Contents. Annual Report 2015

Transcription

1 2015 Annual Report

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3 Contents Annual Report 2015 MANAGEMENT S REVIEW 2 Summary 3 The year Profit for the year 8 Loan impairment charges and provisions for guarantees and value adjustments 12 of acquired loans and advances Investment portfolio earnings 15 Banking activities 17 Mortgage activities 19 Leasing activities 21 Core profit and investment portfolio earnings 22 Capital structure and capital management 23 Liquidity management 28 The Jyske Bank share 33 Other information 34 Events after the balance sheet date 35 Outlook 35 Organisation and management 36 Corporate governance 38 Equal opportunities and diversity policy 38 Corporate social responsibility 38 Internal control and risk-management systems 38 MANAGEMENT S STATEMENT AND AUDITORS REPORTS 39 FINANCIAL STATEMENTS Income statement and statement of comprehensive income 43 Balance sheet at 31 December 44 Statement of changes in equity 45 Capital statement 46 Cash flow statement 47 s 48 Directorships 113 Jyske Bank A/S 117 Jyske Bank A/S Vestergade 8-16 DK-8600 Silkeborg Tel.: jyskebank@jyskebank.dk Business Reg. No Prepress and printing: Jyske Bank

4 CORE PROFIT AND NET PROFIT FOR THE YEAR DKKm Index 15/ Net interest income 6,051 5, ,438 4,471 4,410 Net fee and commission income 1,834 1, ,731 1,652 1,310 Value adjustments Other income 239 3, Income from operating lease (net) Core income 8,433 10, ,205 6,649 6,182 Core expenses 5,322 5, ,469 4,568 4,449 Core profit before loan impairment charges 3,111 4, ,736 2,081 1,733 Loan impairment charges and provisions for guarantees 347 1, ,842 1,478 Core profit 2,764 3, , Investment portfolio earnings Pre-tax profit 3,204 3, , Tax , Profit for the year 2,476 3, , SUMMARY OF BALANCE SHEET, END OF PERIOD DKKm Loans and advances 396, , , , ,494 - of which mortgage loans 249, , of which bank loans 105, , , , ,546 - of which repo loans 41,526 22, ,263 12,607 15,948 Bonds and shares, etc. 76,527 92, ,853 78,195 74,543 Total assets 543, , , , ,220 Due to credit institutions and central banks 39,211 49, ,936 38,818 45,713 Deposits 144, , , , ,338 - of which bank deposits 128, , , , ,243 - of which repo deposits 15,925 19, ,175 17,962 17,095 Issued bonds at fair value 231, , Issued bonds at amortised cost 48,226 43, ,760 34,921 37,482 Subordinated debt 1,354 1, ,649 2,742 2,720 Equity 30,040 27, ,479 15,642 13,846 SELECTED DATA AND FINANCIAL RATIOS Earnings per share (DKK) Profit for the year, per share (diluted) (DKK) Pre-tax profit as a percentage of opening equity Net profit as a percentage of average equity Expenses as a percentage of income Capital ratio (%) Common Equity Tier 1 capital ratio (CET1 %) Individual solvency requirement (%) Capital base (DKKm) 30,088 28,990-17,831 18,603 15,983 Weighted risk exposure (DKKm) 176, , , , ,637 Share price at end of period (DKK) Book value per share (DKK) Price/book value per share (DKK) Number of full-time employees, year-end 4,021 4,191-3,774 3,574 3,809 With effect from 2014, the capital ratio and Common Equity Tier 1 capital ratio are calculated in accordance with CRD IV/CRR. Comparative figures have not been restated accordingly. BRFkredit has been included in the income statement as of 1 May 2014 and in the balance sheet as of the end of The relationship between income statement items under and the income statement item page 43 appears from page 22 in the Management's review. 2 Jyske Bank - Annual Report 2015

