company announcement 2 November 2010

Transcription

1 company announcement 2 November 2010 Interim report FIrst NINE MoNtHs 2010

2 MANAGEMENT'S REPORT 3 Financial highlights Danske Bank Group 3 Overview 4 Financial results for the period 5 Balance sheet 8 Outlook for Business units 14 Banking Activities 15 Danske Markets 21 Danske Capital 22 Danica Pension 23 Other Activities 24 INTERIM FINANCIAL STATEMENTS DANSKE BANK GROUP 25 Income statement 25 Statement of comprehensive income 26 Balance sheet 27 Statement of capital 28 Cash flow statement 30 Notes 31 STATEMENT BY THE MANAGEMENT 45 AUDITORS' REVIEW REPORTS 46 SUPPLEMENTARY INFORMATION 48 Interim Report First Nine Months 2010 is a translation of the original report in the Danish language (Delårsrapport kvartal 2010). In case of discrepancies, the Danish version prevails. OPERATIONS IN 14 COUNTRIES / 690 BRANCHES / 5 MILLION CUSTOMERS / 21,634 EMPLOYEES DANSKE BANK INTERIM REPORT FIRST NINE MONTHS /48

3 Financial highlights Danske Bank Group INCOME STATEMENT Q1-Q3 Q1-Q3 Index Q3 Q2 Q1 Q4 Q3 Full year (DKK millions) / Net interest income 17,774 20, ,840 5,927 6,007 6,765 6,625 27,524 Net fee income 6,185 5, ,069 2,068 2,048 2,077 1,918 7,678 Net trading income 7,126 16, ,930 2,817 2,379 1,961 3,886 18,244 Other income 2,844 2, ,091 1, ,083 Net income from insurance business 1,461 1, , ,810 Total income 35,390 45, ,247 12,056 12,087 13,454 13,602 59,339 Expenses 19,553 21, ,294 6,836 6,423 7,184 6,338 28,907 Profit before loan impairment charges 15,837 24, ,953 5,220 5,664 6,270 7,264 30,432 Loan impairment charges 10,835 20, ,083 3,479 4,273 4,982 6,164 25,677 Profit before tax 5,002 3, ,870 1,741 1,391 1,288 1,100 4,755 Tax 2,409 2, ,042 Net profit for the period 2,593 1, ,713 Attributable to minority interests BALANCE SHEET (END OF PERIOD) (DKK millions) Due from credit institutions and central banks 218, , , , , , , ,356 Loans and advances 1,680,100 1,698, ,680,100 1,688,632 1,665,768 1,669,552 1,698,250 1,669,552 Repo loans 165, , , , , , , ,063 Trading portfolio assets 810, , , , , , , ,052 Investment securities 119, , , , , , , ,979 Assets under insurance contracts 220, , , , , , , ,944 Other assets 146, , , , , , , ,531 Total assets 3,361,116 3,298, ,361,116 3,363,983 3,208,511 3,098,477 3,298,302 3,098,477 Due to credit institutions and central banks 314, , , , , , , ,169 Deposits 763, , , , , , , ,932 Repo deposits 64,257 42, ,257 37,032 56,767 55,648 42,622 55,648 Bonds issued by Realkredit Danmark 563, , , , , , , ,055 Other issued bonds 447, , , , , , , ,601 Trading portfolio liabilities 658, , , , , , , ,567 Liabilities under insurance contracts 242, , , , , , , ,876 Other liabilities 123, , , , , , , ,968 Subordinated debt 79,578 83, ,578 84,636 81,471 80,002 83,578 80,002 Shareholders' equity 103, , , , , , , ,659 Total liabilities and equity 3,361,116 3,298, ,361,116 3,363,983 3,208,511 3,098,477 3,298,302 3,098,477 RATIOS AND KEY FIGURES Earnings per share (DKK) Diluted earnings per share (DKK) Return on average shareholders' equity (%) Cost/income ratio (%) Solvency ratio (%) Tier 1 capital ratio (%) Share price (end of period) (DKK) Book value per share (DKK) Full-time-equivalent staff (end of period) 21,634 22,441 21,634 22,025 21,853 22,093 22,441 22,093 DANSKE BANK INTERIM REPORT FIRST NINE MONTHS /48

