Back to basics: How can retail banking achieve superior returns? Goldman Sachs European Financials Conference Frankfurt Tonny Thierry Andersen CFO & Member of the Executive Board June 5, 2009
Executive summary Retail banking accounts for >80% in Danske Bank Banking will never be the same again due to seismic changes in regulations and structural market changes But we expect less competition from both big and small players in the Nordic region Intelligent, transparent and risk-adjusted loan pricing is pivotal in driving profitability Proven results from lending margin management at Danske Bank, but more is needed 2
Net profit expected to be significantly lower in the Nordic banking sector. What to do? DKr bn 90 Net profit for the period (Nordea+Handelsbanken+Swedbank+DnBnor+Danske Bank+SEB) 60 30 0 2007 2008 2009e 2010e Source: Danske Markets, Nordic Banks April 20, 2009. Sum of forecasts for large Nordic banks: Danske Bank, SHB, SEB, Swedbank, Nordea and DnB NOR. 3
Regulation: It will never be the same again More and better capital Less procyclicality (dynamic provisioning) Leverage ratio, etc. Branch vs. subsidiary Strict liquidity management Macro-prudential oversight Lord Turner, chairman of the UK-FSA: The changes recommended are profound, and the banking system of the future will be different from that of the last decade. Source: The Turner Review, published March 18, 2009 by UK-FSA. 4
What s next for retail banking?5
ROE but so should CoC and implications for P/B? 6
Several elements of the conventional banking model are currently under pressure Unsustainable Lending-driven market share growth with limited sales of fee- and commission - based products Large deposit deficit Bloated balance sheet Unrealistically low lending margins Costs suited to benign revenue environment 7
Net interest income is the biggest revenue component % 80 Net interest income/total revenues 2008 60 63 66 64 64 60 47 40 20 0 DB SEB DnB NOR Nordea SHB Swedbank Source: Annual reports. 8
In Denmark, lending margins are rebounding from a low level % 10 Lending margins 8 6 4 2 0 1996 1998 2000 2002 2004 2006 2008 Source: Danish central bank. 9
Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 The acid test that verifies that Denmark has the best funding of mortgages in the world Swap spreads (bps) 250 European covered bonds (5-yr bullets) (July 28, 2007 April 28, 2009) 200 150 100 50 0-50 Source: Danske Markets. 10
Granular, transparent and risk-focused pricing is pivotal in driving top-line improvements Risk/reward 11
Focus on the categories with the highest exposure DKr m 2,000 Economic Profit by Classification Categories 1,000 0-1,000 A1 A2 A3 A4 A5 A6 B1 B2 B3 Rating Note: The size of the circles indicates the volume of exposure in the rating category. 12
Rating Get pricing right - With liquidity, risk, capital and risk appetite in mind Maturity (bp) 1.... 5 A1 130..... A7 580 Note: illustrative example. 13
Clamp down on leakage - Transparency is a prerequisite to being able to do something about it % 60 Lending margin >25% below target price 52 40 20 10 0 #1 #N Brand 14
Governance Clear guidelines Policies on deviations from target prices Central price forum Relentless follow up Consequences 15
Strong endurance in lending margins - As we step up our focus on this pivotal area in all markets % 3.0 2.5 Lending margins Q1 2009 Q4 2008 Q3 2008 2.0 1.5 1.0 0.5 0.0 * * Ex Realkredit Denmark lending. Sweden 16
Outperforming peers in improving lending margins - More to come, and more is needed % 3.0 2.65 Marginal net interest margins Q4 2008* 2.58 2.5 2.0 2.16 2.02 1.69 1.58 1.5 1.0 0.5 0.0 Danske Bank Nordea DnB NOR SHB SEB Swedbank Source: FPK, Nordic banks, Feb. 23, 2009 * Marginal NIM is absolute change in NII over change in loans YoY. 17
Significant improvement in the drag from value destroyers, but still much to do % 70 > 60% Value destroyers 53 < 45% 35 18 0 Q1 2008 Q1 2009 18
Our work with lending margins has paid off % Corporate % Retail 3 5 Q1 2009 Q1 2009 2 4 3 Q1 2008 1 Q1 2008 2 1 0 A1 A2 A3 A4 A5 A6 0 A1 A2 A3 A4 A5 A6 Share of total lending volume A1 A2 A3 A4 A5 A6 0% 6% 6% 24% 18% 19% Share of total lending volume A1 A2 A3 A4 A5 A6 5% 20% 15% 16% 12% 9% Lending to public sector, banks and financial institutions is excluded. 19
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Disclaimer This presentation does not constitute or form part of and should not be construed as, an offer to sell or issue or the solicitation of an offer to buy or acquire securities of Danske Bank A/S in any jurisdiction or an inducement to enter into investment activity. No part of this presentation, nor the fact of its distribution, should form the basis of, or be relied on in connection with, any contract or commitment or investment decision whatsoever. This presentation contains forward-looking statements that reflect management s current views with respect to certain future events and potential financial performance. Although Danske Bank believes that the expectations reflected in such forward looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. Accordingly, results could differ materially from those set out in the forward-looking statements as a result of various factors many of which are beyond Danske Bank s control. This presentation does not imply that Danske Bank has undertaken to revise these forwardlooking statements, beyond what is required by applicable law or applicable stock exchange regulations if and when circumstances arise that will lead to changes compared to the date when these statements were provided.