5 Management s Review Summary SUMMARY Core income: DKK 8,433m (2014: DKK 7,826m, exclusive of negative goodwill of DKK 2,360m) Pre-tax profit: DKK 3,204m (2014: DKK 743m, exclusive of negative goodwill of DKK 2,360m) The pre-tax profit corresponded to an annualised return of 11.6% on opening equity (2014: 4.3% exclusive of negative goodwill of DKK 2,360m) Value adjustments under core profit: DKK 216m (2014: DKK -42m) o Of which relating to clients' interest-rate hedging: DKK 298m (2014: DKK -541m) Loan impairment charges and provisions for guarantees under core profit: DKK 347m (2014: DKK 1,953m) o At the end of 2015, the total balance of management s estimates amounted to DKK 462m, of which DKK 285m related to agriculture Loans and advances: DKK 396bn (2014: DKK 362bn) Bank deposits: DKK 129bn (2014: DKK 133bn) Capital ratio 17.0%, of which Common Equity Tier 1 capital ratio of 16.1% (2014: 16.4% and 15.3%) Individual solvency requirement: 10.5% (2014: 10.9%) With effect as of 1 March 2016, the share buy-back programme will be raised by DKK 250m to DKK 750m COMMENTS BY MANAGEMENT In connection with the publication of Jyske Bank's Annual Report 2015, Anders Dam, Jyske Bank s CEO and Managing Director states: 'Given the total pre-tax profit of DKK 3.2bn - of which DKK 1.1bn related to the fourth quarter - Jyske Bank saw a favourable development in Hence, the return on opening equity came to 11.6% before tax. All three business areas, banking, mortgage banking and leasing, delivered satisfactory results in Throughout 2015, Jyske Bank was able to benefit from its focus on home loans in a generally tight banking market with low demand. Thus, at the end of 2015, new home loans had been granted in the amount of DKK 57.5bn, which means an increase of DKK 25.5bn in Today new home loans have been granted in the amount of DKK 60bn. After the merger with BRFkredit, the earnings and cost synergies reached DKK 550m at the end of The full annual effect in line with the objective of synergies of at least DKK 600m is, all other things being equal, expected to be reached in 2017, i.e. a year before the original plan and 6 months earlier than the most recent estimate. The quality of the Group's loans and advances is improving and impairment charges are only adversely affected by the continued difficult conditions for Danish agriculture. On that basis, Jyske Bank made further management provisions for agriculture in the fourth quarter of 2015, and at the end of 2015 the balance is DKK 285m. At the end of 2015, the total balance of management's estimates amounted to DKK 462m. Jyske Bank strengthened its capital base in 2015, and, still based on a conservative capital policy, the Supervisory Board has chosen to increase the share buy-back programme by DKK 250m to DKK 750m to take effect as of 1 March Also, the Supervisory Board proposes to the Annual General Meeting that a dividend of DKK 5.25 per share be paid corresponding to about DKK 500m. With respect to 2016, Jyske Bank enjoys good market conditions for continued growth in the property area relating to both personal and corporate clients even though it is to be expected that the setting with low interest rates and low demand for credit will continue', ends Anders Dam. Jyske Bank - Annual Report

6 Management s Review The year 2015 Economic trends The global economy still only saw moderate progress in The euro zone was not as weak as earlier, but on the other hand we saw a definite slowdown in the emerging markets countries in general, where especially the slowdown in China had a strong impact. On the whole, global economic growth slowed down a bit relative to Moreover, the year saw another steep fall in the oil price, at the same time as the Western economies were still seeing an unusually low interest-rate level and low inflation. In Denmark, the private-sector savings surplus is still very high, but the slow recovery was able to continue, supported in particular by the very low interest rates and decent real wage growth. The recovery lost momentum in the course of the year where exports slowed down after a strong first quarter. At the same time, house prices levelled off in the second half of the year after price increases all over the country in the first half of the year. However, the general impression is that the economic development is slightly positive, among other things, due to continuing growth in employment, a rising number of home sales and a decent development in consumer spending, affected positively by this very increase in the housing market. GDP growth for 2015 as a whole seems to be at about 1%. The first months of the year saw pressure for a stronger Danish krone following the Swiss central bank's discontinuation of its currency ceiling in relation to CHF. In order to defend the rate of the Danish krone, Danmarks Nationalbank, the central bank of Denmark, bought currencies and, in several steps, lowered the rate of interest on its certificates of deposit to -0.75%. The attempts to defend the Krone were successful, and the pressure on the currency was reversed, and subsequently the currency reserve was lowered gradually. However, the rate of interest on certificates of deposit was unchanged at % at the end of 2015, but at the beginning of 2016 it was raised to -0.65%. The Danish banking and mortgage credit sector The Danish financial sector was characterised by the following general trends in 2015: - For the seventh year in a row, financial institutions' lending to corporates and private individuals fell. - For the ninth year in a row, mortgage credit institutions' lending to corporates and private individuals continued to increase. - Margins in the banking sector are under pressure due to the generally low level of interest rates and competition driven by the wish to attract and retain clients and business volumes in a market where total lending grows moderately. - On-going implementation of new and future liquidity and capital adequacy rules resulted in adjustments of the Group's securities portfolio. - Danish agriculture, particularly dairy and pig farmers, were still facing challenges due to the extension of the Russian embargo and low commodity prices. Hence, the sector still faced structural challenges in (hereinafter referred to as the Group) comprises the financial institution Jyske Bank, the mortgage credit institution BRFkredit, the leasing company Jyske Finans, as well as international activities in the form of a branch in Hamburg and investment advice to international private banking clients in Gibraltar and Copenhagen. At the end of 2015, the Jyske Bank Group had 4,021 fulltime employees, about 200,000 shareholders and equity amounting to DKK 30.0bn. Jyske Bank was established in 1967 and is domiciled in Silkeborg. The primary objective of Jyske Bank is to supply personal clients and small and medium-sized enterprises with financial solutions. In respect of banking activities in Denmark, Jyske Bank operates 97 personal client branches, 32 corporate client branches and 10 private banking centres. Leasing activities are gathered at the subsidiary Jyske Finans. Jyske Bank is the third largest bank in the Danish market and the second largest Danish-owned bank. BRFkredit is the fourth largest mortgage credit institution in the Danish market, and its activities date back to the establishment of Byggeriets Realkreditfond in In 1975, BRFkredit merged with the oldest mortgage credit institution in Denmark, Husejernes Kreditkasse, which was founded by wealthy citizens in Copenhagen following the great fire in The main activity of BRFkredit is mortgage lending secured against real property in Denmark. Less than 1% of 4 Jyske Bank - Annual Report 2015