4 Overview The Danske Bank Group posted a net profit of DKK 2.6 billion for the first nine months of 2010, against DKK 1.3 billion for the first nine months of The global economic recovery, although fragile, benefited several of the Group s markets. At DKK 35.4 billion, total income declined 23% from the year-earlier level. Net interest income declined 14%. The decline was expected because of low interest rates, declining lending volumes, narrower deposit margins and increasing long-term funding costs. The Group s total lending margins widened modestly during the period, although lending margins in the corporate segment narrowed in the third quarter. Net fee income rose 10% owing to strong housing market activity. Net trading income fell 56% from the extraordinarily high level in the first nine months of Expenses were down 10% from the year-earlier level. Excluding goodwill impairment charges, expenses declined 4%. Expenses included the guarantee commission of DKK 1.9 billion paid to the Danish state under the guarantee scheme (Bank Package I). The expiry of the scheme on 30 September 2010 will in itself reduce Danske Bank s expenses markedly. At almost half the year-earlier level, loan impairment charges totalled DKK 10.8 billion and continued their downward trend since the fourth quarter of The trend in loan impairment charges reflects the improving situation for the Group s units. The difficult market conditions in Ireland persisted, though. Charges against facilities to corporate customers amounted to DKK 7.4 billion, with small and mediumsized enterprises accounting for DKK 6.7 billion. Charges against facilities to financial counterparties amounted to DKK 1.0 billion, and charges against facilities to retail customers amounted to DKK 2.4 billion. Charges made under Bank Package I accounted for DKK 1.4 billion of loan impairment charges. At 30 September 2010, the tier 1 capital and solvency ratios were 14.4% and 17.4%, respectively, against 14.1% and 17.8% at 31 December The EU-wide stress tests showed that, even in the most severe scenario, the Group has a capital buffer of more than DKK 40 billion. Total assets rose DKK 263 billion from the end-2009 figure owing mainly to an increase in trading portfolio assets. Total lending matched the level at the end of last year. Retail lending rose 3% from the end level, while corporate lending fell 2%. Lending equalled 113% of the total amount of deposits and bonds issued by Realkredit Danmark, up from 111% at end In Denmark, new lending to corporate and retail customers, excluding repo loans, amounted to DKK 18.8 billion and DKK 21.1 billion, respectively. In the first nine months of 2010, Danske Bank issued bonds worth DKK 20 billion with maturities of up to five years on the US and other markets. Danske Bank has not issued state-guaranteed bonds since summer Danske Bank also issued covered bonds worth DKK 20 billion with maturities from seven to fifteen years. The Group has obtained the funding estimated to be needed in 2010, and the 2011 funding need is modest. The Group has improved its liquidity, measured as Moody s 12-month liquidity curve, on an ongoing basis. At 30 September 2010, the curve was positive for considerably longer than 12 months. The stabilisation of macroeconomic conditions is expected to continue for the remainder of the year. The recovery remains fragile, though. In view of the general economic climate, loan impairment charges are likely to remain high in 2010, although considerably lower than in Third quarter 2010 against second quarter 2010 Profit before tax rose 7%, reflecting higher net income from insurance business and lower loan impairment charges, which more than compensated for lower net trading income. Expenses fell 8%, mainly because expenses for deposit guarantee schemes in Denmark and Northern Ireland were higher in the second quarter. Affected by low interest rates, net interest income was largely unchanged from the level in the second quarter. Lending margins in the corporate segment narrowed in the third quarter, while lending margins in the retail segment remained at the second-quarter level. Total deposit margins rose modestly, driven mainly by higher interest rates in Sweden. Loan impairment charges fell 11%, mainly because the Danish and Irish units recorded lower charges. The future level of loan impairment charges in Ireland will depend extensively on the economic recovery. DANSKE BANK INTERIM REPORT FIRST NINE MONTHS /48

5 Financial results for the period The Danske Bank Group posted a net profit of DKK 2.6 billion for the first nine months of 2010, against DKK 1.3 billion for first nine months of The global economic recovery, although fragile, benefited several of the Group s markets. The Nordic economies are recovering and have the lowest budget deficits in Europe. The global economic recovery remains fragile, though, because a number of countries are struggling with large government debt and because US key figures are disappointing. The Group s main source of income its banking activities showed robust earnings. Activities in Sweden and Norway generated satisfactory results. Impairment charges at the units in Ireland and Northern Ireland were high in the first nine months of 2010, and both units posted losses. Income At DKK 35.4 billion, total income declined 23% from the year-earlier level. The decline should be seen in the light of the extraordinarily high net trading income in the first nine months of Net fee income totalled DKK 6.2 billion, up 10%. Strong housing market activity and a solid income increase at Danske Capital were the main drivers. Net trading income fell 56% from the extraordinarily high level in the first nine months of There was strong activity in the bond and money markets in particular, however. Net trading income included an unrealised capital gain of DKK 0.7 billion in the second quarter resulting from the merger of PBS Holding A/S and the Norwegian company Nordito AS. Other income was up DKK 0.6 billion owing primarily to a refund of excess financial services employer tax paid from 2001 to The Group s insurance business generated income of DKK 1.5 billion, against DKK 1.0 billion a year earlier. Its investment return enabled the Group to book the DKK 837 million risk allowance to income. At the end of the year, the Group will decide whether to book the shadow account balance to income. Net interest income amounted to DKK 17.8 billion, a fall of 14% from the year-earlier figure. Total lending margins widened modestly, although not enough to offset lower net income from deposits and higher funding costs. As forecast, net interest income in Denmark and Finland declined despite wider lending margins. Danish kroner and euro interest rates remained low and reduced net income from deposits. On the other hand, net income at the Swedish banking units benefited from higher market rates. In Norway, competition for home loans remained keen. Net interest income at the Norwegian banking unit declined because of narrower lending margins and slightly decreasing corporate lending. PROFIT BEFORE LOAN IMPAIRMENT CHARGES Q1-Q3 Q1-Q3 Index Q3 Q2 Q1 Q4 Q3 Full year (DKK millions) / Total Denmark 5,412 6, ,861 1,691 1,860 2,081 2,169 8,812 Total international 3,937 4, ,394 1,251 1,292 1,220 1,527 5,827 Total banking activities 9,349 11, ,255 2,942 3,152 3,301 3,696 14,639 Danske Markets 4,160 13, ,736 1,515 1,008 3,189 14,352 Danske Capital Danica Pension 1,461 1, , ,810 Other Activities Goodwill impairment charges - 1, ,458 Profit before loan impairment charges 15,837 24, ,953 5,220 5,664 6,270 7,264 30,432 Business unit figures do not include goodwill impairment charges. DANSKE BANK INTERIM REPORT FIRST NINE MONTHS /48

