Contents. Annual Report 2012

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1 Annual Report

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3 Annual Report 2012 Contents MANAGEMENT S REVIEW The Jyske Bank Group 2 Summary 3 The year Core earnings before loan impairment charges and provisions for guarantees 7 Loan impairment charges and provisions for guarantees 8 Earnings from investment portfolios 10 Other remarks 11 Events after the balance sheet date 11 Outlook 12 Capital management 13 Liquidity management 17 Banking activities 19 Trading and Investment 20 The Jyske Bank share 21 Organisation and management 22 Corporate governance 24 Corporate social responsibility 25 Internal control and risk-management systems 26 MANAGEMENT S STATEMENT AND AUDITORS REPORTS 27 FINANCIAL STATEMENTS Income statement and statement of comprehensive income 31 Balance sheet at 31 December 32 Statement of changes in equity 33 Solvency statement and capital requirement 35 Cash flow statement 36 Notes 37 The Jyske Bank Group - overview 90 5-year summary of Jyske Bank A/S 91 Directorships 92 Jyske Bank A/S Vestergade 8-16 DK-8600 Silkeborg Tel: jyskebank@jyskebank.dk Business Reg. No.: Prepress and printing: Jyske Bank

4 The Jyske Bank Group SUMMARY OF INCOME STATEMENT DKKm Index 12/ Net interest income 4,879 4, ,723 4,506 3,634 Dividends, etc Net fee and commission income 1,650 1, ,320 1,266 1,513 Net interest and fee income 6,559 6, ,066 5,807 5,174 Value adjustments Other operating income Operating expenses, depreciation and amortisation* 4,825 4, ,098 3,623 3,734 Loan impairment charges and provisions for guarantees 1,840 1, ,798 2,658 1,082 Profit on investments in associates and group enterprises Pre-tax profit , ,307 Tax Profit for the year of which non-controlling interests * Goodwill write-off amounted to DKK 216m in BALANCE SHEET, END OF PERIOD DKKm Loans and advances 118, , , , ,117 - bank loans 105, , , , ,085 - repo loans 12,607 15, ,281 6,310 10,032 Deposits 120, , , , ,030 - bank deposits 97, , ,437 93, ,566 - repo deposits 17,962 17, ,583 1, pooled deposits 5,583 9, ,756 13,966 11,408 Issued bonds 34,921 37, ,383 50,301 36,925 Subordinated debt 2,742 2, ,257 3,252 3,282 Equity 15,642 13, ,352 12,523 10,722 Total assets 258, , , , ,786 SELECTED DATA AND FINANCIAL RATIOS Pre-tax earnings per share (DKK) Earnings per share (DKK) Earnings per share (diluted) (DKK) Core earnings per share (DKK) Share price at end of period (DKK) Book value per share (DKK) Share price/book value per share (DKK) Share price/earnings Solvency ratio (%) Core Tier 1 capital ratio incl. hybrid capital (%) Core Tier 1 capital ratio excl. hybrid capital (%) Pre-tax profit as a percentage of average equity Net profit as a percentage of average equity Income/cost ratio Interest-rate risk (%) Currency position (%) Currency risk (%) Excess liquidity (%) Total large exposures (%) Accumulated impairment ratio (%) Impairment ratio for the year (%) Increase in loans and advances for the year, excl. repo loans (%) Loans and advances in relation to deposits Loans and advances in relation to equity Number of full-time employees at year-end 3,574 3,809-3,847 3,877 3,996 The financial ratios are based on the definitions and guidelines laid down by the Danish Financial Supervisory Authority, cf. note Jyske Bank Annual Report 2012

5 Management s Review Summary Pre-tax profit: DKK 851m (2011: DKK 601m). Net interest and fee income under core earnings: DKK 6,143m (2011: DKK 5,737m). Core earnings before loan impairment charges and provisions for guarantees: DKK 2,190m (2011: DKK 1,905m). The pre-tax profit corresponded to an annualised return of 6.1% on opening equity (2011: 4.5%). Solvency ratio: 17.3% of which Tier 1: 15.3% (2011: 14.7% and 13.3%). Individual solvency requirement inclusive of the activities from Spar Lolland: 10.2% (2011: 10.0%). Total contribution to the Guarantee Fund, etc.: DKK 1,629m since Q4 2008, of which DKK 109m in 2012 (2011: DKK 172m). Loan impairment charges and provisions for guarantees under core earnings: DKK 1,842m (2011: DKK 1,478m). Write-off of goodwill under core earnings: DKK 216m, after which goodwill is recognised at nil (2011: DKK 0m). Core earnings: DKK 348m (2011: DKK 427m). Earnings from investment portfolios net of funding costs: DKK 612m (2011: DKK 346m). Fair value of the held-to-maturity portfolio : DKK 345m higher than the carrying amount (2011: fair value DKK 7m lower than the carrying amount). Liquidity reserves: DKK 43bn (end-2011: DKK 38bn). It is expected that in 2013 the Group s expenses under core earnings will be in the range of DKK 4.0bn- 4.1bn exclusive of the expenses relating to the acquisition and integration of activities from Spar Lolland as well as expenses relating to the integration of Fjordbank Mors. Jyske Bank Annual Report

