Conference call speech

Transcription

1 Conference call speech Interim Report H August 2011 Investor Relations

2 CORPORATE PARTICIPANTS Peter Straarup Danske Bank CEO Henrik Ramlau-Hansen Danske Bank CFO SPEECH Financial results for H 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 With me today are Chief Financial Officer Henrik Ramlau- Hansen and Head of Investor Relations Martin Gottlob. Please go to slide 2. Agenda In today s presentation we will of course focus on our financial results for the first half of 2011 and for the second quarter. We would also like to comment on today s announcement of margin increases to raise our profitability at our mortgage division and similar plans for our Banking Activities units both in and outside of Denmark. I will conclude by looking ahead at the outlook for the rest of After the presentation, as usual, we will open up for a Q&A session. Please go to slide 3. Earnings improved because of higher NII Danske Bank s net profit for the first half of 2011 came to 1.9 billion kroner, which was 12% higher than the level last year, mainly because of lower loan impairments. Even though the result is moving in the right direction, we still have a way to go before we reach our ambitions and our potential. The net profit for the second quarter of 1.2 billion was 500 million higher than in Q1, even though trading income fell by more than 500 million after a very strong Q1. Most importantly, net interest income rose by some 200 million, marking the expected turnaround after a big drop in Q1. 2

3 In our banking activities, the top line rose 4 per cent in the quarter, mostly because of improved NII, but this increase was offset by higher loan impairment charges in Ireland and Northern Ireland. The improvement in the Danish banking activities that we have seen in recent quarters continued, mainly driven by a rise in Danish interest rates in the spring. Swedish and Norwegian banking activities continued to generate solid profits. Danske Capital increased assets under management by 8 per cent over the level a year before. Danica Pension was able to book the risk allowance for three out of four interest rate groups. Lower impairment charges more than offset these factors, raising pre-tax profit to 3.6 billion kroner, which was 14 per cent higher than last year and in line with our expectations. The second quarter showed an improvement over the first, mainly because of lower expenses. Positive items in the results include improved net interest income, a continuation of high trading income although it was down from first quarter and a further decline in impairments although they rose unexpectedly in Ireland and Northern Ireland. Please go to slide 5. Expenses came in higher than expected in the first half because of a payment of 1.1 billion to the Danish deposit guarantee scheme after the failure of two Danish banks Amagerbanken and Fjordbank Mors. We have almost completed our 70 billion funding programme for 2011, so there is very little need for new funding in the next few months. Since the completion of the right issue in April, our solvency has been very strong, among the highest in Europe, as confirmed in the EU stress test a month ago. Net interest income up 4% Q/Q on increased deposit margins... Net interest income for the first half of 2011 came to 11.3 billion, which is 600 million lower than in same period last year. The negative trend in NII was broken in Q2, however, with a rise of more than 200 million kroner. The main reasons for this positive trend were widening deposit margins after the ECB and the Danish central bank rate hikes in April, a higher return on allocated capital, the return on the proceeds from the rights offering, and one additional day in the period. The need to increase the Group s profitability is obvious and one way of achieving this is to increase income. We have already announced higher lending margins in Denmark, and additional measures will come later in the year and in Please go to slide 4. We have already taken initiatives that will improve net interests further. We have increased margins in Denmark by up to 50 basis points on 1 August, and we have today announced increases of the margins on our Danish retail mortgages at Realkredit Danmark in We are raising pricing at our operations outside Denmark also. NII improved, and trading income remained strong As we look at the half-year figures, we see that profit before loan impairments declined 16 per cent owing to lower income and higher expenses. The drop in income was due to lower net interest income resulting from lower short-term rates, a decline in volumes and lower lending margins because of strong competition. Expenses were up 6 per cent owing to higher marketing and IT costs as well as wage increases and higher financial services employer tax in The effect of these initiatives in Denmark when fully implemented, combined with that of the two ECB rate hikes we have already seen, will be around 2.5 billion kroner annually. We expect a positive effect of some 500 million in the second half of The current impact from another hike of 25 basis points from all the central banks in our region is some 600 million annually. But some of this gain might be offset by increasing funding costs, among other things. 3