6 Expenses Excluding goodwill impairment charges, expenses were down 4% from the year-earlier level. The Group launched a number of group-wide initiatives to improve distribution channels and further streamline the organisation. In support of these initiatives, the Group is undertaking an extraordinarily large IT investment programme in 2010 and The programme is intended to ensure the launch of a number of new products and services and the innovative use of digital technology. In September, the Group launched an iphone application for ebanking customers in Denmark, Norway and Finland. These customers can now use their iphones to view account balances, make transfers and get directions to the nearest ATM or branch. The application is scheduled for launch in Sweden in the first quarter of 2011, and a similar application has been launched in Northern Ireland. The application has already been downloaded more than 75,000 times. An application for Android smartphones was released in October. Expenses included the guarantee commission of DKK 1.9 billion paid to the Danish state under the guarantee scheme (Bank Package I). The scheme expired on 30 September Expenses also included provisions of DKK 0.1 billion for losses under deposit guarantee schemes in Denmark and Northern Ireland. Loan impairment charges Loan impairment charges totalled DKK 10.8 billion, against DKK 20.7 billion in the same period a year earlier. Charges against facilities to retail customers amounted to DKK 2.4 billion, and charges against facilities to corporate customers amounted to DKK 7.4 billion, with small and medium-sized enterprises accounting for DKK 6.7 billion. Charges against facilities to financial counterparties amounted to DKK 1.0 billion. Individual charges amounted to DKK 10.2 billion, against DKK 18.4 billion a year earlier, while collective charges totalled DKK 0.6 billion, against DKK 2.3 billion. LOAN IMPAIRMENT CHARGES Q1-Q3 Q1-Q3 (DKK millions) Banking Activities Denmark 6,328 7,881 Banking Activities Finland 276 1,834 Banking Activities Sweden Banking Activities Norway Banking Activities Northern Ireland 783 1,235 Banking Activities Ireland 3,756 4,051 Banking Activities Baltics 171 2,112 Other Banking Activities Danske Markets ,343 Danske Capital 4 54 Total 10,835 20,695 Loan impairment charges at Banking Activities Denmark totalled DKK 6.3 billion and related mainly to small and medium-sized enterprises and the final settlement of the Group s share of the sector s first tranche to cover the losses of distressed banks. Charges relating to retail facilities at Banking Activities Denmark totalled DKK 1.3 billion, against DKK 1.8 billion in the first nine months of The charges equalled 0.3% of lending and guarantees to retail customers. Loan impairment charges were low at Banking Activities Finland, Banking Activities Sweden, Banking Activities Norway and Banking Activities Baltics. The charges at these units totalled DKK 0.6 billion, against DKK 5.0 billion in the same period a year earlier. Loan impairment charges at Banking Activities Northern Ireland totalled DKK 0.8 billion, against DKK 1.2 billion in the first nine months of The charges related mainly to facilities to customers in the commercial property segment. The troubled Irish commercial property market in particular caused Banking Activities Ireland to recognise loan impairment charges of DKK 3.8 billion. In view of the uncertainty surrounding the Irish economy, charges are likely to remain high in the coming quarters. Danske Markets reversed impairment charges of DKK 0.7 billion. The Group s actual losses totalled DKK 2.8 billion at 30 September 2010, against DKK 3.8 billion a year earlier. DANSKE BANK INTERIM REPORT FIRST NINE MONTHS /48

7 Tax Tax on the profit for the period amounted to DKK 2.4 billion. The tax charge is high relative to the pre-tax profit for the period because of profits in countries with higher tax rates than Denmark and losses in Ireland. The tax value of losses is booked and capitalised only if it is likely that, in the future, the Group will book a taxable income that can absorb tax-loss carryforwards made. Third quarter 2010 against second quarter 2010 From the second quarter of 2010 to the third, profit before tax rose 7%, reflecting lower loan impairment charges and higher net income from insurance business. Net interest income, which was affected by low interest rates, was largely unchanged from the level in the second quarter. A rise in deposit margins could not offset the effect of narrowing lending margins. Net trading income fell 31% primarily because an unrealised capital gain of DKK 0.7 billion on the merger of PBS Holding A/S and the Norwegian company Nordito AS was booked in the second quarter. Net income from insurance business rose to DKK 0.7 billion from DKK 0.2 billion in the second quarter. On the strength of a solid return on investments, the Group was able to book the risk allowance for the third quarter and the DKK 177 million risk allowance from the second quarter to income. Expenses fell 8% mainly because expenses for deposit guarantee schemes in Denmark and Northern Ireland were higher in the second quarter and because that quarter was affected also by expenses for holiday pay. The Group continued its focus on tight cost control. Owing mainly to falling charges at the Danish banking unit, total loan impairment charges fell 11% from the level in the second quarter, continuing their downward trend for the seventh consecutive quarter. Excluding the charges made under Bank Package I, loan impairment charges fell to 0.33% of total lending. The charges recorded by the Group s Irish and Northern Irish banking units remained high, mainly because of charges against facilities to customers in the commercial property segment. DANSKE BANK INTERIM REPORT FIRST NINE MONTHS /48