6 Management s Review The year 2012 Economic trends The year 2012 offered challenges in respect of the international as well as the Danish economic trends. The economies in the US, China and Europe showed signs of weakness, and the euro zone as a whole saw negative growth or zero growth in the past four quarters. The risk of a collapse of the euro was reduced as it was possible for the European Central Bank to purchase loans, and in many countries considerable reforms were implemented requiring economic austerity with a view to reducing the large debts. In Denmark, the sluggish economic trends persevered, and it seems that any visible improvement is long in coming. Weak exports, due to the economic slowdown in Europe, the increasing lack of job security and the idle housing market were all factors contributing to the predominant propensity to consolidate and save - also in Increasing optimism driven by reduced uncertainty relating to the debt crisis, slow improvement in the housing market and lower propensity and need to save and consolidate are factors expected to cause stabilisation of the economy in An actual recovery of the economy is not expected to begin until The Danish banking sector and Jyske Bank Due to the economic challenges, the market situation of the Danish banking sector worsened considerably. The low willingness to invest and the high propensity to save caused a setback in the banks balances of loans and advances for the fourth year in a row. The high propensity to save on the part of the households did, on the other hand, cause the banks' deposits to increase, and over the year the effect of these two developments generally reduced the challenges that the sector was facing in respect of liquidity. One result of this was the fairly low willingness to raise loans in connection with the Danish central bank's two allocations of 3-year loan facilities. Jyske Bank did not avail itself of the central bank s loan facilities. Danish interest rate was at a historical low. Therefore, due to the slow economic trends, the low demand for financing and the low interest-rate level as well as the FSA's introduction of more stringent guidelines for impairment charges and provisions for guarantees, the year 2012 turned out to be yet another challenging year for the banking sector. Deposits with Jyske Bank fell because Jyske Bank s favourable liquidity situation reduced the need to attract time deposits. Jyske Bank s lending fell to a lesser degree than that of the market in 2012, and given the strengthened liquidity reserve, the continuing consolidation and the stronger capital base, Jyske Bank was in a desirable position at the end of the year. Profit for the year The Jyske Bank Group realised a pre-tax profit of DKK 851m. Calculated tax amounted to DKK 255m, and after tax profit amounted to DKK 596m. Pre-tax profit corresponded to a return of 6.1% on opening equity against 4.5% in Taking into consideration the effect of the implementation of the FSA's more stringent guidelines for loan impairment charges and provisions for guarantees, the write-down of goodwill in the amount of DKK 216m as well as the value of the held-tomaturity portfolio, the results are found to be satisfactory. Core earnings representing the Group s earnings on customer related activities amounted to DKK 348m against DKK 427m in Core earnings are calculated exclusive of the contribution to the Guarantee Fund, etc., which amounted to DKK 109m against DKK 172m in Earnings from investment portfolios representing the Group s return on its own securities portfolio after funding costs amounted to DKK 612m against DKK 346m in Throughout 2012, interest rates were subject to downward pressure. The European Central Bank and the Danish central bank lowered their interest rates over the spring, which offset the interest-rate increases implemented by the banks. Moreover, the Danish central bank independently lowered its interest rate to protect the Danish krone, and at the end of the year the leading 4 Jyske Bank Annual Report 2012

7 Management s Review Profit for the year DKKm Net interest income 4,471 4,410 Dividends, etc Net fee and commission income 1,652 1,310 Net interest and fee income 6,143 5,737 Value adjustments Other operating income Income from operating lease (net) Gross earnings 6,637 6,189 Operating expenses, depreciation and amortisation 4,459 4,277 Profit from equity investments 12-7 Core earnings before loan impairment charges and provisions for guarantees 2,190 1,905 Loan impairment charges and provisions for guarantees 1,842 1,478 Core earnings Earnings from investment portfolios Profit before contribution to the Guarantee Fund, etc The Guarantee Fund, etc Pre-tax profit Tax Profit for the year IT conversion and migration In October, Jyske Bank completed a successful conversion and migration of its IT systems to Bankdata's platform. Throughout year, the conversion made great demands on the entire organisation, and the preparations, the implementation as well as the actual conversion and migration involved up to 900 employees from Jyske Bank and Bankdata. To this must be added the training of Jyske Bank's employees and the assistance from the other banks that are members of Bankdata. In terms of size, the conversion was a historic project for Jyske Bank, and it is with great pleasure that Jyske Bank is able to conclude that the conversion project was carried out according to schedule and within the defined cost limits. The Jyske Bank Group s conversion of its IT systems thus culminated, and in future focus will be on the further optimisation of processes and actual IT development benefitting customer-oriented activities. Changes in interest rates In 2012, Jyske Bank made changes in the interest rates, due to which it was possible to maintain a satisfactory profitability considering the falling interest-rate level. Issue of covered bonds In 2012, Jyske Bank and BRFkredit signed an agreement offering Jyske Bank access to funding of mortgage products through the issue of covered bonds via BRFkredit. At end-2012, financing via BRFkredit amounted to DKK 3bn through issues with a time to maturity between 5 and 30 years. It is expected that financing in the amount of DKK 7bn - 8bn will have taken place by the end of Business volume and financial position Jyske Bank generated satisfactory organic growth as it saw a net inflow of more than 12,000 customers. Jyske Bank saw an increase in corporate as well as personal customers. Extracts from the balance sheet DKKm Loans and advances 118, ,494 of which bank loans 105, ,546 Bonds at fair value 57,554 54,113 Bonds at amortised cost 18,738 18,901 Total assets 258, ,220 Deposits 120, ,338 of which bank deposits 97, ,164 of which pooled deposits 5,583 9,079 Issued bonds 34,921 37,482 Equity 15,642 13,846 Bank lending and deposits fell by DKK 2.6bn and DKK 3.7bn, respectively, corresponding to declines by 2.4% and 3.7%. These declines are to be viewed in the light of the economic conditions and the overall development in the banking sector. Pricing in the financial markets was to some degree affected by the turmoil in the euro zone. The business volume within asset management, including the Group s private-banking activities, pooled deposits and portfolio management rose totally to DKK 80bn as compared to DKK 71bn at year-end 2011; a breakdown is shown in the table below. Assets under management DKKbn Private banking activities Assets in pooled deposits 5 9 Portfolio management Total The year 2012 like 2011 saw a positive development in respect of portfolio products under assetmanagement agreements. Jyske Bank Annual Report

