Danske Bank's (DNSKF) CEO Thomas F. Borgen on Q4 2015 Results - Earnings Call Transcript

| About: Danske Bank (DNSKF)

Danske Bank A/S (OTC:DNSKF) Q4 2015 Earnings Conference Call April 29, 2016 8:30 AM ET

Executives

Thomas F. Borgen – Chief Executive Officer

Jacob Aarup-Andersen – Chief Financial Officer

Claus Jensen – Head-Investor Relations

Analysts

Jan Wolter – Credit Suisse

Christoffer Rosquist – Barclays

Mads Thinggaard – Handelsbanken Capital Markets

Anton Kryachok – UBS

Jakob Brink – ABG

Riccardo Rovere – Mediobanca

Daniel Do-Thoi – JPMorgan

Christian Hede – Nordea

Jacob Kruse – Autonomous

Andreas Hakansson – Exane

Yafei Tian – Citi

Chris Manners – Morgan Stanley

Omar Keenan – Deutsche Bank

Adrian Cighi – RBC

Operator

Good day and welcome to the Danske Bank Q1 report 2016 conference call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Mr. Thomas F. Borgen, CEO. Please go ahead, sir.

Thomas F. Borgen

Thank you, operator, and thank you, all, for taking the time to listen in to this call today. Other participants with me today is our CFO, Jacob Aarup-Andersen; and Head of IR, Claus Jensen.

Slide 1, please. In today’s call, we have the pleasure of presenting Danske Bank’s financial results for the first quarter 2016. We aim to keep this presentation to around 50 minutes. After presentation, we will open up for Q&A as usual. Afterwards, please feel free to contact our internal investor relations department if you have any more questions.

Slide 2, please. With a net profit of almost DKK5 million for the first quarter of 2016, we had a satisfying start to the year. The results are good evidence of our solid business model and demonstrate our ability to operate in a low-growth environment with more widespread negative rates.

In the first three months, we saw favorable developments in our underlying business, a continuation of very low impairments, and good trend in expenses. The period also brought lower than expected economic activity, however, and difficult conditions in the financial markets. This affected activity-driven income, and to some extent, it makes a sharp contrast to Q1 of last year when we benefited from extraordinarily high customer activity.

We continue to benefit from our strong focus on customer experience and growth initiatives in Norway and Sweden. In addition, we have seen good progress on business banking activity in Denmark and Finland, despite the general macroeconomic situation of subdued growth in these countries.

The net profit of almost DKK5 billion is the same as the year before, and it represents a return on equity of 13.1%. Our capital base remains strong, with a common equity Tier 1 capital ratio of 50%. After full deduction of the DKK9 billion share buyback program and ongoing phasing in of CRD IV.

And finally, we maintain our guidance for 2016. We expect net profit to be in line with net profit before goodwill impairments in 2015.

Slide 3, please. Let me take you through the main items in our financial results. Net interest income came in at DKK5.3 billion. This is almost unchanged from the year before, as lending growth of 2% and lower funding costs mitigated the effect of negative rates.

Net fee income was 9% lower than in the same period last year when we benefited from strong customer activity, including expensive mortgage refinancing. In the first quarter, difficult market conditions and declining asset prices had adverse effects, mainly within wealth management.

Net trading income came in at DKK1.6 billion, down 47% from the level last year, when we benefited from extraordinarily high customer activity.

The first quarter this year was a period of difficult financial markets, with subdued activity and negative value adjustments. But market conditions improved towards the end of the period, and customer activity increased.

Other income rose, primarily as a result of a property sale in the first quarter. Operating expenses were down 8% to DKK5.3 million as a result of ongoing cost efficiency measures. In addition, we saw positive effects from a lower net contribution to the Danish Resolution Fund and lower depreciation of intangible assets. The cost/income ratio came in at 46.3%, almost the same as in the year before.

Slide 4, please. Given the environment of subdued activity and negative interest rates, our business unit had a satisfying start to the year. In comparison with the first quarter 2015, when we had exceptionally high investment activity and remortgage activity, this quarter offered less favorable conditions for activity-based income.

Nevertheless, we achieved strong results at personal banking and business banking because of improved credit quality, and we reduced expenses at this unit, as well as at C&I, as a result of our continuing focus on cost efficiency.

The underlying business remained robust, and we continued to benefit from improved customer offerings and an inflow of new business. Overall, pressure on margins persisted in most markets, but increased lending offset some of the effect.