8 Balance sheet LENDING (END OF PERIOD) Q1-Q3 Q1-Q3 Index Q3 Q2 Q1 Q4 Q3 Full year (DKK millions) / Banking Activities Denmark 1,007,939 1,012, ,007,939 1,012,924 1,005,514 1,005,751 1,012,763 1,005,751 Other, Denmark 40,468 44, ,468 42,983 36,643 46,420 44,219 46,420 Total Denmark 1,048,407 1,056, ,048,407 1,055,907 1,042,157 1,052,171 1,056,982 1,052,171 Banking Activities Finland 158, , , , , , , ,810 Banking Activities Sweden 188, , , , , , , ,461 Banking Activities Norway 157, , , , , , , ,702 Banking Activities Northern Ireland 54,032 53, ,032 54,934 50,030 51,510 53,214 51,510 Banking Activities Ireland 72,740 77, ,740 74,573 75,599 76,601 77,866 76,601 Banking Activities Baltics 24,736 27, ,736 25,379 26,142 26,816 27,841 26,816 Other, international 18,212 24, ,212 19,200 21,454 20,790 24,351 20,790 Total international 673, , , , , , , ,690 Allowance account 42,209 31, ,209 40,903 37,643 34,309 31,062 34,309 Total lending 1,680,100 1,698, ,680,100 1,688,632 1,665,768 1,669,552 1,698,250 1,669,552 DEPOSITS AND BONDS ISSUED BY REALKREDIT DANMARK (END OF PERIOD) (DKK millions) Banking Activities Denmark 319, , , , , , , ,080 Other, Denmark 73, , ,700 74,722 89, , , ,036 Total Denmark 392, , , , , , , ,116 Banking Activities Finland 108,934 93, , ,324 99,003 96,005 93,040 96,005 Banking Activities Sweden 79,231 65, ,231 74,973 76,791 74,263 65,716 74,263 Banking Activities Norway 69,953 57, ,953 68,105 65,201 62,709 57,250 62,709 Banking Activities Northern Ireland 50,367 45, ,367 50,118 44,807 45,914 45,959 45,914 Banking Activities Ireland 31,685 32, ,685 31,289 32,385 30,805 32,367 30,805 Banking Activities Baltics 19,420 14, ,420 19,247 17,818 17,073 14,889 17,073 Other, international 11,151 8, ,151 11,004 10,352 10,047 8,722 10,047 Total international 370, , , , , , , ,816 Total deposits 763, , , , , , , ,932 Bonds issued by Realkredit Danmark 563, , , , , , , ,055 Own holdings of Realkredit Danmark bonds 160, , , , , , , ,270 Total Realkredit Danmark bonds 723, , , , , , , ,325 Deposits and bonds issued by Realkredit Danmark 1,487,089 1,501, ,487,089 1,486,814 1,471,901 1,504,257 1,501,814 1,504,257 Lending as % of deposits and bonds issued by Realkredit Danmark Lending Total lending largely matched the level at the end of Retail lending showed a 3% increase, while corporate lending fell 2% from the end-2009 level. In Denmark, new lending, excluding repo loans, amounted to DKK 39.9 billion. This amount included lending to retail customers of DKK 21.1 billion. New mortgage lending accounted for DKK 9.0 billion (net) of lending to retail customers. Lending equalled 113% of the total amount of deposits and bonds issued by Realkredit Danmark, up from 111% at the end of Deposits and bonds issued by Realkredit Danmark Total deposits declined 5% from the level at the end of 2009 in spite of an increase in deposits placed with the Group s banking units. Short-term deposits placed with Danske Markets by institutional investors declined, because these investors lowered their gearing. Deposits placed with the banking units grew some 5%, with both corporate and retail deposits contributing to the increase. Deposits at Banking Activities Denmark grew 1% in the first nine months of Excluding exchange rate effects, deposits at the banking units outside Denmark rose 5% over the level at the end of DANSKE BANK INTERIM REPORT FIRST NINE MONTHS /48

