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Company release 6-2009 - FIH Financial Report 2008
Net profit for the year of DKK 184 million
Satisfactory net interest and fee income in the FIH Group
Negative market value adjustments in 2008
Large writedowns in the FIH Group of DKK 494 million
Profit for the year
The net profit for the year 2008 is DKK 184 million, or DKK 939 million lower
than in 2007. The profit before taxation is DKK 208 million, or DKK 1,068
million below the 2007 figure.
FIH and the situation in the financial sector
In early October 2008, FIH's parent company, Kaupthing Bank, was put into
administration by the Icelandic government. Since then, the Icelandic owners
have been attempting to sell FIH, but this has not been possible in the current
financial climate.
FIH is “ring fenced” in relation to Kaupthing; therefore, FIH has not suffered
any losses as a result of the Icelandic crisis and the collapse of Kaupthing,
nor has FIH any direct or indirect Icelandic risks on its books.
In response to the collapse of Kaupthing and the current financial market
situation, FIH decided, in early January 2009, to refocus its business strategy
to concentrate on its core business, i.e. lending to corporate customers, and
two advisory-based business units: Corporate Finance (FIH PARTNERS) and
Financial Solutions (advice on strategic risk management and liability
management). Consequently, FIH has shut down the business areas Equity Trading
and Research and Wealth Management. FIH's staff and support functions have also
been resized to the new business strategy, thereby reducing employee numbers by
94 positions, or 21 per cent. FIH now has 358 employees.
As will appear below, earnings from FIH's net interest income are satisfactory.
Following the refocusing of its business strategy, FIH will be well placed to
meet the challenges ahead in 2009.
FIH applied for membership of the Private Contingency Association in autumn
2008 and is thus covered by the government guarantee scheme (Bank Package I),
which has had an overall positive impact on the funding situation. As far as
Bank Package II is concerned, FIH will no later than June decide whether or not
to take advantage of the opportunity to receive government funds.
Activities
Net interest income from the Bank's lending activities in 2008 is quite
satisfactory. During the last couple of months of 2008, the funding situation
stabilised, positively impacting net interest income. Total loans outstanding,
including investment properties, are at a satisfactory level, totalling DKK 74
billion at year-end 2008 relative to DKK 76 billion a year earlier. Like the
rest of the financial sector, FIH is affected by higher writedowns.
In 2008, FIH PARTNERS A/S (Investment Banking) completed a total of 14
transactions at a total value of DKK 116 billion and recorded satisfactory
earnings - despite a difficult market situation. Demand for FIH PARTNERS'
products has changed in response to financial market developments. In 2009,
restructuring, mergers and other structural transactions are likely to come
more to the fore.
The earnings of FIH Capital Markets from interest rate instruments, balance
sheet management products and other products targeting the Bank's loan
customers were satisfactory in 2008. Commission income from shares, in
particular, fell short of expectations, however, prompting FIH to refocus
activities on its core business as described earlier.
Moreover, market value adjustments of the Bank's own holdings are affected by
the financial market turbulence, entailing that market value adjustments are
significantly lower than in previous years.
FIH's accounting policies are consistent with those applied for the previous
year. FIH has decided not to apply the amendment to IAS 39 on reclassification
of certain financial instruments from fair value measurement to amortised cost.
At year-end 2008, FIH has drawn a total of DKK 11.9 billion under the DKK 15
billion credit facility agreed with ATP when FIH Kapital Bank was established
in Q1 2007. The setting up of FIH Kapital Bank provides great flexibility for
FIH in terms of liquidity and continues to prove its worth in the current
financial market situation. At the turn of the year, FIH's liquidity position
is sound, with liquid assets of DKK 15.8 billion.
On 1 April 2008, FIH launched online banking services, specialising in deposits
from retail customers - and from the beginning of the New Year 2009 also
deposits from corporate customers - FIH Netbank Pro. In just nine months, FIH
has achieved deposits of DKK 1,886 million and FIH expects to see continued
growth in this customer segment.