8 Management s Review To some extent the improvement is to be viewed in the light of the decline in assets in pooled deposits, as also 2012 saw a shift of assets from pooled deposits to asset-management agreements. At end-2012, assets under management by Jyske Invest, of which Jyske Bank is the custodian bank, amounted to DKK 61bn against DKK 47bn at end The 30% increase can be attributed to a net inflow of investment funds of DKK 8bn and market-value adjustments in the amount of DKK 6bn. Following the capital increase and the continued consolidation, the Jyske Bank Group's equity came to DKK 15.6bn at the end of the year, and the capital base amounted to DKK 18.6bn. The capital structure is assessed to be very robust with a solvency ratio of 17.3% and a Core Tier 1 capital ratio excluding hybrid core capital of 14.1%. the company's earnings. In late 2012, the company was adversely affected by regulatory changes. The company generated a pre-tax profit of DKK 12m in 2012 against DKK 10m in Due to pressure on the business model and the regulatory changes, it is expected that the future earnings of Berben's Effectenkantoor will fall. In consequence of these anticipations, and due to the goodwill impairment test conducted in relation to the company, goodwill write-off of DKK 216m were recognised and hence activated goodwill is now recognised at nil. Over the period , Jyske Bank s total earnings relating to Berben s Effectenkantoor amounted to about DKK 450m after tax. At the end of the year, the Jyske Bank Group calculated its individual solvency requirement, inclusive of the activities from Spar Lolland, at 10.2% against 10.0% at end On the whole, the Jyske Bank Group s financial position is assessed to be satisfactory at the end of the year. Subsidiaries of the Jyske Bank Group In 2012, Jyske Finans and Silkeborg Data, the two largest Danish subsidiaries, maintained and expanded their strong market positions in the leasing market and in the market for payroll solutions to the public sector, respectively. The year 2012 was a very positive year for the two companies. In 2012, Jyske Finans generated a pre-tax profit of DKK 188m against DKK 127m in 2011, and in 2012 Silkeborg Data generated a pre-tax profit of DKK 48m against DKK 32m in The profit generated by Jyske Bank (Gibraltar) and Jyske Bank (Schweiz), the Group s foreign subsidiary banks, was in 2012 still affected by the general slowdown in private banking activities, even though over the year the development improved relative to the preceding years. On the whole, in 2012 the two subsidiary banks generated a pre-tax profit of DKK 177m against DKK 95m in The year 2012 was challenging for Berben s Effectenkantoor, a Dutch investment services company. The primary business area of the company is asset management through bond investments, and the generally low interest-rate level was a limiting factor to 6 Jyske Bank Annual Report 2012

9 Management s Review Core earnings before loan impairment charges and provisions for guarantees Core earnings before loan impairment charges and provisions for guarantees amounted to DKK 2,190m against DKK 1,905m for Core earnings are calculated exclusive of the contributions to the Guarantee Fund, etc. Core earnings DKKm Net interest income 4,471 4,410 Dividends, etc Net fee and commission income 1,652 1,310 Net interest and fee income 6,143 5,737 Value adjustments Other operating income Income from operating lease (net) Gross earnings 6,637 6,189 Operating expenses, depreciation and amortisation 4,459 4,277 Profit from equity investments 12-7 Core earnings before loan impairment charges and provisions for guarantees 2,190 1,905 Loan impairment charges and provisions for guarantees 1,842 1,478 Core earnings Net interest income under core earnings amounted to DKK 4,471m, up by 1.4%. The low interest-rate level and falling balance of loans and advances limited the development of net interest income. The opposite effect was seen from the interest-rate hikes implemented as they contributed to maintaining the level of net interest income. Net fee income and other operating income rose by 13.7% to DKK 2,022m against DKK 1,779m in The increase can be attributed to rising activity within investments as well as earnings relating to clients converting their mortgages. Fee and commission income (gross) is shown in the table below. Fee and commission income DKKm Securities trading and safe-custody services Money transfers and card payments Loan management fees Guarantee commission Other fees and commissions Total 1,817 1,486 Value adjustments amounted to DKK 66m against negative DKK 44m in Operating expenses, depreciation and amortisation, exclusive of costs for operating leasing, amounted to DKK 4,459m against DKK 4,277m in After adjustment of goodwill impairment by DKK 216m, the operating expenses, depreciation and amortisation came to DKK 4,243m in 2012, against DKK 4,277 in Jyske Bank s total IT costs over the period , inclusive of conversion and migration costs, were DKK 50-75m lower than the original IT budgets that formed the basis for the decision of the IT conversion to Bankdata. Synergies from the IT conversion and migration to Bankdata has therefore to some extent been realised in 2012, and further synergies are expected to be realised over the coming years. It is expected that in 2013 the Group s expenses will be in the range of DKK 4.0bn-4.1bn exclusive of the expenses relating to the acquisition and integration of activities from Spar Lolland as well as expenses relating to the integration of Fjordbank Mors. Operating expenses, depreciation and amortisation DKKm Employee expenses 2,569 2,594 IT Rent, etc Amortisation, depreciation and impairment Goodwill write-off Other operating expenses Total 4,459 4,277 The number of employees was reduced by 235 in 2012; of this number, 180 employees were transferred to Bankdata in connection with the transfer of business. Due to the conversion to Bankdata, Jyske Bank still had about 60 temporary employees at end Since 2006, the number of employees has been reduced by 528. For 2012, payroll tax amounted to DKK 188m against DKK 183m in Jyske Bank Annual Report

