in brief. Activities in 2002

Transcription

1 Annual Report 2002

2 Agenda Page in brief 3 2. Financial highlights 5 3. Business trends Status of capitalisation Trends in business areas Corporate governance Outlook for

3 in brief Activities in 2002 Merger completed and synergies achieved one year early Introduction of new retail customer packages in Denmark Introduction unit-linked programme in Norway Conversion of ÖEB s customer account system and giro platform to the Group s central IT platform Continuing reduction of credit exposure to the USA Share repurchases totalling 404m in second quarter of 2002 Fulfilment of competition authority s stipulations regarding VP Securities Services and the Copenhagen Stock Exchange Gathering of trading activities in Danske Markets Danica receives rating of A+ from Standard & Poor s 3

4 in brief 2002 in brief - A good year despite volatile market conditions Net profit for the year of 1,110m Core income 4% below the level in 2001 Operating expenses and depreciation reduced by 5% Restructuring costs of 47m for organisational adjustment of Danske Securities Provisions for bad and doubtful debts remain at a low level Core earnings generally in line with 2001 level Tax higher owing to extraordinarily low tax expense in 2001 because of tax credit related to previous losses at Fokus Bank Dividend payments and share buyback totaling 872m 4

5 2. Financial highlights Profit & loss account - Core earnings maintained through reduction of costs ( m) Index 02/01 Core income 3,645 3, Restructuring costs Costs 2,039 2, Core earnings before provisions 1,559 1, Prov. for bad and doubtful debts Core earnings 1,368 1, Profit on sale of affiliated companies Earnings from investment portfolios Profit before tax 1,504 1, Tax Net profit for the year 1,110 1,

6 2. Financial highlights Balance sheet - Moderate lending growth ( bn) Index 02/01 Bank loans and advances Mortgage loans Bonds and shares Due to credit inst., etc Deposits Bonds issued Subordinated debt Shareholders' equity Total assets

7 2. Financial highlights Key figures - Improvement in cost/core income ratio continues Net profit for the year per share ( ) 1,5 1,6 Net profit for the year, ex. divest. and restruct. ( ) 1,6 1,6 Dividend Yield (%) 4,0 3,5 Cost/core income ratio (%) Adjusted cost/core income ratio* 55,9 57,1 Return on equity (%) Solvency ratio (%) Core (tier 1) capital ratio (%) Book value per share ( ) 11,4 10,5 * Adjusted for restructuring costs 7

8 2. Financial highlights Danske Bank s share price - Relatively healthy performance Dec Danske Bank MSCI Europe Banks (rebased) Jun- 00 Dec- 00 Danske Bank Jun- 01 Dec- 01 Jun- 02 Dec- 02 The stock market has approved the increase in profitability and the execution of the merger Danske Bank s share price declined 12% in 2002, while the MSCI Europe Banks index fell 27% MSCI Europe Banks (rebased) 25 Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 8

9 2. Financial highlights Interest rate trends - Low funding rates hurt net interest income 6% 5% 4% Funding rate, Denmark Funding rate, Sweden Lower return on surplus liquidity and capital reduced core income Earnings from investment portfolios benefited from the lower funding rate in the investment portfolio and capital gains on the drop in long yields 3% dec- 00 Discount rate, Denmark mar- 01 jun- 01 sep- 01 dec- 01 mar- 02 jun- 02 sep- 02 dec- 02 9

10 3. Business trends Net interest income - Level maintained in the second half of the year m Net interest income ex. income from trading activities Q Q 2001 Q Q Q Q Net interest income still adversely affected by the sharp drop in money market rates Excluding interest income from trading activities, net interest income declined 5% in

11 3. Business trends Fee and commission income (net) - Marginal decline in a difficult market m 1, Remortgaging/loan fees Payment services Securities & custody commissions Guarantee & other commissions Fee and commission income 2% below level in 2001 Advance in remortgaging and loan fees because of strong activitity in Q Drop in securities and custody commissions because of lower activity in the capital markets Decline in payment services because of customers increased use of our Internet bank 11

