Earnings Call: Q3 2010

Nov 2, 2010

Summary

2010 net profit was DKK 3.7bn as lower costs and impairments partly offset weaker income. A DKK 20bn rights issue was planned to strengthen equity capital and support hybrid repayment, while 2011 guidance remained mixed.

Welcome, and thank you for taking the time to attend this presentation of Danske Bank's financial results for 2010. With me today, our Chief Financial Officer, Henrik Ramlau-Hansen, and Head of Investor Relations, Martin Gottlob. Please go to slide 2. In today's presentation, we will of course focus on our financial results for the fourth quarter of 2010 and the year as a whole. We would also like to comment on today's announcement of our intention to make a prepayment of our hybrid capital and our planned rights issue. I will conclude by looking ahead at the outlook for 2011. After the presentation, as usual, we will be open for a Q&A session. Please go to slide 3. Danske Bank's earnings for 2010 showed a net profit of DKK 3.7 billion. The result is satisfactory considering the difficult market conditions, and it shows that we are moving in the right direction. We still have a way to go, however, before we reach our ambitions and our potential. The result for the fourth quarter was slightly better than in Q3, even though our Markets divisions had very difficult market conditions and trading income fell by more than DKK 1.1 billion. The improvement in the Danish banking activities that we saw in Q3 continued, mainly because of falling costs. As in the previous quarters, the Swedish and Norwegian banking activities units generated solid profits. Danske Capital increased assets under management by 10% and booked solid fee income in Q4. Also in the fourth quarter, Danica Pension booked the full risk allowance and the shadow account. We continue to focus on costs even though Q4 once again proved to be a high-cost period. We want to normalize our capital structure. We have approached the Danish government and initiated negotiations on a prepayment of our hybrid capital. We wish to repay the entire DKK 26 billion to the Danish state in May 2012. We will finance the repayment by a rights issue in the first half of 2011. We expect proceeds from the rights issue of some DKK 20 billion. With this move, we will maintain a strong capital position and will improve the quality of our capital. Please go to slide 4. As expected, in 2010, our total income dropped sharply from the level in 2009. The reasons were declines in net interest income, trading income, and income from insurance business. Net interest income fell because of declining interest rates in the first three quarters of the year and the return to normal capital market conditions meant that Danske Markets could not reproduce its stellar 2009 trading returns. The fall in income was more than offset by a 10% reduction of our expenses and a drop in loan impairment charges of almost 50%. Looking at the quarterly trend, we see that income was a little lower in the fourth quarter. This was owing to a substantial fall in trading income, which was partly offset by increasing fees and other income, as well as a small increase in net interest income. Included in Q4 was a DKK 300 million VAT refund from previous years, including interest on the refund. Because of lower income and slightly higher expenses, pre-tax profits fell by 23%. Expenses were higher, mainly because of seasonality, but also because of IT investments and marketing costs. Please go to slide five. Net interest income declined 13% in 2010, owing mainly to lower average lending volumes, falling interest rates for most of the year, and increasing funding costs. As I mentioned, net interest rose slightly from the third to the fourth quarter. This was mainly because of rising rates in Sweden, stronger activity at Realkredit Danmark, and accrued interest of DKK 89 million on the VAT refund. Please go to slide six. Fee income rose by 11% in 2010, mainly because of a 32% increase at Danske Capital, owing to 10% growth in assets under management and higher performance fees. The quarterly trend shows a similar rise of 4% in Q4, which was also due to the performance fees of DKK 251 million at Danske Capital. With the termination of the state guarantee in Bank Package 1 in Q3, we started booking a fee expense for the individual state guarantee on DKK 37 billion in bonds issued in June and July 2009. This will cost DKK 75 million per quarter from Q4 until July 2012. Please go to slide seven. Net trading income for 2010 came in at DKK 7.9 billion, which we regard as a normal level, even when we adjust for the capital gain of more than DKK 650 million in Q2. In comparison with the performance in 2009, which offered extraordinarily favorable market conditions, the item declined more than 50%. In the fourth quarter, net trading income was DKK 800 million. The weak result was due to our decision to reduce the overall risk at Danske Markets because of unstable market condition. These conditions also reduced income from Group Treasury by DKK 300 million. Finally, we saw lower activity in our banking activities units. We believe the difficult market conditions are a temporary phenomenon that will not necessarily affect trading income for 2011. Despite the weak results in Q4, trading income in 2010 was still in a range that we find acceptable, and it was almost DKK 2 billion better than the result in 2008. Please go to slide eight. Income from insurance business came in at a satisfactory level of DKK 2.1 billion, declining 24% from the very strong result in 2009. The drop was caused mainly by lower investment result due to falling returns on bonds and by an increase in special allotments. In Denmark, income from unit-linked business rose 117% because of lower costs. Despite increasing interest rates in Q4, we were able to book the full risk allowance as well as the remaining shadow account. Because of this, special allotments rose by almost DKK 250 million from the Q3 level and reduced the pre-tax profit. Danica continued to show strong premium growth, partly because of strong growth in Sweden and Norway. For the first time, unit-linked premiums exceeded premiums from the conventional guaranteed business. Now let us turn to expenses. We continued our intensive focus on cost in 2010. Total expenses fell 10%, and the underlying cost base fell 1%. We were thus able not only to neutralize salary increases and general inflation, but also to reduce costs. As expected, cost rose from the third to the fourth quarter by DKK 800 million when we adjust for the Bank Package 1 fee that ended in Q3. The largest increase was for IT