Ringkjøbing Landbobank’s quarterly report, 1st-3rd quarter of 2012

The bank’s pre-tax profit for the first three quarters of 2012 was DKK 348 million against DKK 284 million in 2011, an increase of 23%. This result was equivalent to a 19% p.a. return on equity.

Core earnings were DKK 292 million against last year’s DKK 291 million. On this basis, the expectations for core earnings are stated more precisely at approximately DKK 400 million compared to the previously stated DKK 300-400 million.

Three quarters – highlights:

• Increase of 23% in pre-tax profit from DKK 284 million to DKK 348 million
• The profit is equivalent to a return on equity of 19% p.a. after payment of dividend 
• Small increase in core earnings to DKK 292 million
• The rate of costs improved by 3% to 31.7, the lowest in the country
• Loans down by 2% and deposits up by 1% since New Year
• Capital adequacy ratio of 21.9, equivalent to cover of 274%
• Core capital ratio of 20.5
• Launching of new homeowners’ products to support the increase in loans
• Highly satisfactory increase in customers in both branch network and Private Banking
• Expectations for core earnings stated more precisely at approximately DKK 400 million

Please do not hesitate to contact the bank’s management if you have any questions.                                                                        

Management report

Core income

Net interest income was DKK 469 million in the first three quarters of the year, an increase of 6% compared to last year. Compared to last year we have realised an increase in net interest income deri­ving from the increasing deposits and a marginally higher interest margin. Like the rest of the financial sector, the bank has increased its interest margin. The very low interest level is pulling in the opposite direction as it results in a lower return on the bank’s portfolio of securities and cash resources.

Fees, commissions and foreign exchange earnings amount to net DKK 136 million against net DKK 110 million in 2011, an increase of 24%. The increased sums within asset management and the pension area have affected earnings positively, and there has been a brisk level of activity within conversion of mortgage bank loans.

The total core income was 8% higher in the first three quarters of the year, with an increase from DKK 562 million in 2011 to DKK 609 million.

Costs and depreciations

Total costs including depreciations on tangible assets were DKK 193 million in 2012 against DKK 183 million last year, an increase of 5%.

Most of the increase is the new fixed premium paid to The Guarantee Fund for Depositors and Investors, which will be booked as a cost from 2012. It was decided in connection with Bank Package IV to establish an insurance scheme with a premium fixed relative to the deposits for which cover is provi­ded. DKK 1,950 million will be paid annually to the Fund, in which the bank currently has a 0.65% share, equivalent to DKK 12.7 million a year. Payments are to be made to the fund until it reaches DKK 7,500 million. The future expenses for The Guarantee Fund for Depositors and Investors will be financed by payments received, and the duration of this expense can thus not be determined. On the other hand, the fluctuating costs of bank bailouts will disappear in time. DKK 6.4 million was debited to the scheme in the first three quarters.

Notwithstanding the new insurance scheme, the rate of costs improved by 3% relative to 2011 and is now 31.7%, still the lowest in Denmark. A low rate of costs is especially important in periods of difficult economic conditions as the bank’s results are thus very robust, which is also reflected in the computation of the bank’s individual solvency requirement.

Write-downs on loans

Write-downs on loans amounted to DKK 124 million against DKK 88 million in 2011. The level of write-downs remains acceptable and is equivalent to 1.1% p.a. of the total average of loans, write-downs, guarantees and provisions. The bank’s customers still appear to be coping better with the weak economic conditions than the average in Denmark. DKK 45 million was recognised as an expense in the third quarter, DKK 24 million of which was related to group write-downs without stating specific engagements. 

The bank’s total account for write-downs and provisions amounted to DKK 785 million at the end of the third quarter, equivalent to 5.3% of total loans and guarantees. Actual write-downs on loans continue to be very low, and they were exceeded during the year by the credit items “income on previously written off debtors” and “interest income on customer engagements for which provisions have been made”, such that the account for write-downs and provisions increased by net DKK 135 million during the first three quarters of the year.