4 Please go to slide 6. Net fee income: Lower activity partly offset... In the first half of 2011, fee income declined marginally 2 per cent from the level last year, mainly because of the 70 million quarterly fee we pay for the individual state guarantee on 37 billion in bonds issued in June and July This factor was only partly offset by higher fees at Danske Capital. We will continue to pay this quarterly fee until August Fee income also declined 2 per cent in the second quarter, primarily because low turnover caused activity-based fees to drop by some 80 million. Portfolio fees increased, but not enough to compensate for the lower activity. Please go to slide 7. High net trading income driven by repo and derivatives Trading activity remained strong throughout the first half of the year, although the unrest in the euro zone reduced it towards the end of the period. All in all, net trading income amounted to 5.4 billion in the first half, up 6 per cent from the level in Trading was also strong in most of the second quarter, primarily because of heavy demand for repos and derivatives, while activity in the bond market and DCM remained more subdued. Treasury contributed almost 700 million in trading income, with 290 million coming from a value adjustment of Nets. The recent turmoil in the financial markets and the European debt crisis have reignited concerns about PIIGS exposure. At the end of June, our gross exposure to government bonds issued by PIIGS countries amounted to 10 billion kroner, and our net exposure was 3.4 billion. Please go to slide 8. Net insurance income: Risk allowance from three out of four groups. Half-year income from insurance business came to 328 million, down more than 50 per cent from the first half of allowance for one of the four interest rate groups was postponed. Income from unit-linked business rose 31 per cent in the first half of Despite increasing interest rates in the second quarter, we were able to book the full risk allowance for all four interest rate groups at the end of the period. We expect rates to rise further in the remainder of the year, and therefore we expect that we will have to postpone the risk allowance for one group for the entire year. For this reason we have chosen to be cautious and book the risk allowance for only three of the four groups in first half. This is an improvement from first quarter, however, when we booked it for only two groups. Danica continued to show strong premium growth in the first half, with premiums up 17% over the level last year. The growth stems primarily from market products in Denmark and Sweden. Please go to slide 9. Lower expenses in second quarter I would like to stress that cost control is a very important area for us, and we will looking forward continue to focus on trimming our operating expenses. In the first half of 2011, expenses came to 14 billion kroner, up 700 million from In the first half of 2010, we paid nearly 1.3 billion for Bank Package I, and in the first half of 2011, we booked an expense of 1.1 billion for the Danish deposit guarantee scheme. Higher IT expenses, wage increases, higher financial services employer tax in 2011, and marketing costs were the main reasons for the rise. In Q2 total expenses dropped 9 per cent to 6.7 billion, mainly because of a lower payment to the Danish deposit guarantee scheme. In the first quarter, we booked 850 million for Amagerbanken, and in the second quarter a net 295 million, including a gross payment of 467 million for Fjordbank Mors and a reversal of 172 million on Amagerbanken. The drop was caused mainly by a lower investment result owing to falling returns on bonds. In addition, the risk Total adjusted expenses were unchanged from Q1 to Q2 as lower provisions for performance-based compensation and 4

5 severance pay compensated for higher IT and marketing expenses. Please go to slide 10. Impairment charges are improving, albeit slowly Loan impairment charges stood at 5.6 billion in the first half of 2011, down 28 per cent from 7.8 billion in This was higher than we had expected and also higher than the consensus estimate. while Norway had more normalised losses of 16 million after a spike in Q1. Losses in Sweden remained low at 1 basis point. We expect losses in these markets to remain low throughout In Denmark, impairments are now down to 31 basis points. This is still somewhat higher than normal. The details on our Danish impairments are shown on the next slide. In the second quarter, loan impairment charges came to just below 2.8 billion, a decline of 3 per cent from Q1. Individual charges amounted to 2,2 billion, and collective charges increased by 500 million. The impairments stem from Northern Ireland, Ireland and Denmark. In Northern Ireland and Ireland, the commercial property segment is still the main source of the charges. In Denmark, it is the agricultural sector. In the second quarter, individual impairments were still dominated by increases on already impaired loans, although there were some increases in new impairments in Northern Ireland and the Republic. Please go to slide 13. Denmark is dominated by collective impairments... In the past quarter, we saw a greater need for both individual and collective impairments on agricultural and personal customers in Denmark. In the agricultural sector, pig farmers are the main concern because of a further deterioration of the relation between feed and meat prices. Since last summer, feed prices have almost doubled, but meat prices are unchanged. To this should be added the negative effect of rising interest rates and the appreciation of the Swiss franc. A positive factor is stable farmland prices. Please go to slide 11. Please go to slide 14. Impairment charges driven by SMEs... Impairments are still dominated by SMEs, but charges for large corporates increased somewhat. Most of the charges for both segments came in Ireland and Northern Ireland. We have terminated an insurance contract covering retail mortgage loans in Denmark. We did not expect payments to be received from the coverage. Due to the termination, we have received 770 million kroner, which has been booked as reversal of impairments at Retail Banking Denmark. At Danske Markets, an unexpectedly high dividend on our Lehmann exposure resulted in a reversal of loan impairments charges of almost 400 million. Other impairments: Northern Ireland and Ireland are Impairments in Ireland and Northern Ireland were very high in the second quarter. These two countries account for almost 90 per cent of the total impairments in Q2. That was above our expectations, and the amount in Ireland was also much higher than the guidance we gave in the December conference call. In Northern Ireland, commercial property customers, including construction firms, were behind 80 per cent of the charges. The main reasons were falling property prices and reduced activity because of the UK government s austerity programme. This has caused declining values on landbank assets in particular. Please go to slide 12. Nordic impairments: Denmark is moving sideways Impairment levels were low in the Nordics save Denmark. In the second quarter we saw reversals of 34 million in Finland, Impairments in Ireland came to 1.9 billion. The commercial property and investment property segments accounted for close to 100 per cent of the charges. Two-thirds of the charges were made on loans already impaired. 5