9 The market value of mortgage bonds issued to fund loans provided by Realkredit Danmark, including the Group s own holdings, rose 3% over the end-2009 level and amounted to DKK 724 billion. Credit exposure At 30 September 2010, total credit exposure amounted to DKK 3,260 billion. Some DKK 2,330 billion derived from Danish and international lending activities, and DKK 930 billion from trading and investment activities. In addition to exposure resulting from lending, credit exposure from lending activities stems from amounts due from credit institutions and central banks, guarantees and irrevocable loan commitments. This exposure, which includes repo loans, is measured at fair value, net of accumulated impairment charges. Credit exposure from lending activities Retail customers accounted for 37% of credit exposure from lending activities, corporate customers for 38%, and financial counterparties for 19%. Of the exposure to corporate customers, small and mediumsized enterprises accounted for 69%. CREDIT EXPOSURE FROM LENDING ACTIVITIES 30 Sept. Share of 31 Dec. Share of (DKK millions) 2010 total (%) 2009 total (%) Banking Act. Denmark 1,092, ,109, Banking Act. Finland 191, ,155 9 Banking Act. Sweden 240, ,138 9 Banking Act. Norway 191, ,538 8 Banking Act. Northern Ireland 53, ,843 2 Banking Act. Ireland 65, ,942 3 Banking Act. Baltics 26, ,149 1 Other Banking Act. 51, ,391 2 Danske Markets 407, , Danske Capital 10, ,615 1 Total 2,329, ,301, Retail customers Measured in Danish kroner, credit exposure to retail customers increased in the first nine months of A total of 93% of retail loan applications were approved during the period, against 91% during the same period the year before. At 30 September 2010, the average loan-to-value (LTV) ratio of home loans was 68%, against 69% at the end of Accumulated impairment charges against retail facilities accounted for 14% of total charges and equalled 0.7% of lending and guarantees to retail customers. Corporate customers Credit exposure to corporate customers fell in the first nine months of A number of sectors continued to face low activity, with small and mediumsized enterprises in Denmark struggling the most. At 30 September 2010, credit exposure to the property sector was DKK 244 billion. The economic slowdown during the financial crisis had a particularly adverse effect on the property sectors in Denmark, Ireland and Northern Ireland, causing prices to plunge. The Danish market had a high vacancy rate owing to the overheating of the construction sector before the crisis, whereas the Irish and Northern Irish property markets were characterised by low sales and low liquidity. Banking Activities Ireland had a high proportion of impaired exposures, with the main part of accumulated impairment charges recognised against facilities to customers in the construction and property sectors. The credit quality of property developers suffered particularly from the economic crisis. Credit exposure to agricultural customers amounted to DKK 71 billion. Some DKK 45 billion derived from loans provided by Realkredit Danmark. As a result of the sector s low earnings and high level of debt, the Group monitors it closely. The average LTV ratio for agricultural properties mortgaged to Realkredit Danmark was 71%, against 64% at the end of A total of 89% of corporate loan applications were approved during the period, against 87% in the first nine months of Accumulated impairment charges against corporate facilities amounted to 67% of total impairment charges and equalled 3.8% of lending and guarantees to corporate customers. Financial counterparties Credit exposure to financial counterparties rose DKK 31 billion in the first nine months of 2010 and amounted to DKK 441 billion at the end of the period. The increase related mainly to repo loans. Pages provide breakdowns of credit exposure from lending activities by country of residence and rating category. Allowance account Accumulated impairment charges amounted to DKK 46.4 billion at 30 September 2010, against DKK 37.1 billion at 31 December ALLOWANCE ACCOUNT 30 Sept. 31 Dec. (DKK millions) Banking Activities Denmark 19,304 13,496 Banking Activities Finland 2,674 2,545 Banking Activities Sweden 1,388 1,182 Banking Activities Norway 1,503 1,404 Banking Activities Northern Ireland 2,839 2,006 Banking Activities Ireland 10,744 7,002 Banking Activities Baltics 3,034 2,985 Other Banking Activities 402 1,261 Danske Markets 4,202 4,917 Danske Capital Total 46,383 37,095 DANSKE BANK INTERIM REPORT FIRST NINE MONTHS /48

10 Rating categories 11 and 10 comprise individually impaired exposures. EXPOSURE AT 30 SEPT Rating category (DKK billions) Credit exposure before impairment charges Impairment charges Credit exposure Collateral value Total unsecured exposure Covered by impairment charges and collateral (%) Rating category 11 contains exposures to customers who, according to the Group s definition, are in default. These customers are subject to debt collection, suspension of payments or bankruptcy, or have one or more facilities on which a payment is more than 90 days past due. If a customer defaults on just a single facility, the entire exposure to the customer is downgraded to rating category 11. The downgrade takes place even if the customer has provided adequate collateral. The net exposure to customers in default (rating category 11) totalled DKK 25.2 billion, against DKK 30.6 billion at the end of The total unsecured exposure was DKK 4.2 billion. The Group expects bankruptcy dividends to cover the unsecured exposure. Rating category 10 contains impaired exposures to customers who are not in default but for whom other evidence of financial difficulty exists, such as an estimated need for financial restructuring in the future. Most of these customers continue to service their loans in a timely manner. The net exposure to customers in rating category 10 totalled DKK 36.0 billion, against DKK 24.8 billion at the end of Trading and investment activities Credit exposure from trading and investment activities rose from DKK 741 billion at 31 December 2009 to DKK 930 billion at 30 September The rise was due mainly to an increase in the value of derivatives because lower money market rates and a stronger dollar led to higher fair values of conventional interest rate and currency contracts. The Group has made agreements with many of its counterparties to net positive and negative market values. Including the effect of these agreements, the net exposure was limited. Most of the net exposure was secured by collateral management agreements. The value of the bond portfolio amounted to DKK 418 billion, and of this amount, available-for-sale financial assets measured at fair value accounted for DKK 91 billion. Of the total bond portfolio, 97.7% was recognised at fair value, and 2.3% at amortised cost. The Group has not reclassified bonds since The bond portfolio matched the level at the end of Most of the bond portfolio is liquid. It can be used as collateral for loans from central banks and thus forms part of the Group s liquidity reserve. BOND PORTFOLIO 30 Sept. 31 Dec. (%) Government bonds and bonds guaranteed by central or local governments Bonds issued by quasi-government institutions 2 2 Danish mortgage bonds Swedish covered bonds Other covered bonds 5 6 Short-dated bonds (CP etc.), primarily with banks 2 4 Credit bonds 5 4 Total holdings Available-for-sale bonds included in preceding item Solvency and capital At 30 September 2010, the solvency ratio was 17.4%, with 14.4 percentage points deriving from tier 1 capital. Subordinated loan capital raised from the Danish state accounted for 3.1 percentage points of the solvency and tier 1 capital ratios. Risk-weighted assets rose over the end-2009 level because of increasing activity and reversals of impairment charges against facilities with especially high risk weighting. At 31 December 2009, the solvency and tier 1 capital ratios were 17.8% and 14.1%, respectively. Under Danish law, the Group must publish its ICAAP result on a quarterly basis ( provides further information). The Committee of European Banking Supervisors (CEBS) included Danske Bank in the group of 91 European banks subject to the 2010 EU-wide stress tests. The stress-test results showed that the Group is one of the best capitalised banks, exceeding the minimum requirement by more than DKK 40 billion, even in the most severe scenario. The site provides more details on the stress tests. The result is very much in line with the results of the stress tests that the Group itself conducts as part of its capital management. These results were reported in Annual Report 2009 and Risk Management Funding and liquidity The expiry of Bank Package I and the financial turmoil caused by the large government debt of a number of countries had no adverse effect on the Group s liquidity. In the first nine months of 2010, Danske Bank issued bonds worth DKK 20 billion with maturities of up to five years on the US and other markets. Danske Bank also issued covered bonds worth DKK 20 billion with maturities from seven to fifteen years. DANSKE BANK INTERIM REPORT FIRST NINE MONTHS /48

