NASDAQ OMX Copenhagen A/S 30 October 2008
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Company release No. 11-2008 - FIH Interim Report January-September 2008
Satisfactory profit after tax of DKK 471 million
Consistent and satisfactory group net interest and fee earnings
Large unrealised losses suffered on FIH's bond holdings
Increased writedowns at FIH Group level, but level remains reasonable
Downgrade on profit expectations for the year to DKK 600 - 700 million
Net profit for the period
Net profit for the period was DKK 471 million after tax, a decrease of DKK 416
million compared with the same period of 2007. Profit before tax was DKK 577
million, which is DKK 497 million down compared to the same period last year.
FIH and the current financial situation
In the light of the highly unusual situation in the financial markets, FIH would
like to highlight the following in relation to the presentation of the third
quarter results.
In company release of 7 October 2008, FIH stated that the group participates in
the agreement entered into by the Danish State and Det Private Beredskab (the
Sector Fund) concerning state-guaranteed deposits.
Subsequent to the heavy economic turbulence in Iceland, FIH's parent company,
Kaupthing Bank, was placed under administration on 9 October 2008 by the
Icelandic State. It is expected that ownership of FIH will change within the
next couple of months. Accordingly, FIH has decided to audit the third quarter
financial statements.
Despite the international turmoil and the difficult liquidity situation endured
by banks, FIH has made it through the crisis period. FIH's participation in the
Sector Fund thus provides the bank with a positive liquidity outlook.
FIH is “ring fenced” in relation to the parent company and operates as a Danish
bank under Danish supervision. FIH has no exposure to Icelandic financial
institutions or other Icelandic businesses, and is thus entirely independent
from Iceland in a risk perspective.
FIH exposure to the property sector comes to 26 per cent at the end of September
2008. In addition, 9 per cent of the loans and guarantees represent exposures to
properties in medium sized Danish companies, using the properties in the daily
operations of the company. In the area of property loans, FIH has maintained a
conservative policy and thus does not expect considerable losses derived from
this segment. Please see page 10 for details related to the property sector
exposure.
Activities
Net interest income continues to be satisfactory. FIH has adjusted the loan
interest rates to the rising funding costs. The loan portfolio, including loans
related to investment properties maintain a satisfactory level, amounting to DKK
75 billion at the end of the third quarter.
Earnings are, however, influenced by the unrest in the financial markets, as the
derived increase in interest rates has an effect on FIH's own investments and
thus entails capital losses on the spread between the bond holding and the
applied hedging instruments, which negatively influences the net financials. The
majority of the capital losses on the bold holdings have not yet been realised.
Writedowns have risen in the period, however continue to be modest compared with
the total loan portfolio.
At the end of September 2008, FIH has applied DKK 11.2 billion of the credit
facility of DKK 15 billion agreed to with ATP in connection with the
establishment of FIH Kapital Bank in the first quarter of 2007. The
establishment of FIH Kapital Bank provides FIH with large flexibility in the
liquidity dispositions, and remains favourable in the light of the recent
development in the financial markets.
On 1 April 2008, FIH launched a netbanking facility, specialising in cash
deposits from private individuals - FIH Netbank Privat. In the first 6 months of
operations, FIH has obtained deposits of DKK 1,323 million, which is considered
satisfactory. FIH expects this customer segment to grow.
Net interest and fee income
Net interest and fee income amounted to DKK 1,155.0 million, up 11 per cent from
the same period of 2007.
Interest income from loans and other receivables rose by 20 per cent to DKK
3,584.5 million. The rise is mainly attributable to a higher average nominal
interest rate on the loan portfolio compared with the same period of 2007.
Interest on bonds came to DKK 764.8 million, up from DKK 572.1 million in the
same period of 2007. The rise is mainly attributable to larger bond holdings
compared to the same period of 2007.
Interest on derivative financial instruments, mainly interest income and
interest expenses linked to swaps, amounted to DKK 23.7 million against DKK 25.5
million in the first three quarters of 2007. FIH uses swaps to hedge interest
rate risks in the general management of interest rate risks, and for trading
with customers.
Overall, interest income increased by DKK 571.9 million, to DKK 4,525.7 million,
compared with the first nine months of 2007.
Interest expenses increased by a total of DKK 418.8 million, to DKK 3,555.3
million compared with the first nine months of 2007.
Fee and commission income decreased by DKK 53.9 million, compared with the same
period of 2007, to a total of DKK 203.8 million. The decrease in earnings is
primarily attributed to decreasing fee income in Capital Markets and Investment
Banking.