6 The trend is that most of the impairments for commercial property exposure are made on investment property rather than developers. The reasons are declining cash flows, because of reduced rents and increasing vacancies. And this trend lowers the value of collateral further since the future return is falling. At 100 million in the second quarter, impairments against personal customers remained low. Because of the tough austerity measures in Ireland, combined with high unemployment and falling house prices, we expect that the losses could spread to other segments, including personal customers. We continue to expect relatively high impairments in this area in the foreseeable future. Please go to slide 15. The negotiations with the Danish government regarding prepayment of 24 billion in hybrid capital from the state are still ongoing, and I am not in a position where I can give you an update today. Our capital situation is comfortable, and we are very well prepared for the coming CRD IV regulation. The proposal from the EU Commission in July does not in any material way change the view we held about the effect on our capital ratios after the preceding proposal from the Basel Committee. On the issue of liquidity, we are encouraged that the door is still open for Danish mortgage bonds to be recognised as level 1 assets to a greater degree than originally proposed. Our risk-weighted assets increased by 5 billion in Q2, mainly because of an increase in lending. We expect to complete our IRB review in the second half of the year funding almost completed, with less than DKK 10 billion left Our funding need for 2011 is around 73 billion, and at the end of the second quarter, we had already funded 63 billion. Our funding need for the rest of the year is therefore very limited, and we expect to obtain the remaining amount by issuing covered bonds in Finland. Please go to slide 17. Danske Bank passed the European stress test In the recent stress test conducted by the European Banking Authority, Danske Bank ranked as one of the best-capitalised banks in Europe. In the adverse scenario, we had a core tier 1 ratio of 13 per cent at end of 2012, placing us sixth in Europe and second in the Nordic region. Prices on the senior market are higher than they were last year, but this was offset by a net decrease in senior funding and an increase in covered bonds, whose margins are lower and much more stable. Our total funding costs have thus remained stable so far this year. Please go to slide 16. Strong capital position has been strengthened further by the share offering Danske Bank s capital position remains solid after the 20 billion rights offering we completed in April. Again, I would like to thank our shareholders for their support. At the end of Q2, Danske Bank had a core tier 1 capital ratio of 12.3 per cent and a tier 1 capital ratio of 16.6 per cent. Our total capital ratio stood at 18.8 per cent, compared with a solvency need of 10.3 per cent. All the Nordic banks passed the test with flying colours. Please go to slide 18. Realkredit Danmark: Growing OC requirement from Moody s On 23 June our mortgage bank, Realkredit Danmark, announced that it would discontinue its Moody's rating. Consequently, on 28 July Moody's withdrew all mortgage bond ratings relating to Realkredit Danmark. The decision was made after a long dialogue with Moody s about the methodology used for rating RD and the resulting requirements for maintaining a triple-a rating on our bonds. We believe the methodology is misaligned with the strength of our mortgage division. At the end of second quarter, the solvency requirement at Realkredit Danmark was 24.8 billion, leaving a buffer of nearly 21 billion up to our current capital base of 45.9 billion. 6