Net interest and fee income
Net interest and fee income for the period amount to DKK 1,510.0 million, up 9
per cent on the 2007 figure.
Interest income from loans and other receivables increased by 17 per cent to
DKK 4,825.6 million. The increase is attributable mainly to a higher average
interest rate on the loan portfolio in combination with a higher average loan
portfolio than in 2007.
Interest on bonds is DKK 1,100.8 million, up from DKK 790.8 million in 2007.
The increase in interest income from bonds is attributable mainly to larger
bond holdings compared with last year.
Interest on derivative financial instruments, mainly interest income and
interest expenses linked to swaps, amounts to DKK 21.9 million relative to DKK
25.6 million in 2007. FIH uses swaps to hedge interest rate risks in its
general interest rate risk management and in customer transactions.
Interest income increased by a total of DKK 735.8 million to DKK 6,144.8
million relative to 2007.
Interest expenses increased by a total of DKK 568.9 million to DKK 4,859
million compared with 2007.
Fees and commission income declined by DKK 53.9 million to a total of DKK 250.9
million relative to last year. The fall is driven mainly by a decline in fee
earnings from Investment Banking.
Market value adjustments
The market value adjustment is a negative DKK 53.5 million, compared with a
positive adjustment of DKK 510.0 million in 2007.
The market value adjustment of mortgage loans is DKK 3.7 million, which is
cancelled out by corresponding income under market value adjustment of mortgage
bonds issued. The market value adjustment of loans, etc., at DKK 447.8 million,
relates to loans hedged by financial instruments. The market value adjustment
of bonds is DKK 447.8 million against a negative DKK 234.3 million in 2007. The
market value adjustment of shares is DKK 18.9 million against DKK 632.3 million
in 2007, while the market value adjustment of foreign currencies is a negative
DKK 39.7 million relative to a negative DKK 6.0 million in 2007.
Investment properties (operating leasing) are fair value adjusted by DKK 8.3
million, which amount is roughly equivalent to the repayment portion of the
lease payment recognised under the item “Other operating income”. There is a
negative market value adjustment of derivative financial instruments totalling
DKK 429.3 million. Bonds issued refer to mortgage bonds issued as well as bonds
issued and hedged using financial instruments. The market value adjustment is a
negative DKK 511.0 million.
Other operating income
Other operating income totals DKK 95.7 million against DKK 85.9 million in 2007.
Expenses
Expenses are up by DKK 126.2 million to a total of DKK 867.6 million. The
average number of employees is 396, up from 335 in 2007.
Losses and writedowns
Writedowns amount to DKK 494.4 million, up DKK 513.8 million on the 2007
figure.
New writedowns total DKK 583.4 million in 2008, compared with DKK 87.4 million
in 2007. In 2008, writedowns of DKK 86.0 million were reversed, DKK 15.5
million less than in 2007. In addition, DKK 3.0 million was received on claims
previously written off, taking net writedowns to DKK 494.4 million.
Net losses recognised for the year are DKK 217.5 million against DKK 47.4
million in 2007.
Balance sheet
Total loans, including investment properties, are down by DKK 2,378 million,
equivalent to 3.1 per cent since the beginning of the year, to a total of DKK
73,767 million.
Bond holdings amount to DKK 29,296 million, relative to DKK 13,639 million at
year-end 2007.
Holdings of shares and investments in associates total DKK 1,332 million,
compared with DKK 1,017 million at year-end 2007.
Bonds issued amount to DKK 32,681 million, relative to DKK 53,632 million at
year-end 2007.
Equity and solvency
The Group's equity is DKK 7.8 billion at year-end 2008, including the profit
for the period to which subordinated debt in the amount of DKK 3.0 billion can
be added. Accordingly, the Bank's capital base (liable capital) is DKK 10.8
billion.
At year-end 2008, the Group's solvency ratio is 11.9 per cent, while the core
capital ratio is 8.8. The 2008 solvency ratio has been calculated using the
Standardised Approach under the new Basel II Accord; thus the ratio is not
directly comparable with historical solvency figures, but is largely the same
for 2008, as it would have been using the previous method.