Market value adjustments
Market value adjustments were negative by DKK 35.8 million against DKK 473.5
million in the same period of 2007.
Market value adjustments of mortgage loans were negative DKK 15.9 million, which
is offset by corresponding income under market value adjustments of issued
mortgage bonds. Market value adjustments of loans etc. came to DKK 31.8 million
in respect of loans hedged by financial instruments. Market value adjustments of
bonds totalled a negative DKK 234.1 million against a negative DKK 172.6 million
in the first nine months of 2007. Shares were value adjusted by DKK 61.1 million
against DKK 508.0 million in the first nine months of 2007, while market value
adjustments of foreign currencies came to DKK 35.0 million against DKK 7.2
million in the same period of 2007.
Investment properties (operational leases) were fair value adjusted by negative
DKK 16.9 million, which is largely equivalent to the repayment proportion of the
lease payment recognised under “Other operating income”. Market value adjustment
of derivative financial instruments came to DKK 125.2 million. Bonds issued
refer to issued mortgage bonds as well as bonds issued and hedged using
financial instruments. The market value adjustments totalled DKK 48.0 million.
The return on the bank's portfolio of shares has been satisfactory in the first
nine months of 2008. The market value adjustments are shown in the table below.
Other operating income
Other operating income totalled DKK 70.0 million against DKK 63.6 million in the
same period of 2007.
Expenses
Expenses rose by DKK 50.5 million to DKK 573.6 million in the first nine months
of 2008. The average number of employees was 388.6, up from 325.3 at the end of
the third quarter 2007.
Losses and Writedowns
Writedowns during the period amounted to DKK 126.5 million compared to 99.4
million in the same period of 2007. Reversal of previous year's writedowns
amounted to DKK 53.0 million, a decrease of DKK 39.0 million compared with the
same period of 2007. Furthermore, DKK 2.8 million related to previous year's
writedowns has been realised, bringing total writedowns to DKK 70.7 for the
period.
Losses recorded for the period were DKK 10.9 million against DKK 8.8 million in
the first nine months of 2007.
Balance sheet
Total loans to customers including investment properties decreased by DKK 1,046
million, or by 1.4 per cent, to a total of DKK 75,099 million.
Bond holdings were DKK 24,756 million, up from DKK 13,639 million at the
beginning of the year.
Holdings of shares and investments in associates amounted to DKK 1,293 million
up from DKK 1,016 million at the end of 2007.
Bonds issued totalled DKK 37,184 million against DKK 53,632 million at the
beginning of 2008.
Equity and solvency
Equity totalled DKK 8.1 billion at the end of September 2008 inclusive of the
period's profit to which DKK 2.9 billion of subordinated capital can be added.
The bank's capital thereby amounted to DKK 11.0 billion.
The solvency ratio for the group was 12.1 per cent at the end of September 2008
and the core capital ratio was 9.1 per cent. For 2008, the solvency ratio is
determined by the standard approach under the new Basel II-rules and is
therefore not directly comparable to historical solvency figures.
At the end of 2007 the same figures were 11.5 per cent and 8.4 per cent
respectively.
Basel II
FIH Erhvervsbank reports the solvency ratios in accordance with the standard
approach under the Capital Requirement Directive, Pillar 1. The standard
approach is also used for assessing market risk, while the standard indicator
approach is used for the assessment of operational risk. The applied methods are
unchanged compared to the first half year of 2008. The solvency ratios are
reported in parallel by using the internal ratings-based approach (Foundation)
for credit risks to the Danish FSA.
Credit risk
At least once a year, individual credit facilities are reviewed. As part of this
review, new financial information is examined and ratings are updated, among
other things.
Monitoring of credit facilities is undertaken centrally using FIH's credit
system, containing all material information on the size and utilisation of
facilities, collateral security provided and estimated realisable value, etc.
The Risk & Legal department 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, along with individual customer credit ratings. Financial
institutions are rated using a separate model, while the largest customer
segment, corporate customers, is rated using the internally developed Corporate
model. The Corporate model categorises customers into 12 rating classifications,
12 being the best. The model also calculates the probability that, within the
next 12 months, the individual customer will be unable to meet his financial
obligations towards FIH.
Public institutions and similar organisations are assigned rating 13 with a
probability of default of 0 per cent.
Loan portfolio diversification is shown below. Rating D concerns customers in
default.
Rating classes 7-13 correspond to investment grade as defined by the credit
rating agencies, while rating classes 4-6 are below investment grade, although
being of acceptable credit quality. Rating classes 1-3 comprise customers with
increased risk, corresponding to the single B segment defined by the rating
agencies. These customers are closely monitored. Rating 0 comprises the weakest
and most risky customers, corresponding to the C segment as defined by the
rating agencies. The credit quality of the loan portfolio has shown satisfactory
and steady improvement, despite increased pressure on certain sectors.
