Implementing IFRS. B/S and P&L for 2004 restated according to IFRS

Transcription

1 Implementing IFRS and for 2004 restated according to IFRS Copenhagen, February 10, 2005

2 2 Executive summary - New accounting standards unchanged business The adoption of IFRS affects both the valuation and the presentation of Danske Banks accounts, but not the business itself This presentation offers an overview of our reported profit and balance for 2004 restated according to IFRS principles : No significant effect going forward Special attention in 2004 due to one-offs Illogical effect from the elimination of own shares : No material net changes to the future balance sheet volatility

3 Total changes - Decreased assets and lower profit due to one-offs Changes to end-2004 Danish GAAP vs. IFRS (DKr bn) Changes to operational 2004 according to Danish GAAP vs. IFRS () Income Exp./tax Investment earnings Total assets DKr27bn Mainly due to changes in valuation. Elimination of own bonds (IAS 39) decreases assets by DKr246bn. The consolidation of insurance activities (IAS 27) increases assets by DKr194bn Shareholders equity increases due to valuation and presentation: reversal of loan-loss provisions (DKr4.7bn IAS 39) and reclassification of dividends (DKr5bn IAS 10) One-offs in 2004 affect the restatement DKr1.2bn Mainly due to changes in valuation Major effects from: Elimination of shares (DKr387m - IAS 32) Sale of investment properties (DKr234m IAS 40) Loan-loss provisions (DKr777m - IAS 39) 3

4 4 Key ratios - Lower return on equity, mainly due to one-offs Lower return on equity due to one-offs Net profit falls and shareholders equity increases => pronounced effect on return on equity The 2004 result affected by one-offs Number of shares outstanding reduced by own shares (trading portfolio, Danica, pooled schemes) Earnings per share falls due to the lower restated profit Book value per share increases due to increasing equity New solvency rules introduced January 1, 2005 (partly due to the introduction of IFRS) No changes in the scope of consolidation for the period less dividends still included in core capital Domicile properties revalued at fair value Defined-benefit at fair value Key ratios Danish GAAP IFRS Return on equity Earnings per share Book value per share C/I ratio Core capital ratio (incl. hybrid) Solvency ratio

5 5 Valuation issues Write-downs of loans and advances IAS 39 7 Origination fees IAS 39 8 Staff benefits IAS 19 9 Pension commitments IAS Elimination of own shares IAS Mortgage loans & issued bonds at fair value IAS 39 & IAS 1 12 Elimination of own bonds IAS Share-based compensation IFRS 2 14 Properties IAS 16 & IAS Leasehold improvements IAS Reserves subject to a reimbursement obligation IAS Outstanding claims, insurance contracts IFRS 2 18 Unit-linked schemes IFRS 4 19 Hedge accounting IAS Foreign currency translation, foreign units IAS Deferred tax in Danica and tax on the transition to IFRS IAS 12 22

6 Changes due to valuation - Lower assets, affected by one-offs Changes to end-2004 Danish GAAP vs. IFRS (DKr bn) Restated operational 2004 according to Danish GAAP vs. IFRS () Income Exp./tax Total assets DKr 232bn Mainly due to the elimination of own bonds (DKr246bn excl. Danica - IAS 39) Shareholders equity increases due to reversal of loan-loss provisions (IAS 39 - DKr4.7bn) As mentioned one-offs affect the restatement DKr1.3bn Major effect from elimination of own shares (DKr387m excl. Danica - IAS 32) and loan-loss provisions (DKr777m - IAS 39) Lower profit from sale of investment properties (DKr234m IAS 40) 6

7 IAS 39 Write-downs of loans and advances More focus on objectivity Write down when there is objective evidence of impairment (e.g. breach of contract) IFRS: write-down when PD>50% Danish GAAP: write down allowed as early as PD<20% Write down to the present value of expected future cash flows (incl. collateral if any) Recognition of interest income stops when there has been an individual write-down NPV effect from shortening maturity of the writtendown loans is recorded in NII No effect on the actual loan losses Higher loan-loss provisions in 2004 since some of the reversals concern write-downs originally made at low PD (<50%) Provisions made at a later stage More volatile Q/Q provisions Smoother provisions over a business cycle Fall in NII - net effect: Elimination of NII booked after provisions are made (negative) NPV effect from shortening maturity recorded in NII (positive) Net interest income 20 Provisions for bad and doubtful debts 777 Net profit for the year 797 Bank loans & advances 4,533 Mortgage credit lending 121 Total assets 4,654 7 Shareholders' equity 4,654