11 Loans that can serve as collateral for such bonds still hold much unexploited potential. Danske Bank has not issued state-guaranteed bonds since summer Danske Bank can issue such bonds worth an additional DKK 62 billion until the end of One element of the Group s liquidity management is the 12-month liquidity curve calculated in accordance with Moody s Bank Financial Strength Ratings: Global Methodology. expected to be approved at the G20 Seoul Summit on 11 and 12 November The EU Commission has communicated that a proposal to amend the Capital Requirements Directive will be published in March 2011 (CRD IV). The liquidity rules in Basel III remain problematic for the Danish mortgage finance system because the proposed liquidity requirements would not allow financial institutions to count Danish mortgage bonds, including the Group s holding of mortgage bonds issued by the Group, as liquid assets to a sufficient degree. If consideration is not given to the special financing system in Denmark, this may not only create challenges for banks and mortgage credit institutions but may also affect the stability of the Danish krone exchange rate and lead to increased borrowing costs for customers. The proposed capital level represents a significant increase in the minimum capital requirement for credit institutions. The proposed core tier 1 minimum capital requirement will be phased in gradually from the present 2% of risk-weighted assets to 7% by This figure includes a capital conservation buffer of 2.5%. Restrictions are imposed on dividends and other payouts made by banks that fail to comply with the capital conservation buffer requirement. The Group has improved its liquidity, measured as Moody s 12-month liquidity curve, on an ongoing basis. At 30 September 2010, the curve was positive for considerably longer than 12 months. The improvement reflects Danske Bank s issuance of long-dated bonds. By issuing bonds and covered bonds worth DKK 40 billion, the Group has obtained the funding estimated to be needed in The 2011 funding need is modest. Ratings Danske Bank retained its ratings in the first nine months of All new Realkredit Danmark bond issues are rated Aaa and AAA, the highest possible ratings awarded by Moody s and Standard & Poor s. A total of 97% of all bonds issued by Realkredit Danmark carry these ratings. Bonds issued with a guarantee from the Danish state are rated AAA. Regulation In September 2010, the Basel Committee proposed a substantial increase in capital requirements. The requirements form part of the Basel III proposal that is The Basel III proposal also contains stricter requirements for the quality of capital that may count as core tier 1 capital and for the calculation of risk-weighted assets. On the basis of the proposals, the Danske Bank Group estimates its current core tier 1 capital ratio of 9.8% to be reduced by around 1 percentage point when calculated on the basis of fully phased-in Basel III rules. The Group thus already complies with the proposed future minimum capital requirements. There are two reasons for the decline in the core tier 1 capital ratio. Firstly, risk-weighted assets will increase around 5% owing mainly to counterparty risk and market risk. The changes to rules on counterparty risk under Basel III are subject to interpretational uncertainty, however. Secondly, the decline is owing to the Group s statutory deductions from core tier 1 capital, primarily for the Group s investment in Danica. Under EU rules, the Group is defined as a financial conglomerate and thus does not expect further capital deductions for its investment in Danica under Basel III. Under the proposed rules, the Group expects its current deduction of DKK 5.3 billion to be made fully from its core tier 1 capital, however. Risk Management 2009 (p. 31) provides information on the statutory deduction for the investment in Danica. DANSKE BANK INTERIM REPORT FIRST NINE MONTHS /48