Exposure to the property sector
FIH's exposure to the property sector amounts to 26 per cent, composed as
follows:
7 per cent represents exposure to residential lease properties. Primarily loans
secured by first priority pledge with loan-to-value ratio limited to 80 per
cent, however in some cases up to 90 per cent, depending on factors such as the
credit quality of the debtors and additional security. The majority of the
properties are located in Berlin and Hamburg.
17 per cent represents exposure to actual investment properties, including a mix
of properties. Mainly properties secured by first priority pledge with a
loan-to-value ratio of 75 per cent maximum, however in some cases up to 85 per
cent depending on the re-leasing potential and value stability, lessees and
debtor credit quality, length of the lease contract and additional security. Two
thirds of the properties are located in Denmark, while the remaining share is
located in Germany and Sweden.
2 per cent represents exposure to primarily property administration, and to a
limited extent purchase and sale of own properties.
In addition, 9 per cent represents exposure to medium-sized Danish trading and
production companies. Primarily loans secured by first security pledge on the
company owned properties and equipment, the properties being used as part of
daily operations, but for technical reasons are placed in a separate property
company.
The development of the construction industry usually follows that of the
property sector. Loans and guarantees with construction companies amount to 2
per cent of FIH's total portfolio. The number of Danish companies is limited to
a few only.
FIH Erhvervsbank's credit procedures and policies on the area are considered
solid. For each loan application, and as a fixed part of the documentation, FIH
assesses the credit quality of the individual debtor and the abilitiy of the
debtor within the sector. Further, FIH assesses the composition of the
individual property and/or portfolio as to liquidity and profitability along
with the re-leasing potential and value stability of the property.
Market risk
Market risk is the risk of a loss as a result of changes in market value of
FIH's assets and liabilities and off-balance sheet transactions, due to changes
in market conditions. Market risk includes interest rate and exchange rate risks
and risk related to equity trading.
The market risk related to the bank's total balance sheet (inclusive of the risk
not related to the trading book), stated as Value at Risk for interest rate,
exchange rate and equity trading amounted to DKK 16 million at the end of
September 2008.
The Value at Risk method looks at the whole portfolio in the calculation of
market risks associated with financial assets, As a result, not only the
standard deviation, but also the correlation between the portfolio assets are
taken into account, Consequently, the Value at Risk method summarises the total
risk related to the bank's balance sheet by one figure and expressed in Danish
kroner.
Funding and liquidity
The satisfactory liquidity holding of DKK 20 billion held by FIH at the
beginning of the period has shown to be of vital importance during the past
quarter. The impact of the financial crisis during the last three months has
entailed suspension of all normal funding activities. Consequently, FIH has
applied the liquidity reserve and undrawn committed credit facilities in order
to finance the bank's normal loan activities.
FIH's participation in the Sector Fund (Det Private Beredskab) entails that all
FIH senior debt and deposits are covered by state guarantee until 30 September
2010. This provides FIH with a solid foundation to continue diversification
efforts in accordance with the strategy pursued during the last couple of years,
by including a broader range of markets, debt instruments and investor groups.
FIH has not applied its EMTN program this year but has obtained funding by means
of other instruments provided by the international capital market, for example
private placements, bilateral loans and committed loan facilities. This policy
will be adjusted according to the new situation. Thus, special focus will be
devoted to diversification of the deposit base.
Return on equity
At the end of September 2008 return on equity before tax amounted to 9.7 per
cent p.a. compared to 20.2 per cent p.a. at the end of September 2007. Return on
equity after tax was 7.9 per cent p.a. at the end of September 2008 compared to
16.6 per cent p.a. at the end of September 2007.
Other remarks
As mentioned above the interim financial report is audited.
No particular uncertainty has affected the recognition and measurement in the
preparation of the interim report for the period of 2008. After post balance
sheet FIH joined the Danish government guarantee scheme. The committed
contribution by the FIH Group will amount to DKK 632.6 million over two years.
In addition, FIH may be faced with additional obligations, provided the excess
clause related to the agreement sets out and the guarantee commission is
increased. In total, the FIH Group commitments are considered not to exceed DKK
1.5 billion over the two years of the agreement.
Expectations for FIH result 2008
The net interest income shows consistent and satisfactory growth. However, the
FIH Group is affected by the global financial crisis and is facing large
unrealised losses on the bank's portfolio of bonds and instruments, in addition
to increased writedowns.