7 Management s Review the loans in the portfolio is secured against real property outside Denmark. BRFkredit is divided into four different business areas: - Personal clients - Corporate clients - Publicly subsidised housing - Joint funding Jyske Finans was established in 1959 under the name of A/S Jydsk-Fynsk Diskonteringsselskab. In 1986, A/S Jyske Leasing was established with the objective of delivering custom-made financing arrangements to the corporate sector. In 1991, the activities of the two companies were merged, and in 2001 the company was named Jyske Finans A/S. Jyske Finans offers financial solutions in the form of leasing and financing within car financing as well as leasing and financing of equipment for the corporate sector. The activities target Danish personal and corporate clients as well as dealer cooperation schemes and partnerships. In addition to the above-mentioned companies and activities, the Group comprises small subsidiaries, including investment and property companies. Strategy The Group supports the needs of private individuals, businesses and institutions - and hence also society - for financial services that are simple, forward-looking and responsible. The Group offers financial products and other related products and services, primarily in Denmark. The strategy is to focus on the core business, which comprises commercial banking, trading activities based on client transactions, asset management and international private banking activities as well as mortgage operations. In respect of products and services that the Group does not produce itself, but which are considered important to the Group's clients, strategic partnership agreements are concluded, including life insurance through PFA Pension, property and casualty insurance through GF Forsikring, mortgage products relating to agriculture through DLR Kredit as well as payment cards through SEB. Similarly, the Group participates in Bankdata, which delivers essential parts of Jyske Bank's IT development and IT solutions, and Jyske Bank's IT operations are performed at JN Data. The strategic initiatives in recent years focused on strengthening of the income base through selective acquisitions and cost reductions. As was the case in 2014, the strategic focus in 2015 was on the financing of real property by means of new home loan products and direct mortgage activities. The Group's strategy for the coming years rests on the intention that its activities are still to make a difference for its clients. The strategy covers seven themes: - Capital - Management, organisation and employees - Prices and products - Productivity - Distribution and client service - Technology - IT and digitalisation - Marketing Capital The Group's aim is to deliver a long-term attractive return to its shareholders. The return must rank among the best generated by comparable companies and reflect the risks and earnings of the Group. The Group will distribute dividend and make share buybacks provided that it complies with known or probable future capital requirements of authorities, including capital requirements to be met in connection with stress scenarios, that it complies with capital requirements of rating agencies, and provided that the necessary capital is available for organic growth and growth through minor acquisitions. The Group will meet capital requirements through an appropriate combination of equity and loan capital. Long-term risk management and capital planning will ensure competitive and high ratings for Jyske Bank as well as a strong position in the capital market. Management, organisation and employees Based on a set of common values and value-based management, the basis is established for organisational cohesion and agility as well as the ability to develop and retain dedicated, competent, dynamic and responsible employees who are necessary in order to fulfil the company's strategies and objectives. Jyske Bank - Annual Report

8 Management s Review Prices and products Jyske Bank stands out through its development of products, advisory services and client servicing that offer clients the experience of a bank that differs in a positive way in terms of such parameters. Product range, prices and terms and conditions must be simplified to reduce costs. Productivity The productivity is to be improved through efficient utilisation of existing systems and efficient implementation of new systems and processes, through optimisation of value chains, through centralisation of standardised tasks and through investment in productivity-enhancing systems. Distribution and client service The Group will be known for rendering its clients personal and individually adjusted advice. The year 2015 saw a few structural adjustments in the branch network in the form of branch mergers and closures fuelled by changing client behaviour. On an on-going basis, cashier's desks will be replaced by ATMs. At the end of 2015, 21 cashier's desks had been replaced. Focus will be on specialisation. Special competences and servicing of selected client segments are gathered in a few branches that function both as competence centres and handle the overall servicing of clients within the segment or geographic area. Technology IT and digitalisation The Group's supplier of basic banking systems is Bankdata. The Group uses BRFkredit's mortgage banking systems, and the Group' supplier of IT infrastructure is JN Data. Marketing is marketed under two brands: Jyske Bank and BRFkredit. The purpose of using two brands is to reach a wider client group, to ensure the necessary volume in mortgage bonds and to increase the Group's total sales and earnings. Status of the merger with BRFkredit In the spring of 2014, the merger of Jyske Bank and BRFkredit was completed. Through the merger, the Group became a significant player in the Danish financial sector. The Group is a full-line supplier of financial products for all client groups and holds continued growth potential through sales of home loan products and cross-sales to personal and corporate clients as well as cost synergies from optimisation of IT, business processes and overlapping functions. To this must be added improved diversification of the balance sheet, lower risk profile for the total earnings as well as a strong capital base. Thanks to the merger, the Group is able to generate organic growth in a market characterised by low demand. In 2015, the Group maintained its focus on the integration between Jyske Bank and BRFkredit. Through the two-brand strategy, active efforts are made to gain even more full-service clients for the Group. Jyske Bank still caters to clients' need for home financing, among other things, through Jyske Bank's branch network, and also, BRFkredit still distributes home financing products through its mobile corps of advisers and also through its telephone and internet services. Group functions have been established within a number of areas relating to staff functions. The purposes of these are to eliminate overlapping functions with a view to saving resources and also to making better use of core competences. An example of the latter is the establishment of the property competence centre, which is responsible for the implementation of the Group's strategy in the area of property financing. This means development of all the Group's products relating to property financing in the form of bank loans and mortgage loans for personal and corporate clients as well as the responsibility for the systems relating to the Group's property financing activities. In May, the activities of BRFkredit Bank were transferred to Jyske Bank, and the IT systems were converted to the Bankdata platform. The personal clients have been transferred to Finansnetbanken and therefore they continue within a self-service set-up. Corporate clients have been transferred to Jyske Bank's corporate client branches. Integration costs are expected to be in the range of DKK m At the end of 2015, a total of DKK 110m had been paid, of which DKK 47m were paid in Earnings and cost synergies The Group has come a long way in its efforts to realise annual synergies of at least DKK 600m. Since the merger, initiatives have been implemented that will result in annual synergies of about DKK 550m after deduction of the lost fee income of about DKK 300m from Totalkredit. The most important sources of these are earnings on the 6 Jyske Bank - Annual Report 2015

