Pre-recorded webcast speech
Martin Gottlob, Head of Investor Relations
February 10, 2005
CORPORATE PARTICIPANTS SPEECH
Danske Bank A/S Head of Investor Relations
Danske Bank A/S Head of Investor Relations
Thank you for taking the time to watch this pre-recorded
webcast in which I will clarify how the transition to the
International Financial Reporting Standards, or IFRS, will
affect Danske Banks accounts. My name is Martin Gottlob,
and I am Head of Investor Relations in Danske Bank.
As you know, Danske Bank will present its consolidated
accounts in accordance with IFRS from January 1, 2005. In
order to illustrate the effect of this transition, we have
restated our 2004 accounts in accordance with IFRS.
I will touch upon several important issues and concepts in
this presentation for example loan-loss provisions,
elimination of own shares and bonds, amortisation of
origination fees, the corridor method and valuation of
investment properties. The intention of the presentation is to
clarify what changes are purely optical and what changes are
You can download the presentation from our Investor
Relations Web site. Here you can also find other useful
information regarding the introduction of IFRS. We have
published a white paper and an Excel spreadsheet with brief
comments. This presentation is based on the detailed tables
on pages 20 and 21 in the white paper.
Please go to slide number 2.
The adoption of IFRS affects both the valuation of some
assets and liabilities and the presentation of Danske Banks
accounts. However - and this is important - it does not change
our business per se. A substantial part of the changes are
merely formal and do not affect the underlying business, our
risk profile or financials.
The adoption of IFRS will not have a major impact on our
future P&L. However, there are some material changes when
restating the accounts, since the recently presented annual
result for 2004 is affected by some one-offs. I will get back to
this later in the presentation. I should also mention that the
elimination of own shares will have an illogical effect on our
P&L, but that is also something that I will get back to later.
We do not expect IFRS to bring any significant changes to our
future balance sheet volatility.
Please go to the next slide.
As the slide shows, our restated balance end-2004 is 27 The total effect of the changes is an increase in core capital
billion lower than the balance reported under Danish GAAP. and a slight increase in risk-weighted items. The solvency
This fall is due mainly to changes in valuation. According to ratio therefore improves slightly.
IAS 39, own bonds do not qualify as an asset and are
therefore eliminated. This lowers our assets by 246 billion. Please go to slide number 5.
The changed consolidation of our insurance activities partly
offsets this effect, and increases assets by 194 billion.
Shareholders equity increases due to changes to both I will now turn to the issues affecting the valuation of some of
valuations and presentation.
Danske Banks assets and liabilities. I will run through all
The 2004 result was the best ever for Danske Bank, and to items listed on this slide.
some extent influenced by one-offs, for example gains from
the sale of properties and net gain on loan loss provisions. Please go to slide number 6.
These one-offs create some material restatement effects, but
we do not expect IFRS to affect our P&L significantly in the
future. In total, the changed valuation principles lower our closing
balance for 2004 by 232 billion. This is due mainly to IAS 39,
In total, the restated profit for 2004 is 1.2 billion lower and which states that own bonds do not qualify as assets. These
this is due partly to the elimination of own shares but also the bonds must therefore be eliminated from the balance sheet.
sale of properties and the adjustments to credit loss Shareholders equity increases by 0.9 billion at end-2004
expenses which are one-offs. If we adjust for these one-offs,
due to the reversal of loan-loss provisions. As I mentioned,
the fall in net profit is modest.
the effect on the P&L is dominated by one-offs.
Let us move on to slide number 4.
Let us move on to an effect which has been a hot topic and
received a lot of attention: the impairment of loans and
The combination of falling net profit and increasing
shareholders equity is not kind to return on equity, which falls
Please go to slide number 7.
to 14.0 per cent. However, when we adjust for the one-offs,
there is only a marginal effect on return on equity.
Earnings per share decrease as well. This is again due to the Write-downs of loans and advances has been a frequently
falling earnings. The number of shares outstanding discussed topic when discussing potential impact on our
decreases because of the elimination of own shares. accounts.
Book value per share increase quite significantly because of, Historically Danske Bank has made loan-loss provisions even
the increased shareholders equity. if the probability of default was lower than 20 per cent. This
will not be allowed under IFRS.