12 The EU Commission is expected to propose an overhaul of the Financial Conglomerates Directive in 2011 or The Danish rules on the recognition of insurance subsidiaries in solvency statements may in turn be amended. The proposal also introduces a requirement for countercyclical buffers. Such buffers will be in effect only when the relationship between credit growth and GDP exceeds its long-term trend and when the relevant national authorities judge credit growth to be associated with a build-up of systemic risk. Further initiatives for systemically important banks are also expected. Expiry of the state guarantee On 1 June 2010, the Danish Parliament passed legislation on the management of distressed banks after the expiry of the general state guarantee on 30 September Upon the expiry of the guarantee, Danske Bank s commitment to pay an annual guarantee commission of DKK 2.5 billion and its commitment to cover the losses of distressed banks under the scheme expired. The expiry of the state guarantee and the regulatory changes are expected to markedly reduce Danske Bank s expenses for its commitment to cover the losses of distressed banks. At 30 September 2010, Danske Bank recognised a charge of DKK 3.3 billion for its entire commitment under the sector s first tranche. Danske Bank does not expect to have to cover further losses in the sector. Danske Bank is still committed to paying a guarantee commission to the Danish state for state-guaranteed bond issues. Danske Bank has issued three-year stateguaranteed bonds worth DKK 38 billion, and the monthly guarantee commission until the guarantee expires in mid-2012 totals around DKK 25 million. Organisational adjustments The Group will implement a number of organisational adjustments during the fourth quarter of The ambition is to further strengthen the management structure and organisation in order to promote the Group s focus on customers and its international outlook. Georg Schubiger, Managing Director, was appointed Chief Operating Officer and member of the Executive Board with effect from 1 October Henrik Ramlau-Hansen will leave his current position as Chief Executive Officer of Danica Pension and become Chief Financial Officer and member of the Executive Board with effect from 1 January At 1 October 2010, the Executive Board consisted of Peter Straarup, Chairman Tonny Thierry Andersen Thomas F. Borgen Sven Lystbæk (until 31 December 2010) Georg Schubiger Per Skovhus Henrik Ramlau-Hansen (from 1 January 2011) Henrik Normann, Managing Director of Danske Bank Denmark for the past four years, was appointed head of Danske Markets. The former head of Danske Markets, Steen Blaafalk, Managing Director, was appointed head of Group Treasury. Group Treasury will become a separate department responsible for managing the Group s liquidity, balance-sheet risk and proprietary trading. A new Corporate Banking department will serve large corporate customers and institutional clients. The department will also include the Group s corporate finance activities and will thus assume global responsibility for providing the Group s products and services to large corporate customers and institutional clients. Mikael Ericson was appointed head of the new department. He was also named Managing Director and member of the Executive Committee. At 1 October 2010, the Executive Committee consisted of the members of the Executive Board and Steen Blaafalk, Group Treasury Mikael Ericson, Corporate Banking Eva Hald, Group Communications Ilkka Hallavo, Sampo Bank, Finland Helle Havgaard, Group HR Andrew Healy, National Irish Bank, Ireland Mads Jacobsen, chairman of the board of directors of the Baltic units (associate member) Gerry Mallon, Northern Bank, Northern Ireland Trond Mellingsæter, Fokus Bank, Norway Niels-Ulrik Mousten, Danske Capital Lars Mørch, Danske Bank Sweden Henrik Normann, Danske Markets Peter Rostrup-Nielsen, Group Risk Sven Lystbæk, member of the Executive Board and head of Shared Services Centre, will step down from the Executive Board on 31 December Tonny Thierry Andersen, member of the Executive Board, was appointed head of Danske Bank Denmark. He moved from his former position as Chief Financial Officer to his new position on 1 October DANSKE BANK INTERIM REPORT FIRST NINE MONTHS /48

13 Outlook for 2010 The Group expects the rest of 2010 to be challenging for the financial sector, the Danske Bank Group and its customers. The business environment is expected to benefit from positive macroeconomic developments. The global economic recovery remains fragile, though. Robust banking activities, tight cost control and a strong focus on risk, liquidity and capital management combined with the massive capital buffer give the Group a solid foundation for its operations. Danish GDP growth in 2010 is estimated at around 2.1%. The Group expects GDP growth of 1.8% in Norway and 4.6% in Sweden. In Ireland, Lithuania and Estonia, growth is expected to be weak. Latvia is likely to see another year of economic contraction. Recent figures for house prices in Denmark show a slight rise in the second half of 2009 and the first nine months of Since interest rates are likely to remain low, house prices are expected to show a stable trend. A rise in prices is forecast for Norway and Finland. Swedish house prices are forecast to be unchanged for the remainder of the year, while Ireland and Northern Ireland are likely to see a fall. Unemployment rose in the Group s principal markets in The labour market in Denmark showed signs of stabilisation in the first nine months of 2010, however. This trend is likely to continue, and the unemployment rate is expected to stand at more or less the present level throughout the next 12 months. The performance of market-related activities in Danske Markets, Danske Capital and Danica Pension will depend greatly on trends in the financial markets, including the level of securities prices at the end of the year. The Group s net trading income in 2010 will not reach the same extraordinarily high level as in Although the Group expects expenses to increase above their third-quarter level because of usual seasonal fluctuations, IT expenses and marketing costs, expenses are expected to be lower in 2010 than in The expiry of the commitment to pay an annual guarantee commission under Bank Package I will reduce expenses by DKK 625 million in the fourth quarter. The Group will continue to focus on tight cost control. Loan impairment charges are likely to remain high in 2010 but considerably lower than in Loan impairment charges will benefit from the expiry of the commitment to cover the losses of distressed banks. DANSKE BANK INTERIM REPORT FIRST NINE MONTHS /48

