(Formerly Brfkredit) Annual Report 2018

(Formerly BRFkredit) Annual Report 2018

Annual Report 2018

Management’s Review 2 Financial highlights 3 Summary 4 Comments by Management 4 Outlook 5 The year 2018 6 Comments on the financial statements 11 Capital management, funding and liquidity 16 Governance 18 Other information 18 The mortgage credit market 2018 20 Business areas

Financial statements 2018 21 Income statement and statement of comprehensive 22 Balanceincome sheet 23 Statement of changes in equity 23 Capital statement 24 Notes 56 Summary of series financial statements

57 Statement by the Executive and Supervisory Boards

63 Directorships

Jyske Realkredit A/S Klampenborgvej 205 DK- 2800 Kgs. Lyngby Telephone: 89 89 89 89 Business Reg. No. (CVR): 1340983 Email: Jyske [email protected] Website: www.jyskerealkredit.dk

Annual Report 2018 / 1

Financial highlights

Core profit and net profit for the year, DKKm Index 2018 2017 18/17 2016 2015 2014

Administration margin income, etc. 1,896 1,881 101 1,785 1,687 1,494 Other net interest income1 77 -60 - -53 -80 -63 Net fee and commission income, etc. 256 262 98 207 244 151 Value adjustments, etc.1 -84 28 - 39 -22 -190 Other income 216 24 900 50 45 35 Core income 2,361 2,135 111 2,028 1,872 1,427 Core expenses 730 851 86 840 873 876 Core profit before loan impairment charges and provi- 127 sions for guarantees 1,631 1,284 1,188 999 1,194 Loan impairment charges and provisions for guaran- - tees (- = income) -38 202 -32 186 843 Core profit 1,669 1,082 154 1,220 813 -351 Investment portfolio earnings 1 - 49 - 80 89 -30 Profit before IFRS 9 implementation 1,669 1,131 148 1,299 902 -321 IFRS 9-derived adjustment of impairment charges, be- - ginning of 2018 407 - - - - Pre-tax profit 1,262 1,131 112 1,299 902 -321 Tax (- = income) 263 245 107 284 218 -34 Profit for the year 999 886 113 1,015 685 -287 1 As of 2018, the return on Jyske Realkredit’s portfolio of securities (investment portfolio earnings) is recognised as core income under ‘Other net interest income’ and ‘Value adjustments, etc.’ as the purpose of the portfolio of securities is to support mortgage operations, including compliance with LCR rules, etc. Relationships between income statement items under Jyske Realkredit (key financial data) and the income statement page 21 appear from note 2.

Summary of Balance Sheet, end of period, DKKm

Mortgage loans, fair value 327,403 308,121 106 278,407 250,892 220,340 Bonds and shares, etc. 18,593 18,397 101 16,307 8,127 25,792 Total assets 353,280 337,732 105 307,027 269,975 256,145

Issued bonds, fair value 332,955 316,305 105 285,676 249,772 223,925 Equity 17,744 15,731 113 12,812 11,781 11,084

Financial ratios and key figures

Pre-tax profit as a percentage of average equity 1) 7.5 7.9 - 10.6 7.9 -3.0 Net profit as a percentage of average equity 1) 6.0 6.2 - 8.3 6.0 -2.7 Expenses as a percentage of income 31.0 39.9 - 41.4 46.6 61.4

Capital ratio 22.1 20.8 - 19.0 19.1 18.6 Common Equity Tier 1 capital ratio (CET1 %) 22.1 20.8 - 19.0 18.8 18.5 Individual solvency requirement (%) 9.7 9.3 - 9.3 9.6 10.6 Capital base (DKKm) 17,687 15,529 - 12,593 11,820 11,043 Weighted risk exposure (DKKm) 79,976 74,686 - 66,426 62,033 59,329

No. of full-time employees at end-period 28 212 - 694 706 749 No. of employees split between the companies, at end-period 358 272 - - - - 1) In November 2018, share capital in the amount of DKK 1m was injected into Jyske Realkredit. If the capital injection had not been made, the return on equity would have amounted to 7.8% before tax and 6.2% after tax.

Annual Report 2018 / 2

Summary

‧ Pre-tax profit, exclusive of derived effects from IFRS 9: DKK 1,669m, corresponding to a return of 10.0% on average equity.

‧ Post-tax profit, exclusive of derived effects from IFRS 9: DKK 1,317m, corresponding to a return of 7.9% on average equity.