10 Management s Review Loan impairment charges and provisions for guarantees For 2012, net loan impairment charges and provisions for guarantees in the amount of DKK 1,842m were recognised as an expense under core earnings against DKK 1,478m in Hence the loan impairment charges and provisions for guarantees for the year were higher than in 2011, the primary reason being the implementation of the FSA's more stringent guidelines for loan impairment charges and provisions for guarantees. Loan impairment charges and provisions for guarantees are within the previously announced range of DKK 1.6bn to 2.0bn. The development of losses was as expected, and in 2012, Jyske Bank recognised as losses DKK 1,227m against DKK 2,206m in It should be pointed out that in 2011 an amount of DKK 530m was written off in relation to Bank Package I. The Group s balance of loan impairment charges and provisions for guarantees amounted to 3.4% of loans, advances and guarantees at end-2012 against 2.8% at end Loans, advances and guarantees as well as loan impairment charges and provisions for guarantees DKKm Loans, advances and guarantees 130, ,899 Non-performing loans and past due exposures 1,977 2,257 Loans and advances assessed individually: Loans and advances with OEI before loan impairment charges 9,442 8,675 Impaired loans and advances before impairment charges 6,565 6,923 Impairment charges 3,181 2,913 Impaired loans and advances after impairment charges 3,384 4,010 Balance of loan impairment charges and provisions, total 4,661 3,871 Balance of individual impairment charges and provisions 3,608 3,207 Balance of collective impairment charges and provisions 1, Loan impairment charges and provisions for guarantees 1,840 1,480 Whrite-off 1,227 2,206 exhausted. Therefore the companies were under pressure. On the whole, it is assessed that the credit quality was at an acceptable level at the end of the year, but the volume of loan impairment charges and recognised losses is expected still to be at a level above the long-term normal in Due to tax cuts, a low level of interest rates and a fairly low unemployment rate, the credit quality of loans and advances to personal customers was still at a satisfactory level at the end of the year. Disregarding the implementation of the FSA s more stringent guidelines for loan impairment charges and provisions for guarantees, loan impairment charges relating to loans and advances to personal customers fell slightly in Depending on the development of the interestrate level, house prices and unemployment, it is expected that this underlying development will continue in At the end of the year, the Jyske Bank Group had registered collateral totalling DKK 68.9bn against DKK 67.6bn at end-2011, and measured in relation to loans, advances and guarantees, the value of the collateral had increased. At end-2012, collateral relating to cash deposits and securities was at a lower level than at end- 2011; this was, however, more than offset by the higher level relating to commercial real property and personal property. Loans and advances with objective evidence of impairment (OEI) cover loans and advances in connection with which financial challenges have occurred and been demonstrated, and where such financial challenges may lead to uncertainty about future payments. Loans and advances with OEI increased by 9% relative to The Group s balance of individual loan impairment charges and provisions for guarantees rose by 13% in 2012 against the decline of 16% in The increase of 59% (2011: 12%) in the Group s balance of collective loan impairment charges and provisions for guarantees could primarily be attributed to the FSA s more stringent guidelines for loan impairment charges and provisions for guarantees. The credit quality of loans and advances to corporate customers was in 2012 still affected by the crisis and the slower economic growth. Many businesses established that their earnings capacity was limited and the possibilities for cost-cutting initiatives had been 8 Jyske Bank Annual Report 2012

11 Management s Review A breakdown of loans, advances and loan impairment charges and provisions for guarantees is shown in the table below. On the whole, the distribution of the portfolio was acceptable. Distribution Balance of loan impairment charges Loans, advances and guarantees and provisions for guarantees DKKm Ratings ,817 60, Ratings ,981 47, Ratings ,388 11, Default 4,973 4,423 3,200 3,004 Other 7,693 10, Total 130, ,899 4,661 3,871 Rating: Credit rating where 1 reflects the highest rating. The category Other comprises customers for which no credit rating had been established. The Group had no exposures which exceeded 10% of the capital base. The Group had seven exposures that amounted to between 5% and 7.5% and one exposure between 7.5% and 10% of the capital base. Jyske Bank Annual Report