At year-end 2007, the corresponding figures were 11.5 per cent and 8.4 per
cent, respectively.
Basel II
FIH Erhvervsbank reports solvency ratios for credit risk in accordance with the
provisions of Executive Order on Capital Adequacy, the Standardised Approach,
under Pillar I. The Standardised Approach is also applied to market risk, while
the Standard Indicator Method is applied to operational risk. The use of method
is unchanged relative to Q3 2008. In addition, parallel reporting of solvency
ratios in relation to credit risk is done to the Danish Financial Supervisory
Authority using the Internal Ratings-based Approach (Foundation).
Credit Risk
For all exposures, a review of individual exposures is conducted at least once
a year. As part of this review, new financial information is examined and
ratings are updated, among other things.
Monitoring of credit exposures is undertaken centrally based on FIH's credit
system, which contains all material information on the size and utilisation of
exposures, collateral provided and estimated realisable value, etc.
Risk & Legal continuously monitors the scope, diversification and quality of
the loan portfolio, reporting its findings on an ongoing basis to the Executive
Board and, periodically, to the Board of Directors.
Rating models are used in conjunction with individual credit ratings of
customers. Corporate customers are rated using the Corporate Rating Model. The
rating scale of the Corporate Rating Model goes from 1 to 12, 12 being the best
rating. The model also calculates the probability (PD) that, within the next 12
months, the individual customer will not be able to meet his financial
obligations towards FIH. Public institutions, etc., are assigned the rating of
13. The model calculates the probability that the individual customer will not
be able to meet his financial obligations towards FIH in accordance with the
Basel II rules (i.e. will default on his financial obligations). A debtor's
exposures are in default if they have been in arrears for more than 90 days, or
if FIH believes that it is unlikely that the debtor will pay off all of his
financial obligations without FIH's intervention, e.g. in the form of
realisation of collateral or guarantees.
The Corporate portfolio is distributed as follows on the rating scale. Rating D
represents customers in default.
Ratings 7-13 correspond to investment grade as defined by the credit rating
agencies, while ratings 4-6 are below investment grade, representing the BB
rating category and being of acceptable credit quality. Ratings 1-3 include
weaker customers, corresponding to the single B segment of the credit rating
agencies. These customer relationships are followed closely. Rating 0 covers
the weakest and most risky customers, corresponding to the C-CCC segment of the
credit rating agencies.
In 2008, particularly in H2 2008, the credit quality of the loan portfolio has
shown a negative trend, with increasing average default probabilities and a
rise in the number of defaults.
Market risk
Market risk is the risk of loss arising from adverse changes in the market
value of the Bank's assets, liabilities and off-balance-sheet items. Market
risk includes interest rate, foreign exchange and equity risk.
The market risk of the Bank's total balance sheet (including the market risk
not included in the trading portfolio), calculated as the Value-at-Risk of
interest rate, foreign exchange and equity risks, is DKK 20 million at the end
of December 2008.
Value-at-Risk adopts a portfolio approach in the calculation of market risk for
financial assets. Thus, in the calculation of asset risk, allowance is made not
only for the standard deviation, but also for the inter-correlation of assets.
Using Value-at-Risk, it is possible to summarise, in a single figure expressed
in DKK, the total risk of the Bank's balance sheet. FIH's Value-at-Risk is
calculated at 99-per-cent probability and at a one-day horizon. Thus FIH, at
99-per-cent probability, does not expect to lose more than the figure indicated
by the Value-at-Risk model on any given day.
Funding and liquidity
FIH's large holdings of cash and cash equivalents at the beginning of the year
and the DKK 15billion ATP facility have been key success factors in a trying
year for banks and financial institutions. Thanks to the cash holdings, cash
equivalents, and the ATP facility, FIH has been able to conduct business more
or less as usual with its core customers, although it has been necessary to
raise interest rates on loans.