9 Management s Review new home loans and mortgage loans being channelled to BRFkredit, lower capital charges at BRFkredit and the reduced number of employees. From the end of 2013 to the end of 2015, Jyske Bank granted new home loans in the amount of about DKK 57.5bn. In addition, mortgage loans in the amount of about DKK 4bn for corporate clients were channelled to BRFkredit. On an annual basis, these loans contribute net interest income of about DKK 440m. Since the merger, the capital charges of BRFkredit have been reduced by DKK 116m annually. In 2015, BRFkredit incurred capital charges of DKK 134m against DKK 250m in The capital charges of BRFkredit fell as the need for senior debt fell due to lower OC requirements from Standard & Poor's. The cost synergies are driven by the development in the number of employees. At the time of the merger, the Group had 4,444 employees. At the end of 2015, this number had been reduced to 4,021 employees corresponding to a fall of 423 jobs and annual savings of about DKK 300m. The objective is unchanged to achieve annual synergies of a minimum of DKK 600m, and it is expected that the full annual effect from the synergies will materialise in 2017, i.e. a year earlier than originally planned and six months earlier than stated in the most recent announcement. Winding up of Jyske Bank Schweiz In March 2015, it was decided to wind up Jyske Bank Schweiz as the unit no longer met the Group's required rate of return. There were no prospects of improvement of profitability in the future due to stricter regulatory requirement, and increasing regulation will increase the costs of running a bank in Switzerland. Jyske Bank has owned Jyske Bank Schweiz since The winding up is proceeding according to plan, and therefore all banking activities in Switzerland have been discontinued. The banking licence was returned in February The winding up resulted in costs in the magnitude of DKK 50m, of which DKK 35m in the fourth quarter of The majority of the closure costs relate to severance and IT costs. Jyske Bank - Annual Report

10 Management s Review Profit for the year CORE PROFIT AND NET PROFIT FOR THE YEAR DKKm Index 15/14 Q Q Q Q Q Net interest income 6,051 5, ,598 1,500 1,513 1,440 1,428 Net fee and commission income 1,834 1, Value adjustments Other income 239 3, Income from operating lease (net) Core income 8,433 10, ,258 1,703 2,494 1,978 1,902 Core expenses 5,322 5, ,369 1,321 1,294 1,338 1,341 Core profit before loan impairment charges 3,111 4, , Loan impairment charges 347 1, Core profit 2,764 3, , Investment portfolio earnings Pre-tax profit 3,204 3, , , Tax , Profit for the year 2,476 3, BRFkredit has been included in the income statement as of 1 May 2014 and in the balance sheet as of Q Profit for the year The Group realised a pre-tax profit of DKK 3,204m. Calculated tax amounted to DKK 728m, and after tax the profit amounted to DKK 2,476m. The pre-tax profit corresponded to a return of 11.6% on opening equity against 17.8% in The return on opening equity is in line with the objective of a return of 10-15% stated at the beginning of The net profit for the year in percentage of the average equity amounted to 8.6% against 13.7% in Core profit Core profit amounted to DKK 2,764m against DKK 3,002m in 2014 when negative goodwill amounted to DKK 2,360m. Investment portfolio earnings representing the Group s return on its own securities portfolio after finance costs amounted to DKK 440m against DKK 101m in Core profit before loan impairment charges and provisions for guarantees amounted to DKK 3,111m against DKK 4,955m for Net interest income under core income amounted to DKK 6,051m and showed a stable development over the quarters of the year when allowing for the recognition of income of DKK 96m in the fourth quarter relating to fixed-rate home loans issued at a discount. Subsequently the balance was about DKK 50m and will be recognised as income in Net interest income was affected by the very low interest rate level, the slow development in bank loans and advances due to the economic trends, the general pressure on interest rate margins and low reinvestment rates in the liquidity portfolio. Net interest income from the new home loan products has now more than made up for the lost fee income from Totalkredit and, to some extent, the falling net interest income on traditional bank loans and advances. Net fee and commission income rose by 4% to DKK 1,834m against DKK 1,761m in In relation to securities trading and custody accounts, the performancerelated fees began the year on a strong note, but ended the year on a weak note due to the falling equity and bond markets. For the full year, performance-related fees were significantly above the level for In 2015, loan application fees increased by 19% to DKK 310m from DKK 260m. The increase can be attributed to strong refinancing activity within mortgage activities. The loan application fees relating to banking activities did not increase to the same extent as the transfer of mortgage loans were not subject to fees until the end of Guarantee commission was positively affected as, in the first quarter of 2015, compensation from Nykredit in the amount of DKK 84m was recognised as income. 8 Jyske Bank - Annual Report 2015