and consultancy costs, which rose DKK 286 million. The usual holiday payments contributed an increase of DKK 205 million, and marketing expenses more than doubled owing to a number of campaigns in Q4. Even though expenses increased noticeably in the fourth quarter, we still believe we have a firm grip on cost, and we are not yet done with our cost control program, which runs until the end of this year. We will have expenses for some IT initiatives, however, particularly in the first half of the year. In some areas, we will shift our focus from cost-cutting to growing our business. For instance, in the mortgage division in combination with the Danish banking activities. From 2009 to 2010, the number of full-time employees declined by 570. Please go to slide 10. Loan impairment charges stood at just below DKK 3 billion in the fourth quarter and totaled DKK 13.8 billion for the full year. That is still high, but it is encouraging that it is only about half the level in 2009. The loan loss ratio came in at 71 basis points for the year and 64 basis points excluding the payments under Bank Package 1. Excluding both Ireland and Bank Package 1, which unfortunately you cannot do, the loan loss ratio is 38 basis points for 2010. In the fourth quarter, the total ratio was 62 basis points. Adjusted for the payments under Bank Package 1, impairments rose DKK 365 million from Q3 to Q4. The increase was owing primarily to a need for higher charges in Denmark, Ireland, and Northern Ireland. The charges included reversals of about DKK 582 million in collective impairments, mainly because of the migration of customers to better rating categories. Almost DKK 400 million of the reversals took place in the Baltics. On the next four slides, we elaborate a little on the trend in loan impairment charges. Please go to slide 11. When we break down impairments into customer segments, we see that SMEs dominate the charges, accounting for close to half of the total of the year. The number for the fourth quarter differs slightly, with a larger proportion related to personal customers. The reason is a transfer of some DKK 6 billion in collective impairments in Ireland from SME to personal customers with housing investment loans. A positive trend in loans in default or Category 11 loan was broken in Q4, whereas the number in Category 10 declined. This occurred because we made a substantial amount of partial write-offs for loans in Category 10. When we make such a write-off, the exposure is automatically downgraded to Category 11. Please go to slide 12. As I have mentioned in previous conference calls, impairments can fluctuate from quarter to quarter. Denmark in the fourth quarter is an example. The charges declined DKK 200 million, but adjusted for the payments to the Financial Stability, they were higher than in Q3. Danish impairments are still driven by SMEs with commercial property as the largest segment and the rest spread across several segments such as pig farmers and building materials suppliers. The number of new charges rose in the quarter, although they were not very large, typically in the DKK 10 million-DKK 15 million range. In the rest of the Nordics, impairment levels remain low, with some fluctuations between quarters. We expect losses in these markets to remain low in 2011. Please go to slide 13. In Northern Ireland, impairments rose a little. Commercial property customers were behind 89% of the charges. The main reason was falling property prices and reduced activity because of the U.K. government's austerity program. Impairments in Ireland came in at DKK 1.2 billion, which was within the range given in our December conference call on Ireland. Land bank customers and other commercial property investors were still behind most of the impairments. Because of the tough austerity measures in Ireland, combined with high unemployment and falling house prices, we expect that the losses there could spread to other sectors, including personal customers, and therefore expect that impairments will stay high in 2011. Baltic impairments remained low at DKK 36 million in the fourth quarter. Please go to slide 14. After a couple of quarters with a very high tax rate, the rate declined in the fourth quarter. It fell to 26% from 53% in Q3. Adjustment in deferred tax in Q4, caused by a couple of company mergers in the group, offset the loss in Ireland and brought the tax rate down to a normal level. For 2010 as a whole, the tax rate was 43%. The main reason for the high rate was Ireland. Because of large cumulative losses, we stopped capitalizing the tax asset in Ireland in the fourth quarter of 2009. Adjusted for Ireland and non-taxable one-offs, the tax rate for 2010 was just over 26%, which is close to normal for Danske Bank. Please go to slide 15. Let's turn to the bank's funding position. We completed the funding of DKK 50 billion for 2010 by the end of the third quarter. Nevertheless, we took advantage of market opportunities in the third and fourth quarter to raise additional funding of about DKK 20 billion. This means we have now front-loaded our funding for the coming year. We estimate our funding need for 2011 at about DKK 70 billion. At the beginning of the year, we had a little more than DKK 50 billion left to fund, and our untapped covered bond potential makes this a relatively easy task. Please go to slide 16. Danske Bank has approached the Danish government to prepay the DKK 24 billion of hybrid capital that we raised in May 2009. We wish to prepay the loan in May 2012 and to have the option to convert the loan removed now. The loan of DKK 2 billion to Realkredit Danmark will be repaid according to plan also in May 2012. To finance part of the prepayment, we plan to make a rights issue in the first half of 2011 with expected proceeds of DKK 20 billion. Our two largest shareholders, A.P. Møller - Mærsk and Realdania, have both expressed their support for the rights issue. On the basis of our existing capital position at the end of 2010, the DKK 20 billion rights issue will raise our core Tier 1 capital ratio by 2.4 percentage points to 12.5%. The issue will thus make Danske Bank one of the best-capitalized banks in the E.U. All in all, this means that we will have terminated all state loans with state guarantee by the summer of 2012. The rights issue also prepares us for the strict regulation expected on the Basel III. After the rights issue, most of our Tier 1 capital will consist of equity. Since there are still some uncertainties regarding the final Basel III rules, we expect our actual Tier 1 ratio to stay high until the rules are known. We have decided not to pay out dividend