The portfolio of loans with zeroed interest amounts to DKK 103 million, equivalent to 0.7% of the bank’s total loans and guarantees at the end of the third quarter.

Given the low growth experienced by the Danish economy in 2011, which is continuing this year, the bank is satisfied with the conservative credit policy on the basis of which the bank has always been run. The bank’s provisions are expected to remain at a relatively high level in 2012, a natural part of the economic cycle. However, part of the provisions will be reserved for group provisions. It is also still the bank’s judgement that the credit policy, the diversified loans portfolio and the bank’s location in Central and West Jutland will have a positive effect on the bank compared to the general level of losses in the banking sector as a whole.

Core earnings

Core earnings were DKK 292 million against last year’s DKK 291 million. On this basis, the expectations for core earnings are stated more precisely at approximately DKK 400 million compared to the previously stated DKK 300-400 million.

Result for the portfolio

The result for the portfolio for the first three quarters of the year was positive by DKK 58 million including funding costs for the portfolio.

The bank’s holding of shares etc. at the end of the third quarter amounted to DKK 262 million, DKK 25 million of which was in listed shares while DKK 237 million was in sector shares etc. The bond portfolio amounted to DKK 4,463 million, and the great majority of the portfolio consists of AAA-rated Danish mortgage credit bonds and short bank bonds with rated Nordic counterparties.

The total interest rate risk, computed as the impact on the result of a one percentage point change in the interest level, was 0.9% of the bank’s Tier 1 capital after deduction at the end of the third quarter.

The bank’s total market risk within exposure to interest rate risk, exposure in listed shares etc. and foreign exchange exposure remains at a low level.
The bank’s risk of losses calculated on the basis of a value-at-risk model (computed with a 10-day horizon and 99% probability) was as follows in the first three quarters of 2012:

Result after tax

The result after tax was DKK 261 million for the first three quarters of the year against DKK 213 million last year.
The result after tax is equivalent to a return on equity of 14% p.a. after payment of dividend.

Balance sheet

The bank’s balance sheet total at the end of the third quarter stood at DKK 17,990 million against last year’s DKK 17,730 million. Deposits increased by 1% from DKK 12,681 million to DKK 12,861 million. The bank’s loans decreased by 4% to DKK 12,443 million compared to 2011. The underlying growth in new customers from the branch network and within the niches Private Banking and wind turbine financing remains good. However, the changed consumption pattern with a higher savings ratio and the general trend that many customers are deleveraging are generally resulting in greater repayments on the bank’s existing loans portfolio than previously.

Compared to previously, the bank is finding that housing is much more often financed without a subsequent need for a bank loan. On this basis, the bank will launch two new home-owners’ products - a new mortgage loan product and a new credit facility for home-owners which will give the customers the opportunity for more flexibility and for taking advantage of the current excess liquidity to optimise their finances. The new products are expected to support the bank’s growth in loans in the coming year.

The bank’s portfolio of guarantees at the end of the quarter was DKK 1,703 million against DKK 886 million in 2011.

Liquidity

The bank’s liquidity is good, with deposits now DKK 418 million higher than loans. The excess solvency compared to the statutory requirements was 186%. The bank’s short-term funding with term to maturity of less than 12 months amounts to only DKK 833 million, balanced by DKK 4.7 billion in short-term money market placings, primarily Danish banks and liquid securities. The bank is thus not dependent on the short-term money market.

In addition, part of the German loans portfolio for wind turbines was refinanced back-to-back with KFW Bankengruppe, and the DKK 759 million in question can thus be disregarded in terms of liquidity. The bank requires no financing for the coming year to meet the minimum requirement that it must always be able to manage for up to 12 months without access to the financial markets.