11 Management s Review FEE AND COMMISSION INCOME DKKm Securities trading and custody services 1,377 1,199 Money transfers and card payments Loan application fees Guarantee commission Other fees and commissions Total 2,246 2,102 Value adjustments under core profit amounted to DKK 216m against DKK -42m in Due to the rising longterm market rates, transactions relating to clients' interest-rate hedging affected value adjustments positively with an unrealised gain of DKK 298m. In 2014, the effect from these transactions was a negative value adjustment of DKK 541m. In 2015, value adjustments of the liquidity buffer, which primarily consists of Danish mortgage bonds, had a negative impact. In 2014, the value adjustments were subject to a positive effect totalling DKK 483m due to the sale of the equity interest in Nets, value adjustment of sector shares and buy-back of hybrid capital. The 1.8% increase in salaries prescribed by the collective agreement increased payroll costs by about DKK 60m relative to Also, payroll tax for 2015 was increased to 12.2%, and expenses for payroll tax amounted to DKK 258m against DKK 259m in For 2016, the rate will increase to 13.6%. In terms of full-time employees, the number of employees fell in 2015 by 170, and at the end of 2015 the Group had 4,021 full-time employees. The objective is still, all other things being equal, to reduce the number of employees to 4,000 full-time employees. In 2014, operating expenses were affected adversely in the amount of DKK 213m due to integration costs of DKK 47m relating to the merger with BRFkredit, alignment of accounting estimates in the amount of DKK 48 and reassessment of provisions of DKK 118m. Core expenses amounted to DKK 5,322m against DKK 5,231m in In comparison with 2014, it must be considered that BRFkredit was not recognised in the income statement until 1 May Operating expenses were affected by an amount of DKK 50m due to costs relating to the winding up of Jyske Bank Schweiz and by an amount of about DKK 60m in integration costs relating to the merger between Jyske Bank and BRFkredit. In the second half of the year, expenses were paid for both the Guarantee Fund for Depositors and Investors and the Resolution Fund. For the full year, these operating expenses amounted to DKK 168m against DKK 147m for Payments to the Guarantee Fund for Depositors and Investors stopped at the end of 2015 as the Fund was paid up in full. The annual contribution to the Resolution Fund is estimated in the magnitude of DKK 50m-60m against the previous estimate of about DKK 75m. OPERATING EXPENSES AND DEPRECIATION AND AMORTISATON DKKm Employee expenses 3,041 3,009 IT 1,210 1,100 Rent, etc Amortisation, depreciation and impairment Other operating expenses Total 5,322 5,231 Jyske Bank - Annual Report

12 Management s Review SUMMARY OF BALANCE SHEET, END OF PERIOD DKKm Index 15/14 Q Q Q Q Q Loans and advances 396, , , , , , ,799 - of which mortgage loans 249, , , , , , ,864 - of which loans and advances, traditional loans and advances 93, , ,215 95,706 96, , ,331 - of which loans and advances, new home loan products 11,968 18, ,968 14,209 16,964 18,796 18,092 - of which repo loans 41,526 22, ,526 28,275 27,654 28,148 22,512 Bonds and shares, etc. 76,527 92, ,527 78,836 87,686 98,779 92,309 Total assets 543, , , , , , ,679 Due to credit institutions and central banks 39,211 49, ,211 31,947 39,865 46,176 49,885 Deposits 144, , , , , , ,693 - of which bank deposits 128, , , , , , ,198 - of which repo deposits 15,925 19, ,925 13,272 12,056 19,999 19,495 Issued bonds at fair value 231, , , , , , ,539 Issued bonds at amortised cost 48,226 43, ,226 52,556 47,947 54,061 43,413 Subordinated debt 1,354 1, ,354 1,354 1,355 1,362 1,355 Equity 30,040 27, ,040 29,233 28,996 27,970 27,561 Business volume and financial position The Group still recorded satisfactory demand for new home loan products. Since the launch of Jyske Bank's own new home loan products in mid-december 2013, Jyske Bank had at the end 2015 granted loans totalling DKK 57.5bn against DKK 32bn at the end of At the end of 2015, an amount of DKK 57bn, against DKK 31bn at the end of 2014, was recognised in the Group's balance sheet. The new home loan products are primarily sold to existing clients with mortgage loans with Totalkredit and to a lesser degree to new clients. A small proportion of the clients who switch from Totalkredit, raise home loans that are higher than their mortgage loans. The reason for this is that rising house prices have allowed home owners to raise additional loans or to refinance existing bank loans into home loans. The development in home loans more than offset the situation that, as a whole, the banking sector saw yet another year of falling loans and advances for both corporate and personal clients. On the other hand, the mortgage credit sector saw growing lending activities. Traditional bank loans and advances fell by DKK 9bn, i.e. a decline of 9%. Of which a third relate to public institutions. The demand for new loans from existing corporate clients is still limited, and solid corporate clients are in a position to reduce the drawdown under their commercial credit facilities. An inflow of corporate clients has been recorded, and to some extent the ensuing volume offsets existing clients' lower drawdown under their commercial credit facilities. At the end of 2015, repo loans to clients amounted to DKK 41.5bn against DKK 22.5bn at the end of The increase is offset by an increase in repo deposits with clients and interbank counterparties where the latter is included in debt to credit institutions and central banks. Repo activities must be seen in connection with and support of the Group's market making activities in respect of Danish mortgage bonds. In 2015, the Group saw a decline in bank deposits of DKK 4bn. This development is a consequence of the low interest-rate level and the business initiatives implemented with a view to optimising the extent and pricing of the deposit portfolio. The increase in the fourth quarter of 2015 can be attributed to an increase in time deposits. At the end of 2015, bank deposits amounted to about DKK 24bn more than bank loans and advances, corresponding to about 23%. The development shows that there is still a large savings surplus in the society. The business volume within asset management rose to DKK 118bn at the end of 2015 as compared to DKK 94bn at the end of The increase was fuelled partly by an agreement with Jyske Invest on portfolio management advice and partly by considerable new sales across most client segments. Hence, the year 2015 saw a positive development due to the inflow of new funds and also, yet with a more mixed course than in previous years, the favourable development in the financial markets. 10 Jyske Bank - Annual Report 2015