for 2010. The board of directors have set a new target for the dividend payout ratio of up to one-third of the net profit. The new target will be in effect from 2011. Please go to slide 17. The year 2010 turned out to be a year of both recovery and austerity. The global recovery is back on track after being interrupted by the debt crisis last summer. Most countries in Europe are gaining momentum, Germany especially, while Ireland was struggling with high unemployment and fiscal tightening. In Ireland, declining wages have improved competitiveness, and the outlook for exports in 2011 is bright. On the other hand, falling house prices and the collapse of the commercial property market will continue to burden the Irish economy, which we expect will grow slowly in 2011. We believe the recovery in the Nordic economies will be sustainable in 2011, even though further fiscal tightening might restrain growth. Especially in Denmark, political measures could dampen growth and investment. Housing markets in the other Nordic countries have bounced back, fueling fears that rising interest rates, particularly in Sweden and Norway, may cause property prices to fall again. At the same time, this would strengthen their currencies and weaken their competitiveness in relation to the Eurozone. To sum up, we are cautiously optimistic about the economic situation in our main markets in 2011, even though a number of factors pose risks to strong growth. Please go to slide 18. Closing the books on 2010 and turning to 2011 provides us with an interesting perspective on our banking activities. We are looking for the recovery to continue this year, but conditions in some markets will remain difficult. Here, I'm thinking mainly of Ireland and to a lesser extent, Northern Ireland. On the other hand, the Nordic markets are improving, and we expect this trend to continue in 2011. In Denmark, we still see some clouds on the horizon, but we are more positive than we were last year. The outlook for 2011 is thus somewhat mixed. Our banking activities remain robust, but net interest income is still under pressure. Although inflation is trending up in the Eurozone, we still expect no help from rising ECB rates before the end of the year. Fee income is likely to remain stable, but it will be burdened by the fee for the individual state guarantee. We expect trading income at the normal level of about DKK 1.5 billion to DKK 2 billion per quarter, but it will remain highly dependent on developments on the financial markets, as will the performance of Danske Capital. Danica will most likely generate a lower result since there is no shadow account to be booked. We'll maintain our focus on cost management, although we expect increasing cost in some areas of the group as activity picks up. Overall, the absence of Bank Package 1, we expect expenses to be lower than in 2010. Finally, we expect that loan impairment charges will continue to decline. In summary, we believe that Danske Bank is gradually getting back on track. Please go to slide 19. That concludes our presentation of Danske Bank's financial results for 2010, and we are now ready to take your questions. If you're listening to the conference call from our website, you are also welcome to ask questions by email. Please, operator, we are 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 and one 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 speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touch tone phone. Our first question comes from Christian Hede from Jyske Bank. Yes, good afternoon. This is Christian Hede from Jyske Bank. I have a couple of questions on the rights issue. First of all, could you give us some more flavor on the timing of this? If I understand correctly, then there is no chance that you will be able to repay the hybrid bonds before April or May next year. Therefore, you will have this money on the books one year before the prepayment. Also, could you give us some more flavor on the discussions you probably already started with, is it with the government or is it with all the parties negotiating the package from the beginning? Also on the conversion option, will you be able to get out of it? If you are able to get out of it, are we then talking within a couple of days or a couple of weeks? Is it correctly understood that that will take off 50 basis points of your payments? Then finally, and I can take that later, a question on systemic risk. The rights issue is being planned, and it is too early to very precisely put down what date we are going to run the rights issue. I think it is fair to say at this point in time that it is during the first half, and that is as precise as I can get to it. The reason that we are talking about 2012 for the hybrid is that when the law was passed back in 2009, there was a duration of the funding required by the hybrids for three years. That means in the actual law, there is the three-year tenor, and that is why Danske Bank cannot pay back the loan before three years has lapsed, and that is in May 2012. So you are right in as much as you can assume that we are going to have that hybrid until May 2012. That is where the negotiation is. Can we repay it at that point in time, and on what condition can we repay it for the remaining two years? We are negotiating directly with the Minister of Economic Affairs. But obviously, as you indicated, something that has to be agreed upon by the political parties that were active in the Bank Package 1 and Bank Package 2, which means basically most of the parties in Parliament. I don't think this is an issue that should become controversial in the Parliament. So I hope for good cooperation. I cannot go into how the 50 basis points are going to pan out if we get rid of the conversion right, which is one of the first issues that we're dealing with. We can't answer that question at this point in time. Okay. If I may ask another one on the timing, then if we assume that for some reason you knew that you would not be allowed to get out of the hybrids, would you then still raise capital in 2011 or would you wait? We would continue with the rights issue. Okay, thank you. The last question is on capital adequacy. There's a lot of talk about giving certain banks and for sure Danske Bank in Denmark, a number of, or a percentage, put on the capital requirements, due to systemic risk. Do you have any timing on when we could expect these rules to be finalized? Should we expect them to be finalized 2010, 2011, so that they can start from beginning 2013, or will this drag on? Well, I can guess about it. I think what the intention is to deal with both global and local