Our cost/income ratio decreases slightly party since
earnings from investment portfolios now are integrated in
trading income and core insurance earnings. IAS 39 stresses objectivity. Objective evidence of impairment
exists if, for example, a borrower is in financial difficulty or
The Danish FSA introduced new solvency rules on January 1, actually in breach of a contract. This postpones the write-
2005, partly due to the introduction of IFRS. There are some down until the probability of default is as high as 50 per cent.
important issues in these new rules: The loan will be written down to the present value of expected
future cash flows, including collateral, if any.
- There is no change in the scope of consolidation, that is
no change in the way Danica affects our accounts
IAS 39 also states that recognition of interest income stops
- The profit for the year, less proposed dividends, is still when a loan is written down. However, the net present value
included in the core capital effect from shortening maturity of the written-down loans is
recorded in net interest income.
- According to the new capital adequacy rules, domicile
properties must be revalued at fair value, and the How do these new rules affect our accounts moving forward?
revaluation reserve is recognised as supplementary First of all, there will be no changes in actual loan losses. That
capital is important to keep in mind.
- The market value of the defined-benefit pension
commitments, increases or decreases shareholders
equity and subsequently core capital
In an IFRS regime, provisions will be made at relatively high 449 million at end-2004. The fall is booked against
probabilities of default, or later in the default process so to shareholders equity. This is a one-off effect in the balance
speak. Anticipatory provisions that were made at the bottom sheet. If we assume unchanged activity levels, the P&L will
of the business cycle under Danish GAAP will not be allowed. not be affected significantly in the future.
Subsequently, there will be fewer reversals of provisions at
the top of a business cycle. We will therefore experience Please go to the next slide.
smoother provisions over a business cycle but more short-
term volatility when analysing, a quarterly development for
example. IFRS brings more precise accrual of employee benefits. All
salaries and compensation to employees must be accrued
The restatement of the 2004 balance sheet is fairly over the period in which the employee earns the benefit.
straightforward. We will release 4.7 billion from provisions to
shareholders equity. Assets and shareholders equity I will elaborate further on three important effects:
therefore increase by this amount. - Jubilee benefits
- Holiday allowances
There is also an effect on the P&L. The most pronounced - Holiday supplements
effect is a 777 million increase in loan-loss provisions. This
mirrors the fact that some of the net reversals made in 2004 Firstly, jubilee benefits, which employees receive when they
concerns provisions originally made at a low probability of have been employed in the Group for 25 or 40 years, for
default lower than 50% - and, as I mentioned, this is not example, have until now been booked at the point of payment.
allowed under IFRS. Since these provisions never would have In an IFRS regime, these payments must be accrued over the
been allowed in an IFRS regime, we obviously would not have period in which the benefit is earned. We will use statistical
the subsequent reversal that we saw in 2004. models in order to define the size of these provisions. The
introduction of accrued jubilee benefits creates a one-off
Net interest income falls by 20 million and this is basically a increase in our liabilities. The effect is relatively large, since
net effect of two factors: Danske Banks employees have been employed 17 years, on
average. More precise accrual of costs means lower volatility
Firstly, we eliminate the interest income booked on written- in the P&L moving forward.
down loans. This is a negative effect. Secondly, we also book
the net present value effect from shortening maturity of the Secondly we will change the way we account for holiday
written-down loans under net interest income, and this is a allowance. Until now, we have used statistical models for
positive effect. defining the size of the holiday allowance. Now we will use the
holiday allowance actually earned and actually used instead
Please go to slide number 8. of these statistical models. This means that in periods when
many employees are on vacation, the provisions will be low. In
periods when the vacation activity is lower, the provisions for
Another important issue in IFRS is the treatment of holiday allowances will be high. The future effect of this more
origination fees. precise accounting is a somewhat higher P&L volatility
quarter-on-quarter, but the effect over a year is minor.
IAS 39 states that origination fees should be included in the
calculation of the amortised costs of a loan. These fees Holiday supplements, which have been expensed in the
should be accrued over the maturity of the loan. Until now, second quarter each year under Danish GAAP, will also be
origination fees on conventional bank loans have been booked accrued. The peak in the second quarter will therefore be
as a part of net interest income at the point of payment. eliminated and spread across the year.