13 Management s Review After share buy-backs and the consolidation over the year, the Group's equity amounted to DKK 30.0bn at the end of the year against DKK 27.6bn at the end of The capital base amounted to DKK 30.1bn against DKK 29.0bn at the end of 2014, and the capital ratio and the Common Equity Tier 1 capital ratio amounted to 17.0% and 16.1%, respectively, at the end of the year against 16.4% and 15.3%, respectively, at the end of At the end of the year, the Jyske Bank Group calculated its individual solvency requirement at 10.5% against 10.9% at the end of To this must be added a SIFI buffer of 0.3%. On the whole, the Jyske Bank Group s financial position is robust and satisfactory. Jyske Bank - Annual Report

14 Management s Review Loan impairment charges and provisions for guarantees and value adjustments of acquired loans and advances Under core profit, an amount of DKK 347m was recognised as an expense under loan impairment charges and provisions for guarantees against DKK 1,953m in In the statutory reporting format, an amount of DKK 1,372m was recognised as an expense under loan impairment charges and provisions for guarantees. The difference from impairment charges under core profit can be attributed to reclassification relating to write-downs on impaired loans and advances from BRFkredit Bank, BRFkredit and SparLolland. LOANS, ADVANCES AND GUARANTEES AS WELL AS VALUE ADJUSTMENTS OF LOANS AND ADVANCES, ETC. DKKm Index 15/14 Q Q Q Q Q Loans, advances and guarantees 410, , , , , , ,017 Non-accrual loans and past due exposures 2,961 3, ,961 3,160 4,016 3,771 3,795 Loans and advances assessed individually: Loans and advances with OEI before loan impairment charges 27,683 31, ,683 28,433 29,327 31,097 31,659 Impairment charges 4,552 4, ,552 4,516 4,572 4,647 4,233 Loans and advances with OEI after loan impairment charges 23,131 27, ,131 23,917 24,755 26,450 27,426 Balance of loan impairment charges and provisions for guarantees 6,713 6, ,713 6,762 6,780 6,718 6,360 Individual impairment charges and provisions for guarantees 4,934 4, ,934 4,913 4,965 5,161 4,706 Collective impairment charges and provisions for guarantees 1,779 1, ,779 1,849 1,815 1,557 1,654 Value adjustments of acquired loans and advances: Balance of discounts for acquired loans and advances, beginning of period 2, ,878 2,105 2,338 2,625 3,024 Discounts relating to business combinations 0 2, Other additions Positive value adjustments (interest income) 1, Negative value adjustments (loss) Balance of discounts for acquired loans and advances, end of period 1,548 2, ,548 1,878 2,105 2,338 2,625 Total balance for loan impairment charges and provisions for guarantees and balance of discounts for acquired loans and advances 8,261 8, ,261 8,640 8,885 9,056 8,985 Operational loan impairment charges and provisions for guarantees 1,372 2, ,049 Operating loss 1,362 1, Under core profit, loan impairment charges and provisions for guarantees totalling DKK 347m were recognised as an expense against DKK 1,953m in 2014, and losses in the amount of 1,362m were recognised against DKK 1,139m in At the end of 2015, the balance of management's estimates amounting to DKK 462m were made of which DKK 285m related to agriculture. The Group s balance of loan impairment charges and provisions for guarantees amounted to 1.6% of loans, advances and guarantees at the end of the year against 1.7% at the end of The Group s total balance of loan impairment charges and provisions amounted to DKK 8,261m, against DKK 8,985m at the end of 2014, corresponding to 2.0% and 2.4% of the total balance of loans, advances and guarantees. The percentage fall is to be seen in the light that 12 Jyske Bank - Annual Report 2015

