Earnings Call: Q2 2010

Aug 10, 2010

Summary

H1 net profit more than doubled YoY to DKK 1.7bn despite a 25% decline in income; costs and impairments improved. Capital remained strong, while 2010 was expected to stay challenging as rate pressure and high credit charges persisted.

Thank you, operator. Welcome, and thank you for taking the time to attend this presentation of Danske Bank's financial results for the first half of 2010. With me today are Chief Financial Officer, Tonny Thierry Andersen, and Head of Investor Relations, Martin Gottlob. Please go to slide number 2. Tony and I have split up today's presentation. I'll begin with a brief summary of Danske Bank Group's financial performance, then Tony will review the most important accounting items. Finally, I will comment on some key developments and give you some observations on the outlook for the rest of 2010. After the presentation, you will, of course, be able to ask us questions. Please go to slide number 3. With a net profit of DKK 1.7 billion, Danske Bank's half-year result was more than twice as high as in the same period last year, despite a 25% drop in total income. This is an acceptable result in light of the difficult market conditions, and we're moving in the right direction. It is encouraging that an increasing number of our business units are operating with a positive result again. Last year, only 2 of our 8 banking units showed a net profit. This year, 5 of them have, Sweden, Norway, Finland, the Baltics, and other banking activities. If you adjust for the DKK 2 billion we paid to participate in the Danish Banking Package One, Banking Activities Denmark is also on the list. It is also a positive sign that lending volumes have begun rising in several countries. Please go to slide 4. Despite the good news, we must acknowledge that DKK 1.7 billion is not a satisfactory level of earnings in absolute terms. It reflects market conditions which are still difficult, although they are slowly improving. As I said earlier, we are moving in the right direction. As expected, income was somewhat lower than last year's level. Net interest income was adversely affected by lower central bank rates, lower volumes, narrowing deposit margins, and increasing expenses for long-dated funding. There was only a limited increase in lending margins. After the extraordinary trading income we posted in 2009, this item came in at a more normal level of DKK 5.2 billion in the first half of 2010. That actually represents a good performance considering the volatile markets in May and June in reaction to the turmoil in Southern Europe. Other income was fairly stable. Both expenses and impairment charges show a clear improvement. We reduced expenses by a full 14% year-on-year. The improvement was owing to our intensive focus on cost. It also helped that we did not need to make further goodwill impairment charges. In addition, after the third quarter, we'll no longer have an expense of DKK 625 million per quarter for the Danish Banking Package One. Our grip on costs remain firm. Loan impairment charges are still high, but they have declined for 6 consecutive quarters, and in the first half of 2010, they were about half of the amount in the same period last year. The trend is positive, but many of our customers are still struggling with strained finances, indicating that it'll take some time to get through this crisis. There are great differences from country to country. Ireland and Denmark are still the regions that occasion most of our impairment charges. Please go to slide 5 as I turn the microphone over to Tony, who will take you through the specific accounting items in more detail and focus more on the quarterly trends. Thank you, Peter. Let us start at the top with net interest income, which declined only slightly from the first to the second quarter. The positive effect of one extra day in the second quarter, some DKK 67 million, was offset by lower interest rates and continued pressure on deposit margins. Lending margins in Norway were adversely affected by the six-week notice period after the rate hike in the second quarter. We are still experiencing stiffer competition on lending margins despite uncertainty about the coming regulatory tightening and the fragile economic recovery. Funding costs were almost unchanged in the second quarter. Please go to slide number six. It is positive that fee income has stabilized at a level 12% higher than in the first half of 2009. This was owing to increased customer activity on the capital and mortgage markets. Much of our fee income is generated at Danske Capital, which was recently rated the best Nordic asset management company by Thomson Reuters. In the first half of the year, the unit continued to deliver a strong investment performance and succeeded in taking over a number of large mandates. Please go to slide number seven. Trading income rose 18% from the first to the second quarter, but adjusted for the one-off capital gain of DKK 659 million related to the merger of PBS and Nordito in May, it declined 9% in the second quarter. The performance is nevertheless satisfactory considering the market volatility we experienced in May and June. As we have disclosed, the group has very limited exposure to Portugal, Italy, Greece, and Spain. The direct effect of the problems in Southern Europe was therefore very small. We did, however, have some unrealized losses on the Spanish covered bonds, which are part of our available-for-sale portfolio, and as such, did not influence the P&L. But Danish accounting standards require us to deduct the valuation changes in the calculation of our core Tier 1 ratio. On the other hand, declining interest on Danish mortgage bonds offset a good portion of this loss. Our income from customer-driven trading in interest rate and FX products continues to rise. Please go to slide eight where I would like to spend a little time on the income from our insurance business, Danica. Income from insurance business declined 75% from the first to the second quarter because of a lower investment result and only a partial inclusion of the risk allowance. Danica continued to show strong premium growth and an increasingly positive unit link result. But quarter on quarter, we saw a dip in earnings as long Danish mortgage