DANMARKS NATIONALBANK

Major Danish banks show strong resilience in EU stress test

The four Danish banks participating in the EU-wide stress test all show strong resilience toward adverse changes in the macroeconomic condi- tions. , Jyske Bank, and come out of the stress test with Core Tier 1 capital ratios in the range 9.4-13.6 per cent, well above the stress test's minimum ratio of 5 per cent.

The 2011 EU-wide stress test has been conducted by the European Bank- ing Authority (EBA) in cooperation with national authorities, the Euro- pean Central Bank (ECB), the European Commission (EC) and the Euro- pean Systemic Risk Board (ESRB). From Danmarks Nationalbank and the Danish Financial Supervisory Authority participated as national authorities.

The EU-wide stress test, carried out across 90 banks in 21 countries, seeks to assess the resilience of European banks to severe shocks and their specific solvency to hypothetical stress events under certain restrictive conditions.

The assumptions and methodology were established to assess banks' capital adequacy against a 5 per cent Core Tier 1 capital benchmark.

“The stress test results show that even in the adverse economic scenario, all four Danish banks are well capitalised and robust toward credit qual- ity deterioration in their loan portfolios,” says Ulrik Nødgaard, Danish Financial Supervisory Authority.

“The stress test results support our view that the overriding part of the Danish banking is well consolidated and resilient,” says Nils Bernstein, Danmarks Nationalbank.

The participating Danish banks (including Bank Danmark which participates in the stress test through Nordea Bank AB) together account for more than 80 per cent of the Danish banking sector.

The stress test was carried out based on the EBA common methodology and key common assumptions (e.g. constant balance sheet) as published in the EBA Methodological note. Therefore, the information relative to the baseline scenario is provided only for comparison purposes. Neither the baseline scenario nor the adverse scenario should in any way be con- strued as a bank's forecast or directly compared to a bank's other pub- lished information.

RESULT OF THE ADVERSE SCENARIO

All four Danish banks pass the EBA stress test with a comfortable margin to the 5 per cent Core Tier 1 capital benchmark, cf. Chart 1. In fact, the four Danish banks all experience significant increases in their Core Tier 1 ratios under the specified adverse scenario.

For Danske Bank, part of the increase is due to a capital injection of net DKK 19.8 billion (EUR 2.7 billion) from owners completed in April 2011.

CORE TIER 1 RATIO IN THE ADVERSE SCENARIO Chart 1

Core Tier 1 ratio 16

13.6 14 13.0 12.8 12.4 12.1 12 10.0 10 9.4 8.8

8

6

4

2

0 Danske Bank Jyske Bank Nykredit Sydbank

2010 2012 - Adverse scenario

Operating profits for the four banks decline or remain at the 2010-level under the adverse scenario. This is mainly due to assumptions about the cost of funding and limits on banks' ability to pass on the increasing costs of funding to borrowers.

Average yearly impairments on financial assets under the adverse sce- nario remain largely unchanged for Danske Bank and Nykredit whereas it show a decreasing tendency for Jyske Bank and Sydbank compared to 2010 impairments, cf. Chart 2.

The loss rates for particularly Nykredit but also Danske Bank are affected by the fact that parts of the companies are specialised mortgage institu- tions (realkredit). Danish realkredit is subject to stricter legal constraints than conventional banking and loss rates have historically been lower. In particular loss given defaults, LGD, are lower due to strict loan to value, LTV, limits.

IMPAIRMENTS IN THE ADVERSE SCENARIO Chart 2

Per cent of exposure 1.5

1.25 1.17

1 0.84 0.85 0.74 0.75

0.5 0.44 0.46

0.22 0.23 0.25

0 Danske Bank Jyske Bank Nykredit Sydbank

2010 Yearly average 2011-12 - adverse scenario

Note: Impairments are calculated as impairment charges on financial and non-financial assets in the banking book in percent of total exposures as of 31 December 2010.

The stress test also shows that the Danish banks' exposures to the most vulnerable sovereign entities in Europe are very limited. Exposures to- wards Greece are immaterial.

MACROECONOMIC SCENARIOS

The stress test uses a baseline and an adverse macroeconomic scenario that covers the period 2011-2012, cf. Table 1. The baseline scenario is mainly based on the Autumn 2010 European Commission forecast but remains broadly in line with the current expected economic develop-

ment in the case of Denmark. The adverse scenario represents a signifi- cantly more negative economic development.

MACRO-ECONOMIC SCENARIOS FOR DENMARK FOR THE 2011 EU-WIDE STRESS TEST Table 1

Baseline scenario Adverse scenario

2010 2011 2012 2011 2012

GDP at constant prices (per cent change) 2.3 1.9 1.8 0.4 -0.2 Unemployment rate (per cent of total labour force) 6.9 6.3 5.8 7.2 8.3 Short-term interest rate (3 month Cibor) 1.2 1.7 2.2 3.0 3.5 Long-term interest rate (10 year treasuries) 2.6 2.8 3.0 3.0 3.2 Nominal USD exchange rate (DKK per USD) 5.6 5.4 5.4 4.8 4.8 Inflation (per cent change) 2.2 2.1 2.0 1.6 1.5 Commercial property prices (per cent change) 0.0 1.5 -11.4 -10.0 Residential property prices (per cent change) 0.0 1.5 -5.7 -3.7

DETAILED RESULTS

The detailed results of the stress test under the baseline and adverse scenarios as well as information on banks' credit exposures and expo- sures to central and local governments can be found on Danmarks Na- tionalbanks and Danish Financial Supervisory Authority's homepages (www.nationalbanken.dk/DNUK/FinanceStab.nsf/side/Danish_results_of_ EU_stress_test!OpenDocument and www.finanstilsynet.dk/EU-stresstest respectively) in the disclosure templates based on the common format provided by the EBA.

FURTHER INFORMATION

See more details on the scenarios, assumptions and methodology on the EBA website: www.eba.europa.eu/EU-wide-stress-testing/2011.aspx

For further information, please contact:

Niels Bartholdy, Danmarks Nationalbank: 33 63 60 24 or

Lars Stage, Danish FSA: 33 55 83 34