‧ Pre-tax profit: DKK 1,262m (2017: DKK 1,131m) corresponding to a return of 7.5% on average equity (2017: 7.9%).

‧ Net profit for the year: DKK 999m (2017: DKK 886m) corresponding to a return of 6.0% on average equity (2017: 6.2%).

‧ Core profit : DKK 1,262m (2017: DKK 1,082m).

‧ Core expenses: DKK 730m, corresponding to a decline by 14% relative to 2017.

‧ Ordinary impairment charges affected core profit by an income of DKK 38m (2017: an expense of DKK 202m).

‧ The effect from the implementation of IFRS 9 and adjustments to the standard amounted to DKK 407m before tax at the beginning of 2018. ‧ Equity injection of DKK 1 bn from the parent company Jyske Bank A/S. ‧ At the end of 2018, the capital ratio and Core Tier ratio was 22.1% (end of 2017: 20.8%).

% DKKbn Return on equity after tax Portfolio development 12 350 300

7 250

200 2 150 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 -3

DKKm % BasisindtægterCore income BasisomkostningerCore expenses Capital ratio 2.500 25,0 2.000 20,0 1.500 15,0 1.000 10,0 500 5,0 - 0,0 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018

Annual Report 2018 / 3

Comments by Management Outlook

In connection with the presentation of the Annual Re- For 2019, continued lending growth is expected, albeit port 2018, Lars Waalen Sandberg, Chief Executive Of- at a more moderate pace than seen until now. ficer, states: In 2019, a new intra-group settlement model will be ‘Today Jyske Realkredit announces a profit of DKK introduced relating to the distribution of mortgage 999m, corresponding to a return on equity of 6.0%. loans from Jyske Bank. Due to the agreement, Jyske The profit was extraordinarily affected by one-off ad- Realkredit will pay a higher distribution fee than has justments of loan impairment charges and provisions been the case until now, on the other hand, Jyske for guarantees at the beginning of 2018 due to the im- Realkredit will obtain the right of offsetting recognised plementation of IFRS 9. Adjusted for this item, the profit losses against loans. The higher net expenses ensuing amounted to DKK 1,317m, corresponding to a return of from the agreement that Jyske Realkredit will have to 7.9% on average equity. pay relate to the hedging of the credit risk. The ultimate effect of the agreement depends on the development The core profit rose relative to 2017, some reasons be- of losses and impairment charges. ing the lower impairment charges and lower costs. Moreover, the core profit was favourably affected by a Provided that impairment charges and return on non-recurring income from the sale of the company’s securities are unchanged, the annual results (exclusive owner-occupied property as well as lower interest ex- of one-off effects) are expected to be slightly below the penses due to the redemption of senior loans in January level for 2018. 2018. The capital base is solid at a capital ratio of 22.1%.

The portfolio of mortgage loans increased by DKK 19.3 bn. ’