rates declined. Consequently, the technical basis for the risk allowance was not sufficient for us to book the full allowance, so DKK 177 million has been transferred to the shadow account which now amounts to DKK 758 million. Please keep in mind that there is no time limit on when we can book this amount to our P&L. In order for us to include the full risk allowance for 2010, share prices would have to rise about 0.6% from the level at the end of the second quarter. On the basis of the latest share prices, we will therefore be able to book the full risk allowance for 2010. Now let us turn to expenses. Please go to slide number nine. In the first half of 2010, expenses were 14% lower than in the same period last year, although they increased 6% or around DKK 400 million from the first to the second quarter. The reason for these changes were about DKK 67 million of the rise was the result of the announced postponement of costs for marketing, IT, and renovation projects in the first quarter. DKK 50 million stemmed from the depreciation of cars sold at Nordania Leasing, but this was offset by a rise in other income so it had no bottom-line effect. DKK 118 million were owing to the seasonal booking of holiday payments, which will be reversed in the third quarter. We also booked DKK 145 million for the deposit guarantee scheme in Denmark and Northern Ireland in the second quarter. Severance payments were a little higher than in the first quarter, and on the positive side, our pension obligations in Norway were DKK 93 million lower. The underlying cost base fell 3% from the level in the first half of 2009. We have been able not only to neutralize salary increases and general inflation, but also to reduce cost. We are pleased with this trend, but we are not done yet. Our current cost control program runs until the end of 2011. On top of this, we will get some help. The third quarter is the last in which we have to pay the DKK 625 million state guarantee fee as the first Danish Banking Package expires in September. This alone will immediately reduce our cost base by about 10%. The total number of FTEs increased in the second quarter, mainly because of summer temps in Finland who will be off the books in the third quarter. Please go to slide number 10. Loan impairment charges declined for the sixth consecutive quarter and stood at DKK 3.5 billion in the second quarter. The annualized loan loss ratio came in at 71 basis points. We see less need for impairments in most of our markets and consider the low levels in Finland, Sweden, Norway, the Baltics, and other banking activities to be sustainable. Impairments in Denmark also fell, but they remain high. In both Northern Ireland and Ireland, we needed to increase impairments above the level in the preceding quarter. The charges include DKK 460 million in collective impairments, mainly against Irish commercial properties, Danish housing cooperatives, and personal customers. We also booked DKK 464 million to Financial Stability this quarter to cover the expected cost of troubled Danish banks. The remaining portion of the maximum obligation of our first loss/tranche loss of DKK 3.3 billion is now DKK 0.5 billion, which is still at stake until the end of the third quarter. On the next couple of slides, I will elaborate a little on the trend in loan impairment charges. Please go to slide number 11. We have chosen once again to include this illustration of rating changes in the presentation. Our corporate book still shows more credit downgrades than upgrades, and the previously improving trend leveled off somewhat in the second quarter. There is still a way to go before we are out of the woods, especially at our Danish unit as the number of new bankruptcies remains high. Please go to slide 12. Loan impairments continue to improve at the Group level, falling to DKK 3.5 billion in the second quarter from DKK 4.3 billion in the first. SMEs still dominate the impairments, whereas charges against personal customers at 24% of impairments are still low relatively to the amount of the loans. We have still seen an increase in loans subject to individual impairment testing. This is driven by higher credit exposures in rating category 10 to personal customers and SMEs that are not yet in default but have shown other signs of economic difficulty. Exposures to rating category 11, which contains customers in default, actually declined by 10% in the second quarter. Please go to slide number 13. Let us now take a look at the impairments for each of our main business units. Charges decline on all of the Nordic markets, which represents 88% of our total lending, but they are still high in Denmark. Danish impairments are still driven by the SMEs, now mainly in the farming, fishery, and cooperative housing segments. These are our first charges on the latter segment as we see problems arising from the special construction of housing cooperatives combined with falling collateral values. Impairments on retail customers make up 25% of the total impairments at Banking Activities Denmark. At the end of the second quarter, Danish banks began publishing reports from the Danish FSA on the FSA's inspections during the quarter. The assessment of the Danish unit occasionally some comments on the credit quality of the retail book. By the time of the publication, we had already tightened our credit and lending policies and have thus met the FSA's requirement, including the booking of DKK 280 million in collective impairments. Add to this the DKK 464 million for Bank Package I that is also booked under Banking Activities Denmark. Please go to slide 14, which covers our other business units. Impairments increased in both Ireland and Northern Ireland in the second quarter. In Northern Ireland, the rise was due to a few write-downs on Land Bank. The economic outlook for Northern Ireland has become a bit weaker as the new U.K. plan for cost savings in the public sector will hit the region. In Ireland, the commercial property segment is still driving the high impairment level because of updated value adjustments of collateral on commercial property. The sharp decline in our Baltic impairments was a positive surprise last quarter, and the trend continued at all three units. Most of the impairments are made on personal