FIH's membership of the Private Contingency Association means that, in
practice, all of FIH's senior debt and deposits are guaranteed by the Danish
Government until 30 September 2010 (Bank Package I). Since FIH became a member
of the Private Contingency Association, the Bank has seen a significant
increase in deposits. At year-end 2008 and the beginning of 2009, Moody's and
S&P have given AAA ratings to the Danish guarantee scheme, meaning that, from
2009, FIH once again has access to the important international funding markets.
FIH has not had access to raise funding under the EMTN programme in 2008.
Instead, FIH has utilised other instruments in the international capital
market, such as private placements, bilateral loans and loan approvals. This
policy will be adapted, allowing for Bank Package II, which was adopted on 3
February 2009. Over the next few years, particular focus will be attached to
growing the deposit base, thus ensuring that, in future, an increasing portion
of total loans outstanding are financed by deposits.
Return on equity
At year-end 2008, the return on equity before taxation is 2.7 per cent p.a.,
relative to 17.6 per cent p.a. a year earlier. The return on equity after
taxation is 2.4 per cent p.a. at year-end 2008, relative to 15.5 per cent a
year earlier.
Additional remarks
The financial statements have been audited.
No special uncertainties have affected recognition and measurement in the
financial statements. At an extraordinary board meeting, held on 8 January
2009, the Board of Directors resolved to refocus the Company's activities and
reduce the number of employees with a view to adapting the Company's business
activities to the current market situation. In 2009, the refocusing is expected
to reduce income by about DKK 30 million, while lowering expenses by about DKK
180 million. In addition, non-recurring expenses related to the restructuring,
DKK 80 million, will be charged to the income statement in 2009. The 2008
results will not be affected by the restructuring.
Expectations for FIH's results for the full-year 2009
The net profit for the year 2008 of DKK 184 million is lower than the
previously announced earnings expectations of DKK 250-300 million, the reason
being a need for further writedowns.
For 2009, profit in the order of DKK 1 billion is expected before writedowns
and taxation. Much uncertainty prevails as to writedowns for 2009. At the time
of reporting, writedowns of about DKK 400 million are expected. Under the
assumption of writedowns of approximately DKK 400 million, the net profit for
the year will be in order of DKK 400-500 million, not including potential
government contribution payments.
Copenhagen, 6 February 2009 at 4:30 pm
On behalf of the Board of Directors
Hans Skov Christensen
Chairman
Appendices
Income statement and balance sheet for the FIH Group and FIH Erhvervsbank A/S
For additional information please contact
Chief executive officer, Lars Johansen, tel. +45 7222 5000
Statement by the Executive Board and the Board of Directors
The Board of Directors and the Executive Board have today presented and adopted
the annual report of FIH Erhvervsbank A/S for the financial year 1 January to
31 December 2008.
The consolidated financial statements have been prepared in accordance with
International Financial Reporting Standards as adopted by the EU and the annual
report for the Bank has been prepared in accordance with the Danish Financial
Business Act. Further, the annual report has been prepared in accordance with
additional Danish disclosure requirements for annual reports of financial
companies with listed debt instruments.
The management's review includes a fair presentation of the development in the
Group's and the Bank's activities and financial position as well as a
description of the material risks and elements of uncertainty that may affect
the Group and the Bank.
We consider the applied accounting policies appropriate for the annual report
to provide a true and fair view of the Group's and the Bank's financial
position at 31 December 2008 and of the financial performance of Group and the
Bank and the cash flows of the Group for the financial year 1 January to 31
December 2008.
Copenhagen 6 February 2009
EXECUTIVE BOARD
Lars Johansen
Managing Director and CEO Henrik Sjøgreen
Managing Director
/Kenneth Retbøll-Bauer
BOARD OF DIRECTORS
Hans Skov Christensen
(Chairman)
Guðni Niels Aðalsteinsson Ragnar Árnason Hans Ejvind Hansen Svend-Aage Nielsen
Jørgen Vorsholt Per Erlandsen Brun Jørgen Bruun-Toft Randi Holm Franke
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