SIFIs. There's no doubt that Danske Bank will come what you call a local SIFI. That could mean that we got a certain addition to our solvency need because of that. That can also develop instruments that can cover that structure. I think it's too early to tell. I would expect clarity on this by the end of the year. Therefore, it might be a little early for it to be implemented by the beginning of 2013, but it's not for me to say. Okay. Thank you very much. The next question comes from Jakob Brink from Handelsbanken. Hi, it's Jakob from Handelsbanken in Copenhagen. I just have one follow-up also on the rights issue and hybrids, and one more asset quality. I'm just thinking, why exactly are you going for a DKK 20 billion rights issue and I get 12.5% core Tier 1 ratio. You're still assuming I can see in the annual report that you have a 1.2 percentage points reduction due to Basel III. So even though it will be somewhat above sort of the European level, it's still not sort of that high in a Nordic perspective. So why exactly DKK 20 billion? That's my first question. The second question is on asset quality. I see that the upgrades and downgrades of customers, even in Denmark, is approaching 50 quite fast. Given that asset prices also seems to be stabilizing in your presentation here on farming, for example, why is it that you keep bookings actually increasing loan losses in the fourth quarter? I mean, what is it that should we soon be seeing some sort of significant reduction in loan losses? Thank you. Thank you. Well, first, the increase, if you make a comparative analysis and see where Danske Bank is positioned after a DKK 20 billion rights issue, also compared to the Nordics, we actually are well-placed in the upper end. So nothing seems to indicate that DKK 20 billion is too little. We also obviously expect with the earnings momentum increasing, to be able to generate capital by ourselves. In addition to that, there will be new instruments that we could possibly make use of. But I think for now it's enough just to celebrate a little bit the fact that our capital ratios are going to be relatively strong compared to others. You're right when you indicate that it looks as if the upgrades are starting to improve compared to the downgrades, but there are still individual companies that are facing issues. There are a number of medium-sized, smallish companies that have issues because the Danish consumption has declined. There's also been a decline in commercial property, and that has hit some of the collateral. Some of the Danish farmers, especially pig farmers, are having a stressed situation, and that's why. But the general overall trend seems to indicate that asset quality is improving in the Danish market, and we're glad for that. I have got a question from the website from Henry Christiansen from Citigroup. He asking the following questions. Could you please elaborate on your rationale of the planned capital rising, and why do you think now is the right timing to repay the government hybrids? Danske Bank is already reasonably well capitalized in core Tier 1 in a European context. What are the drivers why you think you need to add another DKK 20 billion of equity, especially in the light that some of your Nordic peers regard 10% as a long-term requirement? Finally, do you expect your regulator to impose higher capital requirements than Nordic peers, and how would that affect your ability to have a level playing field across the region? That was more than one question. As far as the question, why are we planning this capital issue at all? One needs to remember the functionality of the hybrid. The hybrid has a conversion feature, which means that if Danske Bank were to start taking losses, it would convert into stock, and that means it has loss absorption capacity. However, that disappears in 2014. So it is apparent that this is an instrument that is losing its value. We have also noticed that some rating agencies are discounting the hybrid, not even including that capital as core capital in their assessment of Danske Bank. We have also seen charts where Danske Bank is placed at the lower end. That is one reason why we think that we need to get rid of the hybrid. Another one is a bit emotional. It is not Danske Bank's preference to be subject to state support or whatever it is called. We do not really think it is state support because we pay a handsome coupon on the loan, but still we fall in that bracket. For Danske Bank's identity to be subject to that is also not the greatest. So there are a couple of reasons. Why we are doing it now? We can see that the new regulations are coming in in the second half. We have also been noticing that there had been a certain overhang in Danske Bank stock. By announcing what the rights issue will be when it is coming, we believe that we can deal with that. Why is it DKK 20 billion? A little before that question, I was asked why it was not more than that. I suppose it is a question of finding a balance, and if we compare Danske Bank's capital to other Nordic institutions, this places us relatively well. If we compare Danske Bank to European institutions, then it places us very well. We have it fine with that. You asked whether the Danish regulator could possibly have requirements that might affect level playing field. I hope not. I think level playing field is one of the statements that we continue to repeat here, but still, we must accept the fact that Danske Bank will be in the Danish market, a significant financial institution, and that could have an effect on our capital requirements, but nothing that will hamper Danske Bank's ability to function in its own market. But I cannot rule out a notch or so in capital requirement. But anyway, we will anyway wish to run Danske Bank with an ample amount of capital, and that is what we managed to get through this rights issue. The next question comes from Klaus Heimann from ABG. Yes, hello. Three questions from my side. First one on asset quality. When I look at your fact book, it looks like the non-performing loans are flat quarter-over-quarter. At the same time, I see that you have quite large write-offs down to your allowance account, which to me implies that you must have had quite a substantial inflow of new problem loans in the quarter. If that's correct, could you maybe elaborate on where that is and why you're seeing an inflow of new problem loans? Secondly, on costs, you once again in your report here specified that you will have DKK 1 billion in extra IT costs, which have been distributed over three years and which will end 2011. Could you maybe tell us how much of this has