Financial Review

“We are pleased to deliver strong profit in 2018, driven by a significant reversal of impairment charges and the sale leaseback of BankNordik’s head office property both products of the Group’s devotion to creating long-term value for our shareholders. Even though our top line was challenged by enduring interest margin compression, we were able to attract new business and build volumes,” said BankNordik CEO, Árni Ellefsen.

The following comments relate to the adjusted figures and are generally stated relative to 2018.

Income statement

Operating income

Net interest income amounted to DKK 374m in 2018 compared to DKK 387m in 2018. Tighter interest margins remained a challenge but the adverse effect on income was to some degree offset by an increase in both corporate and personal lending. Net fee and commission income declined by DKK 18m, from DKK 190m in 2017 to DKK 172m in 2018. This sharp drop was mainly due to a restructuring of asset management activity related to the implementation of MiFID II. Other operating income, on the other hand, increased by DKK 18m to DKK 45m in 2018. While insurance premiums grew notably in 2018, higher claims put a damper on net insurance income growth, resulting in net insurance income of DKK 44m in 2018 compared to DKK 43m in 2017. In total, the Group recognised operating income in the amount of DKK 635m in 2018, down 2% from 2017.

Operating costs

Operating costs fell by DKK 6m to DKK 456m in 2018 from DKK 462m in 2017, which was fully in line with the Group’s aim of keeping expenditures flat until 2020. In spite of general wage pressures and a notable amount of resources devoted to implementing MiFID II and GDPR in 2018, BankNordik managed to keep costs below last year’s level. This was achieved by applying persistent cost discipline and by taking continuous measures to drive efficiency, such as centralising operations, streamlining processes and automating tasks by using technology. Heading into 2019, BankNordik will continue to work towards improving its cost structure.

Net impairment charges

The Group once again recognised net impairment charge reversals, mirroring not only the current market environment but also the sound credit quality of the Group’s portfolio. Net impairment charges amounted to a reversal of DKK 111m in 2018 relative to a reversal of DKK 60m in 2017. Considering the Group’s low-risk approach, its strong loan-to-value private sector exposure accounting for about two thirds of the total loan portfolio and its corporate portfolio carrying only modest exposure towards historically risky industries, BankNordik expects to be able to sustain below industry average impairments going forward.

Operating profit

Operating profit came in at DKK 289m in 2018 compared to DKK 246m in 2017, an increase of DKK 43m due to the substantial reversal of impairment charges.

Non-recurring costs

Non-recurring items amounted to DKK 72m in 2018, compared to a net expense of DKK 18m in 2017. The main item was the sale and leaseback of the Group’s head office property, which triggered a gain of DKK 70m. A revaluation gain of DKK 21m was also recognised as a one-off item related to BankNordik’s equity position in BI Holding A/S, while severance costs related to organisational adjustments amounted to DKK 11m and other non-recurring costs amounted DKK 8m.

Market value adjustments

Market value adjustments amounted to a loss of DKK 38m in 2018, compared to a profit of DKK 6m in 2017. These adjustments primarily reflect the spread risk widening in the Danish bond market in 2018 and to a lesser extent changes in interest rates.

Profit before tax

Profit before tax amounted to DKK 323m in 2018, up DKK 88m from DKK 235m in 2017, mainly attributable to extraordinarily large reversals of impairment charges and a gain on the sale and leaseback of the Group’s head office property.

Balance sheet

Lending

Loans and advances amounted to DKK 9,956m in 2018 compared to DKK 9,537m in 2017. Corporate lending volumes increased by DKK 289m, while personal lending volumes increased by DKK 130m. In addition, the Group increased its brokered mortgage volumes by DKK 371m in 2018.

Loans and advances

BankNordik has placed great emphasis on maintaining sound credit policy guidelines to ensure that growth in lending does not come at the expense of sustainability. Two thirds of the loan portfolio is allocated to personal lending, while the remaining one third is allocated to a well-diversified corporate sector, as shown in the figure below. No single corporate customer represents more than 5% of the total portfolio.

Deposits

Total deposits amounted to DKK 13,432m at the end of 2018, an increase of 6% from DKK 12,632m in 2017. Deposits have grown at a fairly stable pace in recent years as businesses and households in general have consolidated their finances.

Solvency and liquidity

BankNordik held total capital of DKK 2,098m at 31 December 2018 compared to 1,954m at 31 December 2017. Subordinated capital was stable at DKK 223m, net of deductions, while core capital amounted to DKK 1,875m at 31 December 2018, which was an increase of 143m from DKK 1,731m at 31 December 2017.

The Group’s solvency requirement increased to 9.7% at the end of 2018 from 9.3% at year-end 2017. The total capital ratio increased to 19.8% in 2018 from 19.7% in 2017, while the CET1 ratio was 17.7% vs. 17.5% in 2017. The Group’s total capital includes DKK 11m worth of subordinated debt (0.1 percentage point) not eligible to be included in the solvency surplus. As such, the solvency surplus at the end of 2018 was 10.0 percentage points compared to 10.2 percentage points in 2017.Compared to the external capital requirements, incl. buffer requirements totalling 13.7% at the end of 2018, BankNordik had a solvency surplus of 6.1 percentage points.

The Group’s liquidity indicator was 266% at yearend 2018, well above the requirement of 100% due to a large deposit surplus. The LCR requirement, on the other hand, calls for a liquidity buffer of at least 100%. By the end of 2018, BankNordik’s LCR was 266% compared to 209% in 2017.

Financial Results for Q4

Net interest income in Q4 2018 was DKK 92m, a slight decrease from DKK 94m in Q3 2018 due to margin pressure and lower average volumes during the period. Net fee and commission income was DKK 42m in Q4 compared to DKK 43m in Q3, while insurance income was DKK 13m in Q4, flat compared to the previous quarter.

Operating costs amounted to DKK 115m in Q4 compared to DKK 111m in Q3. The increase was mainly due to higher marketing costs related to BankNordik’s digital marketing campaign in Denmark, launched in October 2018. Impairment charges were a reversal of DKK 18m in Q4 vs. a reversal of DKK 39m in Q3.

As a result, profit before tax amounted to DKK 38m in Q4 2018 compared to a profit of DKK 78m in Q3 2018.

Other

Supervisory Diamond

The Supervisory Diamond is used to measure a bank’s risk profile. The model identifies five areas that if not within certain limits are considered to be indicators of increased risk. As shown in the figure, the Bank meets all criteria by a comfortable margin (large exposures, exposures towards property, excess liquidity, stable funding and lending growth). The sum of large exposures increased from 119.2% to 122.2%, well below the limit of 175%, and all large exposures are of good quality. The liquidity indicator was 266% at year-end compared to the minimum requirement of 100%.

Share buy-back programme

During 2018, the Group bought back own shares for a transactional value of DKK 15m and held 4.11% of the total share capital at 31 December 2018. The current buyback programme runs until March 2019. Although BankNordik on a regular basis will reconsider buying back additional shares, there is no such programme planned for the immediate future.

Dividends proposed

At the upcoming Annual General Meeting, to be held on 21 March 2019, the Board will propose total dividend payments of DKK 70m for 2018 (DKK 7 per share). Dividends of DKK 40m were paid in 2018 in respect of the 2017 financial year. More information on the dividend policy is available at our website at www.banknordik.com/dp