customers who are undergoing great difficulties because of rising unemployment and lower wages. But it's positive that our corporate customers are doing better and that we see a steady improvement in the Baltic economies. Impairments in other activities derive mainly from our exposure at Danske Markets, where we made reversals of DKK 807 million in the second quarter because of positive developments in the U.S. housing market that led to higher collateral values. That concludes my section of this presentation, which Peter will now resume. Please go to slide number 15. Thank you, Tony. The stress test of European banks was a hot topic a couple of weeks ago. As you know, Danske Bank passed the test with a solid margin, and our 10% Tier 1 ratio put us in the top quartile. This is a confirmation of the Group's substantial financial strength. Even if you exclude the DKK 26 billion in hybrid capital from the Danish state, we exceeded the 6% requirement by a sound margin. Please go to slide 16. Let's turn to the bank's funding position. We completed this year's funding of DKK 30 billion by the end of June. In the second quarter, our main issues included a 12-year covered bond for EUR 1 billion in our international pool. This is another example of our strategy of focusing on long-term borrowing. In the second half, we will look at the opportunities in the market, and if we find attractive terms, we'll consider increasing our long-term funding further. At about DKK 30 billion, our funding need for 2011 is very limited, however, and it can be fully covered through unutilized covered bond pool assets. In the short-term funding markets, there's much attention to the expiry of the Danish state guarantee at the end of September. We do not expect that this will have any material effect on Danske Bank's funding activities. We've already issued a substantial amount of commercial paper that matures after the expiry date, and we see this as a confirmation of the market's confidence in Danske Bank as a borrower. Our low CDS spread is another sign of our favorable standing, which was further confirmed in the days after the stress test result were announced. Please go to slide 17. With a core Tier 1 ratio of 9.1%, Danske Bank maintained a strong capital position in the second quarter. Including the convertible state hybrid loan capital, our total Tier 1 ratio was 13.7% and our total solvency ratio was 17.2%. When we compare these levels with our ICAAP ratio of 10.1%, it is clear that we have a sound capital base, as the EU stress tests also confirmed. Our capital ratio declined slightly in the second quarter because of increasing risk-weighted assets. The rise was caused by a reversal of impairments on our securitization portfolio owing to improved figures for the U.S. housing market in combination with an appreciation of the dollar. Please go to slide 18. Two weeks ago, the Basel Committee published a revised note on the coming Basel III rules that in many ways moderated the measures proposed in the first note from December. The new set of proposals is an improvement in many respects, although not all issues that were raised last year have been resolved. We see the note as a clear step towards a set of rules that can work for most of Europe. From our point of view, the main outstanding issue is how to treat the Danish mortgage market, particularly regarding short-term liquidity. We're still confident that we will end up with a solution that is acceptable to Danish mortgage providers as well as Danish mortgage customers. After all, the unique Danish mortgage system proved its superiority during the financial crisis. Please go to slide 19. The recovery of the European economies continues, although somewhat fragile. GDP is expected to grow in almost all of our markets this year and next, but at low levels. The timing and effect of any fiscal and monetary tightening, as well as possible adverse consequences of future financial sector regulation, remain the largest threats to the economic recovery in the coming years. In the second quarter, the capital markets once again turned harsh and punished the Southern European countries for their overextended public finances. Our main markets in the Nordic region, including Denmark, remain in a strong position, however, with the lowest public debt levels in the EU and high sovereign ratings. Please go to slide 20. Our cautious optimism about the macroeconomic improvement, of course, influences the way we look at our earnings potential for the rest of the year, and we expect 2010 to remain a challenging year. Our expectations for the remainder of 2010 have therefore not changed significantly in the past three months. Net interest income is expected to remain under pressure as we see no changes in ECB rates before the end of next year. Trading income is getting closer to the normal level of about DKK 1.5 billion-DKK 2 billion per quarter, but it will remain highly dependent on the developments in the financial markets. That is also the case with income from our insurance business, Danica. At this point, we are able to book the full risk allowance for 2010, however. We are now less than two months from the expiration of the first Danish Banking Package One. This will reduce our expenses and loan impairment charges by a total of DKK 1 billion per quarter. We do not expect any major negative effects from this. In addition, we continue our strong focus on cost management, and we hope to see a continuation of the positive trend in loan impairment charges, although we expect them to remain high. We can now see light at the end of the tunnel, and we believe that better times are in store for both Denmark and Danske Bank. Please go to slide 21. That concludes our presentation of Danske Bank's financial results for the first half of 2010, and we are now ready to answer your questions. If you are listening to the conference via 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 then one on your touchtone phone. If you wish to be removed from the queue, please press the hash key. Your questions will be queued in the order that they are received. Christian Hede from the Jyske Bank is online with a question. Yes, good afternoon. This is Christian Hede from Jyske Bank. I have three questions. One is about