already been taken and how much we should expect for the rest of 2011? Finally, on the back of the problems or the default of Amagerbanken, have you made any observations of any adverse impact on your bank on the back of that? Thank you. I can begin with the first question about the inflow of the non-performing loans. It's true that there is an increase underlying in the non-performing loans. This mainly comes from Denmark, where we mentioned in the speech that there was a number of smaller medium-sized companies that has given us some reason for impairments this quarter, and also both Ireland and Northern Ireland, we saw some increasing NPLs. I can refer to slide number, what is it? In the appendix, slide 34, where you can see the actual NPLs in the different countries, and there you can see that these areas I just mentioned are showing increasing numbers. The write-off we have done is partly write-off we have decided to take on some specific loans where we are 100% sure we will not get this money back. These are related both partly to Ireland, partly to Danske Markets, and to a small extent also to Denmark. Okay. Can I just quickly follow up on that? Is that increase in problem loans in Q4, is that at all related to rising interest rates, or do you just see it as a, you can say, random fluctuation over the quarter? It's nothing to do with increasing interest rates because interest rates in the euro is flat in short-term interest rates, and in Denmark it's only up by very few basis points. So it is not related to that. On the IT side, it's right that we have some increased IT cost in Q4. We have said that there will be some IT investments to be made also in 2010, and this will also be visible in our numbers throughout this year. We don't know exactly when this will be booked, but it will be visible, maybe not as much as in Q4, but they will be there. As far as adverse impact from the Amagerbanken collapse, I suppose the first and very direct adverse impact will be that we'll be getting a bill from the Deposit Insurance Scheme. We haven't gotten it yet, but it will probably be around DKK 800 million. Other than that, it's obviously not great that a bank in a country loses or falls with losses for simple depositors. I think the market has noticed that this is a very unusual situation. Amagerbanken is a bit of an oddball in the Danish banking industry. It has been given a number of periods to raise capital by the Danish regulator. It has been presumed dead at a certain point in time and managed it again. So I think it's such a special case, and certainly we have not seen any reaction internationally as far as pricing Danske Bank paper. So I think we will be forgiven this one. Okay, thanks. The next question comes from Omar Keenan from Societe Generale. Good afternoon. As you said, your core Tier 1 will be amongst the highest of European peers. Is this in part about closing the funding gap with your Nordic peers? Can the loss of corporate market share and margin today be explained by this? Just a second question, please. Are you going to give an ROE outlook or target based on your enlarged equity base? Because if I plug in the rights issue then to cover an arbitrary 10% cost of equity, you need earnings of about DKK 13 billion a year over a few years, and that could see Danske struggle to cover its cost of equity. Do you have any comment on that? Thanks. Thomas, could you please repeat the first question? The first question was, your core Tier 1, as you said, will be amongst the highest of European peers. Is this partly about closing the funding gap with your Nordic peers related to your corporate market share and margin? I think of course that is something we can hope for this, if we have a higher Tier 1 ratio, that the funding, the gap between some of our peers could be narrowed. But it's not the main reason for this. Regarding the return on equity, you're right that our increased equity base will be around DKK 120 billion. If we should earn 10% on that will be DKK 12, or you mentioned I think DKK 13 billion. We'll have to work on that. We feel that Danske Bank has the potential to earn these numbers in some years in the future. Okay, thanks. The next question comes from Aaron Ibbotson from Goldman Sachs. Hi there. Good afternoon. Unsurprisingly, I also got a couple of questions on the rights issue. First, I would just like to square two comments from you, Peter Straarup, if that's okay. In the beginning, you said that you're doing this rights issue to finance a prepayment of the government participation capital of the hybrid. Yet you're saying that you will go ahead even if we're not allowed to pay it. So, I'm a bit confused if that is really the reason. Secondly, and obviously related to that, I wonder why you didn't wait until you got clarity on whether you can repay or not. Third, and finally, just looking at how Danske Bank look at being well capitalized. You mentioned you didn't like some charts where you showed up in the bottom. Just very quickly, if I look at the Nordic banks, Nordea was very clear that they think 10% is too much. Swedbank thinks 10% is enough. Handelsbanken thinks 8% is enough. DNB just reported 9.2% and SEB with 12% say that they are dramatically overcapitalized. So I'm just trying to look for how you see yourself when you look at well capitalized. I assume you're referring to Standard and Poor's risk-adjusted capital ratio when you say that you're at the bottom of the chart. Nordea obviously put it in its presentation where Danske Bank is second worst in Europe of peers. As far as I can calculate, the additional DKK 20 billion will move you from second worst to third worst. So in what way does this change the picture for Danske Bank? Thank you. First, as far as the rights issue, the reason for it, I suppose is multiple. One is that it's losing its value as indicated as a loss absorption structure, and that makes it inferior. We do know that we get new legislation from Basel III that will have a reducing effect on Danske Bank's core equity by more than 1%. We do also know, I think that we will be able to repay the hybrid with the government. There's already been a number of ministers that have expressed a positive attitude towards it. I just don't know what we are going to pay for getting out of the hybrid. But that's something we now have almost a year to negotiate, and we are doing that at this point in time. I think you are asking for clarity as far as the hybrid is concerned. I think what we are aiming for is clarity as far as Danske Bank's capital situation is concerned. With this rights issue, we demonstrate to the market what we