However, we have already changed our principles regarding
up-front fees for syndications and other products. In 2004 The transition to IFRS increases liabilities by 395 million at
these fees were accrued over the maturity of the facility, due the end of 2004. This increase is booked against
to changes in Danish GAAP. shareholders equity. These three issues also affect our P&L
slightly. Our costs for 2004 would have been 3 million lower
The net profit for 2004 is affected negatively due to the under IFRS.
accrual of loan fees. The accrued loan fees for 2004 are
moved from the P&L to the balance sheet and entered as a Please go to the next slide.
negative asset which partly offsets the value of the loans. The
effect on the balance sheet is of course more pronounced
due to the accrued fees from previous years, and loans fall by
There will be no change in the accounting for defined- The corridor method, which is the primary method used by
contribution schemes, only changes to the way we account other financial institutions in the Nordic countries and in the
for defined-benefit schemes. With this in mind, let us look at UK that have defined-benefit schemes, has one important
the details. advantage: It mitigates P&L volatility since short-term
underfunding only affect the balance sheet. The method also
The majority of Danske Banks pension commitments are makes good sense since our pension obligations and
defined-contribution schemes. As you may know, we have had investment strategy are long-term and not short-term.
defined-contribution in Denmark since 1982. The 2004
policy of expensing contributions made to defined- How does this affect the restatement? First of all, our
contribution pension schemes will be unchanged in the world operating expenses increase by 90 million. This effect can be
of IFRS. explained mainly by the expected pension costs in Norway
and Sweden. The item is somewhat extraordinary, since in
IAS 19 provides for an increase in the number of pension 2004 we had an actuarial gain on our scheme in Norway due
schemes recognised in the balance sheet. We will include to favourable developments in the capital markets. The
some schemes in Denmark which previously have not been expected cost is therefore significantly higher than the stated
included. cost for 2004. I should also mention that the net deficit of
January 1 in our defined-benefit schemes have been booked
When discussing pension commitments, the most important over shareholders equity.
change in this area upon the adoption of IFRS is the
accounting treatment of our defined-benefit schemes. We As I mentioned, IFRS increases the number of pension
have defined-benefit schemes in Sweden, Norway, the UK and schemes which should be included in the accounts. The
some schemes in Denmark. I should also mention that there assets and liabilities therefore increase accordingly. Assets
are significant defined-benefit schemes in Northern Ireland increase by the net assets in overfunded pension schemes
and the Republic of Ireland, and they will be added to our and liabilities increase by the net liabilities in underfunded
balance sheet when National Irish Bank and Northern Bank pension schemes.
If we assume unchanged staff composition, interest rate and
Danske Bank will use the IAS 19 corridor method when salary trends, there will be no material effect on future
accounting for the defined-benefit schemes. The expense in profits. The corridor method will, as I mentioned, mitigate the
the P&L will therefore be based on an estimate of the volatility of our P&L.
expense for the year.
That should cover the major issues related to pension
In the world of IFRS, defined-benefit schemes will still be commitments.
subject to an actuarial estimate of the present value of future
benefits. Expected salary levels, interest rates, inflation and Please go to slide number 11.
mortality, are important parameters in these estimates. The
net pension obligation is calculated as the difference between
the present value of the future benefits and the fair value of The elimination of own shares is a very important issue for
the schemes assets. Danske Bank, and I would therefore like to spend some time
Any difference between the estimated development of the
schemes assets and the defined-benefit commitments on the Under Danish GAAP, own shares were stated at fair value
one hand, and actual amounts on the other will result in and market value adjustments of these shares were booked
actuarial gains or losses. in the P&L. Own shares that were acquired with a view to
reducing share capital were recognised at zero value, and the
If the cumulative actuarial gains or losses exceed the greater cost of acquiring these shares was charged directly to
of 10 per cent of the defined-benefit commitment or 10 per shareholders equity. Own shares held on the behalf of
cent of the fair value of the schemes assets, the gain or loss holders of pooled schemes and the policyholders in Danica
exceeding the 10 per cent will be recognised in the P&L. The did not impact the result.
gain or loss will be amortised over the employees expected
remaining working lives with the Group, which means that the In an IFRS regime, own shares do not qualify as an asset and
corridor effect in a single year might be quite modest. must therefore be eliminated from the balance sheet.