12 Management s Review Earnings from investment portfolios Investment portfolio earnings, which amounted to DKK 612m against DKK 346m in 2011, were affected by the falling and generally low interest-rate level. Assessed on the basis of the chosen risk profile, the investment portfolio earnings were satisfactory. Earnings from investment portfolios DKKm Net interest income Dividends, etc Net fee and commission income -2-3 Net interest and fee income Value adjustments Other operating income 0 0 Gross earnings Operating expenses, depreciation and amortisati 9 8 Profit from equity investments 0 0 Earnings from investment portfolios before loan impairment charges and provisions for guarantees Loan impairment charges and provisions for guar -2-1 Earnings from investment portfolios The investment policy applied to the Jyske Bank Group's own securities portfolio rests on a long-term risk-return view and an assessment of the total risk positions with special focus on stabilisation of the Group s aggregate earnings by taking into account correlations to the core business. Market risk At end-2012, the aggregate interest-rate, currency and equity risk expressed as Value-at-Risk (VaR) amounted to DKK 16m (calculated with a time frame of one day and 99% probability) against DKK 21m at end The levels of the positions were moderate considering the chosen risk profile in respect of market risk, including the risk/return ratio. Generally, volatility levels were low throughout Historically, the interest-rate risk has been the most important market risk. Also in 2012, the interest-rate risk was dominated by exposures to Danish and foreign mortgage bonds with short and medium maturities. As market rates fell generally in mid-2012, the Group s interest-rate risk was reduced to zero. Towards the end of the year, the risk again increased and amounted to 1.1% of equity. The Group s interest-rate risk was planned on the central premise that the very high debt level in the western world will put a damper on growth and therefore most likely cause the interest-rate level to be low over the coming years. The low level of interestrate risk reflects the low ongoing earnings due to the low interest-rate risk as well as limited potential of further falls in interest rates. As usual, the Jyske Bank Group's equity risk was at a low level. In 2012, the positions were composed with a preference for equities in growth countries as well as to some extent Japan, which seemed to be undervalued. Over the year, the currency positions were gradually reduced and characterised as well-diversified. At the end of the year, the position taking was characterised by long positions in emerging-market currencies, which were offset by short positions in JPY and CHF. Value-at-Risk as a percentage of equity % 0, , , , , Total Interest-rate Currency Equities Credit risk relating to securities In the second half of 2012, credit spreads narrowed significantly following the first half of the year with much nervousness triggered by the debt crisis in Southern Europe. The catalyst was primarily the ECB s commitment to buy Southern European government bonds. The Group s positions in securities with low to moderate credit risk were maintained more or less throughout the year. Hence the positions were still dominated by European mortgage bonds and banks' senior issues with shorter maturities. The overall credit portfolio developed very favourably in 2012 and yielded therefore a satisfactory return. The Group s total portfolio of held-to-maturity bonds amounted to DKK 18.7bn against DKK 18.9bn in The portfolio is still dominated by low-risk securities. At end-2012, the market value was DKK 345m higher than the carrying amount. At end-2011, the market value was DKK 7m lower. 10 Jyske Bank Årsrapport 2012

13 Management s Review Other remarks Jyske Invest Hedge Markedsneutral Obligationer (JIHMO) In 2012, Jyske Bank negotiated with the Consumers Ombudsman and Foreningen af Investorer i Jyske Invest Hedge Markedsneutral Obligationer (the Association of Investors in Jyske Invest Hedge Markedsneutral Bonds) for a settlement of the JIHMO issue. The outcome of the negotiations was that at certain conditions, Jyske Bank offered to pay partial compensation for losses incurred by investing in JIHMO. The offer was recommended by the Consumers' Ombudsman and accepted by the Association of Investors in Jyske Invest Hedge Markedsneutral Bonds. At end-2012, a process relating to the calculation and payment of compensation under the offer was still in progress. Jyske Bank has made provisions to cover the expected costs relating to the proposed settlement. The Danish Financial Supervisory Authority's report The Danish FSA conducted an inspection of Jyske Bank, and in 2012 Jyske Bank received the following reports: - The FSA conducted in September 2012 a functional inspection of management and control in the credit area. The inspection checked compliance of requirements in the credit area as stated in the FSA's Executive Order on the management and control of banks, etc. Following the FSA s inspection, an enforcement order was issued, which has now been complied with. - The FSA conducted in February 2012 a functional inspection of the bank s exposure to the agricultural sector. The inspection covered credits relating to agricultural clients working as full-time farmers within pig breeding, cattle breeding or plant farming. The FSA s inspection did not give reason to any enforcement orders or significant comments, nor did it give reason to make any changes in the overall level of impairment charges or the solvency requirement. - The FSA conducted in September 2011 a functional inspection of Jyske Bank s function as custodian bank for Investeringsforeningen Jyske Invest and Hedgeforeningen Jyske Invest. Following the FSA s inspection, two enforcement orders were issued, which have now been complied with. - The FSA conducted in September 2011 a functional inspection of Jyske Bank s market risk. The FSA s inspection did not give reason to any enforcement orders or significant comments. Jyske Bank was, however, given a minor comment on risk relating to the reporting in the area of compliance. Supervisory Diamond Tilsynsdiamanten (the Supervisory Diamond) defines a number of special risk areas including specified limits that banks should generally not exceed as from end The Supervisory Diamond limits applicable to Jyske Bank A/S at end-2012 are shown below. Supervisory Diamond Sum of large exposures < 125% of the capital base 0% 0% Increase in loans and advances < 20% annually 9% 6% Exposures to property administration and property transactions < 25% of total loans and advances 8% 8% Stable funding < 1 0,79 0,65 Liquidity surplus > 50% 122% 86% As at 31 December 2012, Jyske Bank A/S met all the benchmarks of the Supervisory Diamond. Events after the balance sheet date Acquisition of Spar Lolland On 25 January 2013 it was announced that Jyske Bank had entered into an agreement with Sparekassen Lolland A/S to take over all Sparekassen Lolland s banking activities, including the 45,000 customers of Spar Lolland s branches and 70,000 customers of FinansNetbanken, as well as employees and branches. Jyske Bank took over all assets and liabilities, except for subordinated debt. The total loans and advances as well as deposits involved in the transaction were calculated at DKK 7.1bn and DKK 9.7bn, respectively. It is expected that the profitability of Spar Lolland s branches and FinansNetbanken will be in line with that of Jyske Bank s domestic branches in two or three years. Jyske Bank Årsrapport