In the first quarter, the return on allocated capital at our business units was affected by the implementation of a new capital allocation framework that is based on regulatory capital, and not as previously economic capital. Further, capital consumption at the business units is now more closely aligned with the Group’s total capital consumption.

If we look at personal banking, it delivered good results, with profit before tax up 56% to DKK1.3 billion. Total income came in at 10% lower than the year before as a result of a decline in net interest income and lower activity-driven income in comparison with the same period a year before.

Expenses were down 16%, primarily as a result of lower activity and the costs associated with deposit guarantee fund. Impairments improved by DKK465 million, primarily due to higher collateral values in Denmark.

Total lending volume was unchanged, although the underlying trends were mixed. In Denmark and Finland, sluggish demand resulted in declining volumes, whereas in Norway, we continued to see high level of customer activity. In Sweden, we began to see a good inflow of new business as a result of our partnership with Saco.

At business banking, we continued to see good momentum in all markets. There was good growth activity in Sweden and Norway where lending volume rose 8% and 17% respectively.

In Denmark, lending rose 9%, excluding Realkredit Danmark. And in Finland, where we started to see increased activity in the second half of last year, lending was up 10%.

Overall, profit before tax rose 7%. Total income was down 5% compared to the level in Q1 2015, where customer activity in Denmark in particular was very high. Expenses fell 3% as a result of efficiency measures and a focus on costs. Impairments improved by DKK270 million [ph], primarily because of reversals in the Danish commercial property segments.

Finally, at C&I profit before tax declined 35% from an extraordinarily high level in the same period last year. Market conditions were challenging, mainly in the first two months, and this led to a decline in customer activity and negative value adjustments.

By the end of the quarter, however, market conditions improved and customer activity increased, particularly in FICC and capital markets.

Total income declined 20%, mainly because of lower trading income. Lower fee income, owing to decline in activity, was offset by an increase in NII.

Expenses were down 5% owing to cost efficiency measures. Impairments, which by nature fluctuate in C&I, were up 19% because of higher collateral charges.

Slide 5, please. Let’s now look at our new business unit, wealth management where we have gathered our activities within asset management, pension savings and private banking.

The unit’s launch was affected by the difficult market conditions which caused low customer activity and a decline in the value of assets under management.

Profit before tax at wealth management was down 25% from the level in the same period last year, which was unusually long.

Fee income was slightly lower, mainly because of lower performance and risk allowance fees compared to Q1 2015.

Trading income was the main reason for the drop in total income. It was DKK200 million lower than in the same period in 2015. The decline came from unusually high level last year, and it was due to lower investment results in the health and accident business.

Assets under management fell 4% due to declining asset prices. The drop in asset prices was partly offset by a positive net inflow from sales and premiums of DKK20 billion.

Slide 6, please. Since the beginning of the year, our business in Northern Ireland has operated as a separate unit. Previously, it was part of personal banking and business banking. The organization change will improve our ability to develop our market position further for the benefit for our customers.

Profit before tax rose 4% from the level compared to Q1 2015. Before loan impairment charges, profits were up 22%. Adjusted for the depreciation of the currency, the items were up 11% and 29% respectively.

Expenses were the main factor in the improved result, which were down 16% from the first quarter of last year. Adjusted for currency effect, expenses fell around 11%, primarily because of lower cost of premises and staff.

As for impairments, we posted a reversal of charges for the eighth consecutive quarter. The reversal reflects more favorable macroeconomic conditions in the region which brought higher collateral values.

Slide 7, please. Operating expenses in the first quarter amounted to DKK5.3 billion, 8% lower than the year before, as we continued to benefit from our continuing emphasis on cost management. So said, the substantial decline in this quarter occurred mainly because our contribution to the Resolution Fund was lower than last year’s contribution to the deposit guarantee fund, to which our contribution ceased in 2015. The decline also reflects lower depreciation on intangible assets.

The increase in the number of FTEs from Q4 2015 is related to further in-sourcing activities as part of cost efficiency initiatives.

Slide 8, please. The positive trend in credit quality we saw last year continued in the first quarter. We booked a small net reversal of DKK0.1 billion, almost the same level as in the preceding quarter. The loan loss ratio, including non-core activities, was minus 3 basis points in the quarter. Personal banking showed the biggest change compared to Q1 2015. The positive trend was driven by high collateral values, mainly in Denmark, where the housing market has improved.

At business banking, we continued to see the net reversals, particularly in the commercial property segment in Denmark. Since the outlook for agriculture remained challenging, we took an additional collective charge in Q1. Charges at C&I increased as we continued to pay collective charges against oil-related exposure.