7 On top of RD has taken up a senior unsecured loan with Danske Bank, increasing its overcollateralisation capacity to roughly 63 billion. The requirement from S&P is 50 billion, and the one from Moody s was 97 billion. Earlier I described the positive effect on net interest income of the already implemented and planned increases in our lending rates as well as the rate hikes from the ECB and the Danish central bank expected later this year. While S&P s OC requirement has been roughly unchanged since the beginning of 2010, Moody s requirement has tripled from 29 billion to 97 billion, with a further increase to 147 billion if a downgrade occurs. Higher long yields will make it difficult to book the full risk allowance in our insurance and pension income. At this point, we assume that we can book risk allowance for three of the four groups. OC should enable us to withstand a severe stress test. A stress test defined by the Danish FSA shows loan impairment charges of 4.4 billion in This would be offset by a high yield on liquidity, leaving a small profit of some 400 million as well as a capital buffer of 19 billion. Since the financial crisis, RD has succeeded in delivering a net profit. Arrears are very low, as is the number of repossessed properties, and the loan-loss ratio has remained below 20 basis points. We believe that, in requiring RD to hold 97 billion in OC, Moody s underestimated the fundamental strengths of the market and the Danish mortgage banking model Fee income tends to be higher in the second half because of performance fees at Danske Capital, but it is too early to assess this year s performance. As always, trading income will depend on the capital markets, customer activity, unrest and so on. We had a very good first six months, which we don t expect to match. The summer season and Christmastime are often quiet, and they are both in the second half. We still focus on expenses, but this year we expect a minor increase of some 3 per cent over the level in Since first-half growth was 6 per cent, we expect that expenses in the last six months will be close to flat. Please go to slide 19. Economic recovery is still modest Overall, the recovery in the global economy is expected to continue in the second half of The recovery varies from market to market, however, with the Nordic economies save Denmark performing well, with expected GDP growth of around 3.5 per cent in The Danish economy is struggling to move out of the recession and we have cut our 2011 GDP forecast for Denmark. In Ireland, we must acknowledge that the economic climate is still very challenging. Loan impairments were higher than expected in the first half at the units in Ireland and Northern Ireland. Although we still expect the charges to be lower in 2011 than in 2010, the decline will be less than we had hoped for because of the issues remaining in those markets. We expect that total impairments at the two units will remain high in the second half, but will be lower than twice the amount in the second quarter. To conclude, we expect that 2011 will represent another step towards a normalisation of Danske Bank s earnings capacity. As I described earlier, we have taken further steps to speed up this process. Please go to slide 20. Please go to slide 21. Outlook for 2011: Tailwinds will increase net interest income... Given this macroeconomic outlook, increasing interest rates and long-term yields will affect the results in the remainder of Q&A session That concludes our presentation of Danske Bank s financial results for the first half of 2011, and we are now ready to take your questions. 7

8 If you are listening to the conference call from our website, you are also welcome to ask questions by . Please operator, we are ready for the Q&A session. Operator: Thank you. We will now begin the question-and-answer session. If you have a question, please press star then one on your touchtone phone. If you wish to be removed from the queue, please press the hash key or the pound sign. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touchtone phone. fashion again, it would be the same areas we are revisiting, together with a process focus, meaning that we will see if we can improve processes in order to cut down the requirement for FTEs. So there's no new magic in it. But I have to stress that we are looking at our costs on an ongoing basis in Danske Bank, so this is part of our DNA. But if we were to engage in a special programme, these would be the areas. Loan losses in Ireland we expect to be high for the remaining part of the year. We are saying, though, that we hope that the combined losses will be lower than the level we have in second quarter of So, you asked what we expect, what we say is high. We think that we have experienced in the second quarter is very high. So it should be lower than that, and that's as far as we could take it for now. Claus Højmark Jensen - ABG - Analyst Yes, good afternoon. A couple of quick questions here. First one: I guess the recent market turmoil is telling us that global growth is probably going to be lower than what we expected some months ago. If that were to be the case, what potential do you see in cutting your costs even further than you have done, and what scenario would you need to see play out for you to start looking closer at your costs? Secondly, in terms of your loan losses in Ireland and maybe also in Northern Ireland, you've previously guided that losses would be high. But I guess as you also pointed to in your own introduction, they were higher than you expected, and now again you guide that they will be high for the remainder of Could you give us just some sort of indication on what you believe is high when you say that they will remain high? First, the market turmoil: one could share the observation that there's a risk that the declining stock markets will have an impact on growth. Danske Bank has been observing its costs on an ongoing basis. We had a cost programme which we initiated when we had the first financial crisis if one could use that expression or the financial crisis in There we were focusing on processes. We were focusing on cutting out fat. We have been focusing on the purchases that we're having from other parties, and that gave Danske Bank a good cost performance in '09 and '10. I think if we decide to look at costs on an extraordinary Claus Højmark Jensen - ABG - Analyst Okay, thanks. Jakob Brink - Handelsbanken - Analyst Yes, it's Jakob from Handelsbanken, Copenhagen. I have three questions. The first one is regarding actually the question you just got from Claus regarding losses in Ireland. I know you haven't guided more specifically, but still, if we go back to the first quarter and the fourth quarter, I believe you said we should be expecting 1 billion a quarter. Now, obviously, that's probably not going to happen. So, I mean... couldn't you just at least tell us what has gone wrong? Northern Ireland as well... you have told us before that the austerity packages should actually mean nothing to provisions, as it would not mean layoffs of public workers. Now you're actually telling us that it's the reason for the decline in landbank values, so somewhat more details would be nice. Then secondly, the review of your IRB models: I understood that this would be an ongoing process over Now you said that something would be done in the second half of this year. Have you already now got any idea of how much more growth in risk-weighted assets should you actually see? And then my final question is regarding the CDS contract that you're exiting and the 800 million gain. It fits remarkable well to the collective provision you're doing in agriculture and retail Denmark. Is there any kind of correlation between those two? And also on the Swiss franc: you mentioned how much 8