For the purpose of further diversifying the bank’s funding possibilities, an agreement has just been entered into with BRFkredit on joint funding of the bank’s mortgage loans with security within 60% of the property’s value. The joint funding will take place in BRFkredit’s AAA-rated capital centre and it enables long-term hedging of the bank’s commitments. An agreement has also been entered into on the provision of mortgage loans for commercial properties. The two agreements will not result in any change to the bank’s existing mortgage credit agreements with Totalkredit/Nykredit and DLR Kredit.

The deposit guarantee scheme

The future fixed costs of the insurance scheme are recognised under other operating costs. We have, however, received an additional charge from the estate in bankruptcy of Fjordbank Mors, which will be recognised as an expense of DKK 2 million in 2012.

Share buy-back programme

The current buy-back programme involves 100,000 shares. The bank’s holding of own shares at the end of the third quarter of 2012 was 54,542, and the holding on 22 October 2012 was 77,849 shares. 67,000 shares are reserved for subsequent cancellation.

Capital

The bank’s equity at the beginning of 2012 was DKK 2,483 million, to which must be added the profit for the period, and from which must be deducted dividend paid and the value of the repurchased own shares, after which the equity at the end of the quarter was DKK 2,641 million.

The bank’s capital adequacy ratio (Tier 2) was computed at 21.9 at the end of the third quarter of 2012. The core capital ratio (Tier 1) was computed at 20.5.

The individual solvency requirement for Ringkjøbing Landbobank is calculated at 7.0% because of the bank’s robust business model, and the ratio was thus reported at 8%. The Danish FSA reviewed the report during its routine annual visit and had no comments on it.

Encouraging increase in customer numbers

The bank implemented several outreach initiatives towards new customers just over two years ago. The basis was the fact that the bank has both the liquidity and the capital to support growth, that we felt comfortable about the bank’s credit facilities, and that our cost structure is suitable for the future. The biggest challenge in times of low growth in society is thus creating growth in the bank’s top line.

The bank’s outreach initiatives were intensified in 2012, when an investment was made in a further extension of the bank’s Private Banking platform at national level, and the outreach activities in the branch network in Central and West Jutland were stepped up after the summer break and will continue in the coming months.

A highly positive increase in customers is currently being seen in the branch network and within the Private Banking segment, with transfers of deposits, pension and securities customers. The growth in lending has been swallowed up by repayments on the loans portfolio. In the bank’s judgement, we are, however, currently enhancing the foundation for future earnings.

Accounting policies and key figures

The accounting policies applied are unchanged relative to the audited annual report presented for 2011. It should be noted, however, that the bank will book the fixed expenses for The Guarantee Fund for Depositors and Investors as other operating costs from 2012.

Expectations for earnings in 2012

Core earnings were DKK 292 million against last year’s DKK 291 million. On this basis, the expectations for core earnings are stated more precisely at approximately DKK 400 million compared to the previously stated DKK 300-400 million.

Main and key figures for the bank

Profit and loss account

Core earnings

Balance sheet

Balance sheet

Statement of shareholders’ equity

Notes

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Main figures summary

Danish Financial Supervisory Authority
key figures for Danish banks

           
Statement by management and board of directors

The board of directors and management have today considered and approved the quarterly report for Ringkjøbing Landbobank A/S for the period 1 January - 30 September 2012.

The quarterly report was prepared in accordance with the provisions of the Danish Act on Financial Activities and further Danish requirements on listed financial companies concerning disclosure. We consider the accounting policies to be appropriate and the accounting estimates made to be responsible, such that the interim report provides a true and fair view of the bank’s assets, liabilities and financial position as of 30 September 2012 and of the bank’s activities for the period 1 January - 30 September 2012. We also believe that the management report etc. contain a true and fair review of the developments in the bank’s activities and financial circumstances, and a description of the most important risks and uncertainty factors which could affect the bank.

The quarterly report was not audited or reviewed, but the external auditors have checked that the conditions for ongoing inclusion of the earnings for the period in the Tier 1 capital have been met.

Ringkøbing, 24 October 2012