Actuarial gains or losses not exceeding the 10 per cent limit Consequently, the returns from these shares must be
are not recognised in the P&L but in the balance sheet. eliminated from the P&L. Note that this includes all own
shares those acquired by the Groups trading department
and also oddly enough - those acquired on the behalf of Holdings of own bonds also fail to qualify as an asset in an
holders of pooled schemes and Danicas policyholders, where IFRS regime. Own bonds must therefore be eliminated from
the risk and return resides outside the Bank. The purchase of the balance sheet. Unfortunately, this elimination is not
own shares must be treated as a reduction and the sale of without problems, since the assets and liabilities are valued
own shares will be treated as an issue of shareholders at different principles.
The IAS 39 adopted by the EU, states that issued mortgage
This has some implications for our restated P&L and balance bonds, a liability, should be valued at amortised cost and that
sheet. Positive market value adjustments and dividends the portfolio of mortgage bonds, an asset, should be valued at
received for 2004, must be neutralised in the P&L. As you fair value. The bonds that will be eliminated will therefore be
can see from the slide, trading income falls as an effect of valued according to two different principles. This creates an
that. The balance sheet is also affected negatively. Assets illogical effect, and we believe it actually distorts a true and
and shareholders equity fall. fair view.
In the future, capital gains and losses on buying and selling In order to overcome this obstacle, we have decided to use
own shares will affect shareholders equity when they are the possibility to override in IAS 1, for your information article
realised. We can easily live with that when it comes to the 17, and we will subsequently value the issued bonds at fair
shares that we actually own ourselves and where we carry value as well. Fair value is here defined as the current stock
the risk. exchange price. The chosen method is an override of the EU-
approved IAS 39, but the chosen method complies with the
However, IFRS also gives us some headaches. As I Danish accounting rules, set out by the Danish FSA and the
mentioned, Danske Bank buys own shares for the holders of IAS 39. The liquid Danish bond market and the fact that
pooled schemes and for Danicas policyholders. We do this in mortgage loans always can be repaid with the underlying
order to obtain a sufficient diversification of the customers mortgage bond, makes this override possible.
portfolios. Danske Bank is a dominant company in the Danish
market and is therefore an important element in a well- This decision affects Mortgage Finances balance sheet and
diversified investment portfolio. therefore also the consolidated Groups balance sheet. The
issued bonds and the corresponding mortgage loans are as
The holders of pooled schemes and Danicas policyholders mentioned valued at fair value instead of nominal value. As
receive the gains or losses and bear the risk on these assets. the markets stand now, this change increases assets and
In the future, the gains and losses paid to these customers liabilities. Please note that shareholders equity is not
will affect our P&L, but we cannot neutralise these bookings affected. Assets and liabilities are now stated according to
since the underlying gains and losses, as I mentioned, must the same principles, and the elimination can be made without
be eliminated from our P&L. Realised gains and losses will be an illogical effect on the P&L.
booked against shareholders equity.
Please go to the next slide.
If we assume that our share price normally will increase, our
P&L will be negatively affected and our profit understated.
This is not logical and not intuitive, but that is how it will be. Let us finish the discussion regarding elimination of own
We will, however, disclose this effect to you in the future. The bonds. Since holdings of own bonds do no qualify as an asset,
elimination reduces our trading income for 2004 by 387 purchase of own bonds is considered to be a redemption of
million. Approximately 40 per cent of that amount is own bonds, and sale of own bonds is considered to be an
attributable to the holdings in pooled schemes and the issue of bonds.
holdings in Danica.
Danske Bank acquires its own mortgage bonds as a part of
The illogical treatment of gains and losses related to the its mortgage finance operations, liquidity management and of
pooled schemes and the Danica shares will increase the P&L course long-term investments.
volatility. However, the other effects from the elimination of
own shares decrease P&L volatility. If we look at the restatement effect in the table on the right-
hand side of this slide, we note that the elimination of own
Please go to the next slide. bonds affects the P&L and the balance sheet. The P&L effect
is merely an internal shift the interest paid to the holders of
pooled schemes has been moved from net interest income to
The elimination also lowers both assets and liabilities by Domicile properties will continue to be valued at cost less any
approximately 246 billion at end-2004. I should also mention depreciation and write-downs. We have chosen not to use the
that the numbers on this slide do not include the bond option of revaluing domicile properties at fair value. The
portfolio held in Danica so the total effect of elimination of revaluations we have booked previously will therefore now be
bonds is actually somewhat higher. reversed.