9 of your agriculture lending is done in Swiss francs. That was my questions. Thanks. If we look at the Northern Irish situation, it is correct that we have gotten disappointed with the developments. It has something to do with the take-up on landbank is slower than we had expected, and for that reason we have marked down the value of a relatively small landbank portfolio. The austerity package in England obviously does have an effect on the consumption and on consumer sentiment. In addition to that, one has to be aware of the fact that there's also an Irish contagion taking place into the Northern Irish market, and that's the reason for that. IRB market Yes, Henrik Ramlau speaking. As we have communicated previously, we are going through our IRB modelling based on the comments we got from the Danish FSA at the beginning of 2011, based on the inspection we had from the Danish FSA late And we have also previously communicated that that work would be finished during 2011, and we still expect that to be finished now in the second half of And we have also communicated that you should be prepared for some increase in our risk-weighted assets. But we haven't finished the work yet and then therefore we cannot be more precise about the level of increase in risk-weighted assets. And on the impairment charges and the insurance contract, you're right in your observation that those figures are close to one another. There's no direct correlation with them, though. On the farmers, you ask about Swiss franc exposures. It is not a significant part of our farming exposure, but still there are a number of farmers that have been run over in Swiss franc because of the appreciation of the currency. I don't have a precise figure here. It's not something which is compared to Danske Bank's size significant. But in the farming sector, it has meant something, and that's why we have mentioned it. And we made this provision on the agricultural side because there are some farmers we're a little bit, you could say, nervous about. And we had made the provision on the Danish private customers because if interest rates start to go up and we have a situation also based on the crisis with the falling Danish house prices there may be a need for more individual impairments on the private customer side. And that's why we have made this collective provision on the Danish private customers. Jakob Brink - Handelsbanken - Analyst Just one follow-up, if I may. On the private residentials, you're showing a slide actually where the number of arrears and repossessed houses is actually coming down. So even though it did look at the end of June as if rates were going up, I mean why secondly are you then choosing to make the provisions right now? Well, we have seen a couple of quarters where we had negative growth in Denmark, and the macroeconomic effects from that has given us some caution. And some of our models are indicating that when you see a macroeconomic setback, it's time to consider whether you should make collective impairment. And also, the current environment is not exactly positive for house prices in Denmark. Jakob Brink - Handelsbanken - Analyst Okay, that was my questions. Andreas Håkansson - Exane BNP Paribas - Analyst Yes, hi. Two questions actually, both touch on NII. You said that the full-year impact is 2.5 billion from repricing and higher interest rates. Then I think you said something that there could also be a negative impact from funding costs. Could you tell us, if we assume that there's no loan growth in 2012, should we then actually expect that the NII should be growing by less than 2.5 billion? Second question is on funding. You said that you almost completed this year's 9

10 funding. We hear some of the Swedish banks now having funded into basically half of Could you just remind us how much of the funding have you got to do in 2012, and when you do expect to start pre-funding that? Thanks. You're commenting on the 2.5 billion NII we are mentioning as a combined effect of the increasing rates from the central banks and the more specific rate increases we are doing in our Danish banking area and also on the mortgage side. That is our current guidance for other things being equal in Of course if our funding costs should go up in 2012, there may be a negative impact in 2012 relating to that, but you should be aware that our funding costs are evolving over time. We do not need to, so to say, re-fund the last portion in But if spreads remain at the current level and if interest rates do not go up further in 2012, there may be a slight reduction in the 2005 [2.5] figure in Ronny Rehn - KBW - Analyst Yeah, good afternoon. Thanks for taking time to do the call with us today. A few questions. First, on the 2.5 billion: could you kind of break this out a little bit particular what comes from higher rates, what comes from re-pricing? What is your rate assumptions roughly? So do you think [inaudible] rates would go up basis points going into next year? Secondly, in Denmark, so if we were to add back in the 770 million reversal in Retail, you would just basically run it almost like 1.5 billion. Is that so should we consider this a one-off, or is it kind of a rebasing? I just wanted to check on this. And secondly, the funding that you have done in senior unsecured: what was the average cost that you have seen on those papers? Thank you. While Ramlau concentrates on that, I will just answer the question we admitted to answer from Andreas Håkansson, and that was the question related to the funding requirement for We have no figure on that at this point in time. We have, as we mentioned in our presentation, a funding requirement for 10 billion kroner for the remainder of the year. The total funding requirement for the year is 73, and we have funded 63. We have ample covered bond material to cover that. But we haven't taken that to the market, so we haven't gone out and funded. We believe that we also in the second half will start looking at the funding need for the first half. But we're not communicating the size of our funding need, but it's not extraordinary compared to what we usually have. And relating... you asked about the split of the 2.5 billion in additional income, other things being equal, for And it includes the impact of the two central bank rate hikes that have taken place here earlier in 2011 in April and July. So it includes these two central bank rate hikes, and then it includes our rate increase in the Danish banking activities, where we previously have communicated a number around 400 to 500 million. It includes the impact of the increases in our Realkredit Danmark, our mortgage division, also around 500 million. And then we are considering implementing rate increases in our foreign units of around, let's say, 300 million. So roughly half comes from specific rate increases, and the other half comes from, you could say, floor risk impact from the increased central bank rates. And then you asked about our senior funding we have been doing in the first half of 2011, and as an example, we have done a 1 billion euro issue for five years at a price of Euribor three-month plus 126 basis points, as an example. And then there was a question as to the 770 million reversal: if that should be regarded as a one-off. Well, it was an insurance we cancelled, and we're not going to cancel one next quarter. At the same point in time, we also made some collective impairment charges that were related to the portfolio going forward, and I wouldn't think that is going to take place each quarter either. Ronny Rehn - KBW - Analyst So was a bit like a "kitchen sinking" exercise [inaudible] 10