your additional write-down for Banking Package One of DKK 464 million. I noticed that other banks have not done this. How do you see the situation? How big do you expect the bill to be? Do you expect the DKK 10 billion of the first tranche to be used, all of them? The second question also relates to Banking Package One, but more to the expiry of it, since you are not allowed to pay out dividends under Banking Package One. Have you given it any thought what your policy will be going forward when you are allowed to pay out dividends? Would it be fair to assume that you will not exceed around DKK 4.80 restriction from Bank Package II? The last question is relating to the fact book, page 24, where I am looking at the write-offs debited to the allowance account. I noticed that these write-offs are quite small. They are now below DKK 0.5 billion this quarter. When do you expect these to increase? Since I assume you expect to use all DKK 44 billion from the allowance account, then, of course, you will need to have much bigger write-offs. What would be the timing of this? Are we talking increasing in 2011 and then topping in 2012, or how do you see the situation? Thank you. Thank you. First on the impairment charges we have booked related to Danish Banking Package One. What we have basically decided is that we think that there will be a claim for the full DKK 10 billion, which is the first tranche. The DKK 10 billion we have a third responsibility for. That means that it is about DKK 3.3 billion. So if we book the same impairment charges, which you should expect for this specific item in the third quarter, then we have made a full provision for DKK 3.3 billion. I know that the tally is not up to DKK 10 billion at this point in time. I think the assessment that is going to be made by the end of September will be based on realizable values, and that might take a little out of the present surplus that is compared to DKK 10 billion. To be honest with you, I think in the benefit of caution, there is a high risk that we will use all the money and we might as well save up for it. As far as Banking Package One is concerned, when that expires, you are right, then we can pay dividends again. We can pay dividends if we have earned the money. This will mean that we can pay dividends in 2011 for 2010 for the fourth quarter if that fourth quarter has a profit. How much we will pay in dividends and if and when and all this is an item for the board and for the annual general meeting, of course, to decide. You made mention of the threshold which is related to Bank Package II. That is a threshold where if we exceed it, the interest we pay, the interest expense we pay on the hybrid will increase. And it is a safe bet to assume that the bank will not go beyond what we have to pay or what we can pay without having an increase. I do not think, though, you should expect us to hit that target for the fourth quarter if we end in a situation where we declare any dividends. On page 24 in the fact book, you are right that write-offs are relatively low when you consider the fact that we have an allowance account of DKK 44 billion. It is a timing issue. There is no policy decision behind it. You see a need for an impairment. A company goes into bankruptcy, and it takes a while before the estate in bankruptcy is carried through the court system, and we write down when the legal proceedings around bankruptcies, et cetera. So you should expect that figure to rise in the coming quarters. I cannot be precise on how much it will, and you should also expect it to fluctuate. It is possible that we, at a certain point in time, would be a little more aggressive on writing off on account on this item and then accumulate a little. We have not done that in the second quarter. Thank you very much. Aaron Ibbotson from Goldman Sachs is online with a question. Yes. Hi there. Good afternoon. I just have a quick question actually on just some clarification on the movements in risk-weighted assets. I think you mentioned, was it 27 billion or so related to credit risk migration? You said that majority were primarily due to movements in securitizations. I am a bit confused how it can be so much. Even if I apply a sort of 12.50 deduction on your sort of 900 or 800 reversal, I get around 10 billion. So I would like if you can give some clarity on those 27 billion. Secondly, and very much related to that, I wonder if you can update us on your expectation of movement in risk-weighted assets that are not related to credit growth, both maybe this year, but primarily maybe year-end 2011, when potential new Basel rules, sort of Basel 2.5 being introduced. Thank you. Aaron, on the question on the downgrade, I think you are right that our securitization takes up some part of this credit migration. But if you go and look at slide 11, the one that shows upgrades and downgrades on a corporate book, you can see we still have more downgrades than upgrades, and particularly in the Danish corporate book. So adding that to the effect on the securitization, that is what has consumed the credit migration. The only thing you also have to remember that the US dollar appreciates against the Danish kroner, and we have some exposure, especially when it comes to our securitization portfolio, which are exposed to in the US dollar, which are not impaired. But there the risk would also go up because of the dollar has gone up. I guess the only thing that confuses me a little bit, is if I compare it to previous quarters and movements in risk-weighted assets during those quarter when your actually downgrades were even worse than they are currently. We did not see really any pro-cyclicality coming through in absolute levels, whereas now we are seeing quite a large one. Yeah, but you also keep in mind last quarters, previous quarters in 2009 and also the first quarter 2010, you saw loan balances coming down, whereas that has stopped more or less in the second quarter. The combination that the low loan balances came down in 2009, that absorbed more or less the downgrades you saw on the book. Is my DKK 10 billion, DKK 17 billion a rough split of credit versus securitization? Yeah, that would be the expectations. Okay. Going forward? Well, I think when you look at risk-weighted assets going forward, we could