Let us move on to slide number 14. The effect on our accounts is fairly straightforward. The fair
value of our portfolio of investment properties is larger than
the cost value previously used. This has of course a positive
There are two highlights to note regarding share-based effect on our assets and shareholders equity. On the other
compensation: hand the balance is reduced by the reversal of previous
revaluations of our portfolio of domicile properties. However,
Firstly, costs for the various incentive schemes should be the positive effect from investment properties is greater.
accrued, and secondly, share-based compensation by own
shares is affected by the elimination rules I mentioned earlier. As I mentioned the transition to IFRS increases our book
value of investment properties. As I hope you know, we sold
Our share-based compensation consists of: quite a substantial part of our portfolio of investment
- share options properties in 2004, and if those transactions had been made
- conditional shares and in an IFRS regime, our profit would be lower. The P&L is
- employee shares therefore adjusted accordingly. The depreciations are also
somewhat lower since we have reversed the depreciations
IFRS 2 states that the fair value of share-based made to our investment properties.
compensations must be accrued over the time period in
which the compensation is earned. The expense will be Let us move on to the next slide.
counter booked against shareholders equity.
How do these issues affect our accounts? There are only minor effects regarding leasehold
improvements. There is no change in the valuation method.
First of all, we have neutralised the market value adjustment Leasehold improvements will also be valued at cost less
of the obligation for share-based compensation. The fair value depreciation and write-downs in an IFRS regime. Depreciation
of our share has increased, which means that our obligation is determined according to the straight-line method over the
has increased and our trading income has therefore been term of the lease, with a maximum of 10 years.
negatively affected. This is now reversed and our trading
income increases accordingly. However, leasehold improvements made before 2003 will
now be capitalised. This means an increase in assets and an
Secondly, the liability in own shares is eliminated and offset increase in shareholders equity. The only effect on the P&L
by an increase in share-holders equity. The balance sheet concerns depreciations which have been adjusted to include
effect on this slide should therefore be seen in conjunction the capitalised leasehold improvements prior to 2003. The
with the elimination of own shares discussed earlier. capitalisation also affects the level of our depreciations in the
Please go to slide number 15.
Please turn to the next slide.
Our property portfolio is divided into domicile properties and
investment properties. Investment properties are properties Mortgage Finance issued a number of loans before 1972
that we own to earn rentals and capital appreciation. where the borrowers are entitled to be repaid their deposits
Domicile properties are properties that we own and use for when the loan is redeemed. Pre-IFRS, the provision was
administration, branch activities or other activities. carried at par, but this will now change. IFRS state that such
provisions must be recognised at present value, which is
The transition to IFRS requires new valuation principles for obviously lower than par.
our portfolio of investment properties. These properties will
now be recognised at fair value instead of cost less
depreciation and write-down, as they were under Danish
The value of our repayable reserves, a liability, falls and When valuing investment contracts, the present value of
shareholders equity increases accordingly. expected administrative results is not deductible from
provisions. On the other hand, sales commissions will be
Net interest income falls due to the net present value effect accrued according to IAS 18.
created by the maturity reduction of the reimbursement
obligations. Trading income falls due to the changed How does this affect our accounts? Let us start with the P&L
repayment pattern during 2004. The actual repayment and the result from the insurance business, which is affected
pattern is different from that expected when estimating the by two things: Firstly, the accrual of sales provisions
discounted value of the reimbursement obligations in the increases the income from the insurance business. Secondly,
beginning of 2004. Our customers are actually repaying the the present value of expected administrative results, which
loans faster than expected. has been deducted from the provisions under Danish GAAP,
is reversed and this decreases insurance income. The
Please go to slide number 18. second effect is the larger so the net effect on our P&L is
small, but negative.
Under Danish GAAP, outstanding claims provisions were As you can see, the balance sheet is also affected. The
estimated without including the direct and indirect costs that liabilities in Danica increase, since the expected
we expect to pay in order to fulfil the obligations. According to administrative results no longer are deductible from
IFRS, these costs must be included. investment contracts. The increasing liabilities are offset by a
decrease in Danicas shareholders equity. Let us still assume
The impact on the accounts is straightforward. equity-consolidation. The decreasing shareholders equity in
Danica will therefore reduce the assets and shareholders
Let us start with the balance sheet. Danicas liabilities equity of the consolidated Group.
increase when the costs are included in the provisions and
the shareholders equity decreases proportionately. Let us Next slide please.
assume that we still are consolidating Danica using equity-
consolidation. A fall in Danicas shareholders equity
therefore creates a corresponding fall in the Groups assets Until now, we have not included the market value of hedged
and shareholders equity. risk or the market value of the derivatives used for the
hedging in our balance sheet. These two items has merely
The inclusion of costs also has a minor effect on the P&L. been offset against each other. Our P&L has therefore not
Increasing activity in Danica means higher cost allocation to been affected by neither market value adjustments of the
outstanding claims and subsequently a slight fall in the hedged risk nor market value adjustments of the derivatives
income from insurance business. used.