8 8 IAS 39 Origination fees Origination fees must be accrued Origination fees must be included in the calculation of a loans amortised cost value In 2004 we changed our principles regarding upfront fees (for syndications etc.) due to changes in Danish GAAP The accrued origination fees offsets part of the value of the loan Origination fees must be amortised over the duration of the loan Origination fees have previously been included in NII at the point of payment. Now they will be accrued over the duration of the loan The part of the 2004 fees that is accrued to future periods is moved to the balance sheet and entered as a negative asset => falling NII and bank loans The asset side also negatively affected by accrued origination fees from previous years The asset reduction is offset against shareholders equity Net interest income 34 Net profit for the year 34 Bank loans & advances 449 Total assets 449 Shareholders' equity 449

9 IAS 19 Staff benefits More precise accrual of employee benefits All salaries and compensation to employees must be accrued over the period in which the employees earn the benefit Items like jubilee benefits that have been booked at the point of payment will now be accrued Holiday allowances will be set aside according to earned and held holidays (instead of a statistical model) Holiday supplements (booked in Q2 under Danish GAAP) will be accrued over the year Jubilee benefits: one-off increase in liabilities Holiday supplements: spread out over the year and not booked in Q2 => no seasonal effect in Q2 Holiday allowances: low cost when many employees are on holidays, high cost when few are on holidays => increases volatility In total: Minor effect on operating expenses Liabilities increase and shareholders equity decreases proportionately Operating expenses and depreciation 3 Net profit for the year 3 9 Other liabilities 395 Total liabilities 395 Shareholders' equity 395 Total liabilities & equitiy 0

10 IAS 19 Pension commitments Application of the corridor method => lower volatility is effected by adjustment of realised cost to Majority of our commitments = defined-contribution expected costs in Norway and Sweden Defined-contribution in DK since 1982 No policy change to these schemes Negative effect since actual numbers for 2004 are affected by actuarial gains More pension schemes must be recognised in our accounts according to IFRS Corridor method applied to defined-benefit schemes The corridor method: If cumulative actuarial gain/loss >10% of commitments or fair value (the greater) => Gain/loss booked in. Amortised over the employees expected remaining working life within the Group If cumulative actuarial gain/loss < 10% of commitments or fair value (the greater) => not recognised in. but in the Inclusion of more pension schemes causes an increase in assets (overfunded schemes) and liabilities (underfunded schemes) Assuming unchanged staff composition, interest rate and salary trends => no material effect on future profits Corridor method lowers volatility Operating expenses and depreciation 90 Net profit for the year 90 Other assets 218 Total assets Other liabilities 521 Total liabilities 521 Shareholders' equity 303 Total liabilities & equitiy 218

11 IAS 32 Elimination of own shares Own shares not qualifying as assets IAS 32 states that: Purchase of own shares = reduction of shareholders equity Sale of own shares = issue of shareholders equity Equity-settled derivatives on own shares = equity instrument (IFRS 2) Premium booked as a change in shareholders equity Cash-settled derivatives on own shares will be recognised at fair value. Value adjustment carried in the Own shares in Danica and pooled schemes () (end-2004) Danica 367 Pooled schemes 438 Total No capital gains/losses from own shares in the P/L Positive market value adjustment (share price + dividends) for 2004 eliminated All holdings of own shares written down to nil Realised capital gains/losses from own shares will affect only the in the future not the The customers returns from Danske Bank shares held in pooled schemes and in Danica will be booked under trading income. Will affect shareholders equity when realised Trading income 387 Net profit for the year 387 Bonds & shares 1,395 Other assets 367 Total assets 1,762 Shareholders' equity 1,762