14 Management s Review Outlook Jyske Bank expects that the economic recovery will be long in coming. Consumer spending and investments will only grow modestly and, also, exports will be affected by the slowdown in growth in the euro zone. On the whole, it is expected that the sluggish economic trends will continue, and GDP growth in 2013 is expected at a modest level just below 1%. Jyske Bank s strategic target is to grow through organic growth and acquisitions. Under the current economic conditions, it is most likely that acquisitions will be the primary means to achieve the growth target. 12 Jyske Bank Årsrapport 2012

15 Management s Review Capital management The objective of capital management is to optimise the Group's capital structure given the adopted risk profile. Capital management objective and planning Jyske Bank's capital-management objective as well as its risk appetite is to reach a solvency ratio sufficient for the Group to continue its lending activities during a period of difficult business conditions. The available capital must be such that regulatory and internal capital requirements are met during such a period, and it must be possible to weather heavy unexpected losses. The Group s capital planning aims in the long term at meeting the requirements for obtaining an AA rating. The Group regards a rating of at least the A level to be essential and focuses therefore on initiatives supporting the achievement of such a rating. The capital planning is subject to two overall considerations: - optimisation of the Group s risk and maximisation of earnings; - taking advantage of the situation in the market to acquire portfolios with an acceptable risk. Jyske Bank expects to be classified as a systemically important bank. Until the situation has been clarified in Denmark, Jyske Bank aims at a Core Tier 1 Capital above 12%. Moreover, the capital planning takes into account the expected future capital requirements to be introduced gradually until Solvency and core capital The development in the Group s solvency and core capital ratios is shown in the table below. It appears that the solvency and Core Tier 1 capital ratios improved throughout 2012 and at the end of the year they are at a strong level relative to Jyske Bank s capitalmanagement objective. Solvency and core capital ratios Solvency ratio (%) Core capital incl. hybrid capital Core capital excl. hybrid capital Capital base At end-2012, the Core Tier 1 capital amounted to 82% of the capital base, i.e. it was in line with the level at end The high proportion of Core Tier 1 capital in the capital base is in line with Jyske Bank's wish to achieve the highest quality possible of its capital base. In 2012, the core capital increased due to the capital increase, resulting in proceeds of DKK 1,138m. Capital base and risk-weighted assets DKKm Share capital Retained earnings 14,548 12,855 Non-controlling interests Intangible assets Deferred tax assets 0 0 Core capital excl. hybrid capital 15,257 13,275 Hybrid core capital 1,296 1,292 Diff. betw. EL* and impairment charges Other deductions Core capital 16,481 14,409 Subordinated debt 1,428 1,423 Revaluation reserve Diff. betw. EL* and impairment charges Other deductions Capital base 18,603 15,983 *EL: Expected losses Weighted asset involving credit risk 81,976 82,935 Weighted assets involving market risk 13,483 14,091 Weighted assets involving operational risk 12,177 11,611 Risk-weighted assets (RWA) 107, ,637 Minimum capital requirement Determination of the minimum capital requirement expresses the regulatory capital requirements and rests on the risk types credit, market and operational risk. Jyske Bank has been approved to apply the advanced internal rating-based approach (AIRB) to the measurement of credit risk. The approval extends to the application of advanced methods for determining the minimum capital requirement for the main part of the Group's credit portfolio. The minimum capital for market risk is measured according to the standard approach and operational risk according to the standard indicator approach Minimum capital requirement by risk type DKKm Credit risk 6,558 6,635 Market risk 1,079 1,127 Operational risk Minimum capital requirement, tier I 8,611 8,691 Capital requirement, transitional provisions 0 85 Total minimum capital requirement 8,611 8,776 Jyske Bank Årsrapport