Annual Report 2018 / 4

The year 2018 Adjustment of product range In 2018, Jyske Realkredit increased lending by DKK 19.3 Through Jyske Bank, Jyske Realkredit has consolidated bn. Since the merger with Jyske Bank, Jyske Realkredit’s the range of new home loans for personal clients (0- loan portfolio has grown by about DKK 120 bn, which is 80% mortgaging) so that clients will experience evidence of the Group's strong market position with enhancement of processes and simplification. In future, respect to products and prices. the Jyske Bank Group will offer only one variety of each product, which are all marketed under the ‘Jyske’ Company-specific circumstances brand. Jyske F1 is offered with the possibility of In consequence of the Jyske Bank Group’s decision in redemption at the price of 100 at five days’ notice. future only to use one brand, the company changed its Apart from this, the mortgage products are unchanged. name to Jyske Realkredit A/S on 21 June 2018, with BRFkredit a/s as its secondary name. On 3 December Implementation of new impairment rules, IFRS 9 2018, the company launched two new websites: IFRS 9 took effect on 1 January 2018 and have been jyskerealkredit.dk and jyskerealkredit.com; and also, the incorporated in the Danish accounting rules. As a company’s mortgage bonds - new as well as existing consequence of the new rules, impairment charges are ones - will in future be referred to as ’Jyske Realkredit’. calculated as the expected loss on all loans, advances and guarantees. Carsten Tirsbæk Madsen resigned from the company’s Executive Board on 30 June 2018. The Supervisory Due to the company’s implementation of and Board appointed Lars Waalen Sandberg to Chief adjustment to IFRS 9 derived effects, the balance of Executive Officer as of 1 July 2018 and Torben Hansen impairment charges increased by DKK 407m (DKK 317m to Director as of 1 October 2018. Carsten Tirsbæk after tax) on 1 January 2018, which affected the profit Madsen continues in the Jyske Bank Group as Director in early 2018. The overall effect was fully recognised in of Jyske Bank Personal clients. the financial statements and solvency ratio in the first quarter of 2018. Anders Dam and Laila Busted resigned from the Supervisory Board of the company on 30 June 2018, Capital injection and Carsten Tirsbæk Madsen, Peter Schleidt and Anette On 20 November 2018, an extraordinary general Lykke Poulsen joined on 1 July 2018. Anette Lykke meeting was held at Jyske Realkredit, and the general Poulsen resigned from the Supervisory Board on 30 meeting approved the Supervisory Board's motion to November 2018. Now the Supervisory Board consists of expand the share capital by DKK 1 bn at par. Carsten Tirsbæk Madsen, Niels Erik Jakobsen, Per Skovhus, Peter Schleidt and Kim Henriksen, the last- Sales of owner-occupied property mentioned elected by the employees. The Supervisory Jyske Realkredit’s owner-occupied property, Board elected Carsten Tirsbæk Madsen chairman and Klampenborgvej 205, was sold at the end of June 2018. Niels Erik Jakobsen deputy chairman. The sale affected ’Other income’ by DKK 185m. In connection with the sale, Jyske Bank has entered into Joint processeses and systems an 11-year lease agreement for the property with the In 2017, the Jyske Bank Group gathered the client- buyer. oriented entities of the organisation in Jyske Bank to make it simpler for clients to bank with Jyske Bank. In 2018, the Jyske Bank Group worked on optimised home loan processes for personal clients. The home loan processes are in line with the decision that it must be easy and simple to bank with the Group - no matter which product or service our clients demand. At the end of the year, the processes for personal clients are more or less uniform, and in 2019 the Group will continue to work on similar processes for corporate clients.

Annual Report 2018 / 5

Comments on the financial statements

Core profit and net profit for the year, DKKm Index Q4 Q3 Q2 Q1 Q4 2018 2017 18/17 2018 2018 2018 2018 2017

Administration margin income, etc. 1,896 1,881 101 483 475 472 465 482 Other net interest income1 77 -60 - 16 13 29 19 5 Net fee and commission income, etc. 256 262 98 74 91 25 67 77 Value adjustments, etc.1 -84 28 - -23 -12 -22 -27 20 Other income 216 24 900 21 2 191 2 3 Core income 2,361 2,135 111 571 569 694 527 586 Core expenses 730 851 86 178 178 192 182 200 Core profit before loan impairment charges and provisions for guarantees 1,631 1,284 127 394 391 502 344 386 Loan impairment charges and provisions for guarantees (- = income) -38 202 - -81 -18 40 21 102 Core profit 1,669 1,082 154 475 409 462 323 285 Investment portfolio earnings 1 - 49 ------14 Profit before IFRS 9 implementation 1,669 1,131 148 475 409 462 323 271 IFRS 9-derived adjustment of impairment charges, beginning of 2018 407 - - - - - 407 - Pre-tax profit 1,262 1,131 112 475 409 462 -84 271 Tax (- = income) 263 245 107 109 88 84 -19 58 Profit for the year 999 886 113 366 321 378 -65 213 1 As of 2018, the return on Jyske Realkredit’s portfolio of securities (investment portfolio earnings) is recognised as core income under ‘Other net interest income’ and ‘Value adjustments, etc.’ as the purpose of the portfolio of securities is to support mortgage operations, including compliance with LCR rules, etc.