12 IAS 39 & IAS 1 Mortgage loans & issued bonds at fair value Override of EU-approved IAS 39 - chosen principle in accordance with Danish FSA and IAS 39 The EU-approved IAS 39 states that: Issued mortgage bonds should be valued at amortised costs Holdings of the same mortgage bonds should be valued at fair value The chosen valuation principle implicates the balance sheet of Mortgage Finance (and therefore the consolidated Group) Issued bonds and mortgage loans which were valued at nominal value according to Danish GAAP are now valued at fair value Own bonds dont qualify as an asset (see slide 14) and should therefore be eliminated Increased assets and liabilities since fair value > nominal value When valued according to different principles, the elimination gives an illogical effect which distorts true and fair view Therefore: Balance sheet prepared for elimination => No adverse effect on the when elimination is made (see slide 14) To overcome this distortion, Danske use the possibility to override in IAS 1 (article17): Issued bonds and holding of own bonds will be valued at fair value (current stock exchange price) A liquid bond market and the fact that loans can be repaid with the underlying bond makes this possible Mortgage credit lending 7,707 Total assets 7,707 Issued bonds 7,707 Total liabilities 7,707 12

13 IAS 39 Elimination of own bonds Own bonds not qualifying as assets Own bonds fail to qualify as an asset Purchases of own bonds = redemptions of issued bonds Sales of own bonds = new issues Own mortgage bonds acquired as a part of our mortgage finance operations, liquidity management and long-term investments Own mortgage bonds now valued at fair value in order to keep a true and fair view of the accounts (see slide 12) Interest paid to pooled schemes moved from NII to trading income Falling balance due to the elimination Numbers stated on this slide do not include the bonds held in our insurance business Net interest income 246 Trading income 246 Bonds & shares 211,659 Other assets 34,740 Total assets 246, Issued bonds 237,950 Other liabilities 7,406 Subordinated debt 1,043 Total liabilities 246,399

14 IFRS 2 Share-based compensation Costs for incentive schemes accrued Elimination of obligation in own shares We have three share-based compensation schemes: Share options Conditional shares Employee shares The obligation for share-based compensation has been market value adjusted in These adjustments are now neutralised Increasing share price => increasing obligation => lower trading income Liability in own shares is neutralised and offset by an increase in shareholders equity Fair value of share-based compensation will be reported as an expense accrued over the period in which the employee earns the compensation Expense will be counter booked against shareholders equity The portfolio used for hedging the share-based obligation must be eliminated (see slide 12) Trading income 115 Net profit for the year 115 Other assets 158 Total assets Other liabilities 138 Total liabilities 138 Shareholders' equity 296 Total liabilities & equitiy 158

15 IAS 16 & IAS 40 Properties Investment properties at fair value Investment properties will now be stated at fair value Domicile properties will still be stated at cost less any depreciation and write-downs Prior revaluations of domicile properties have been reversed Portfolio of investment properties () end-2004 according to IFRS Investment properties 4,463 - Danica 1,102 - Operational leasing, Nordania 2,124 Domicile properties 3,849 Total 7, affected positively: Fair value > cost less depreciation and write-downs Reversal of prior revaluations affects negatively however positive effect from investment properties is greater from investment properties sold in 2004 decreases - book value of these properties would have been higher under IFRS Moving forward: Increased and volatility due to market value adjustments of investment properties Other core income 241 Operating expenses and depreciation 7 Net profit for the year 234 Other assets 248 Total assets 248 Shareholders' equity 248

16 IAS 16 Leasehold improvements Minor changes Unchanged valuation method: cost less depreciation and write-downs Increasing assets due to the capitalisation of leasehold improvements made before 2003 Leasehold improvements made before 2003 will now be capitalised Depreciations related to these leaseholds increase the Groups total depreciations in 2004 Increases the future level of total depreciations Operating expenses and depreciation 47 Net profit for the year 47 Other assets 128 Total assets 128 Shareholders' equity

17 IAS 37 Reserves subject to a reimbursement obligation Minor change related to Mortgage Finance Mortgage Finance has some loans issued before 1972 where the loan conditions state that the borrower is entitled to be repaid his/her deposit at the time of redemption IFRS state that these provisions must be recognised at present value instead of par value The value of the repayable reserves decreases (PV < par value) Other liabilities decrease and shareholders equity increases NII falls due to maturity reduction of the obligations Fairly large effect in 2004, but the future adjustments will be minor Trading income falls due to changes in payment patterns during 2004 Faster-than expected repayment increases PV of the reimbursement obligations Net interest income 20 Trading income 43 Net profit for the year Other liabilities 83 Total liabilities 83 Shareholders' equity 83 Total liabilities & equitiy 0

