Capitalising on Basel II

Transcription

1 Capitalising on Basel II Goldman Sachs European Financials Conference Tonny Thierry Andersen CFO & Member of the Executive Board June 15, 2007

2 How to stay focused? Basel I: Return on Equity CRD/Basel II: Risk adjusted performance measures 2

3 New performance metrics required - Current ROE and even RAROC methodologies are highly inadequate ROE RAROC ROAC* Framework Regulatory Internal Internal Time horizon Point-in-time 1 year 3-5 years Confidence level NA 99.97% 99.97% Credit risk Simple Internal Internal Concentration risk No No Yes Migration risk No No Yes Operational risk No Standard Standard Market risk Advanced Advanced Advanced Performance capital All capital Risk capital All capital Other risk No Yes Yes *Return on Allocated Capital 3

4 The four pillars REAL value creation 4 M&A Capital management Financial management Basel II Products and pricing

5 Product and pricing - Advanced Basel II model gives better pricing Risk weighting of mortgage loans 50% 40% 30% 50% 35% LTV 80% 50/60/80 Concept Margin 0.80% 20% 2%-30% Depending on customer rating 60% 0.60% 10% 50% 0.50% 0% Basel I Foundation Advanced Basel II 0% 0% 5

6 Same ROAC different prices - Knowledge of risk and pricing parameters very powerful % ROAC = 20% in all cases Assumptions, base case: A4 credit quality 5 year loan No collateral Avg. non-interest income (cross selling) Base case credit risk + 50% collateral +100% cross selling 1 year loan Tw o notch lower risk 6

7 IRB advanced vs. IRB foundation - Huge differences in competitiveness Bank Nordic Advanced Foundation Loan 1,000 1,000 Margin 0.05% 0.05% Interest income loan Income capital Total income Risk-weight (A2 rated bank) 8.5% 15.3% Allocated capital (6%) Return on equity (pre costs & tax) 12.8% 8.4% CRD will/should imply a significant value creation impact 7

8 Should risk and return go hand in hand? Do you believe in the concepts of: Information ratio? Sharpe ratio? Beta? 8

9 Basel II - Will force transparency on REAL value creation ROAC No 1 No 2 No 3 CoC No 4 CoC ROE..you have to allocate the true economic capital 9

10 Valuation impact could be significant - Traditional multiples are insufficient as they dont include risk P/B 3 Traditional P/B ROE relation how you normally price Too expensive 2 1 Too cheap Modern P/B ROAC relation how you should price Return 25 10

11 Capital management in Danske Bank - Tier 1 ratio reduced by 200 bps since 2004 % Equity issuance as part of Sampo Bank purchase Q1 '07 Min. core tier 1 target 11

12 Stress testing - Do you know what happens if the freak wave comes? Recession (1 in 25) Mild recession Deflation Oil price hike House crash US dollar decline Liquidity crisis Bird flue 12

13 Securitisation enables Danske Bank to build a smooth bridge between Basel I and Basel II % Risk weight on balance sheet In 2010 we save app. DKr 0.5bn on CDS fees 50% Frees 5bn in capital Gradually prepares the rating agencies to Basel II More flexible and reversible than equity issues/hybrid capital 8-10% 8-10% Mortgage loans Basel I 1. loss tranche on CDS Mortgage loans Basel II 13

14 Stand alone vs. diversification - Size and scope matters Index Economic capital (illustrative) Marginal contribution to a diversified portfolio (Index 100) & Stand alone Danske Markets DB-brand Realkredit (Inv. bank) (Retail bank) Danmark (Mortgage comp) Norway (Retail bank) Sweden (Retail bank) Good questions: What about mono-liners? What about single name concentration? What about geographical diversification? 14

15 Country correlation - FI and IE adds significant diversification to the Group % Correlation Real GDP growth ( ) 100% 79% 68% 64% 50% 45% Denmark OECD Norway Sweden Finland Ireland Source: OECD and own calculations 15

16 M&A: Acquisition of Sampo Bank - Using several tools to optimize capital structure DKr bn bn Cap. reserve Tier 1 ratio 0.5% above old target 20 Goodwill Reduced tier 1 Tier 1 target reduced 0.5% due to diversification CDS RWA reduced by 100bn 10 Share issue 10% new shares sold in less than 20 hours Equity 0 Price Equity/Goodwill Funding 16

17 Take-aways CRD is much more than just capital reduction CRD should have significant impact on the pricing of banks First movers in CRD already take commercial and capital management advantages Pricing of loans and product development will increasingly become more risk adjusted and will divide the CRD-players The value of diversification could entice more M&A activity Danske Bank aims to be best in class in regards to CRD 17

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