Lets move on to the next slide and discuss unit-linked When moving into an IFRS regime, the derivatives used for
schemes. hedging must be recognised at fair value and the value
adjustment on these derivatives will be carried in the P&L
under trading income. Furthermore, the hedged interest rate
Pre-IFRS, provisions on unit-linked schemes were valued on risk will also be included in the balance sheet and recognised
the basis of the share of the linked unit trusts held in the at fair value. The market value adjustments to this hedged
individual policies less the present value of expected future risk will also be carried in the P&L.
administrative results. This valuation policy will be changed
for investment contracts, but not insurance contracts. Since the derivatives and the risk now must be included in the
balance sheet, assets and liabilities increase accordingly.
In an IFRS regime, each individual unit-linked scheme must be
classified either as an insurance contract or as an We use derivatives to hedge the interest risk on fixed-rate
investment contract. An investment contract must be operating leases in Nordania. Under IFRS, hedge accounting
treated in accordance with IAS 39. At the end of 2004, for operating leases is not possible. The market value of the
Danske Bank had approximately 11 billion in unit-linked derivatives used should therefore be included in the balance
schemes: 6 billion in insurance contracts and 5 billion in sheet, but there is no corresponding inclusion of the hedged
investment contracts. risk on the asset side. Since the derivatives at present have
negative market values, our shareholders equity must
absorb this effect and therefore falls.
If IFRS were applied in 2004, there would have been a Let me give you an overview of the changes. The changes in
negative market value adjustment in the P&L for the year. the presentation produce increasing assets, liabilities and
The restated accounts therefore include a negative effect on shareholders equity. This is due mainly to the fact that we
trading income. replace the equity-consolidation of Danica with another
consolidation method, and include our securitisation
Please go to slide number 21. activities in our accounts. The shareholders equity is
affected by a reclassification of dividends.
IFRS change the way currency translation differences are The introduction of IFRS does not implicate any material
booked. However, they do not change the policy for the changes to our net profit.
exchange rates used.
However, there is another important change introduced in
The balance sheet will still be translated at the exchange conjunction with IFRS but which is not due to IFRS itself. The
rates that are valid on the balance sheet date. Income and earnings from investment portfolios will be split in three
costs will still be translated at the exchange rate at the time parts.
of recognition. However, under IAS 21, all translation
differences that arise when we translate the amounts at a Please go to slide number 25 and discuss this split further.
foreign unit must be recognised directly in shareholders
equity as a separate reserve. Until now we have realised
these translation differences in our P&L.
As I mentioned we will divide earnings from investment
Net investments in foreign units will still be hedged. The net portfolios into three parts:
effect of this will also be included in shareholders equity.
- Investment earnings, Danica, which will be integrated in
There is a minor effect on our P&L as a result of this change. earnings from insurance business,
In 2004 we had a negative translation difference of 32 - Investment earnings, Banking business less costs which
million, and this is now neutralised. will be integrated in trading income,
- The related costs will be included in operating costs for
Next slide, please. the Group
This is not a change due to IFRS per se. It is a change that we
We have gathered the tax effect into one exhibit for you. found reasonable to implement when implementing IFRS.
However, there is also a tax effect in Danica which is worth
mentioning and treating as a separate issue. There are two important reasons for this change:
1. Interest rate risk is an important feature for both trading
Deferred tax in Danica has been discounted according to income and earnings from investment portfolios. By
Danish GAAP. This is not permitted after the transition to gathering the two we are isolating the interest risk in one
IFRS. Deferred tax must instead be stated at nominal value, line,
which obviously is higher than discounted value. This means 2. All costs are gathered under operating expenses
that the liabilities in Danica increases and that shareholders
equity in Danica decreases by 297 million. Let us keep the There is of course no effect on net profit and no effect on our
assumption of equity-consolidation of Danica. A fall in future risk taking. The key effect is that trading income will be
Danicas shareholders equity therefore causes a fall in the more volatile and highly dependent on the development in the
assets of the Group. capital markets.