18 18 IFRS 2 Outstanding claims, insurance contracts Expenses included in the provisions In an IFRS regime, outstanding claims must include amounts needed to cover all expenses incurred in fulfilling the obligation to settle the claims Outstanding claims provisions = liability in Danica. This liability increases when costs are included Danicas shareholders equity decreases The Groups assets decrease due to the equity consolidation effect due to increasing activity in Danica. Increasing activity => higher cost allocation to outstanding claims Income from insurance business 3 Other assets 30 Total assets 30 Shareholders' equity 30

19 19 IFRS 4 Unit-linked schemes Minor change to investment contracts Investment contracts (IAS 39): PV of expected administrative result is not deductible from provisions Sales commissions must be accrued (IAS 18) Insurance contracts (IAS 18): PV of future administrative results will continue to be deducted from provisions => no change Net effect on income from insurance business: Accrual of sales provisions (positive) Reversal of PV of administrative result (negative) Increasing liabilities in Danica since the PV of the expected administrative result is not deductible from investment contracts Corresponding decrease in shareholders equity Decreasing assets of the Group due to the equity consolidation Portfolio - Unit-link (DKr bn) (end-2004) Insurance contracts 6 Investment contracts 5 Unit-linked scheme in total 11 Income from insurance business 18 Net profit for the year 18 Other assets 42 Total assets 42 Shareholders' equity 42

20 IAS 39 Hedge accounting Inclusion and market value adjustments Danish GAAP: IAS 39: Market value of hedged risk have been offset against the market value of the derivatives used for hedging. Subsequently: Not included in the and no value adjustments in the Derivatives used for hedging will be recognised at fair value in the. Market value adjustment carried in Hedged risk will be be recognised at fair value in the. Market value adjustments will be carried in the IFRS: Hedge accounting for operating leases is not possible (affects Nordania) 20 Assets and liabilities increased by the hedged interest rate risk and derivatives Nordania: market value of derivatives included in the. No corresponding inclusion of hedged risk. Negative market value on these derivatives => falling shareholders equity Negative market value adjustments of the derivatives in 2004 => falling trading income Net interest income 1 Trading income 36 Net profit for the year 35 Bank loans & advances 2,023 Other assets 1,697 Total assets 3,720 Deposits 819 Issued bonds 106 Other liabilities 2,193 Subordinated debt 777 Total liabilities 3,895 Shareholders' equity 175

21 21 IAS 21 Foreign currency translation, foreign units Translation differences => Shareholders eq. No policy change to the exchange rates used still translated at the exchange rates on the balance sheet date Neutralisation of the translation effect booked in 2004 still translated at the exchange rates at the time of the transaction Exchange gains/losses from translation will now be recognised directly against shareholders equity as a separate reserve Net investments in foreign units will still be hedged. Net effect included in shareholders equity Trading income 32 Net profit for the year 32

22 IAS 12 Deferred tax in Danica and tax on the transition to IFRS Changes to valuation affect tax No discounting of deferred tax in Danica Reversal of accumulated provisions creates the largest tax effect Deferred tax in Danica is a separate issue: Danish GAAP: Deferred tax in Danica has been discounted IFRS: Discounting of deferred tax is not permitted after the transition IFRS. Deferred tax should be stated at nominal value Deferred tax in Danica: PV < nominal value Deferred tax (liability) in Danica will therefore increase. Shareholders equity in Danica falls Danicas shareholders equity = assets in the Group accounts (equity consolidation) => falling assets Assets also affected by other tax issues Tax 289 Net profit for the year 289 Other assets 1 Total assets 1 Other liabilities 1,342 Total liabilities 1,342 Shareholders' equity 1,341 Total liabilities & equitiy 1 22

23 23 Presentation issues Earnings from investment portfolios 25 Reclassification to trading and investment securities IAS Consolidation of Danica and securitisation activities IAS Reclassification of pooled schemes IAS Goodwill IFRS 3 & IFRS 1 29 Operating leases IAS Issued bonds carried at amortised costs IAS Reclassification of bank and mortgage loans IAS Elimination of internal rent IAS 1 33 Net operating income from property divided into income & expenses IAS 1 34 Reclassification of dividends IAS 10 35