Slide 9, please. At the end of the quarter, the common equity Tier 1 ratio was a solid 15% on a reported basis. The decline from 16.1% at the end of 2015 was owed mainly due to the deduction of the math of the share buyback program.

This quarter, we implemented the last remaining FSA order on IRB models, and it led to an increase in the total REA of DKK20 billion. Total REA rose only slightly this quarter by DKK8 billion, mainly because of lower market risk.

The leverage ratio was 4.4% according to transitional rules, and 4.0% when the new rules are fully phased in. The decline from the preceding quarter was as expected.

Slide 10, please. In short, we maintain our outlook for the net profit for 2016 to be in line with the net profit for goodwill impairments in 2015.

Slide 11, please. Those were my initial comments and messages. We are now ready for your questions. Please limit yourself to two questions. If you are listening to the conversation, conference call from our website, you are welcome to ask questions by email.

Operator, we are ready for the Q&A session.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We will not take our first question from Jan Wolter Credit Suisse.

Jan Wolter

Two questions from me, and the first on the Danish plateau buffer, now capitalized 56% with core Tier 1. I wonder if that changed the way management in Danske thinks about excess capital in any way. So that’s my first question.

Thomas F. Borgen

Okay. No. We have a very clear capital strategy, as we communicated in 2015, as we reiterated in connection with the annual results of 2015. We have a capital target of minimum 30% on core Tier 1. At the same time, we have said that due to the regulatory uncertainty and the macroeconomic subdued environment, we think it’s prudent to be around 40%.

Our dividend policy is clear, between 40% and 50%. And if we – after taking profitable growth into account, we have said we’ll distribute an excess capital back to shareholders.

Jan Wolter

So that’s how – that remains then 14%; that’s what you’re saying now?

Thomas F. Borgen

We see no reason to change that now.

Jan Wolter

Okay. Thanks. And the second question is if you could talk about business banking in Denmark. In isolation, the Danish SME business is the Company’s biggest business, I believe around 20% of the Group NII this quarter. NII is down 10% or so despite 2% volume growth. And over the past year or so, NII is down 4% or 5% and volume up 4%. So if you could talk about how you see that going forward, if there is reason to take any action there in any way to strengthen that up. Thank you.

Thomas F. Borgen

Thanks. The business banking in Denmark has had a very good development on basically all accounts, particularly on the customer satisfaction, on customer on-boarding, and in control of the credit quality in continuous improvement. We can also see that we are now taking small market share, which is very good in a very competitive environment.

What you alluded to is that it has to be a margin compression, both on the deposit side and to some extent on the lending side. We believe that very much on the deposit side we have reached the bottom in the sense that unless there will be substantial cuts in short-term rates – we don’t see that as probable – that we see no more pressure there. However, on lending side, we see that some of that pressure is easing off, and we expect margins in business banking very much to be flattish to maybe a marginal tip down, but not to the same extent as we have seen during the last 18 months.

Jan Wolter

Okay. Are you seeing in the business that the pressure on the margin side now is abating? And why is that? Why do you think that that pressure could ease off going forward, please?

Thomas F. Borgen

Yes. We can see that the margin pressure is abating. It’s still a small margin compression, but as I said, not to the same extent as we have seen the last 18 months. The reason is that basically that all banks needs to have a satisfactory return on the capital employed, and we’re getting to a level where we are rightly priced. I think that’s the main reason.

Jan Wolter

Okay. Many thanks for that.

Operator

Our next question comes from Christoffer Rosquist of Barclays. Please go ahead.

Christoffer Rosquist

Just two questions from my side and first of all on costs. I think you’re guiding for costs in this year below 2015, and that’s quite a good start in the first quarter. Previously, you mentioned that some investments will actually offset the reductions that your efficiency measures result in. Are those investments back loaded towards the end of the year, meaning that we should not extrapolate the progress that you’re making at the moment; that – or is this actually the first quarter, a good indication of what below 2015 could mean and really how far below 2015 you could reach?

That’s my first question. And then I have one on capital and capital allocation.

Jacob Aarup-Andersen

Okay. It’s Jacob here. Let’s take the costs question first. You are asking the right question after the first quarter here. There’s no doubt that we maintain a very strong cost discipline, as Thomas also said. There are some structural reductions that you are aware of. The deposit guarantee scheme and the Resolution Fund and the amortization of customer relations. In total, that’s around DKK170 million; the DKK450 million reduction you saw.