12 3. Business trends Costs - Improvement in cost/core income ratio continues bn % 3,5 3,0 2,5 2,0 1,5 1,0 0,5 0,0 Restructuring Costs Adjusted C/I ratio C/I ratio % 60% 55% 50% The cost/core income ratio improved to 57.2 in 2002 Adjusted for restructuring costs, the ratio was 55.9 Since the merger announcement, 136 branches have been closed Headcount has been reduced by 2,700 since autumn 2000 Agreements have been reached to discontinue an additional 500 positions 12

13 3. Business trends Breakdown of costs - Synergies have a large effect on costs bn Costs 2000 Payroll, inflation, etc. Restructuring, Danske Securities Pension & severance BG brand BG brand Lower bonus payments Lower IT conversion costs Synergies Costs

14 3. Business trends Synergies and announced savings - Merger completed one year ahead of schedule m Expected Realised Synergies DB branch plan Plan 700 Merger completed and synergy savings achieved one year earlier than planned Headcount down by 2,700 since merger announcement. Severance agreements with additional 500 staff 136 branches closed IT conversions completed successfully Positive effect on accounts in 2003 as well 14

15 3. Business trends Provisions for bad and doubtful debts - Level remains low m Provisions for bad and doubtful debts amount to 14bp of loans, advances and guarantees Expected long-term average loss of 23bp (over a business cycle) Mortgage loans account for 50% of total loan portfolio Q1 Q3 Q1 Q3 Q1 Q

16 3. Business trends Credit policy - Conservative credit policy ensures good loan quality Ratings Distribution af loan and guarantees Volume (ex. mortgage loans) % ,2 10,0 2 37,0 36,8 3 18,4 14,4 4 11,2 9,8 5 7,5 9,1 6 6,6 5,6 7 2,5 2,4 8 1,8 1,6 9 0,2 0,2 10 0,4 0,2 Not rated 1,3 9,9 Total Note: The four highest ratings in The Bank s rating system (1-4) correspond to investment grade ratings at international rating agencies. The Group s small and midsized corporate customers pose a larger credit risk than major corporates Credit risks are reflected in the interest rate margin and provisioning percentage Provisions are managed through ratings and credit quality The investment-grade segment has increased by 9 percentage points Total provisions amount to 320% of NPL 16

17 3. Business trends Tax - Profit lower in 2002 owing to extraordinarily low tax expense in 2001 The decline in the Group s net profit compared with 2001 derives from an extraordinarily low tax expense in 2001 resulting from a tax credit of 94m related to prior-year losses at Fokus Bank Index ( m) /01 Tax Tax credit related to prior-year losses at Fokus Bank Tax ex. extraordinary tax credit Profit before tax 1,504 1, Net profit after tax 1,110 1, Net profit after tax ex. extraordinary tax credit 1,110 1,

18 3. Business trends Trend in loans and advances - In line with Nordic expansion strategy m Change in lending volume by geographic segments, ex. repos, since year-end 2001 USA DK UK Luxembourg Germany Norway Sweden Mortgage Total Bank loans and advances stood at 65bn at year-end 2002 Mortgage loans stood at 62bn Loans and advances in the Nordic countries up by 2bn Loans and advances down 0.8bn in the USA and down 0.4bn in the UK Mortgage loans are replacing bank loans in Denmark 18

19 3. Business trends Loans and advances - Loans and advances concentrated in core markets Breakdown of lending volume, year-end 2002 Mortgage 50% Repos 8% USA 1% Nordic region & EU 20% Half of the Group s loans and advances are very low-risk mortgage loans Bank loans and advances are concentrated in Denmark, the rest of the Nordic region and the EU Exposure outside core markets has been reduced Denmark 21% 19

20 4. Status of capitalisation Solvency ratio -Core (tier 1) capital higher, but the Bank mainains target % % Core capital The Bank maintains its target for core capital of around 6.5% Target for payout ratio of 40% High capitalisation contributed to lower ROE than in 2001 Share buyback reduced the core capital ratio by 0.4 of a percentage point * Assumes a payout ratio of 40%. 20

21 5. Trends in business areas Trends in business areas - Banking Activities account for a growing share of earnings Core earnings before provisions Distribution ( m) Banking Activities 1,098 1,025 70% 63% - Banking Activities, Denmark % 45% - Banking Activities, Int'l % 18% Mortgage Finance % 19% Danske Markets % 10% Danica Pension % 9% Danske Capital % 4% Danske Securities % -3% Other areas % -2% Group total 1,559 1, % 100% 21