see if your share loan balances being more or less unchanged there. You can look at the graph on page 11, seeing that the trend is that there are still more downgrades than upgrades, but it is improving slightly, so you could hope eventually that things would normalize. So there could be some credit migration going forward also that are negative, but I do not think of any particular magnitude as I see it. You asked the question on the Basel 2.5, what would the impact be? I do not think there will be any particular impact on risk-weighted assets from that side. I think the changes on leverage ratio and on the minority interest is obviously positive for us. So I do not expect any big drag on Basel 2.5. Is that okay, Aaron? Jacob Brink from Handelsbanken is online with a question. Hi. It is Jacob from Handelsbanken. I have two questions. Or actually just one question. It is regarding the Irish operations. I am quite puzzled about the big jump in provisions in Ireland to around DKK 1.6 billion, up around 15%. I think you mentioned someplace in the report that it is due to declining asset values and commercial property. But looking at your own graph material from some time ago, it is coming down much slower now than it used to do last year. So I am a bit surprised about the very, it is actually the biggest write-down you have ever done in one quarter in Ireland. So I was thinking if this has maybe anything to do with the Irish Bank starting to transfer assets to NAMA, and then you might getting some prices in the market. Thank you. Our indication on the property market in Ireland is that it is soft, and it continues to be soft, and it is softer than we have expected. And you are right that we might have taken some inspiration from NAMA. You saw NAMA transfer the first tranches out of a number of the banks, and they came down much lower than we talked about just five, six months ago. Discounts of 48%-50%. So I do not know if we are on the side of caution here. We have not done that so far in the Irish property market, but we felt that there was a disappointing development, and liquidity in the market was not very strong. So that is the reason. Basically, the remaining of your commercial property book or construction book in Ireland has now been written down to the NAMA levels, or how should I read that? By and large, there are individual differences in the individual impairments and where it built and what is the possibility for rental. It is individual impairments, but I don't think we owe anything to the Irish banks when we compare the relative level of writedowns. Okay. Thank you. Andreas Håkansson from Credit Suisse is online with a question. Yes, hi. A few questions. First, just to follow up on Ireland. When we listen to the Irish banks, it sounds like they believe that provisions peaked sometime during 2009. Could you just tell us, we saw this very sharp increase in your provisions, but how should we look at when did we see the peak? Was this a more or less of a one-off quarter, and should we get back towards, well, not normal level, but what we saw in the previous quarters? The second question, if I look at NII, you benefited from the DKK 106 million from interest on the employee tax refunds. You saw that also similar number in Q1. Could you just tell us how much is left to be booked in the coming quarters? The last question quickly, just on FTEs in Finland increased quite significantly in the quarter. Can you tell us what's driving that? Thanks. Well, just on the latter, on the FTEs in Finland, that is summer temps they're using, and they will be out of the books in Q3 in Finland. So that's not a spike in FTEs. On the net interest impact income of the tax refund interest on that, we don't expect to book anything in the future. It could be obviously court cases we win, but I don't think that is something we guide anything about. So don't expect that as part of your guidance. On the question whether the impairment charges in Ireland peaked in 2009, I have to say that the picture was that Danske Bank started making impairment charges somewhat higher and somewhat more than the Irish banks. Now the picture is that they by and large have caught up with us in terms of percentage if you compare them. I would hope that the levels peaked in second quarter here, where we made the adjustment, I suppose, based on the latest developments. But we don't know. The Irish market, of course, is seeing some economic recovery as far as the macroeconomic developments are concerned, and that gives ground for some optimism. But there haven't been much liquidity in the property market, and that's the reason why we have found it necessary. Just to follow up on that. If commercial real estate prices would be unchanged from here, should we then see your provision go back to the trends you saw in previous quarters and then go up or down depending on how the macro environment is developing? Yeah, that wouldn't be an incorrect guess, I suppose. Thank you. Claus Jensen from ABG is online with a question. Yes. My question mainly regards the Danish operations and basically the return in the Danish operations. Now, after Q3, you will have the cost for Bank Package One running off. Even if I adjust for those in this quarter, the return on allocated capital is not that fantastic. If we assume, which I do not hope to be the case, but if we assume loan losses stay at this level, what opportunities do you have to improve your return in the Danish operations? Well, I think, Claus, when you look at the profit, keep in mind that the impact from the first banking package is not only on fees, DKK 625 million, but also including DKK 400 million to DKK 500 million every quarter on provisioning. So we are talking about DKK 1 billion delta per quarter in our Danish operation that are affected on this one. Secondly, when you look at the things we are moving in in terms of using customer service center and we are using technology, I think there are scope for us to continue on the cost side. So I think looking that into account and maybe also the loan losses eventually also will come down as we see now house prices are beginning to pick up a little bit in Denmark. There should be scope for us to improve profitability going forward. You seem to have turned a bit