So there were a couple of one-offs in the numbers, as we’ve also pointed out, of a bit more than DKK100 million you can’t annualize. And otherwise, we obviously maintained a strong cost discipline.

And do remember that Q1 is – it’s seasonally low quarter on costs. Do remember we will continue to invest, as you also referred to, in digital solutions regulations compliance. And then we have underlined wage inflation.

Some of these investments are, as you point out, they are more back-end loaded. We didn’t see a lot of that in Q1. So you can’t just extrapolate the cost development in first quarter, but we are obviously sticking to our guidance of lower costs in 2016. Nothing has changed there. But you can say it was probably more front-end loaded here.

Christoffer Rosquist

Okay. Thank you. That’s very clear. Then secondly, I think you mentioned in the report that you have implemented a revised method for allocating capital internally, and one area I saw that seems to have had an impact on is the trading business or the CIB business where you have significantly more capital quarter on quarter. Is that because of that change in methodology?

And if that is the case, is that because you think that your businesses actually need incentives to improve profitability that have been subsidized previously? Or is this simply an up-pick in trading activity that requires capital for normal reasons?

Thomas F. Borgen

Okay. Thank you. Yes. We have done one fundamental change. We have gone from an economic model to a regulatory model. So we’ve done a fundamental change to have more transparency that the sum of the parts adds up to regulatory capital requirements and our ratios. So it’s a way to give, particularly you, a better transparency.

It doesn’t necessarily mean that the regulatory capital is always the right way to look at the right economic return on a unit, but it’s the best we see it for the time being, and it is calibrated to some extent to see what our peers are doing.

The second point is, of course, all units need to make sure that we meet our targets, which we have said is minimum 12.5% in 2018 at the latest. C&I in particular has worked very diligently to optimize their business model last couple of years, and have reduced like-for-like capital, reduced cost, and had a very good de-risking throughout. That will continue.

So the first quarter was difficult for C&I, particularly in the first two months, but I’m very comfortable with this strategy which has been laid down by C&I, and which was communicated to all of you – I think it was six quarters ago in that sense.

Christoffer Rosquist

Okay. Thank you. So just to confirm that I understood you correctly, there is more capital in C&I against less revenue, and this now the true economic profitability that we see here, which means that there is more work to be done in that division to meet your above 12.5% return on equity target.

Thomas F. Borgen

Yes. If you call that regulatory capital is a true economic result then you are right, but what I alluded to, if you go through economic allocation model or if you go through a regulatory allocation model can always be discussed, but we think for the time being, it is very useful to use a regulatory capital allocation. And in that sense, we will continue to improve the business, as we have done through each quarter during the last couple of years.

Jacob Aarup-Andersen

And Christoffer, please also be aware that a good part of the increases in allocated capital in C&I is coming from the fact they have implemented the last IRB order we have had with the Danish FSA, and that is having almost full effect within C&I.

Thomas F. Borgen

And if you want to have the complete answer is also that we have allocated all capital, so we have less capital in the center.

Christoffer Rosquist

And if I remember that order correctly, that means that it’s actually the lending business that has absorbed more capital and not your trading or investment banking business. Is that correct?

Thomas F. Borgen

It was the corporate exposure with counter party risk. So that’s correct.

Christoffer Rosquist

Thank you very much.

Operator

Our next question comes from Mads Thinggaard from Handelsbanken Capital Markets. Please go ahead.

Mads Thinggaard

Two questions, and the first question is on – I guess you would call it a bit of the Nordic growth paradox in Q1. If you could explain a bit how to view the very high growth on lending volumes in Norway, but actually there’s more sequential drop on NII in Norway versus the flattish growth development in Sweden compared to a very high sequential NII growth in Sweden Q1, I think. And if you could also kind of explain what you expect here going forward, it would be quite helpful.

And then as the second question, looking at the stable NII here Q1 and factoring in the tailwind to SEK and to NOK in Q2 at this point, and also perhaps factoring in more additional growth in Norway and Sweden, would it be fair to expect stable NII, stable sequential NII in Q2? Or is that too optimistic in your view? Thanks.

Thomas F. Borgen

Okay. Let me take your first question. There is various direction of what is happening in the market which you allude to. I think you first alluded to the Norwegian market. There, we can see first of all that there is good volume growth in both the business side and on the personal side. However, the margin direction is going in two different ways.

In Norway, we can see that in business banking, margins are coming up. In personal banking, margins are under severe pressures, and have had a pretty severe drop in Q1. We think that we are seeing a bottoming out on margins in personal banking in Norway in Q1, and so we are more optimistic, of course; but not an increase but more flattish going forward.