11 Well, I don't know. I'm just saying that, in our bank our size, there are one-offs every quarter, and one just has to take them individually into consideration. Ronny Rehn - KBW - Analyst Okay. And just on short-term rate assumption: I mean, where do you see rates going in your best-case scenario, in like, say Denmark, in the main currencies that matter, Sweden? Martin Gottlob - Danske Bank - Head of IR In the guidance we have of 2.5 billion, we are not including any further hikes of the short-term rates. Ronny Rehn - KBW - Analyst All right, that's interesting. Thank you. Nick Davey - UBS - Analyst Yes, good afternoon, everyone. Thanks for taking the time for the call. Nick Davey from UBS. I've got three quick questions, if I may. The first is on expenses and your outlook. You now guide for 3% higher costs, 2011 versus Could you please just confirm that that assumes no further charges for Bank Package III in the second half of 2011? The second question, I'm afraid going to back to Ireland: you mentioned you're slightly cautious about the outlook for personal customers in Ireland, noticing that your LTV in the Republic has lifted to 96% from 83 at full year. Could you give us a sense of that mortgage book in Ireland? How much of the portfolio is above 100% LTV, please? And then the third question is on capital. I think your guidance is slightly higher now for Basel III sensitivity: 1.6 percentage points of reductions in core tier 1. Could you just talk us through the drivers for that please? I note your deductions from total capital relating to Danica have increased in the quarter. Is that to do with the subordinated loans you've repaid? Does that change your Basel III guidance? And if so, could you just talk us through any other potential sub debt repayments that you might consider in the future? Thanks. Your first question was about expenses. You're right that our guidance of plus 3% for the full year does not include any additional expenses relating to Bank Package III. We have had the expenses from Fjordbank Mors, Amagerbanken in the first half. And you're right, we do not in our guidance assume and we cannot budget with that, of course. We do not include any impact of additional Bank Package III banks going under, where we have to pay our part of the guaranteed deposit schemes. And in order to give you a little bit more guidance on the plus three, we have had extra... in the first half, we have had extra costs for Fjordbank Mors, and then there was a reduction relating to Amagerbanken. But the net additional cost from Fjordbank Mors is around 300 million, and then in our accounts there's additional minor item. So we have had additional costs of around 400, which on annual basis is, let's say, 1.5 percentage point. And you're right, we're guiding 3 percentage point, and that is so to stay within the limit we need to in order to run the business. And we'll continue to invest in IT and marketing also for the second half, so that gives an indication of the background for the plus 3%. And if I then could take the third question. You asked about the additional reduction in relation to Basel III, and you're completely right. The increased impact of Danica is related to that we are in the process of repaying this subordinated loan that are currently in Danica. And of course when we get more clarity about the Basel III rules altogether, including the impact of the insurance subsidiaries, we ll look at our total mix of capital and where we should have our tier 1and tier 2 instruments. So it's Danica and the redemption of the Danica loan that is reason for the slight increase you referred to. And then you asked a question about the Irish personal loans, which predominately of course are personal mortgages, and you're right that we have expressed some concern about that, also because the loan-to-values are deteriorating and going up towards 100%. There's a couple of things that make us believe that we are not going to have such a harsh development in personal 11