14 Business units INCOME Q1-Q3 Q1-Q3 Index Q3 Q2 Q1 Q4 Q3 Full year (DKK millions) / Banking Activities Denmark 13,755 16, ,574 4,554 4,627 5,254 5,179 21,277 Other banking activities in Denmark 1, Total Denmark 15,042 16, ,951 5,046 5,045 5,500 5,406 22,241 Banking Activities Finland 2,915 3, ,035 1,079 4,577 Banking Activities Sweden 2,350 2, ,776 Banking Activities Norway 2,562 2, ,620 Banking Activities Northern Ireland 1,210 1, ,695 Banking Activities Ireland 924 1, ,325 Banking Activities Baltics Other non-danish banking activities Total international 10,824 11, ,631 3,654 3,539 3,691 3,685 15,153 Danske Markets 6,237 15, ,573 2,457 2,207 1,663 3,811 17,238 Danske Capital 1,199 1, ,728 Danica Pension 1,461 1, , ,810 Other Activities Total Group 35,390 45, ,247 12,056 12,087 13,454 13,602 59,339 Banking Activities caters to all types of retail and corporate customers. The finance centres serve large businesses and private banking customers. Mortgage finance operations in Denmark are carried out through Realkredit Danmark. Real estate agency operations are conducted by the home, Skandia Mäklarna and Fokus Krogsveen real estate agency chains. All property finance operations are part of Banking Activities. Danske Markets is responsible for the Group s activities in the financial markets. Trading activities include trading in fixed-income products, foreign exchange and equities. Danske Markets provides financial products, advisory services on mergers and acquisitions, and assistance with equity and debt issues in the international financial markets to large corporate customers and institutional clients. Group Treasury is responsible for the Group s strategic fixedincome, foreign exchange and equity portfolios and serves as the Group s internal bank. Institutional banking covers facilities with international financial institutions outside the Nordic region. Facilities with Nordic financial institutions are part of Banking Activities. Danica Pension is responsible for the Group s activities in the life insurance and pensions market. Danica Pension targets both personal and corporate customers. Its products are marketed through a range of distribution channels within the Group, primarily banking units and Danica Pension s own insurance brokers and advisers. Danica Pension offers two marketbased products: Danica Balance and Danica Link. These products allow customers to select their own investment profiles, and the return on savings depends on market trends. Danica Pension also offers Danica Traditionel. This product does not offer individual investment profiles, and Danica Pension sets the rate of interest on policyholders savings. Other Activities encompasses expenses for the Group s support functions and real property activities. Other Activities also covers eliminations, including the elimination of returns on own shares. Danske Capital develops and sells asset and wealth management products and services. They are marketed through the banking units and directly to businesses, institutional clients and external distributors. Danske Capital also supports the advisory and asset management activities of the banking units. Through Danske Bank International in Luxembourg, Danske Capital provides international private banking services to clients outside the Group s home markets. Danske Capital is represented in Denmark, Sweden, Norway, Finland, Estonia, Lithuania and Luxembourg. DANSKE BANK INTERIM REPORT FIRST NINE MONTHS /48

15 BRANCHES 690 EMPLOYEES 13,472 PRE-TAX PROFIT DKK -2,165 million Banking Activities BANKING ACTIVITIES Q1-Q3 Q1-Q3 Index Q3 Q2 Q1 Q4 Q3 Full year (DKK millions) / Net interest income 17,565 20, ,854 5,811 5,900 6,622 6,554 27,102 Net fee income 5,137 4, ,715 1,735 1,687 1,668 1,627 6,419 Net trading income ,115 Other income 2,303 2, ,758 Total income 25,866 28, ,582 8,700 8,584 9,191 9,091 37,394 Goodwill impairment charges - 1, ,458 State guarantee commission (Bank Package I) 1,875 1, ,500 Other expenses 14,642 14, ,702 5,133 4,807 5,265 4,770 20,255 Expenses 16,517 18, ,327 5,758 5,432 5,931 5,395 24,213 Profit before loan impairment charges 9,349 9, ,255 2,942 3,152 3,260 3,696 13,181 Impairment charges under the state guarantee 1,393 1, ,612 Other loan impairment charges 10,121 17, ,400 3,817 3,904 3,779 5,767 20,874 Loan impairment charges 11,514 18, ,866 4,281 4,367 4,188 6,131 22,486 Profit before tax -2,165-8, ,339-1, ,435-9,305 Loans and advances (end of period) 1,680,655 1,681, ,680,655 1,685,543 1,664,149 1,654,257 1,681,302 1,654,257 Allowance account, total (end of period) 41,888 28, ,888 39,820 35,728 31,881 28,746 31,881 Deposits (end of period) 684, , , , , , , ,140 Bonds issued by Realkredit Danmark (end of period) 723, , , , , , , ,325 Allocated capital (avg.) 67,490 70, ,698 67,369 67,399 68,194 69,401 70,184 Profit before loan impairment charges as % p.a. of allocated capital Pre-tax profit as % p.a. of allocated capital (ROE) Cost/income ratio (%) Cost/income ratio, excluding goodwill impairment charges (%) Excluding the guarantee commission under Bank Package I, profit before loan impairment charges was DKK 11.2 billion Loan impairment charges fell 37% Net interest income declined 14% as a result of low interest rates and increasing long-term funding costs Total deposits rose 6% from the end-2009 level Market conditions The global economy improved modestly in the first nine months of The recovery is still fragile, though. Like the euro-zone countries generally, most of the Group s markets saw relatively strong economic growth in the first nine months of The primary growth driver was the export sector, which benefited from the recovery in international trade. Financial summary At DKK 17.6 billion, net interest income declined 14% from the level in the first nine months of The decline was expected, as wider lending margins could not offset an increase in funding costs and a decline in net income from deposits caused by the low interest rates. Net interest income in the third quarter was unchanged from the level in the second quarter. Competition was intense in all the Nordic markets, especially for new loans to large corporate customers. Both domestic and international banks and brokerages are seeking to gain market shares. The ongoing repricing of the loan portfolio has thus far allowed the Group to slightly widen its lending margins on the entire portfolio. DANSKE BANK INTERIM REPORT FIRST NINE MONTHS /48