In Sweden, there is a slightly different story. There, as you alluded to, our personal banking are more or less flattish in volume as our agreement with Saco first took real action in the latter part of Q1, but it looks very healthy in the on-boarding of new clients.

The reason for the uptick in NII as well is that margins are having a healthy expansion in personal side. On the business side in Sweden, we have – for several quarters have had a good development on the lending side, and margins there are flattish to a tick up. So that’s the reason why Sweden looks the way it does.

And if you want me to take Denmark, I think we went through that in the previous question; basically that personal banking margins are flattish, and in business banking flattish to maybe a touch down, but not to the same extent as we’ve seen previously.

And Finland, where we now are seeing healthy growth in business and personal also picking slightly up, there, you should assume, or at least we’re assuming, more flattish margins going forward.

And then your final question, how does all this come together? Basically, how we see it is flattish to the risk of having higher NII during the full year. The reason in addition is, of course, that we had the refinancing of the bonds at lower rates than we have outstanding. So cautiously optimistic is what I will guide you on there.

Mads Thinggaard

Okay. And did I hear you saying the full year, so it’s not on Q2 specifically?

Thomas F. Borgen

No. Full – yes. I’d just say to you, it’s too difficult to budget quarter on quarter.

Mads Thinggaard

Okay. Great. Thanks.

Jacob Aarup-Andersen

Just one comment on that, Mads. You should also – I think one thing that will be helping you, as you know, is also the number of banking days. There has been a drop between March and April here around Easter.

Operator

[Operator Instructions] Our next question comes from Anton Kryachok from UBS.

Anton Kryachok

Just two questions, please. Firstly, on the cost base in personal banking, I think Q1 result was very strong, but you mentioned that there were some positive run-offs at the Group level. So I just wanted to double-check whether we can rely on the Q1 cost number in personal banking as the run rate for the rest of the year, or whether you would expect it to come up a little bit. And can you please flag any one-off there?

And the second question, please, on the net interest income again. In C&I, you’ve seen quite a jump Q on Q, I think around 15%. Can you please break a little more which part of this jump perhaps comes from market-related activities which might disappear and which part is here to stay for the rest of the year? Thank you.

Jacob Aarup-Andersen

Thank you very much, Anton. Okay. So let me start with the personal banking on the cost side. One thing you need to be aware of when you look at the very positive movement in the personal banking expenses is that personal banking, due to the nature of the way the deposit guarantee scheme was and the Resolution Fund has been constructed, personal banking had a bigger relief from the changes here in terms of us rolling over to the Resolution scheme. So they have a bigger release now. And they also had a bigger relief from the amortization change in terms of the write-off of the customer relations. So they’re getting a bit more help than the other businesses from that.

Those are obviously effects that will continue, so you should expect those effects to continue. Personal banking, like the other businesses, also has benefited from this seasonality effect we spoke about earlier.

So there will be the same message on personal banking as for the Group, which is there is some seasonality and you would expect some of these costs to come back. But generally, the effects obviously from customer relations and from the deposit scheme is something that permanently helps the cost base. So most of this stays.

Anton Kryachok

And were there any one-offs in this cost number, the positive one-offs that you’ve highlighted at the Group level?

Jacob Aarup-Andersen

No.

Anton Kryachok

Thank you.

Thomas F. Borgen

And then your question on NII in C&I, as you know, we have had a Danish rate hike which came in quite early in the quarter, and part of the increase you can see in C&I is caused by the rate increase we have seen by the Danish Central Bank.

Anton Kryachok

Okay. So it is sustainable going into the rest of the year and we might even see tailwinds if the rate environment improves?

Thomas F. Borgen

Of course, we have a big tailwind if the rate environment improves. You may all recall that we have a sensitivity of approximately DKK700 million to DKK750 million on 25 basis points. On the upside, we have slightly less sensitivity on the downside due to the floor risk of a lot of our products, so that will benefit. But in the very small adjustments around levels, C&I would proportionately gain more than the other units.

Anton Kryachok

That’s very clear. Thank you. And the increase in loan volumes in C&I, is it again sustainable, or is it more driven towards changes by the end of the quarter?

Thomas F. Borgen

There is, as you are alluding to, a – part of the explanation is seasonality here, that we have seen increases in lending from Q4 into Q1 over the last couple of years. So that’s more this activity-based for the C&I clients.

Anton Kryachok

Perfect. That’s very clear. Thank you so much for your answers.