15 Management s Review growth in loans and guarantees is based on home loans involving a low credit risk. In 2015, the impairment charges were affected by conflicting circumstances. Both corporate and personal clients saw general improvement, which resulted in low individual and collective impairment charges and, in respect of certain sectors, reversals. In respect of agricultural clients, there was also in 2015 a need to make considerable individual impairment charges as well as management's estimates. At the end of the year, the Group had registered collateral totalling DKK 322bn against DKK 301bn at the end of 2014, and measured in relation to loans, advances and guarantees, the value of the collateral was stable. A breakdown of loans, advances and loan impairment charges and provisions for guarantees is shown in the table below. DISTRIBUTION Balance of loan impairment Loans, advances and guarantees charges and pro- visions for guarantees DKKm Ratings , , Ratings , , Ratings ,850 37, Default 9,145 11,500 5,385 5,217 Other 6,464 10, Total 410, ,017 6,713 6,360 Rating: Credit rating where 1 reflects the highest rating. The category Other comprises clients for which no credit rating had been established. Agriculture, hunting, forestry and fishing made up the most risky sector for the Group in terms of impairment charges as a percentage of loans and advances. Particularly the segments dairy and pig farming faced challenges, and the situation for the segments deteriorated further due to falling settlement prices and the extension of the trade boycott imposed by Russia as well as excess capacity due to the discontinuation of milk quotas. At the end of 2015, the overall impairment ratio relating to dairy farmers amounted to 41% of loans, advances and guarantees, and 33% related to pig farming. The total impairment ratio for dairy and pig farmers amounted therefore to 37%. BALANCE OF LOAN IMPAIRMENT CHARGES AND PROVISIONS FOR GUARANTEES / LOANS, ADVANCES AND GUARANTEES Loans, advances and guarantees Balance of loan impairment charges and provisions for guarantees Impairment ratio DKKm/% Dairy farmers 1,016 1, % 34% Pig farming 1,237 1, % 23% Total 2,253 3,036 1,314 1,211 37% 29% Real property accounts for the second largest impairment charges in absolute terms. Due to considerable improvements of prices of commercial property, net reversals were made for the sector in Oil prices have fallen significantly in the recent period and reached the lowest level for more than a decade. The Group has very limited exposure to sectors that are directly affected by the falling oil prices. In certain situations, the Group has to ease terms and conditions agreed for clients in financial problems to minimise the Group's loss (forbearance). Forbearance measures are based on the condition that the client is in financial trouble. Irrespective of the client's subsequent compliance with the terms and conditions, the client will be subject to forbearance for at least two years. The definition of forbearance is based on the EBA's technical standards. At the end of 2015, loans and advances subject to forbearance amounted to 7.1%. Non-performing loans comprise exposures with individually assessed impairment charges and exposures with high or full risk as well as past due exposures. If criteria for non-performing exposures are no longer present, and if previously credit easing measures have been granted, clients are still subject to the criterion for non-performing exposures for at least a year after the credit easing was granted. The definition of non-performing exposures is based on the EBA's technical standards. Non-performing loans and advances amounted to 4.7% at the end of At the end of 2015, the Jyske Bank Group had no exposures amounting to more than 10% of the adjusted capital base. At the end of 2014, the Group had one exposure amounting to more than 10% of the adjusted capital base. Jyske Bank - Annual Report

16 Management s Review The Group had five exposures amounting to between 5% and 7.5% of the adjusted capital base and one exposure between 7.5% and 10% of the adjusted capital base. At the end of 2014, the corresponding figures were one exposure between 5% and 7.5% and two exposures between 7.5% and 10%. 14 Jyske Bank - Annual Report 2015

17 Management s Review Investment portfolio earnings INVESTMENT PORTFOLIO EARNINGS DKKm Index 15/14 Q Q Q Q Q Net interest income Net fee and commission income Value adjustments Other income Income Expenses Investment portfolio earnings before loan impairment charges Loan impairment charge Investment portfolio earnings Investment portfolio earnings amounted to DKK 440m against DKK 101m in The earnings were affected favourably by both equity positions and the credit portfolio. To this must be added a positive contribution from dynamic adjustment of the interest-rate risk relative to the interest-rate development. Assessed on the basis of the chosen risk profile, earnings from investment portfolios were satisfactory in The investment policy applied to the Group's own securities portfolio rests on a long-term view of risk-return and takes into account an assessment of the total risk positions with special focus on stabilisation of the Group s aggregate earnings. The merger with BRFkredit did not have any material effect on the investment policy applied to the Group's own securities portfolio. The reason is partly that BRFkredit's market risk profile is limited to fixed income products, and partly that efforts are made to ensure that, due to the balance principle, the Group's lending activities for mortgage products are neutral to general interest-rate changes. Market risk The primary focus in 2015 was on risk management relating to the increased portfolio of home loan products as well as risk management of the significant fall in interest rates in the first half of The market adjustment to the newly implemented LCR regulation was another dominating component in In terms of Value-at-Risk (VaR), the Group's estimated market risk increased significantly in 2015 from DKK 19m at the end of 2014 to DKK 78m at the end of This rise in calculated VaR stems from two parts: Firstly, the VaR model was during the first quarter of 2015 enhanced with an add-on relating to OAS-risk (Option Adjusted Spread). OAS risk is the interest rate spread defined as the risk premium related to investing in a mortgage bond compared to the equivalent swap-rate. OASrisk was subject to high volatility during Secondly, the volatility of interest rates in the general market was particularly high in 2015, resulting in a significantly higher VaR. Value-at-Risk as a percentage of equity % Total Interest-rate Currency Equities The rise in VaR is substantial but at a moderate level in a group risk perspective and relative to Jyske Bank s desired risk profile The Group's interest-rate risk rose in the course of The development was affected by a strategic adjustment of the market risk strategy in relation to the low-interest-rate environment The increase in the volumes of the new home loan products indicates a permanently high OAS risk. The interest-rate risk from home loan products is hedged on a continuous basis. In addition to the core business in the form of deposits and loans, the interest-rate risk was dominated by exposures to Danish and international mortgage bonds as Jyske Bank - Annual Report