Please go to the next slide. I should also mention that the split affects our cost/income
Let us leave the changes in valuation and move on to the Please go to slide number 26.
changes in how we present our accounts under an IFRS
regime. I will cover all items listed on this slide.
IFRS state that financial instruments should be classified
Next slide please. according on an intention-based approach, and not a product-
based approach which has been used under the Danish
This prompts some changes to the items in our balance After the transition to IFRS, these contracts are therefore
sheet. Firstly, we introduce a trading portfolio on the asset as booked under Assets held in pooled accounts and unit-linked
well as on the liability side. The trading portfolios will consist schemes, which in the financial highlights is a part of other
of the financial assets acquired and liabilities incurred with assets. The corresponding deposits will be presented
the intention to sell or repurchase within a short period of separately from all other deposits as Deposits in pooled
time. The trading portfolios will also include portfolios of accounts and unit-linked schemes, which in the financial
financial assets and liabilities that are managed together and highlights is a part of other liabilities. The deposits will be
for which there is a recent actual pattern of short-term profit- valued at the value of the savings.
taking. We will include all derivatives in the trading portfolios
as well. Interest on pooled assets and deposits will no longer be
recognised under net interest income, but under trading
Secondly, we will create a new item: Investment securities. income, which includes all other returns on pooled schemes.
This item will include securities that are not carried under the This explains the transfer of a negative 180 million from net
trading portfolio or assets under insurance contracts. interest income to trading income.
As you can see, these changes do not affect our According to IFRS, the portion of the assets invested in
shareholders equity or net profit. They are merely a Danske Bank shares and own bonds, will be eliminated from
reclassification of existing assets and liabilities. We have also the consolidated accounts. This explains why the fall in
moved dividends paid on assets in the pooled schemes, which deposits is higher than the fall in bonds and shares.
according to Danish GAAP were included in other income in
the financial highlights. Let us move on and look at goodwill. Please go to slide
Please go to slide 27.
Under Danish GAAP, goodwill was capitalised and amortised
Until now, Danica has been consolidated using the equity over the expected useful life of the asset, with a maximum of
method or one-line-consolidation if you like. The Groups 20 years. However, goodwill on acquisitions made before
securitisation activities have not been included in our 2002 was written off against shareholders equity in year of
accounts. the acquisition.
Under IFRS we will change the consolidation method used for The IFRS guidelines regarding goodwill are to be found in IFRS
Danica. From now on, we will consolidate Danica using 3, Business combinations. Goodwill will now be capitalised
designated lines in the balance sheet. The securitisation and tested for impairment. If evidence of impairment is found,
activities will be consolidated on a line-by-line basis. the goodwill is written down accordingly.
This means that 205 billion is added to the balance sheet at We have decided to apply IFRS 1 to the goodwill created in
end-2004. The P&L is also affected by the consolidation acquisitions made before 2002. This goodwill will therefore
also by a portion attributable to minority interests. not be capitalised. We have not made any significant
acquisition since 2002, so our accounts have not been
The Groups financial highlights will still show earnings from adjusted. The acquisition of National Irish Bank and Northern
insurance activities excluding funding costs, on one line. Bank is not yet approved by the relevant authorities, so that
will not be adjusted either. However, when that day comes,
Let us move on to the next slide. goodwill will be capitalised and subsequently subject to
The introduction of IFRS requires that all assets belonging to Let us move on to slide number 30.
investment contracts be gathered under other assets and all
returns on these contracts be gathered under trading
income. Let us look at the details. Nordania is a lessor of operating leases. Under 2004
accounting policies, we recognised our operating leases as
Under Danish GAAP, pooled assets and deposits, the return loans and advances and carried them at amortised cost. Net
on pooled assets, and interest on pooled deposits were income, which consists of lease payments less depreciations,
recognised on a line-by-line basis. Under IFRS, they should be was booked under net interest income. Please note that this
valued at fair value and be separated from other assets. booking was a net number.