Thomas F. Borgen

You bet.

Operator

Our next question comes from Jakob Brink of ABG. Please go ahead.

Jakob Brink

Thank you. I have two questions, please. The first one is regarding what we already discussed slightly about the new capital model. Just to confirm; so if I do the calculation, last year in C&I, you did roughly 15% return on equity on the allocated capital. Would you have used the current higher level of around SEK40 billion, the return on equity would only have been around 12.5%. Is it correctly understood that you now require C&I to come back up to the 15%, or has the target level changed in connection with the new model?

And then secondly, to the widely debated issue of Danish mortgage rates, could you maybe just give us an update on what you think? I believe this was a few days after you reported that likelihood increased rates. Thank you.

Thomas F. Borgen

I’m sure your mathematics are right. I haven’t done them myself, but I feel [ph] that’s right. Secondly, there is still question that all units will constantly be requested to improve the performance to bring together the parts of making sure that the Group overall remain a very profitable, long-term investment. And short term, we have told you at least 12.5% in 2018 at latest, and that we confirm.

Secondly, we do not guide specific goals on individual units as the Group is too complex and there is too much inter-linkage between them. The target we discussed last time was just to give the directional vibe of where we would expect C&I to contribute to the overall directions going forward.

Jakob Brink

[Indiscernible]

Thomas F. Borgen

To your second questions, we cannot and will not comment on any potential price adjustment of our mortgage products.

Jakob Brink

Okay. That’s okay. Thanks a lot.

Thomas F. Borgen

Thank you.

Operator

Our next question comes from Riccardo Rovere from Mediobanca.

Riccardo Rovere

Just one question. I am interested to have your opinion on asset quality. Do you think that the reversals that you are experiencing in retail banking and in Northern Ireland will continue to be as strong as to – enough strong to offset possible deterioration that you also mentioned in eventually oil or agriculture and maybe shipping in the coming quarters? Thank you.

Thomas F. Borgen

We have said several times that we expect that our impairments will remain low towards 2018, and that has not changed. Being low means that it should probably stay below 10 basis points.

We have had during the last three quarter reversals, and that’s something of course one cannot expect for prolonged periods of time, but it may fluctuate quarter over quarter as single events. But we see no reasons why impairments in the short period of time should stay very low.

When it comes to your three sectors, our agriculture sector is nothing new for us. We have a sizeable book but very small in the sense of the size of the Bank, and we are well provisioned in that sector. I think we are very well provisioned in that sector.

On the oil and offshore sector, we give you some details in the pack. We have a very small exposure. We have stress tested that book for lower, for longer. That means $20 a barrel for a prolonged period of three years. And even on that scenario, our low expectations will not change. That means being below 10 basis points. And we have nothing to report of negative incidents or views on shipping which changes that.

Riccardo Rovere

Okay. Very clear. Thank you.

Operator

Our next question comes from Daniel Do-Thoi of JPMorgan.

Daniel Do-Thoi

Just two questions, please. The first one was on NII. You commented I think last quarter, Thomas, that you expected to see at a Group level NII at least flat year on year with potential upside risk. I just wanted to confirm whether that’s still the case three months on.

And then secondly, and perhaps I’m reading a bit too much into it, but looking at the fact book and the customer numbers that you report in personal banking, that looks that declined by about 2% quarter on quarter. Is that a reflection of more aggressive behavior by your Danish peers taking advantage of the pricing announcements in the market? Or is it just a case that I shouldn’t be reading so much into a single quarter? Thank you.

Thomas F. Borgen

No. Yes, I can confirm, as I alluded to in a previous question that we expect flattish with the risk of upside, and I think Q1 confirms that.

On the second question, actually, we have never had a better customer inflow in the Bank, also in personal, as we have seen in Q1. You should be very cautious to look at these numbers. So we are using something called Nem E there [ph]. That means actually clients who have a full relationship with us, and that is going very well. So that’s why also personal banking are developing well also in Denmark. So we’ve never been happier on the personal side.

Daniel Do-Thoi

So you’re not seeing much switching behavior in the market as a result of the announced price increases?

Thomas F. Borgen

We see it in the sales a positive towards Danske, if that’s what you are asking.

Daniel Do-Thoi

Yes. Thank you very much.

Operator

The next question comes from Christian Hede from Nordea. Please go ahead.

Christian Hede

I’ve two questions. One is on the run-off of the non-core business portfolio. Could you just walk us through how you see that happening? Is it going to be very slowly with the Irish portfolio, or do you expect to see any portfolio sales?