18 Management s Review well as covered bonds with short and medium maturities. The Group s OAS exposure is primarily found in the short-term segments. Jyske Bank s return on Danish mortgage bonds was affected by widening OAS spreads throughout Throughout 2015, Jyske Bank's exposure to equities was almost unchanged, whereas the portfolio of foreign currency risks increased moderately due to increased positioning in EUR/DKK. The underlying equity portfolio as well as the currency portfolio are characterised by being well-diversified, and at the end of 2015 market risks for both portfolios were at moderate levels relative to the desired risk profile. For further details, please see note 57. Credit risk relating to securities Exposure to credit risk on financial instruments relates to the Group's bond holdings. Jyske Bank had a positive view of the market for credit securitisations in 2015, and for that reason, the investments in US and European CLOs were increased. The investments are held only in credits with high credit quality and senior status. The overall credit portfolio developed favourably in 2015 and yielded therefore a satisfactory return. The Group s portfolio of held-to-maturity bonds amounted to DKK 3.9bn against DKK 6.9bn in The portfolio is still dominated by highly rated and highly liquid securities. At the end of 2015, the fair value was DKK 145m higher than the recognised carrying amount, against DKK 246m at the end of Jyske Bank - Annual Report 2015

19 Management s Review Banking activities SUMMARY OF INCOME STATEMENT DKKm Index 15/14 Q Q Q Q Q Net interest income 3,793 3, , Net fee and commission income 1,639 1, Value adjustments , Other income 193 3, Core income 6,115 8, ,600 1,102 2,051 1,362 1,215 Core expenses 4,249 4, ,114 1,056 1,010 1,069 1,048 Core profit before loan impairment charges 1,866 4, , Loan impairment charges 248 1, Core profit 1,618 2, Investment portfolio earnings Pre-tax profit 1,969 2, , SUMMARY OF BALANCE SHEET, END OF PERIOD DKKm Loans and advances 133, , , , , , ,741 - of which bank loans 91, , ,502 96, , , ,229 - of which repo loans 41,526 22, ,526 28,275 27,654 28,148 22,512 Total assets 257, , , , , , ,301 Deposits 144, , , , , , ,467 - of which bank deposits 128, , , , , , ,972 - of which repo deposits 15,925 19, ,925 13,272 12,056 19,999 19,495 Issued bonds 43,507 38, ,507 47,840 43,232 48,883 38,210 Banking activities cover advisory services relating to traditional financial solutions targeting personal and private banking clients as well as corporate clients and trading and investment activities targeting large corporate clients and institutional clients, including trading in interest-rate products, currencies, equities, commodities and derivatives. Finally, Banking activities cover private banking activities targeting foreign clients. The strategic balance sheet and risk management as well as earnings from investment portfolios in Jyske Bank are allocated also to Banking activities. Core profit Core profit from banking activities came to DKK 1,618m against DKK 2,161m in The core profit for 2014 was affected by a series of special circumstances, of which the most important ones were the recognition of DKK 2,360m in negative goodwill relating to the merger with BRFkredit; DKK 296m and DKK 189m in earnings from the sale of Silkeborg Data and the equity interest in Nets, respectively; DKK 217m from value adjustments of sector shares; and DKK 196m in integration costs, alignment of accounting estimates and reassessment of provisions. Adjusted for these circumstances, the core profit for 2015 was considerably better than that for The improvement can be attributed to the lower impairment charges at DKK 248m in 2015 against DKK 1,882m in General improvement was seen in respect of both personal and corporate clients, except for agricultural clients as, among other things, low settlement prices for milk and pigs were still squeezing profitability for dairy and pig farmers. Trading and investing activities saw a continued increase in the number of clients and, therefore, a sound activity level. The new home loan products made a positive contribution to net interest income, which was, generally, affected by fierce competition in the market place and the falling volume of traditional bank loans and advances. In the fourth quarter of 2015, net interest income of DKK 96m was recognised as income due to the issue of fixedrate home loans at a discount. The remaining balance of about DKK 50m will be recognised as income in So far, new home loan products were stated at amortised cost and subsequently transferred to BRFkredit at fair value according to the joint funding agreement. As of 1 January 2016, the home loan products will be stated at fair value at the first recognition. Jyske Bank - Annual Report