24 24 Changes in presentation - Increase in assets, minor effect on the profit Changes to balance sheet end-2004 Danish GAAP vs. IFRS (DKr bn) Changes to operational 2004 according to Danish GAAP vs. IFRS () Income Exp./tax 668 Investment earnings Total assets DKr205bn DKr28m Consolidation of Danica (DKr194bn after elimination of own shares and bonds - IAS 27) and securitisation activities (DKr11bn - IAS 27) Increase in shareholders equity due to reclassification of dividends (DKr5bn IAS 10) Marginal effect on net profit Earning from investment portfolios divided into three parts

25 Earnings from investment portfolios Earnings from investment portfolios divided Earnings from investment portfolios will be divided in three parts: Shadow account, Danica => Income from insurance business Trading income will be more volatile and highly dependent on the development in the capital markets Positive effect on C/I ratio Earning from investment portfolios, banking business => trading income Costs related to investment portfolio, banking business => operating costs Not an effect of IFRS per se Two important arguments for the change: Interest rate risk is an important feature for both trading income and earnings from investment portfolios All costs are gathered in operating expenses Trading income 1,571 Income from insurance business 445 Operating expenses and depreciation 133 Earnings from investment portfolios 1,883 25

26 IAS 39 Reclassification to trading & investment securities Intention-based approach Presentation of financial instruments in the balance sheet: Danish GAAP: product-based approach IFRS: intention based approach Introduction of trading portfolio under both assets and liabilities The trading portfolios consist of: Financial assets acquired and liabilities incurred with the intention to sale or repurchase within a short period of time Portfolios of financial assets and liabilities that are managed together and for which there is a recent actual pattern of sortterm profit-taking All derivatives Investment securities created Securities that are not carried in the trading portfolio or assets under insurance contract 26 No net effect on the balance No effect on net profit Dividends on assets in pooled schemes have been moved from other operating income to trading income Trading income 188 Other core income 188 Trading portfolio assets 109,931 Investment securities 53,927 Other assets 163,858 Trading portfolio liabilities 216,194 Other liabilities 216,194

27 27 IAS 27 Consolidation of Danica & securitisation activities Equity consolidation replaced & securitisation consolidated Danish GAAP: IFRS: Danica consolidated by equity method Securitisation activities not consolidated Danica will be consolidated using designated lines Securitisation activities will be consolidated on a line-by-line basis The Groups financial highlights will still show earnings from insurance activities (excl. funding costs) on one line Net interest income 101 Net fee and commission income 32 Trading income 60 Income from insurance business 19 Net profit for the year* 28 Bank loans & advances 9,872 Trading portfolio, assets 441 Investment securities 13,954 Assets under insurance contracts 160,084 Other assets 21,943 Total assets 205,412 Deposits 143 Trading portfolio, liabilities 387 Liabilities under insurance contracts 189,168 Other liabilities 16,509 Minority interest 265 Total liabilities 205,412 *Attributable to minority interests

28 IAS 39 Reclassification of pooled schemes Investment contracts will be segregated Pooled assets = investment contracts No net effect on income The customers bear the full risk for these assets These assets will be recognised at fair value segregated from other assets under Assets held in pooled accounts and unit-linked schemes The underlying deposits will be recognised at the value of savings in Deposits in pooled accounts and unit-linked schemes Interest on pooled assets and deposits is moved from NII to trading income Danish GAAP: Dividends paid have been booked under NII IAS: Dividends paid must be included in trading income. No net effect on income Investment contracts moved to Assets held in pooled accounts and unit-linked schemes under other assets Underlying deposits moved correspondingly Difference between assets and liabilities = own bonds and shares - which now are eliminated Net interest income 180 Trading income 180 Bonds & shares 25,915 Other assets 25, Deposits 32,853 Other liabilities 32,853

29 29 IFRS 3 & IFRS 1 Goodwill Impairment test before amortisation Goodwill will be capitalised and subject to impairment tests (IFRS 3) When the acquisition of NIB & NB is approved, the goodwill will be treated according to IFRS 3 IFRS 3 will not be applied to acquisitions made before January 1, 2004 (in accordance with IFRS 1) Amortisation after impairment test Goodwill on acquisitions made before 2002 will therefore not be restated