22 5. Trends in business areas RAROC - Group s risk-adjusted return at satisfactory level (%) Banking Activities Mortgage Finance Danske Markets Danica Pension 5 67 Danske Capital Danske Securities Investment Portfolios Group total The cost of equity before tax was 13% Decline in risk-adjusted return was owing to lower riskadjusted earnings and higher economic capital Increase in Raroc in investment portfolios because of favourable fixed-income positions Decline in Raroc at Danica Pension because of sharply higher economic capital and the charge for the risk allowance was postponed until a later accounting period 22

23 5. Trends in business areas Banking Activities, Denmark - Improvement driven by reduction in costs Core earnings before provisions m The area accounts for half of the Group s total core earnings before provisions Income diminished by a drop of almost 2 percentage points in interest rates since 2001 The cost/core income ratio fell from 64 in 2001 to 60 in 2002 Fee income in line with 2001 Sales of customer packages proceeds satisfactorily Limited lending growth because of economic sluggishness Introduction of non-cash branches 23

24 5. Trends in business areas Banking Activities, International - Investment in Nordic region boosts earnings Core earnings before provisions m Norway Sweden UK USA Other Overall gain in core earnings before provisions of 7% The area contributed some 20% of the Group s core earnings before provisions Favourable developments in British, Norwegian and Swedish activities Foreign exchange rates affect results in the USA, the UK and Norway 24

25 5. Trends in business areas Banking Activities, Norway - Earnings continue to rise m Core earnings before provisions Core earnings before provisions grew 85% Increase in sales raised income 19% Stronger effort in retail segment through new products and open architecture Growth in lending volume of 10% driven mainly by retail segment Four new branches opened in focus regions in 2002 and more planned for the Oslo area Reduction of IT costs because of conversion to the Group s central platform in

26 5. Trends in business areas Banking Activities, Sweden - Costs reflect IT investments and expansion m Core earnings before prov. Core income (right) m Core earnings before provisions reduced by IT costs Lending volume grew 11% Market share of lending volume rose to 7%, and market share of deposits rose to 3% Satisfactory upgrade of the Swedish IT platform Expansion of branch network to a total of 46 branches Costs for payment of pension obligations amounted to 17m 26

27 5. Trends in business areas Banking Activities, UK - Advance despite lower activity level m Core earnings before provisions Rise in core earnings before provisions of 15% in local currency Declining costs Growth in fee income Activity level remains low in Danske Bank s segments of the British market Expansion of SME activities

28 5. Trends in business areas Banking Activities, USA - Rise in core earnings in local currency m Core earnings before provisions Growth in core earnings before provisions of 11% in local currency Reduction of exposure to US companies continues in accordance with the Bank s lending strategy Cost level unchanged from

29 5. Trends in business areas Mortgage Finance - Low interest rate level hurts core earnings m Core earnings before provisions Decline in core earnings before provisions because of lower return on allocated capital and current liquidity lower remortgaging activity Costs reduced 3% Gross lending of 15bn in 2002 Market share of gross lending of 32%, and market share of net new lending of 28% Adjustment of distribution channels by reduction of local offices 29

30 5. Trends in business areas Lending in relation to property value - Solid loan-to-value ratio Loan to value End period bn LTV (pct.) Private market Urban trade Agriculture Residential rental Total lending Increase in bond prices Strong lending activity, with many supplementary loans Higher loan-to-value ratio Repayment of existing loans Slight rise in property prices Lower loan-to-value ratio Altogether, a slight rise in the loan-to-value ratio 30

31 5. Trends in business areas Danske Markets - Satisfactory performance in a difficult market m 200 Core earnings before provisions Core earnings before provisions declined 28% to 112m Difficult market conditions for bond issuance Trade in fixed-income and foreign exchange products especially strong Growth in customers volume of derivatives for hedging of interest rate and currency risks Sharp expansion of trade in Norwegian government bonds Leading position in the Swedish bond market maintained 31