more positive, if my interpretation is correct, from what you said on press conference today and also what you just mentioned in your presentation on the level of loan losses in Denmark. Could you maybe elaborate a bit on the reason for your optimism? You mentioned house prices, but I guess they have been increasing since last summer. Well, what I am saying is that you see that export is improving in Denmark. You see that house prices are coming up. You see the unemployment rate are coming slightly down. Economic activity is coming up slightly. That does not mean it is not a fragile situation, because a lot of stimulus has been pumped into the European economy. So that is where the uncertainty is around this one here. But eventually, we would hope that we will not have to continue with this kind of impairments, even though it will take some time to get out of it. Okay, thank you. Janice Walsfield from Mitsubishi UFJ Noble is online with a question. Oh, hi. I had a couple of questions. On trying to look at the NIB and the issue in the Republic of Ireland, if I take your stock of provisions, I think it's DKK 9.7 billion. How much of that would be to commercial property and construction? Can I compare it to the DKK 20 billion in the slides? I mean, just kind of get a feel for how far we are along. Yeah. About 80% of it is related to commercial property. Okay. Also two more things. One on the securitization issue and risk-weighted assets. Is there a scenario where we get more risk-weighted assets coming back? Because you made those. I think you had a reclassification, didn't you, in Q4 where the risk-weighted assets went out because they were written off, and it's quite a big number. How much have we seen of that coming back, and is there a prospect of this happening again? In theory, if it turns out that we don't lose one single US dollar on this, then it all can come back. But I think that's unrealistic to expect. Things have improved for some months in Q2. Lately, we have had some reversal information saying that things are maybe not as good on this market. So I wouldn't expect that you'll see any strong improvement, at least not in the near term. But in terms of how much has been reversed from the original, I think the Q4 number was like 90 billion, wasn't it, that went off. So we've seen like 10 billion-15 billion come back, because I think there's quite a lot of things going on in the 27 billion RWA number, isn't there? No, but the majority is still left. The provision we have made is still left the majority of that. The reversal is much less than we made. We made an impairment of around 3 billion in Q4. Okay. Thanks so much. Chintan Joshi from Nomura is online with a question. Hi, good afternoon. I've got four questions. The first question, reversal of 800 odd million that we saw on the securitizations. Could you talk about what these underlying assets are? We get an idea of what's happening there. The second question, given the kind of changes in expectations of rate hikes, what are your expectations when interest rates go up and when you expect to see some of the deposit margins come back? Third question on holiday expenses, DKK 118 million. Should we expect the reversal in Q3 to be DKK 118, or will it be more than DKK 118? Just want to reconfirm that. The fourth question on your credit outlook statement. In the last quarter, you said you don't expect credit losses to be as high as, whereas in this quarter you say credit expenses will be somewhat lower than. I just want to understand the difference between these two statements. Okay. First, the reversal on the DKK 800 million from Danske Markets, that relates to securitization where we have some exposure to the U.S. property market which has also already been discussed here in connection with the securitization question. What we have seen, and we base our impairment charges on the use of a model. What we have seen is that the arrears on collateral in the U.S. housing market have come off over the last five, six months. And then our model actually shows that the expected loss go down. Our model is relatively conservative. We compare, for example, the vintage 2005 with Moody's estimates, and we are having a higher expectation of expected losses than Moody's have, even after Moody's have adjusted theirs downwards also here in February. We think we use a cautious method of assessing this, and we use the model, and we have used the same model over the last five quarters. If you look at the reversals on impairment charges, I think it's important to be observant of the fact that we, on an ongoing basis, actually have quite high reversals. If you go into our fact book, and that you can see on page 24, then you can see that this quarter, the second quarter, we had DKK 1.6 billion in reversals of impairment charges, which includes, obviously, the DKK 800 million, DKK 900 million that we talk about at this point in time. In the first quarter, we had DKK 3 billion in reversals, and in the quarter before that, the fourth quarter of 2009, we had DKK 1.4 billion. The interesting thing to note is that new and increased impairment charges are actually low compared to what they have been in previous quarters. They are the lowest we have seen, which also follows the trend, of course, in the net development in impairment charges, just for clarification, but it's all something that's listed in our fact book. You asked about the changes and the possibility for rate hikes. I think our expectation is that that should not be until the end of 2011. And you are right in assuming that that will continue the same amount of pressure on our net interest account. We benefit from an increase in rates, and therefore we would be looking forward to that. On the holiday payment, that will come back in Q3, probably more close to DKK 150 million than the DKK 118 million we saw in the second quarter. You had a question on credit losses. I am not sure I got that. I just wanted to understand, it is a very slight difference in the outlook statement. What has changed? Yeah. It is slightly more positive. Thank you. Let me just underline, when it comes to the holiday payment, we have a cost this quarter, extra DKK 118 million. In the third quarter, you probably will see an income of around DKK 150 