30 IAS 17 Operating leases Operating lease assets = tangible assets Property leased out under operating leases will be valued as investment property (fair value) Other lease assets (cars, machinery and equipment) will be valued at cost after deduction of depreciation and write-downs Lease income will be recognised under other income No effect on net profit or shareholders equity NII is moved to other income and expenses Higher C/I ratio than the Group average (implied C/I ratio 72%) The relevant bank loans are now classified as other assets Mainly related to Nordania and its leasing activities Net interest income 304 Other core income 1,072 Operating expenses and depreciation 768 Bank loans & advances 4,157 Other assets 4,157 Information regarding hedging of operating leases on slide 20 30

31 31 IAS 39 Issued bonds carried at amortised cost Issued mortgage bonds moved Chosen valuation principles: Mortgage bonds: fair value (see slide 12) Other bonds: amortised costs Issued mortgage bonds will therefore be presented separately from other issued bonds Presented under other liabilities in the financial highlights Premiums/discounts on subordinated debt will be a part of the calculation of amortised cost Amounts moved from issued bonds and subordinated debt to other liabilities The effect in other assets mirrors the fact that premiums/discounts on subordinated debt now are included in the calculation of amortised cost Other assets 48 Total assets 48 Issued bonds 179,508 Other liabilities 179,467 Subordinated debt 7 Total liabilities 48

32 32 IAS 39 Reclassification of bank & mortgage loans Loans valued at fair value separated Mortgage loans (asset) to include only loans measured at fair value, i.e. loans at Mortgage Finance Other lending => presented as loans and advances to customers No effect on shareholders equity or net profit Minor effect on total balance: assets and liabilities created at pre-issues of mortgage bonds are now replaced by market value adjustments of issued bonds Assets and liabilities created at pre-issues of mortgage bonds => presented under mortgage bonds (previously included under other assets and other liabilities respectively) Bank loans & advances 534 Mortgage credit lending 534 Other assets 20 Total assets 20 Issued bonds 1,744 Other liabilities 1,764 Total liabilities 20

33 IAS 1 Elimination of internal rent Proper elimination when implementing IFRS We own several properties - some of them rented out to external parties and some used internally Danish GAAP: The line Net operating income from property (incl. in Other operating income) shows how much we as an owner have earned on these properties Fall in Net operating income from property. Operating expenses and depreciation fall accordingly No effect on the reported profit The Net operating income from property includes the rent income paid by our own business units that rent space in our properties This rent income is also included as a cost in operating cost and expenses No elimination of these items needed Other core income 454 Operating expenses and depreciation 454 IFRS: The rent included in income and expenses should be eliminated 33

34 34 IAS 1 Net operating income from property divided into income & expenses Gross instead of net Danish GAAP: Net income from property is a netnumber, i.e. it consists of income less expenses The costs related to the properties are moved down to operating expenses Other operating income increases by the corresponding amount IAS: No effect on the reported profit This item should now be stated as a grossnumber, i.e. income and expenses should be presented separately Other core income 226 Operating expenses and depreciation 226

35 35 IAS 10 Reclassification of dividends Dividends part of shareholders equity until the AGM Danish GAAP: IAS 10: Proposed dividend payments announced in the annual report deducted from shareholders equity Dividends should be included in shareholders equity until the AGM, when the proposed dividend payment is approved Solvency statements: same as IFRS No net effect on the balance No effect on core capital or solvency Other liabilities 5,010 Total liabilities 5,010 Shareholders' equity 5,010

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37 37 IAS/IFRS standards included - Key standards included in this presentation Standard Description Slide IAS 1 Presentation of financial statements 12, 33, 34 IAS 10 Events after the balance sheet date 35 IAS 12 Income taxes 22 IAS 16 Property plant and equipment 15, 16 IAS 17 Leases 30 IAS 19 Employee benefits 9, 10 IAS 21 The effects of changes in foreign exchange rates 21 IAS 27 Consolidated and separate financial statements 27 IAS 32 Financial instruments: Disclosure and presentation 11 IAS 37 Provisions, contingent liabilities and contingent assets 17 IAS 39 Financial instruments 7, 8, 12, 13, 20, 26, 28, 31, 32 IAS 40 Investment properties 15 IFRS 1 First-time adoption of IFRS 29 IFRS 2 Share-based payments 14, 18 IFRS 3 Business combinations 29 IFRS 4 Insurance contracts 19