16 Management s Review The transitional rules still applicable and relating to the former capital adequacy rules did not result in any increase in ICAAP and individual solvency requirement Jyske Bank s ICAAP (Internal Capital Adequacy Assessment Process) forms the basis of the assessment of Jyske Bank s capital structure and hence the determination of the Group's adequate capital base as well as its individual solvency requirement. The assessment is based on the current relation between the Group's risk profile and capital structure as well as forward-looking considerations that may affect this. Stress tests are used to model the micro- and macroeconomic factors to which Jyske Bank is exposed. Adequate capital base according to internal method The adequate capital base expresses Jyske Bank's own assessment of the capital requirement given the Group's risk profile. Measurement of the adequate capital base is based on Jyske Bank s internal models for measuring economic capital, which comprise the risk types for which the Group wishes to set capital aside: credit risk, market risk, operational risk and business risk. By using internal models as a basis, the measurement of the adequate capital base reflects the Group s own data, experience and management. Throughout the ICAAP, analyses are carried out for each risk type addressing qualitative as well as quantitative elements with regard to monitoring and ongoing quality assurance, including extensive evaluation of model assumptions. The analyses also address the 17 regulatory items, which - according to the Danish Executive Order on capital adequacy - must be assessed. Based on the calculation of economic capital, it is also assessed whether any considerable circumstances have not been addressed by the calculation model or for which, by way of precaution, funding is desirable. In that case, additional capital will be set aside. The additional capital addresses the uncertainty relating to individual circumstances and the model setup. In respect of credit risk, a precautionary buffer will be added in connection with weak exposures. This buffer is calculated on the basis of an extra cautious assessment of elements forming part of the measurement of these exposures. The additional capital for market risk relates to circumstances which are not addressed by the applicable model. Additional capital due to other circumstances relates to issues specific to Jyske Bank and issues which generally apply to the banking sector, such as a counter-cyclical buffer. Counter-cyclical buffers are accumulated in good times and are applied in bad times. Moreover, Jyske Bank s ability to generate a profit is also considered when assessing the adequate capital base. This means conceptually that the adequate capital base mirrors the negative retained earnings/profit in an extreme situation. The acquisition of the activities of Spar Lolland is reflected in the adequate capital base at end-2012 with an addition corresponding to a conservative assessment of the minimum capital required for Spar Lolland. Adequate capital base according to 8+ approach In 2012, the Danish Financial Supervisory Authority (FSA) issued guidelines on the measurement of the adequate capital base and solvency requirements specifying that in future the FSA will assess an institute s adequate capital base through the so-called 8+ approach. This method is based on the assumption that the minimum requirement of 8% of risk-weighted assets will cover the institute s ordinary risks. In a number of respects, the guidelines define benchmarks for the assessment of whether the additional capital in excess of 8% is necessary, and also in some respects methods are stated for the calculation of the additional capital. Simultaneously with its application of the 8+ approach, the FSA introduced a higher degree of tolerance in respect of enforcement of the solvency rules, as the solvency requirement is now a soft requirement whereas the minimum capital requirement of 8% is an absolute requirement. With a view to assessing the future implications of Jyske Bank s adequate capital base calculated on the basis of Jyske Bank s models, Jyske Bank has in accordance with the guidelines calculated the capital base using the 8+ approach. At end-2012, the method prompted add-ons in respect of the credit risk on major customers with financial problems as well as minor add-ons relating to the concentration of credits relating to individual accounts, market risk as well as liquidity risk. On the whole, inclusive of the acquired activities from Spar Lolland, the 8+ approach resulted in a solvency requirement of 10.0% at end Jyske Bank Årsrapport 2012

17 Management s Review Individual solvency requirement and capital buffer The individual solvency requirement for Jyske Bank is determined as the higher one of the requirements based on Jyske Bank s own method, the FSA s 8+ approach as well as statutory limits. In addition to the minimum capital requirement (a solvency ratio of 8%), the individual solvency requirement is subject to the interim rules pertaining to AIRB institutions. The individual solvency requirement calculated on the basis of the adequate capital base calculated according to Jyske Bank s own models is higher than the individual solvency requirement calculated on the basis of the 8+ approach. Therefore, at end-2012, the Group calculated an individual solvency requirement of 10.2%. The table below shows the contribution from the individual types of risk to the adequate capital base and the individual solvency requirement. Individual solvency requirement DKKm 2012 % of RWA 2011 % of RWA Credit risk 8, , Market risk Operational risk Other 1, , Total 10, , The capital buffer plus earnings from operations denote maximum sustainable loss without additional capital. Jyske Bank s large proportion of core capital (excluding hybrid core capital) cements the quality of the total capital. Capital buffer DKKm 2012 % of RWA 2011 % of RWA Capital base 18, , a) Core capital 16, , of which hybrid capital 1, , Supplementary capital less deductions 2, , Individual solvency requirement 10, , Capital buffer 7, , Stress and capital testing Stress testing has proved a useful capital management tool, and it is therefore an important element in Jyske Bank s approach to projecting the adequate capital base and individual solvency requirement. Moreover, stress tests are suitable to assess the Group s capitalmanagement objective in a future perspective. Stress testing is used in a number of respects. Stress testing characterised as sensitivity analyses of the impact on the risk measurement of various parameters is applied as is extensive scenario-based stress-testing of the importance of cyclical changes. Furthermore, reverse stress testing is carried out with a view to testing the Group s capacity for loss. Additional information about stress testing and various scenarios is available in the report "Risk and Capital Management An objective of the stress-test analyses is to gauge whether the future risk level of a certain scenario can be covered by capital, given the Group's earnings, capital policy and management objective as well as its risk measurement. The results of the stress-test analyses are also used, for instance, to assess whether the capital level and the quality of the capital suffice and consequently whether it is necessary to implement the Group s capital emergency plan. It is therefore crucial to determine the circumstances against which the Group wishes to hold capital. Another objective is to estimate the individual solvency requirement. In accordance with regulation, the estimate must at the least be made following stress tests based on a mild recession scenario. In addition to the stress testing applied internally, Jyske Bank also participates in stress testing facilitated by the FSA and the European Banking Authority, EBA. The most recent European testing was a follow-up to the capital test in 2011; this follow-up took place in June Once again Jyske Bank s position among the best capitalised banks in the test was confirmed. New capital adequacy rules The upcoming renewal of the Capital Requirements Directive, CRD IV, has by now been on the agenda both in Denmark and in Europe for quite some time. The main purpose of the rules is to strengthen the banks' general resilience in crisis situations. Together with the rest of the Danish banking sector, Jyske Bank has actively participated in the ongoing hearing of the new rules. The rules strongly emphasise harmonisation ( single rule book ) across the EU countries, which is a shift relative to the previous extensive application of national options. Denmark has particularly focused on the implications for the Danish mortgage system. The full recognition of the mortgage bonds is important in relation to the new liquidity standards. Jyske Bank Årsrapport