million or so. So the swing factor between Q2 and Q3 will be between DKK 250 million and DKK 300 million. The swing factor. Thank you. Johan Akland from Bank of America is online with a question. My question has been answered. Thank you. That was an easy one. Thank you. Nick Davies from UBS is online with a question. Yes. Good afternoon, everyone. Thanks very much for taking the time to take this presentation. It's Nick Davies from UBS. Just two remaining questions, really, both relating to spreads in the Danish division. I noticed quarter-on-quarter, there's been weakness in the lending spreads domestically. I think you referenced this in your presentation about increasing competition on the lending side. Maybe if you could just reflect in a bit more detail on the dynamics that you see there going forward. Second, then, if we can just move down to the deposit margins. I noticed in your group outlook statement you said you don't expect any offsetting negatives from the expiry of the Bank or the state guarantees at the end of Q3. Could you just talk me through exactly how you view the outlook for deposit margins domestically? Clearly, you've seen some stability there quarter-on-quarter. Would you expect this situation to remain going forward, obviously, until we see rate hikes? Thank you. Well, if you take the first question on the lending margin spread, it's true we saw a little bit in the second quarter, and I think it's important to divide when you look at lending spread a little bit to product segments. On the mortgage side, the margins are stable around 50 bps. On other clients, corporates, and particularly large corporates, we do see intensified competition in the Nordics from domestic players, but also certainly players coming from abroad, traveling again to the big corporate market. As we said, this is maybe a little bit surprising to us given the stage and the economy, but that's how it is. I don't foresee the stock being put under significant pressure going forward. We still can do a little bit of repricing of the back book, and I think that the market in itself would adjust naturally to a more sustainable margins on this. There is tougher competition in the markets here. I do not expect, I think, too much pressure on the total stock going forward. There may be some. You had a question on deposit margins. I think that we do see competition on that, but I also think that many banks have, in Denmark, raised long-term funding in order to prepare for the expiration of the state guarantee, and that could reduce the need for short-term deposits going in here. I do not see the pressure heating up significantly on that as long as the loan growth is still somewhat muted. Can I add that we, at this point in time already, are issuing commercial paper which are expiring beyond the 1st of October, and we can see that the prices we pay for that is nothing that will be a dramatic impact on our funding cost. That is very clear. Thank you. Jan Wolter from Deutsche Bank is online with a question. Yes. Hi, Jan Wolter, Deutsche Bank. A couple of follow-up questions here. Just the coverage ratio for the Irish book and/or for the Irish commercial real estate part of the book, if you could give that out. I mean, we can try to calculate from the numbers that you're giving us, but just to be crystal clear what that is today. Secondly, the size of lending to cooperative housing sector in Denmark. Do you have that number? I assume that is where we saw some extra losses this quarter. I wonder why you're seeing those losses now, since I guess they have to do with the Danish housing prices moving up and down, and they have come up year to date. If you could elaborate a bit on that. Final question, I noticed that number of staff is up Q on Q for the first time since I think 2008. Does that have to do only with the Finnish situation, or should we expect that nominal staff and branches as well will come up from here despite the efforts to cut costs? Thanks. The coverage ratio, if you take our impairments on the commercial property, I guess that's what you're talking about. We have today made impairments of around 25% of our commercial property book, which we have disclosed in our report. If you only look at the impaired loans in that book, the impairments we have made is close to the double, 50%. You asked about the staff. I think we have mentioned before that the increase of staff is solely due to summer temps in Finland. They will be out of the book again after the summer. If you look at the numbers last year, they were not including any staff numbers last summer, but we have the same summer temps in Finland as well. There was a question on the housing co-ops in Denmark. I think you have to divide the ones that are located in the banking activities and the one in a mortgage institution. The one in our banking activities there, they are around DKK 700 million, and we have made, I think, rather substantial provisioning on those, so we don't foresee us to having future losses of any magnitude on that. The reason why we have that is that some of these were established a couple of years ago, and as part of that assumed that they could sell some of the apartments out, but the prices have since come down. So it's still performing to make the liquidity, the cash flow make ends meet here. That is the reason why we see the losses on that. Danske Bank, by the way, has a relatively low market share on co-ops. Yeah, just a clarification there on the co-ops then. Did you say you have DKK 700 million in? In the Fænges system. I think in our mortgage division, we have around DKK 29 billion with an average LTV of 76%, which I don't foresee us taking any losses of any magnitude there. Yeah. So you took all the losses on this DKK 700 million book in the banking operation then. Yeah. Okay. Just on the coverage ratio there, Morten, you said something about, is that 50%? Is that the interpretation of what you said? On the impaired loans. Yeah, the coverage ratios. You take the provisions, accumulated provisions over the impaired loans. Yeah. In our, yeah. Yes, on commercial property. Yeah. One final question, if I may there. On the Financial Stability Company, they haven't said anything new on the expected net losses on the guarantee here after the expiry. If