We are also reclassifying some mortgage loans as bank
IAS 17 states that assets leased out under operating leases loans.
must be recognised as tangible assets and treated
accordingly. The portfolio of lease assets consists of After the implementation of IFRS, the asset mortgage loans
properties which should be valued as investment properties, consist only of loans that are valued at fair value, that is, the
and cars and other assets which should be carried as loans in the Mortgage Finance division. As I mentioned
tangible assets. Investment properties will, as I mentioned, be earlier, we have decided to value these loans at fair value in
valued at fair value, and tangible assets will be carried at cost order to maintain a true and fair view of our accounts. Other
less depreciation and write-downs. Income from the whole lending will be presented as loans and advances to
lease portfolio will be recognised under other income, and the customers. The reclassification has no effect on
depreciations and write-downs will be booked under shareholders equity or net profit.
operating expenses and depreciations.
As you can see on the slide the reclassification creates a
This has one implication for the grouping in our balance minor decrease in total assets. The rationale behind this is
sheet. The portfolio of operating lease contracts is moved that assets and liabilities that are created in relation to pre-
from bank loans and advances to other assets. There are, issues of mortgage bonds are replaced by market valuation of
however, more important changes to the P&L. We will now these issued bonds.
book lease income under other income and book depreciation
and write-downs under operating expenses. This means that Please go to the next slide.
we move a net 304 million from net interest income to other
income, which increases by 1,072 million, and costs, which
increase by 768 million. But keep in mind that there is no As you already know, we own several properties. Some of
effect on the net profit. them are rented out to external parties, and some are used
However, the change will have an adverse effect on our
cost/income ratio. As you can see, the implied cost/income Danish GAAP has put quite a lot of emphasis, on showing
ratio from this change is 72 per cent, and that is quite high how much we have earned from owning properties and how
compared with the average cost/income ratio for the Group. much we have spent in using properties. In order to comply
with these rules, we have gathered the earnings related to
Please turn to slide number 31. our property ownership under the line Net operating income
from property, which is a part of other operating income.
Since all rent income is included in this line, it also includes
As mentioned earlier in this presentation, we have decided to rent income received from own business units that rent
value issued mortgage bonds at fair value. Other issued space in properties owned by the Group. The same amount is
bonds will still be valued at amortised cost. We have also included in expenses for rent, which are booked under
therefore chosen to separate the mortgage bonds from all operating expenses and depreciations.
other issued bonds.
IFRS changes this. Under IFRS, these items must be
IFRS also state that premiums and discounts on eliminated. The implication of this is very simple: other
subordinated debt must be included in the calculation of income falls by 454 million, and operating expenses fall
amortised cost of this debt. accordingly. As you can see, there will be no net effect on
The changes described have a fairly straightforward effect on
our accounts. The main effect is that issued bonds and Please go to slide number 34.
subordinated debt decrease and other liabilities increase.
Note that the increase in other liabilities is lower than the fall
in the other debt items. This difference mirrors the fact that Let us resolve one more issue regarding earnings related to
the discounts and premiums on subordinated debt now are our ownership of property. Net income from property is, as
included in the calculation of amortised cost. There is the name implies, a net number. It consists of income less
therefore also a minor negative effect on our total assets. expenses. These items should now be stated gross, that is,
allocated to income and costs accordingly.
Please move on to slide number 32.
This problem is solved by moving the costs part of the net
result, from other operating income to operating expenses
and depreciation. Again, there is no net effect on profit.
Please go to the next slide.
Danish GAAP stated that proposed dividends should be
booked as a liability. IAS 1 states that the proposed dividend
for the accounting year must be included in shareholders
equity until the AGM.
This is simply a move from liabilities to shareholders equity,
so there is no net effect on the balance sheet. As I mentioned
earlier, the dividends are also included in the shareholders
equity in our solvency statements.
Please go to slide number 36.
That concludes my presentation.
I have in detail shown how the transition to IFRS affects our
balance sheet and P&L. I have emphasised that the 2004
P&L is affected by one-offs which affect the restatement. We
do not expect any significant changes to our P&L going
forward. The balance sheet is affected by a number of issues,
but we do not expect our balance sheet volatility to change
significantly under IFRS.
Once again I think that it is important to stress that IFRS does
not affect Danske Banks underlying business. In order to
provide you with solid material, we have published extensive
information on our Web site. I can recommend that you read
the white paper and get an overview in the Excel spreadsheet.
You are of course also always welcome to contact us in
Investor Relations if you have any further questions.
Thank you for your attention.