18 Management s Review The preliminary revision of the Base Committee s liquidity recommendations issued in January 2013 does still not recognise Danish mortgage bonds in line with government bonds in the definition of the most liquid assets (level 1) when calculating short-term liquidity (LCR). Also, a key element of the CRD IV is a general wish on the part of legislators that banks will be required to hold more capital for various risks. This can be achieved through these measures, among others: - improvement of the banks capital by increasing the proportion of equity in the capital base; - higher capital requirements in relation to counterparty risk; - introduction of capital buffers that are to be accumulated in good times and function as buffers in bad times. Originally the implementation of the new rules had been scheduled for the beginning of 2013, but the negotiation process turned out to last longer than anticipated so the final wording of the law was not completed according to schedule. Since mid-2012, the Council of Ministers, the European Parliament and the EU Commission have attempted to reach agreement on the final wording of the CRD IV. It is expected that such agreement will be reached in the spring of In the past couple of years, Jyske Bank has taken part in a large number of tests, e.g. the European quantitative impact study (QIS) and a number of national and international stress tests, which demonstrate that already now Jyske Bank is well prepared to meet the new requirements. Based on preliminary calculations, it is expected that Jyske Bank s solvency ratio will be affected by a modest decline of percentage point when the forthcoming CRD IV rules are implemented in However, there is still considerable uncertainty relating to the final version of the legislation. Risk and Capital Management 2012 Additional information about Jyske Bank s internal risk and capital management procedures and the regulatory capital requirements is available in the report Risk and Capital Management 2012', available on 16 Jyske Bank Årsrapport 2012

19 Management s Review Liquidity management Liquidity reserve In 2012, Jyske Bank maintained a solid and satisfactory liquidity risk profile with excess coverage in respect of the stress-based internally delegated limits and guidelines. Despite the continued challenges due to the European government debt crisis, the capital markets were in the second half of 2012 characterised by renewed positive sentiment and narrowing credit spreads relative to the level in the second half of 2011 and the first half of At end-2012, the Group s liquidity buffer amounted to DKK 43bn against DKK 38bn at end DKK 39bn of the buffer is eligible as collateral at either the Danish central bank or the ECB. At end-2012, under a stress scenario assuming that Jyske Bank is precluded from refinancing in the international financial money markets, Jyske Bank's liquidity reserve would after a 12-month period amount to DKK 12bn against DKK 12bn at end After 24 months, the reserve under this stress scenario would amount to DKK 7bn against DKK 2bn at end The table below shows the development of Jyske Bank's liquidity reserve over a 12-month period. Liquidity buffer and run-off DKKbn December months months months months The liquidity reserve according to S.152(1)(2) of the Danish Financial Business Act was high throughout the period. At end-2012, the liquidity ratio was 22.7%, corresponding to a liquidity surplus of 127%; at end the surplus was 98%. Funding Jyske Bank s primary source of funding is deposits from customers. At end-december 2012, deposits funded 92% of the loan portfolio, which was in line with the level at end Jyske Bank's other funding sources are the interbank market as well as the issue of CP and EMTN. The volume under the CP programme was in the first half of 2012 adversely affected by the downgrade of Jyske Bank s credit ratings. Over the second half of 2012, the volume developed favourably and stabilised at a level at about DKK 10bn. Jyske Bank regularly acts in the private placement market and issues, on an as-needed basis, benchmark bonds. In November 2012, Jyske Bank took advantage of the favourable market window and issued a benchmark bond; and on the basis of an order book of almost EUR 800m from 90 different European investors, a floatingrate bond loan in the amount of EUR 500m and with a term of 2½ years was issued. Moreover, in 2012, through private placements under the EMTN programme, Jyske Bank issued bonds totalling EUR 400m with a weighted average duration of almost 3 years. Original loan period Currency Million Maturity 7 years EUR years EUR years EUR years EUR At end-2012, in the course of the ordinary management of the run-off profile, Jyske Bank bought back EMTN issues with shorter time to maturity in the amount of just above DKK 2bn. Joint funding of mortgage lending via BRFkredit In February 2012, Jyske Bank concluded an agreement with BRFkredit on joint funding of new mortgage loans via covered bond issues through BRFkredit s capital centre. In June 2012, the agreement was extended so that it will also cover the part of Jyske Bank s existing mortgage lending that meet the requirements of covered bond funding. At end-2012, funding under this framework agreement with BRFkredit amounted to DKK 3bn through the issue of covered bonds with a time to maturity between 5 and 30 years. It is expected that funding in the amount of DKK 7bn - 8bn will have taken place by the end of Credit ratings In November 2012, Standard & Poor s confirmed its rating of Jyske Bank with stable outlook. In its most recent credit rating of Jyske Bank, Standard & Poor s emphasises that, in respect of personal as well as corporate customers, Jyske Bank still holds a strong position in the market, and likewise Standard & Poor s had a positive view of Jyske Bank s capital structure, funding profile and liquidity management. Jyske Bank Årsrapport