you have over-reserved them vis-à-vis the final loss calculation after September 30, do you know what you're going to do then? If we have over-reserved? Yeah. Then we take it into profit in the fourth quarter. Okay. Thanks a lot. Sure. Thorsten Beck from LD Invest Markets is online with a question. Yes, hello. Thorsten Beck from LD Invest Markets. Just one question, if I may. I have looked on the lending market shares outside Denmark in the Nordic countries, and see they are still trending somewhat down. What do you see as the key to breaking this trend? Is it something with prices you are binding, or is it products? And how do you see the competitive situation in the lending market in those countries? In Sweden and Norway, the main reason for the declining market share is that we have in both countries around two-thirds of our loan books to corporates and one-third to retail. If you look at the growth in these two segments in both countries, we saw that the retail has increased in the last couple of years, whereas the corporates has gone down. So that is because of the business mix that the overall market share has declined. That is to a little extent also the case in Finland, but there we have an issue that both we and Nordea are losing market share to OP Bank. Okay, thank you. Petrus Brent from Arctic Securities is online with a question. Yes, thank you. Good afternoon. Looking at page 16 in your presentation about the funding. I wonder if you could just split the new funding in 2010 in covered and senior, and just give related to average maturity in 2010 on the new funding and also in total on covered and senior. Thank you. I think that's a little bit detailed to do disclosure on. I think where we can say for 2011 that the funding need we have, all of that can be funded through we have a covered bond pool we have not utilized. Typically, when we issue covered bond right now, we do it between five and 10 years, and we actually done also some private placement 15 years. So you will probably see around the five-year range. That would be the covered bond issues we would do in 2011, that range. I think that's the closest we can get on that. And for 2010, the maturity of the bonds you have already- The bonds we issued in 2010 in the second quarter, just give you an idea, that has been 8 years, 12 years, 15 years, and senior unsecured, we have also done that 5 and a half years. We also done that 7 years. I think we are using the whole spectrum of the range of duration on this. Okay. So what would you say your average maturity would be on your long-term funding out of end of 2009 or now in that respect? Well, first of all, you probably have to divide a little bit because the mortgage books that are match funded has a very long duration on our, because it is match funded and- Yeah. Taking that aside, I don't think I would give a specific number on that, or I can give you that, but it's one of the longest you probably see giving a mortgage book has such a long duration. Yeah. Okay. Thank you. Andreas Håkansson from Credit Suisse is online with a question. Yeah, sorry, just a follow-up question. I might have missed it in the summer, but what's the status about the court ruling on Nykredit's ability to hike their mortgage margin and what's your view on what you would do if you have a ruling in either way? Thanks. Well, I think the competitive authorities are still considering whether there should be reasons why Nykredit should be able to increase their deposit rates based on this agreement they made about 5, 6 years ago. It came out in, I think June, and commented that straight out there was not a justification for a price increase, but it could be justified by changes in the environment, and they would now spend some time evaluating whether there had been such changes in the environment. I think one should expect an answer before the end of the year. Okay, thanks. Klaus Tarp from Enskilda is online with a question. Yes, hello. The question relates to your trading income. You used to say that a normalized trading quarter will have DKK 2 billion of trading income. In the last quarter, you have DKK 2.8 billion where we have to deduct DKK 700 million. So we are down to DKK 2.1 billion. If I look at the trading environment, and within your presentation, you also actually have a slide saying that there has been a fairly good environment. Then I am a little bit disappointed that you actually only reach DKK 100 million above a normalized quarter because as you are saying in the presentation, you have been wise for not being exposed to the Southern European debt market. So you have not lost on those accounts there. At the same time, there's been, in this period of time, a flight to the Northern region in terms of Southern European investors and other investors investing in the Nordic area. Can you try to elaborate and also on currencies has been fairly volatile. Can you try to elaborate what is the reason why your trading income only just barely exceeds a normalized level? Well, I think I'm probably a little bit more enthusiastic than you are about our trading income. I think we have to take into account in the second quarter we do have some summer and usually less activity in the markets when that is happening. You cannot, even though we say normalized around DKK 2 billion, you cannot take that as a point estimate every single quarter from now on until eternity. There will be fluctuations on this, and this time it's around the summer holiday that has some impact there because our market position and the capabilities in markets are very strong, and I don't see why we should not going forward be able to fulfill our ambitions at this level. But please don't take it as a point estimate every quarter. You're right that we don't have any negative exposure on what you saw in Southern Europe that goes into the trading book. But nevertheless, I do believe it's a pretty solid result. Okay. We have no further questions at this time. Okay. Well, thank you very much, operator. Thank you all for your interest in Danske Bank. Thanks for your questions. As always, you are welcome to contact us if you have any further 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 call presentation will appear on our website shortly, and the transcript