think is required. Some of your questions, once you remember the fact that Basel III is reducing our capital, I suppose answer themselves. I am sorry. All the other Nordic banks have about 1% discount from Basel III as well, so I do not think there is any change. Do you view- When I make an analysis of Danske Bank and compare ourselves to the Nordics, you say we place from the bottom three. I do not know how many banks you have in your universe, but that is normally smack in the middle, I suppose. Sorry, I was referring to your comment where you said that you did not like some charts where Danske Bank was at the bottom. I just thought that you were referring to Standard and Poor's risk- That is an S&P chart. Another reason for the capital raising is that as an example, S&P in their assessment of Danske Bank completely disregard the hybrid for the reason that also Peter Straarup mentioned, that it is losing its loss-absorbing ability. They completely disregard it. In their charts, we are in a place where we do not want to be in the future. Okay, Danske Bank still looks at quarter one as the key metric to measure capital strength. You think that, well, I guess 11.2 then under Basel III is what you need to run with. At the same time, you are saying that we have a too high tier core, Tier 1 rate, where at the same time, you also say we are very weak. It does not make sense. Which of these ones do you believe is the right one? No, Martin, I don't have a view. I just wanted to try to understand what Danske Bank feel is the right way to look at capital and how you measure your own capital strength. Because you obviously say in your release that you have a massive amount of capital buffer above what's required. I'm just trying to understand, going forward, how we should look at what Danske considers being well-capitalized or not, and how- Well, when you look at our capital, then you can see that the equity-based core Tier 1 capital is a bit lower than our peers. The Basel III is looking precisely for equity-based core Tier 1 capital. That's the reason for the rights issue. Okay. Thank you. The next question comes from Johan Eklund from Bank of America. Thank you. You made some comments regards to the funding ratio in your report, and you said that at the moment you're at about 70%, yet you say that you have very limited funding needs this year. How are you going to take that from 70% to 100% and what does that imply in terms of long-term issuance? I think what we were saying was that we have about DKK 70 billion worth of term funding required for the year in order to continue to have the runoff on our liquidity profile that we appreciate, namely one where we have positive liquidity for at least one year. Those DKK 70 billion, was not 70%, it was DKK 70 billion, and we have raised DKK 20 billion in the fourth quarter. So we have remaining term funding requirement for the whole year of DKK 50 billion, which is not a lot when you look at our balance sheet. What we said in addition to that was that we have covered bond material, meaning covered bond loans that we can sell into the market, that we haven't utilized. So it should be a relatively easy job. The reason that this is being mentioned is that these days, liquidity, of course, is in focus many places, and many banks have large refunding obligations. Since we think we are in a relatively good position, we wanted to point that out. If I can summarize, it says on page 14 of the report that according to FSA guidelines, the ratio should exceed 100%, right? That is another metric. Okay. Yeah, that's another metric. That is a new metric that has been set up by the Danish regulator. We pass that in flying colors. Thank you. I have some questions coming from the net from Ronnie Rehn from KBW. He is asking the following three questions. Whether the regulators or government's stance was influenced by Amagerbanken's bankruptcy, how should we think about the potential reimbursement charges for the early repayment of hybrids, and how significant was the risk of rating downgrade as hybrid approach expiry? I am not sure how the first question should be understood. Come again. Whether regulators or government stance was influenced by Amagerbanken's bankruptcy, probably against repaying the loan. I don't think the government or the regulator will be influenced by Amagerbanken's situation when we negotiate our repayment. As said, we are in negotiations with the government, and it is a little difficult to, at this point in time, opine on how they are going to transpire. And the other one? How we should look upon the potential reimbursement charges for the early repayment of the hybrid. Yeah, we will have to communicate on that as soon as we have new information about it. As said, this is from the period from May 2012 until May 2014. Next question comes. How significant was the risk of a rating downgrade as hybrid approaches expiry? Well, it's obvious that on S&P we have a negative outlook. As we reach expiry and as we have seen Standard and Poor's giving it very little weight, if any at all, there was a risk of a rating downgrade. That would be, though, measured up against how the bank's performance would be in general, and we are starting to see improving performance. Anyway, we think this is the right thing to do. The next question comes from Simon Christensen from Nordea Markets. Yes, good afternoon. I have a few questions on Danica and also one thing to start with. Your NII sensitivity, I think is on the NII chart. More than roughly doubles one quarter from DKK 450 to DKK 900. Could you tell me what's going on there? Also on Danica, four small questions. What do you expect to be the Solvency II impact in terms of capital requirement for Danske Bank? Also, the Danish FSA has been out stating some benchmark level for life expectancy. How do you expect that to impact you? Also, do you expect that you can subtract the sub-debt in the capital requirement for running the life business in Danske's core Tier 1 complying with Basel III? Lastly, when I look at it looks like it will take roughly five times more capital to run the life business in Denmark relative to Sweden. Do you think there will be some collaboration across the borders? Thanks. Okay. Henrik, I'm now speaking. You had some questions about Danica. First, the Solvency II impact on Danica. Danica is participating in the QIS studies, and it's our overall assessment that the Solvency II level in Danica will be plus minus roughly the same as it currently is. We do not expect Solvency II in Danica to lead to a large increase in the solvency requirement in Danica. You should take into