And the second question is on cost and the investments on the compliance side. How big investments are we talking about? Are you planning to do hundreds of extra FTEs, or how should we see that? Thank you.

Jacob Aarup-Andersen

You will notice that we’re showing you a little less information on non-core compared to the full-year numbers as it’s declining all the time. You’re correct that if you look at the current cycle of non-core business, it cites our risk-weighted assets of just below DKK20 billion. The book is basically the remaining of Baltic book and the Irish book, and then some conduits, the majority of this being the Irish book.

We expect this – as you know, it’s very well provided and a very wide book and it’s a performing book. We do expect to occasionally sell off portfolios. We are not sitting here ready to announce a big portfolio sale, but we will constantly look at opportunities to accelerate the run-off if we can do it a good way. But otherwise, we’re very happy to see the book run off gradually. So no drama there. You should expect the continued run-off of the Group quarter by quarter with the occasional sale of a portfolio.

Thomas F. Borgen

Okay. When it comes to compliance, of course, I think it goes with all banks, including Danske that we work very hard and diligently with compliance. We are putting a lot of resources into this area, as we have done in 2014 and in 2015. But it’s nothing which make us change the outlook or which we need to specify in specific.

Christian Hede

Okay. That’s very clear. I hope you have a nice weekend.

Thomas F. Borgen

Thank you.

Operator

Next question comes from Jacob Kruse of Autonomous. Please go ahead.

Jacob Kruse

Hi thank you. This is Jacob from Autonomous So I just wanted to ask, on your commission income side, could you talk a bit about how the quarter developed? How much or to what extent was the beginning weaker than the end? And what are you seeing in terms of activity levels in corporate and the market in April so far?

And then just on the agriculture side, could you talk about how you take the general provisions? Are they now aligned with the latest forecast from agricultural industry associations with respect to operating ratios in agriculture companies, or are you doing this more internally? Thank you.

Thomas F. Borgen

Okay. Let me take the last one first, and then Jacob will respond to your first question. There is no one way you do collective impairment charges. However, we have and will remain very diligent, and some would call, say, conservative of the development of how we see the sector moving on.

We are cautious on the sector. We think it’s going to be a long work period, but taking into account our size, most of it is within Realkredit Danmark and our Alliance [ph] account. It does not need for us to give you any specific guidance beyond what I’ve told you overall.

We have the details in the pack, which you have seen. We have a gross exposure of some around DKK66 billion, and we are very well covered to that. So no particularly new information on that one, and no new pain [ph] points from us on this issue.

Jacob Aarup-Andersen

And then if I can just address your question on commissions on fees, there’s no doubt that we saw a very subdued start to the year in connection with financial markets being very volatile. We do see less client activity when markets become very volatile, as usual.

Then the other thing is, obviously, as the management fees, when assets decline, AuM falls and we see less fees and commissions on the assets. But we did see a pickup in March with the improving financial markets, and we’ve seen that pickup continue in April. So we are not – we haven’t changed our structural view on fee growth as we have guided you to, despite a subdued start to the year obviously driven by the financial markets.

Jacob Kruse

Okay. Thank you very much.

Operator

Your next question from Andreas Hakansson from Exane. Please go ahead.

Andreas Hakansson

Yes thank you. We’ve gone through most things. I just had some smaller questions. Just on fees and commissions, one of the Swedish banks that has been quite active in stock lending over the dividend period said that we’re going to see quite a material slowdown in that area if they choose not to do that. I can’t remember. There was some media, or something mentioned in the media about a year ago about the levels done in Denmark and that. Could you just tell us, are we going to see a slowdown from that activity for you as well in the second quarter?

Thomas F. Borgen

No. The reason is that we have a very marginal business in that area so that will not impact us at all.

Andreas Hakansson

Okay. Great. And then I want to check. You said that you expect no loan loss provisions now for the next coming years, and below 10 basis points also for 2018. Is that the level that you are basing your return on equity target on then?

Thomas F. Borgen

I hope you have seen our bridge, and the bridge consists of several parts. It’s about income initiatives; it is on cost initiatives, and assuming loan losses of 10 basis points.

Andreas Hakansson

Okay. Thank you.

Operator

Our next question comes from Yafei Tian of Citi, please go ahead.

Yafei Tian

I have two questions. One is a follow-up on the fee income. As we understand, the first quarter has been relatively low when it comes to activities. Could you give us more color around the weakness in fee income in the personal and business banking division? How much of this can we see improving going forward from improving activity levels?