12 properties as some other lenders are going to have, and that is that this is a portfolio that's put together without being in the first-time buyer market. It's put together also without being in the broker market in the Irish. There was, when the crisis struck, a loan-to-value of about 44% because we were marketing a product called "Loan-to-Value", which gave you a low margin if you had a low loan-to-value. So the quality of the book and therefore the quality of the financial situation of the individual loaners were quite strong. And we can also... when we look at the arrears... that they're about 3%, which is lower than what any of the other mortgage providers in the Irish are experiencing. But still, it is a concern to see a loan-to-value climb up from 44, up towards 100. The amount of mortgages that are above 100 are relatively moderate. There's not that many. So for now, we think the book is manageable, but we cannot rule out that it will give us some impairments. Martin Gottlob - Danske Bank - Head of IR May I add that the big part of the increase from year-end 2010 from 84% to 98% now was made in the first quarter and was due to a reassessment of the model we're using to value the houses, where especially we make some writedowns of the value of the houses outside the city centres in Ireland. And that was the main explanation for this increase this year. Nick Davey - UBS - Analyst Thank you. Those are three very clear answers. Could I just follow up briefly then on the Basel III sensitivity? Am I right in then assuming that there's potential for the 1.6 percentage points Basel III sensitivity to increase, or is that not what you're saying? No, we don't expect that. The 1.6 was based on that we are now planning to redeem the 400 million euro subordinated loan in Danica. Nick Davey - UBS - Analyst Okay. Jan Wolter - Deutsche - Analyst Yes, good afternoon. Jan Wolter at Deutsche. A couple of questions related to previous questions, I m afraid. First, on the senior funding: in other presentations, I think you have stated that around 70 billion of senior funding matures in 2012 or so. So the first question is if that seems largely correct. And then, if so, is it right to say that you need to start refunding that in the second half of this year already? And the third question related to this is: What options do you have apart from issuing new senior funding? Are there other things you can do, or do you see a situation where you don't even need to refinance the majority of these 70 billion? Second question, on the collective charges in Danish banking, is 700 million... is that for the first half? And if so, how much is first quarter and second quarter? And then the final question: I wondered about the CDS contract termination. Was that your decision, or did it just mature? Thank you. Martin Gottlob - Danske Bank - Head of IR To take the senior funding first, we have not given details in our funding need for It's true that the debt that is maturing in 2012 is around 70 billion, but that's not necessarily saying that the funding need will be the same. Of course, we have different ways of funding ourselves, and senior funding is one of them. Long-term, we probably cannot live without having access to the senior market. But for a shorter period, it's of course possible. And regarding the CDS contract: it was through a dialogue between our counterparty, and the contract as such did not mature. It could run for many more years, but we took the initiative in order to terminate the contract. Okay, understood. Thank you. 12

13 And the 700 million was taken in the second quarter. Jan Wolter - Deutsche - Analyst Yes, and just follow up there on the last answer: the 700 million, you say, the majority is that these 115, 120 banks, which is far too many. Some of them have difficulties going into a merger because of change-ofcontrol costs that accelerates issue paper, both the senior and subordinated, which makes it difficult. These are some of the things that could be tried to be moved away as an obstacle. But how we're going to approach this and what the government is contemplating, I can't answer. Yeah, that would be [inaudible]... Jan Wolter - Deutsche - Analyst Okay thanks. And just to follow up: is Danske Bank interested in participating in this consolidation, if it were to be allowed? Jan Wolter - Deutsche - Analyst Could we be more specific than that? We could take a [inaudible] after the conference perhaps, if possible. We can give you some more specific answers on that. I don't have the precise amount, but I think it was about a bit more than 400 million kroner in personal customers. And going beyond that, I think we'll have to do it after the conference. Jan Wolter - Deutsche - Analyst Okay, thanks. Simon Christensen -Nordea - Analyst Yes, good afternoon. I only have one question. In relation to you took 1.1 billion on Amagerbanken and Fjordbank Mors... I mean, how do you see... or your views on this funding stress among the small and midsize Danish banks... how do you see that playing out? And I'm also interested in your view whether there's any kind of risk that the sector or maybe the taxpayer will be prompted to provide liquidity for consolidating smaller banks. How do you see that playing out? Thanks. That's a very difficult question to answer, and I think if one reads the Danish papers then it's obvious that the Danish politicians are considering precisely those issues at this point in time. One thing that would be beneficial is to have some more consolidation in the Danish banking industry. We have No, we are not. Two reasons. One is we won't be allowed because we have a market share of about a third in most activities. The other thing is that, for our bank, it's a disturbing factor to start accommodating or merging with another company. We have had quite a number of mergers-takeovers. They take time, focus, IT development, and our observation is that we have had beneficial work on the Bank's platform over the last couple of years. We have good possibilities for continuing to harvest on a very efficient platform, and that gives us a better return than picking up a smallish compared to our size financial institution and consolidating with that. Jan Wolter - Deutsche - Analyst Okay, thanks. Very clear. Erik Gjerland - DnB - Analyst Hi, it's Erik Gjerland from DnB. I have three questions as well. The first one is about the volumes. Could you elaborate a little bit on the volume trends in your different markets? And secondly on volumes: what kind of growth do you really want to have in these countries versus your senior funding? Secondly, you're taking a more cautious stance to SMEs and personal clients. Is that really the household sector and really the whole SME sector which you have started to get more worried about in both Ireland and potentially in Denmark? Final questions: How is the funding market behave or being another lost week in Denmark versus what you saw in late 2008 after the Lehman collapse? Is it under similar trends, 13