account that Danica is growing its markets business, Danica Link and Danica Balance quite a bit. Therefore, the real capital requirement by Solvency II come from the traditional business, and that is gradually moving into a runoff status. You asked about the Solvency II impact or the Basel III impact on the bank of owning Danica. There we expect that the solvency impact will be a reduction of the bank's core Tier 1 capital, and that's also what is illustrated in the annual accounts from Danske Bank, that there will be a reduction in our core Tier 1 capital ratio of around 0.8 or 0.9 in that range by owning Danica, seen from the bank side. You asked about the life expectancy in Danica, where the FSA has sent out some recommendation, and it's our feeling that Danica is quite well prepared to tackle that, and also in Danica's annual accounts we have over a number of years actually increased the provisions for life expectancy. It's our assessment that Danica is well prepared for answering these additional requirements from the FSA. You asked something about life insurance in Denmark compared with Sweden, and to be honest, I'm actually not fully able to answer that. We can come back to that if you're interested. You had interest- Yes. Then I can say a few things about net interest income. You are right that the sensitivity at the moment is DKK 900 million, as we have stated on slide number 5. The last time we commented on this was about a year ago, where it was only roughly half the size. The reason for this is that the interest rate, especially in Denmark, has continued downwards, which means that a bigger amount of our deposits will not be raised when interest rates are moving up again. You could say that the impact when we are at these low ends is much bigger because a 25 basis point downwards trend will, the last couple of times that has happened during 2010, then there was a substantial amount that went into the bracket where there were a floor risk. This also means when we see the turnaround, if the interest rates are starting to move up again perhaps sometime during this year, then you will see this DKK 900 million impact at the beginning. But very quickly this number will decline again when we are up 50 or 75 or 100 basis points. The number will be substantially lower again. Okay, thanks. Just one thing I did not get more clarity on, that is the deduction in the capital core Tier 1 base from Danica. I mean, today I have not seen the Q4 number, but roughly you subtract DKK 5.2 billion, and the capital requirement of running Danica is around DKK 8 billion. The difference between that is the subordinated debt. It just does not make any sense to me that you should be able to subtract the sub-debt into the core equity, clean equity base under Basel III. What is your opinion on that? Is that included in the 0.8 or 0.9? It is true that this is a question mark we also had ourselves, whether we will be allowed to make this deduction in the solvency requirement in Danica of DKK 3 billion of Tier 2 capital. It might be so that we have to deduct it in the core Tier 1 in the bank. If so, then it will raise from the current. Actually at the end of 2008, the number have declined to DKK 4.8 billion roughly. So it will be an additional DKK 3 billion on top of that. That will of course further reduce our Tier 1 ratio in the group. This is a good example of the uncertainty there still are into what the final Basel III regime will be, and that is also one reason why we believe it is a good idea to have a little bit extra capital for the time being. Okay, thanks, Martin. The next question comes from Jacob Kruse from Autonomous Research. Hi, Jakob from Autonomous. I just had a couple of questions. First, to get back to that hybrid issue we just discussed on the Danica side. When you talk about the 1.2% impact of Basel III, does that then fully include the 0.8 to 0.9 decrease from Danica, or is that a different issue? Does it include this hybrid debt situation in Danica? What we have mentioned and shown in the annual report, that the Basel III impact would be 1.2 or 1.3 reduction in our Core Tier 1 ratio. That's a combination of two factors. It's a combination of the Danica effect of the DKK 5 billion we just talked about, which the previous question was related to, and then it's an additional impact on our risk-weighted assets from Danske Markets. This 1.2, 1.3 effect on our Core Tier 1 ratio does not include an effect if the subordinated debt in Danica should also be deducted in the bank's Core Tier 1 capital. That would be on top of that, but there are uncertainties related to these future rules as Martin Gottlob just explained. The other question I just wanted to ask was on the SIFI issue, because it sounds to me like you are mostly raising capital to improve your core Tier 1 ratios rather than directly to repay the hybrid, which I guess would have been more sensible to raise at the time of repaying it and having that cleared. But what is the impact that you are seeing from this SIFI regulation in terms of your minimum core capital requirements that you think that you need from the point of view of regulators? Also, was it a regulatory review that instigated this capital raising, or is it you doing your own internal numbers and coming up with a need for further capital? That is easy to answer. It is us doing our internal numbers. As mentioned here, we wanted to prepare the bank for it early, and that is the reason for the rights issue. What level is it that you are looking at from the additional from the SIFI risk? From the SIFI? Yeah. We can't answer that question. We also can't answer whether a part of the SIFI should be covered by a convertible bond or whatever develops. I think the way the regulators are planning this is first to deal with what you call global SIFIs and then find out what is required in terms of monitoring global SIFIs, and then later look at local SIFIs. So it's too early for us to communicate on it, but obviously it's going in the direction that it will be an addition to our solvency requirements. Okay. Thank you. The next question comes from Mats Andersson from Cheuvreux. Yes, good day. Mats Andersson here at Cheuvreux. Coming back, of course, to the capital question here. If I heard it correctly, you said that the board has today decided on a new payout ratio or dividend strategy for Danske Bank of one-third of the EPS being distributed to shareholders. I was wondering a bit if you could elaborate on the balance you are striving here between both Danske Bank's capital needs as you have tried in other angles here during the afternoon, but also in terms of