And what about some structural changes in the business such as lower interchange fee that could cause a structural decline in the fee income in personal and business banking division?

And then the second question is on cost. It’s more of a clarification. If I were to take full-year 2015 cost number and add back the impairments, I reach a cost number of DKK23.2 billion, roughly. So are we guiding a cost level below DKK23.2 billion for 2016, or it’s a different level that we should be looking at as a reference? Thank you.

Jacob Aarup-Andersen

Thank you very much for those two questions. If we start on the fee income, it’s – you asked for a bit more detail on what we saw in Q1 in terms of PB; sorry, personal banking and business banking. The big effect you need to be aware of in terms of when you look at year on year in the first quarter is the significant remortgaging activity we saw last year which affected our fee income last year. So that we did not see for obvious reasons in this quarter.

Then there is also a smaller effect from the fact that investment funds, the sale of investment funds and the fees on those were smaller due to subdued customer activity. You also asked in terms of interchange fees. That’s not a big impact on Danske due to the way the common debit card model we have in Denmark. We reiterate that we do expect continued fee growth despite this subdued start to the year. We have a number of initiatives, and one of them, as you know, is the new wealth management organization which we expect to help that growth.

And then your other question on the costs side, we’re not guiding towards a specific number. What we have guided towards is that the cost level will be lower this year. We’ve also guided you towards the couple of, you could say, technical effects, one being the deposit guarantee scheme and the Resolution Fund, and the other one being the amortization of customer relations.

So your point is fair, but we are reluctant to guide to a specific number at this stage beyond the fact that absolute costs will be down.

Yafei Tian

Okay. Thank you.

Operator

The next question comes from Chris Manners of Morgan Stanley.

Chris Manners

So I have a question for you. It was just on the EU referendum in the UK and whether you’re seeing any impact on activity levels in the Northern Irish business on account of that. And also, if we were to get a vote to exit the European Union, how do you think about the Northern Irish business? Because obviously, they actually seem to receive more EU subsidies than the rest of the UK, and presumably, your economy could be a little bit more impacted. Just your thoughts around that would be really interesting. Thank you.

Jacob Aarup-Andersen

Yes. I’ll be very cautious to have strong views on how – first of all, how it would turn out, and I can only read what we all read that the probability seems to be slightly lower now for an exit. If there is an exit, most economies and our own economies and myself, we think this is very negative for the EU economy. It will impact the European economy, and will also have some impact on the Nordic economies.

So actually, a Brexit will hurt Europe and the Nordic; probably will impact more on Danske than our operations in Northern Ireland by itself. And the reason is that with all due respect, our very good bank in Northern Ireland only accounts for approximately 5% of the Group’s position. They will be impacted, but in the relative world, they have a very strong position, as you know, with a very strong credit portfolio.

So it will impact, but nothing which will majorly impact the Group by Northern Ireland. But I think that if it happens, we need to look into Europe and how it will impact the Nordics. And here I think we will see slower growth, which may then impact Danske moving into 2018. But, as we advised, not to change our guidance on 12.5%. We still see that even with a Brexit.

Chris Manners

Thank you. That’s really helpful.

Operator

Our next question comes from Omar Keenan of Deutsche Bank.

Omar Keenan

Sorry. I’m sure these questions have already been covered, but what’s your thinking about the re-pricing potential in Denmark? Thank you – on mortgages, that is.

Thomas F. Borgen

Yes. I can repeat what I just said earlier is that we will not comment on any potential future price adjustments. I can just add finally that we will always remain competitive in this area. And I think we are coming to an end, so can I have the last questions, please?

Operator

Our final question comes from Adrian Cighi of RBC. Please go ahead.

Adrian Cighi

Just one follow-up question on trading, please. Can you discuss the approximate size of the negative value adjustment? Is5 this a CBA/DBA [ph] type of adjustment? I’m just trying to understand the underlying performance, if possible, excluding this negative impact. Thank you.

Jacob Aarup-Andersen

Adrian, as you know, we don’t disclose the underlying value adjustment, so we won’t be doing that this quarter either.

Adrian Cighi

Okay. Thank you.

Thomas F. Borgen

Okay. Thank you, all, for your keen interest in Danske Bank and for your very good questions. As always, you’re welcome to contact our investor relations department if you have more questions after you’ve had had time to look at the financial results in detail.

A transcript of this conference call will be added to our website and our app within the next few days. Have a good afternoon.

Operator

Thank you. Ladies and gentlemen, that will conclude today’s conference call. Thank you for your participation and you may now disconnect.

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