Based on the above, FIH downgrades profit expectations for 2008 to DKK 600 - 700
million assuming that the spread between the bond yield and the swap interest
rate remains unchanged compared with the Q3 level. The profit announced earlier
was DKK 800 - 1,000 million.
Copenhagen, 30 October 2008 at 8:40 am
For the Board of Directors
Hans Skov Christensen
Chairman
For additional information please contact
Chief executive officer, Lars Johansen, tel. +45 7222 5000
Statement by the Executive Board
We have today discussed and adopted the interim report for FIH Erhvervsbank A/S
for 1 January - 30 September 2008.
The interim report has been prepared in accordance with IAS 34, Presentation of
interim reports in respect of the consolidated financial statements, in
accordance with the Danish Financial Business Act in respect of the parent
financial statements, and in accordance with additional Danish disclosure
requirements for interim reports of financial companies with listed debt
instruments.
We consider the applied accounting policies appropriate for the interim report
to provide a true and fair view of the Group's and the Parent's financial
position at 30 September 2008 as well as of the results of their operations and
the consolidated cash flows for the period 1 January - 30 September 2008.
Copenhagen, 30 October 2008
EXECUTIVE BOARD
Lars Johansen Henrik Sjøgreen
Managing director and Managing Director
CEO
BOARD OF DIRECTORS
Hans Skov Christensen Sigurdur Einarsson
(chairman) (vice-chairman)
Per Erlandsen Brun Jørgen Bruun-Toft Hans Ejvind Hansen Randi Holm
Franke
Hreidar Már Sigurdsson Svend-Aage Nielsen Jørgen Vorsholt
INDEPENDENT AUDITORS' REPORT
To the shareholders of FIH Erhvervsbank A/S
We have audited the interim report of FIH Erhvervsbank A/S for the period 1
January to 30 September 2008. The interim report comprises the statement by the
Executive Board and the Board of Directors (Management) on the interim report,
the Management's review, the accounting policies, the income statement, the
balance sheet, the statement of changes in equity, the cash flow statement and
the notes to the financial statements. The consolidated financial statements
have been prepared in accordance with IAS 34, and the parent financial
statements have been prepared in accordance with the Danish Financial Business
Act. In addition, the interim report has been prepared in accordance with
additional Danish disclosure requirements for interim reports of financial
companies with listed debt instruments. The comparative figures for Q1-Q3 2007
contained in the interim financial report have not been audited.
Management's responsibility for the annual report
Management is responsible for the preparation and fair presentation of an
interim report in accordance with IAS 34 in respect of the consolidated
financial statements, in accordance with the Danish Financial Business Act in
respect of the parent financial statements, and in accordance with additional
Danish disclosure requirements for financial companies with listed debt
instruments. This responsibility includes: designing, implementing and
maintaining internal control relevant to the preparation and fair presentation
of an interim report that is free from material misstatement, whether due to
fraud or error, selecting and applying appropriate accounting policies, and
making accounting estimates that are reasonable in the circumstances.
Auditor's responsibility and basis of opinion
Our responsibility is to express an opinion on this interim report based on our
audit. We conducted our audit in accordance with Danish and International
Standards on Auditing. Those Standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable assurance that
the interim report is free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the annual report. The procedures selected depend on
the auditor's judgement, including the assessment of the risks of material
misstatement of the interim report, whether due to fraud or error. In making
those risk assessments, the auditor considers internal controls relevant to the
entity's preparation and fair presentation of an interim report in order to
design audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the entity's
internal controls. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of accounting estimates made by
Management, as well as evaluating the overall presentation of the annual report.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Our audit has not resulted in any qualification.
Opinion
In our opinion, the interim report gives a true and fair view of the Group's
financial position at 30 September 2008 and of its financial performance and its
cash flows for the financial year 1 January to 30 September 2008 in accordance
with IAS 34 and additional Danish disclosure requirements for interim reports of
financial companies with listed debt instruments.
In addition, in our opinion, the interim report gives a true and fair view of
the Parent's financial position at 30 September 2008 and of its financial
performance for the financial year 1 January to 30 September 2008 in accordance
with the Danish Financial Business Act and additional Danish disclosure
requirements for annual reports of financial companies with listed debt
instruments.
Copenhagen, 30 October 2008
Deloitte
Statsautoriseret Revisionsaktieselskab
Anders O. Gjelstrup Jens Ringbæk
State Authorised Public Accountant State Authorised Public
Accountant
See the complete company release with graphs and tables on enclosed pdf file and
can
be downloaded from www.fih.com
