side the QIS5 results came, I think it was a month ago or so. Do you have any update on the capital requirement for Danica in this perspective? Maybe also you could provide an update on the Financial Conglomerates Directive, if there are any news or change here in relation to the subordinated debt. Thank you. On that latter one, there is no new information that we can share with you. You are correct in assuming that the net interest income margin squeeze to some extent takes place around the larger corporates. It is a portfolio of about DKK 100 billion. You asked a question about Nordania? Oh, yeah, Nordania. The cost related to Nordania is obviously depreciation of leased equipment. There is an income side also. Which is booked as other income, whereas the other figure you mentioned is booked as a cost part. The cost in Nordania is actually not a negative factor. It just shows that there is business running. But you can actually say that normally we have a lot of new cars coming in in December, and then the old cars, people are replacing their cars, so they have to be sold in the first quarter. Therefore you often see an elevated amount of cars sold. We sell these cars, then the gross proceed is booked as other income, and then the amount that we had on our balance sheet is removed as a cost on expenses. So the net of that, hopefully that is quite positive, but not much, depending on, of course, how good they are at selling the cars. Then you asked about Danica and the QIS5. Danica is, from our perspective, pretty well prepared for upcoming Solvency II rules. So we don't expect any material jump in the solvency on the Danica side based on the QIS5 study. The most recent information I have is that there's still discussions going on in a number of areas. So it's a little bit unclear whether the rules will be put fully into place at the end of 2012 or there'll be a more gradual phasing in of the Solvency II rules. With respect to the impact Danica has on the bank's solvency, there's nothing new on the conglomerate side. So we still expect that, or we plan according to that, this roughly DKK 5 billion solvency impact will be deducted in our Core Tier 1 eventually. Okay, thanks. Just two short follow-ups. On slide 34 on the presentation material, you show this usual number of upgrades in relation to downgrades. I was just wondering how large proportion of the book has actually seen an unchanged rating. Also on the write-offs directly charged on the P&L of roughly, I think it's DKK 460 million, what geographies are these related to? What was the latter question there, Simon? It was, you charge write-offs directly on the P&L. You have not provisioned for it, of roughly DKK 460 million in the quarter. It seems a little bit above what it usually is. I am then surprised at this, i.e., what kind of geographies are they related to? Where do you not see these NPLs showing up? We do not have the information on exactly what business areas that this almost DKK 60 million is coming from. This number fluctuates somewhat between quarters, and you are right, this is the biggest one in the last five quarters, but it is not out of range from what it has had. I will come back to you on that. That will probably also have to be the same on the proportion of neutral exposures where we have neither upgraded nor downgraded. We do not have that information here. Okay. Thank you very much. Jan Wolter from Deutsche Bank is online with a question. Yes. Good afternoon. Jan Wolter, Deutsche Bank. Two, three questions here. First, going back to the discussion on margins. If we look at the lending margins, specifically in the Nordic area, we can see of course that they have been trending down for the last four or five quarters. A bit more than peers, if I compare the different countries there. In Denmark, we have seen a couple of players raise mortgage margins last year, and we are well aware about the situation with Nykredit. Danske Bank is allowed to raise mortgage margins. Could you discuss why you have decided not to take the opportunity on that one, since right now the business opportunity should be more to protect the margin side, I guess? The second question is on trading, where looking at the DKK 2.3 billion trading activity income. Within this item, do you only book spreads on your flow business, or do you book to any extent portfolio adjustments as well? What is driving the Q-on-Q change here? Is it only customer activity or something else that has happened here between the quarters? Thank you. The development in net interest income is under pressure, obviously because of competition. One thing you have to note that this quarter there is an extraordinary from Realkredit Danmark, which is not recurring. There are reasons why we do not increase Realkredit Danmark margins or administrative fees. This is a relatively homogeneous product in the Danish market. Our observation is that if we were to raise above market level, and there is a market level, then it would cost us customers. These are good customers. Many of the mortgages are sold through the retail franchise where customer relationships are embedded. So we have not found it wise, actually. That is the reason for that. One also has to mention the fact that so far there has not been elevated credit losses in the mortgage book. This adjustment. Then you talked about the trading income. You can see if you look at total trading income, the group treasury, there could be some element of gain on losses realized and unrealized on our portfolio. In the trading activities in Danske Markets, then there it is market making, it is flow business. And of course there could be some element if you have a position bought cheap in the morning, you sell it at a higher price in the afternoon. Well, that is a flow business or it is a portfolio gain. It is up to you to decide. But of course, there is an element of that in the result as well. But you can see that the risk is relatively low. The value at risk is very low. Okay. Just clarification there. I understand that there is some element of portfolio adjustment there in flow income as always is. But, if we look at value at risk in your report, it is also fairly stable during the quarters here, even if things could happen between them, right? Yes. But there must be a tremendous either spread increase between bid ask spreads that you take out from customers or much, much higher client activity Q1 between Q4. Does that higher client activity explain the increase in your world or is it more higher bid-ask spreads just to get if there is any sustainability in that DKK 2.3 billion number. Thank you. Well, it is a bit of all. Then also there will be times where you ride the markets, and you follow developments during the day, and if the markets are accommodating, then you just have better results. So it is not prop trading, but in the market-making activities, you do have market positions on an ongoing basis, and they have an effect also. Okay, thanks for that clarification. As a reminder, if you have a question, please press star then one on your touch-tone phone. Jacob Blank from Handelsbanken is online with a question. I just have one follow-up question. I think at least all your Nordic peers have guided for some, or at least set a target of ROE going forward. Have you done any sort of discussions around that topic hereafter opposed to a rights issue? At this point in time, we concentrate on getting above cost of capital. We obviously also do not have complete clarification as to what is required in terms of capital levels. We have not heard from the EU. There are also CRD issues out there. So at this point in time, we focus on coming above cost of capital. And when we get there, then I think we should start communicating capital targets. Okay. Thank you. Jeff Barrons from Arctic Securities is online with a question. Yes, thank you. Just two questions from me. Just elaborating some more on the margins in Denmark, because looking at the situation with some small banks being quite weak position, who is driving down the margins, do you see? Is it the Swedish banks like Nordea and so on operating there that are pushing the margins? And if it is possible also to provide the average risk weights in Ireland and so on, and what you use there as an average risk weight. Thank you. The margin pressure takes place predominantly among the larger corporates. There it is the larger banks in the Danish market, but it is also larger banks internationally that come in and compete for major corporate business. Okay. Also outside the Nordics. Well, outside the Nordics, we do not compete so much for business, to be honest with you. Our risk appetite in the Irish market is very low. Yeah. But the banks that are competing for business with the major corporates in Scandinavia- Yeah and the Nordic market are also from outside the Nordics. We have quite a number of branches from foreign banks here. Okay. That are participating in competition. Then you had a question about the average risk weight in Ireland. I think we will have to come back on that. Okay. Thank you. As a reminder, if you have a question, please press star then one on your touch-tone phone. We have no further questions at this time. Okay. Well, thank you all for your interest in Danske Bank. Thank you for your questions. As always, you are welcome to contact us if you have any more questions after you have had time to look at the accounts in more detail. As usual, we will be ready to talk to you until 9:00 P.M. this evening, Central European time, and of course, again tomorrow morning. A transcript of this conference call presenting-