14 or are you just happy about it today, or how do you really see the short-term handle the liquidity market today? Thank you. Our volumes in especially the Danish market is growing a little bit, not very much, and we can look forward for that to continue. We can see in the figures that we have actually gained a little bit of market share, but the market is not, you know, growing very much. But we can foresee that in the Danish market we ll take a little bit of market share, and the volumes will grow a little bit. You ask about the growth and that in relation to the senor funding, I think indicating perhaps that we should consider the fact that our senor funding had increased in price. And we are of course observant of that; that has something to do also with this Bank Package III, which we hope that the Danish politicians will start to remedy a little. One needs to remember, though, that our senior funding is only 15% of our funding requirements. So when we look at our funding, it's not ruinous that we have seen an increase in our CDS spreads. When we approach our markets for growth, it's obvious that we look at the macroeconomic situation and we also look at the individual case. is a number of Danish mortgage holders that have variable interests and that would have an impact on some debtors ability to repay. The funding markets in Denmark is at this point in time not like they were at the Lehman situation. They are sluggish, but I think the funding markets in all jurisdictions at this point in time are sluggish. As it is in the US, I think it's a question of pricing, and I think because of Bank Package III, the larger banks in Denmark are seeing a bit higher pricing. The smaller banks, because of Bank Package III, have been cut out of the market, the international market. Internally it functions in an acceptable fashion. Not good, but I don't think it functions well anywhere. Erik Gjerland - DnB - Analyst Thank you very much. Claus G. Therp SEB - Analyst Yes, hello. I have two questions. The first is on the deposit growth: if you can elaborate the reason why the deposit growth in total has not been higher than it has been during the quarter. I can see, for instance, in Ireland, you have negative deposit growth, where to some extent it's a little bit puzzle to me. My perception were that the fact that you are a high-quality bank in the Irish market should make you able to gain deposit in the Irish market. (Inaudible) And there I think we do what all other financial companies or most other financial companies are doing. We're looking at the returns on each individual exposure in totality before we decide to use the Bank's money. And there you're right: there we've probably gotten a little more tight in our funding since the onset of the financial crisis, as has many others. You asked about the perception for personal customers, and in the Irish market, I think I already answered. We have a book of personal mortgages where we are a little bit concerned because we see property values plummet. But if one considers the fact that we have seen property values go down by 50%. I don't think our book is that bad. In the Danish market, we see arrears declining, so there's actually a beneficial development in Danish mortgages. But again, as mentioned previously, the Danish economy has been contracting a bit. That's one thing. The other thing is also, if we get interest rate increases, there (Inaudible) This just to answer that relatively quickly: these are a number of larger corporate deposits where we have decided not to bid up for... because the Bank's funding was adequate, and that's what goes into that. It's not mass-market deposits that are leaving the bank. And in Ireland, we still see a positive development in mass-market deposits. Claus G. Therp SEB - Analyst Okay. And the second question goes to: Do you foresee a risk that there will be irrational pricing on deposits? I have talked to other bank CEOs in Denmark, which has told me that they have so far been somehow surprised that the pricing of deposit has been rather rational. And do you see a risk that that sort of price discipline will decrease as we move closer to the summer of 2013, where the state guaranteed bonds have to be repaid? 14

15 Yes, I see a risk of that. It's obvious that especially deposits that are below the level of the deposit insurance could be in demand if banks are starting to be under pressure. Then the market gets concerned; then that's where you can get your funding if you want to pay up, because it's being paid for by the other banks. So there is some risk of that, if nothing else happens. I think as we sit here, the political perception is that something should happen about Bank Package III, so I don't hope we're going into 2013 without any development on that. Claus G. Therp SEB - Analyst Okay. Maybe one follow-up question. Can you elaborate maybe a little bit on your state hybrid capital issue? Last time, you said that you don't want to comment on it. But we are moving closer and closer to the possible election in Denmark, and isn't it an advantage negotiating with the current government compared to a potential future, more social democratic government? Operator: We have no further questions at this time. Okay. 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. And as usual, we will be ready to talk to you until 9.00pm 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 a transcript of the Q&A session will be added within a few days. I think it doesn't matter because there was a political agreement when that hybrid was established that include the Social Democratic, the Socialist Peoples Party, the Radical Venstre, the Conservative Liberal Party and Danske People's Party. So the whole parliament, save one party, has to be part to this change. And that's precisely probably why it takes quite a bit of time, because there has to be an agreement. And I don't know whether these are the times to be kind to bankers if you want to profile yourself in an upcoming election, or what it is. We have requested an early repayment, and the repayment, if it is allowed early, of course has to have some kind of compensating factor in by the fact that we pay early. That's what's being discussed. There's also some other condition attached to it. One thing that might also have an influence on it not having been resolved at this point in time is that it's not until April 2012 that we want to repay, so we really don't need an answer here now. So all these factors go into it. But no, it doesn't really matter I think which government it is we have. 15