32 5. Trends in business areas Danica Pension - Very satisfying business developments m Core earnings Core earnings before provisions in line with expectations Profit before tax of 69m Good start in sale of unit-linked insurance policies in Norway Sales of Danica Health Insurance up by 30% Danica s A+rating from Standard & Poor s confirms the company s financial strength Transition to market valuations 32

33 5. Trends in business areas Danica Pension - Gross premiums are growing at a double-digit rate m 2,000 1,600 1, Gross premiums * Gross premiums rose 17% to 1.8bn Growth in employer pension scheme segment of 18% Gross premiums at Danica Link increased to 256m, including 67m in internal transfers * BG Pension s gross premiums included in 2001 and

34 5. Trends in business areas Danica Pension - Core earnings in line with forecast, but loss on investments Full year 1H Full year ( m) Core insurance earnings Earnings from invest. portfolios Risk allowance postponement Return on investments Profit before tax Hedging at Bank Funding costs Satisfactory trend in core earnings Earnings on investment portfolios were reduced because the charge for the risk allowance was postponed until a later accounting period Collective bonus potential of 606m, or 3.2% of life insurance provisions Profit before tax

35 5. Trends in business areas Danica Pension - investment profile - Conservative risk profile Danica Pension Group ex. unit linked DK equities 2% Property 9% Foreign equities 7% Bonds 81% Financial instruments 1% * Danica Pension Group ex. unit-linked policies Total return on investments: 3.7% Ongoing sales of equities for 1.2bn to reduce market risk Danica Pension can withstand a drop in equity prices of 36% Use of financial instruments partially offset drop in interest rates At year-end 2002, Danica could withstand another drop in interest rates of 3 percentage points Separate investment of shareholders equity and pension funds 35

36 5. Trends in business areas Danske Capital - Falling prices in capital markets reduce earnings foundation m Core earnings before provisions Core earnings before provisions down by 27%, hurt by large drop in equity prices in 2002 Substantial reallocation from equities to bonds among existing customers Rise in core income of 29% at Danske Private Equity Net increase in new agreements of 714m Share of Danish retail market maintained at 41% Asset under management of 46bn at year-end

37 5. Trends in business areas Danske Securities - Restructuring and integration with Danske Markets m Core earnings before provisions The corporate finance activities and selected parts of equity trading and research were transferred to Danske Markets on 1 January 2003 Closure of activities in Finland and a large portion of trading and research activities in Norway, Sweden and the UK Core earnings before provisions in 2002 showed a loss of 64m, including 47m in restructuring charges Restructuring costs 37

38 5. Trends in business areas Earnings from investment portfolios - Drop in interest rates increased earnings Earnings from investment portfolios ( m) Insurance business Risk allowance Return on inv., Danica 6 - Net earnings, insurance Banking business Return Hedging Costs Net earnings, banking Breakdown by asset type - Fixed-income positions Share positions Currency positions 10 3 Total return by asset type Fixed-income earnings rose 59m because of falling interest rates Danica s earnings were reduced by 114m because the risk allowance was postponed 38

39 6. Corporate governance Corporate governance Internal Chief Auditor Banking Activities Mortgage Finance Danica Pension Board of Directors 21 members Executive Board 2 members Executive Committee 6 members 3 associate members Central IT platform Danske Markets Danske Capital Other Separation of Board of Directors (BD) and Executive Board Rules of procedure for BD Internal Chief Auditor appointed by BD Use of incentive programmes for key employees Committees without Executive Board members appointed by BD: Credit Committee Audit Committee Salary & Bonus Committee Realkredit Danmark Committee Danica Pension Committee Economic management model Financial targets 39

40 7. Outlook for 2003 Outlook for Weak economic growth, but improvement in C/I ratio Danske Bank expects a continuation of weak growth in the global economy and generally lower interest rates; the timing and strength of a recovery in the real economy remain uncertain Core earnings in 2003 are expected to stay at the same level as in 2002 Costs are expected to decline in 2003 The quality of the loan portfolio is satisfactory; the provisioning ratio is therefore expected to remain relatively low Investment portfolio earnings for both banking and insurance operations will depend, as in previous years, on the trend in the financial markets The Group s tax rate is expected to be 29% of profit before tax 40

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