future growth, as well as how do you see the shareholders' demands for a cash flow through the dividend to them. Thank you. Well, obviously by indicating a payout ratio of one-third, we indicate where we hope we could put the payout ratio. We would obviously need to look at the capital situation first and foremost before you start having paid the payout dividends, and we would also need at a certain point in time to set a capital target. We shy away from that a little bit at this point in time, and I think the contents of this phone conversation here also discloses the fact that there is great uncertainty as to where the capital requirements are going to precisely land due to the regulatory action. But what the bank would need to do once we have clarity was to fix a capital target and then have a dividend policy. And here we are phrasing that the dividend policy would be about a third. If we were in a situation after that, then we had capital in excess of that. The bank obviously would have to consider how it could make cash flow available to its shareholders. And the way we did it in the beginning of the 2000s was we had share buyback programs. I think it's early days starting to talk about share buy programs, but when we make an analysis of Danske Bank's developments, then we will to the best of my expectation, produce quite a bit of cash flow. But let's see how it develops. Thank you. The next question comes from Jan Wolter from Deutsche Bank. Yes, good afternoon. A couple of quick questions. First, when you repay the hybrid, obviously we don't know the details around that, but I think we all assume that you will negotiate some kind of penalty for early repayment with the government. Could you share with us what you propose in your application, which I understand you sent in, and how we should view sort of the shortfall in interest income for the government here? You pay a coupon on 9.6 today. What should we compare that with? The risk-free rate out there in the market or an instrument of similar risk, since this has a great impact on the penalty fee? That's the first question. The second on the trading activities, I think you mentioned that you could see DKK 1.5 billion-DKK 2 billion trading income here going forward. What confidence do you have in that number? Was it only valuation effects that brought down the trading income this quarter so much, or do we also see a materially lower flow income in that business? Thank you. First, on the hybrid, I think I have to maintain that I can't offer to have the discussions with the government conducted in public. Both parties, of course, are looking at that, and Danske Bank is approaching it in a commercial fashion, and now we'll have to communicate when we get further on it. Trading income? Well, the trading income, we still believe that the underlying income flow from trading will be in the area of DKK 1.5 billion to DKK 2 billion per quarter, giving the current market condition. We know that market condition can rapidly change. We have seen that previous time, and that, of course, can change the picture. But for the time being, we will stick to that. So we are pretty convinced at the situation is now that we can keep that. But there will always be quarters where we are outside of that bracket, both on the upper side and on the lower side. Okay, many thanks. The next question comes from Nick Davey from UBS. Yes, good afternoon, everyone. Thanks very much for taking the time. Nick Davey from UBS. Just one final question, please. If you could just talk a little bit around the deposit environment domestically in Denmark. I noticed some shift in the deposit balances domestically. If you could just talk us through your remarks around that area. Thank you. Danske Bank has been relatively liquid during the last couple of years, and that has also been the case in 2010. For that reason, we have not been bidding aggressively into what you can call the corporate short-term deposit market. Danske Markets therefore saw a decline in that type of deposit. On the other hand, we saw a good growth in the traditional deposit activity in the retail bank, where we actually saw a development positive above DKK 48 billion on retail deposits. So the quality of our deposit book and the average pricing of it improved. That was a very beneficial development. In some of the other franchises, we have seen a similar development, and especially in Ireland, we have seen quite a bit of inflow on the deposit side. So the bank's loan-to-deposit ratio has been quite a bit improved during 2010. Okay, thank you. Simon Christensen from Nordea Markets is back online with a question. Yes, I think you touched upon it before. I can see if I subtract Realkredit Danmark and the Danish loan losses and also the lending, of course, you increase excluding Bank Package payments in Q3 from 87, I think, to 134. To me, this is kind of disappointing. I know they can fluctuate, and it is just disappointing in the sense that we were pretty much expecting that maybe the good times or some better times are returning to Denmark, and I am just interesting to know your gut feeling about 2011 on this. I think better times are turning to Denmark. We can also see that by the developments in up and downgrades. However, there are still companies that have impairment charges, and our developments here where they are a little stubborn in not coming down too quickly is also shared by other banks than just us. So the Danish market still has relatively high impairment charges. We think it is wearing down. We can also see that the amount of bankruptcies is developing in the right direction, but it could take a couple of quarters. Okay, thanks. Am I completely incorrect if I suggest that your coverage ratio, excluding Realkredit Danmark in Denmark, would be around a little bit below 80%? Say that again. Coverage ratio. Coverage ratio on the non-performing loans in Denmark. Would it be entirely incorrect if that would be suggested to be around 80%? I have not made that calculation, so I cannot say it exactly here. I can check it. Thanks. Once again, if you have a question, please press star then one on your touch tone phone. Okay. We have no further questions. More questions. We have no further questions at this time. Okay, operator. Thank you very much, and thank you all for your interest in Danske Bank and for your questions. As always, you are all welcome to contact us if you have more questions after you have had time to look at the accounts in 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 will appear on our website shortly, and a transcript of the Q&A session will be added.