Profit for the year Core income Jyske Realkredit generated a pre-tax profit of DKK Core income consists primarily of administration margin 1,262m. Calculated tax amounted to DKK 263m, and net income, etc. as well as brokerage and fee income from profit for the year amounted to DKK 999m. The net mortgage activities and amounted to DKK 2,361m in profit for the year corresponds to a return on average 2018 against DKK 2,135m in 2017. equity of 6.0 % compared to 6.2 % in 2017. Administration margin income amounted to DKK The pre-tax profit was adversely affected by the 1,896m in 2018 against DKK 1,881m in 2017. implementation of IFRS 9, which resulted in a non- Administration margin income was positively affected recurring adjustment of loan impairment charges and by the increasing portfolio, both for personal and provisions for guarantees of DKK 407m at the beginning corporate clients, yet negatively affected by falling of 2018 (DKK 317m after tax). The adjustment is average administration margin rates paid by the clients. presented as a special item, and therefore comparability of the individual items is still possible. In Within the personal client area, the portfolio grew by addition, the sale of the owner-occupied property DKK 7.5 bn in 2018. The shift on the part of clients to Klampenborgvej 205 resulted in an accounting gain of fixed-rate loans and/or amortized loans, etc., for which DKK 185m (DKK 153m after tax). the administration margin/the risk are lower continued in 2018 and resulted in a minor decline in the average Core profit administration margin rate paid by clients. In 2018, core profit before loan impairment charges and provisions for guarantees amounted to DKK 1,631m Within the corporate client area, the portfolio increased against DKK 1,284m in 2017. in 2018 by DKK 12.0 bn, and this increase took place mainly within the property category Private rental In 2018, core profit amounted to DKK 1,669m against properties (rental housing). In the corporate client area, DKK 1,082m in 2017. the portfolio of weak loans with high administration margin rates fell due to repayments and renegotiation of exposures of which the credit quality has improved,

Annual Report 2018 / 6

which contributes to a minor decline in the average service agreements, Jyske Realkredit pays Jyske Bank to administration margin rate. perform these tasks.

Other net interest income consisted, among other Loan impairment charges and provisions for guarantees things, of interest on the portfolio of securities, interest The implementation of IFRS 9, which took effect on 1 expenses for senior debt incurred in order to comply January 2018, caused effects that resulted in a non- with SDO and rating requirements as well as various recurrent adjustment in the amount of DKK 407m of interest income and amounted to an income of DKK loan impairment charges and provisions for guarantees 77m in 2018 against an expense of DKK 60m in 2017. at the beginning of 2018. Exclusive of the IFRS 9-derived The improvement can be attributed to both effects, loan impairment charges and provisions for reclassification of the portfolio of securities and Jyske guarantees amounted in 2018 to an income of DKK 38m Realkredit’s repayment of senior debt in January 2018, against and expense of DKK 202m in 2017. which resulted in a reduction of DKK 97m in interest payments in 2018. The increase in IFRS 9 impairment charges is not a reflection of deteriorated credit quality, but it solely Net fee and commission income, etc. fell by DKK 6m reflects that as of 1 January 2018 impairment charges and amounted to DKK 256m in 2018 compared to DKK must be recognised for all loans from the very moment 262m in 2017. Loan application fees rose by DKK 17m the loan is disbursed. because, as of August 2018, home loans were chiefly distributed directly to Jyske Realkredit. On the other Relative to total loans, the effect from the impairment hand, fee income from refinancing fell by DKK 12m, as charges on the income statement amounted, exclusive the volume of loans that were refinanced in 2018 was of the IFRS 9 regulation, to -0.01% in 2018 (0.11% lower than in 2017. In addition, expenses rose for the inclusive of the IFRS 9 regulation) against 0.07% in market-maker scheme relating to pricing and trade in 2017. Jyske Realkredit’s bonds as well as guarantee commission to the state relating to 100% government- The effect on the income statement was in 2018 guaranteed loans for subsidised housing. distributed with an expense of DKK 449m (2017: an expense of DKK 192m) on personal clients and an Value adjustments, etc. amounted to an expense of DKK income of DKK 80m (2017: an expense of DKK 10m) on 84m against an income of DKK 28m in 2017. Among corporate clients. other things, the difference of DKK 112m was caused by a negative value adjustment of the portfolio of The total balance of impairment charges amounted to securities, which was previously included in the return DKK 1,380m at the 2018 (end of 2017: DKK 1,219m), on the portfolio. Typically, the portfolio of securities corresponding to 0.4% of total loans (0.4% at the end of consists of bonds with a short time to maturity that 2017). The increase was solely caused by the IFRS 9 have been bought at a price above par and are held to implementation. maturity, which results in a positive interest yield and a negative value adjustment. Jyske Realkredit's holding of assets held temporarily amounted to DKK 376m at the end of 2018 against DKK In 2018, Other income amounted to DKK 216m against 435m at the end of 2017. The decline could primarily be DKK 24m in 2017. The increase could primarily be attributed to value adjustments of properties already attributed to a gain of DKK 185m from the sale of Jyske acquired through foreclosure. Realkredit’s owner-occupied property, Klampenborgvej 205, at the end of June 2018. In connection with the Jyske Realkredit had no exposures after deductions that sale, Jyske Bank has entered into an 11-year lease accounted for more than 10% of the capital base. The agreement for the property with the buyer. concentration risk is followed closely and all large exposures are monitored on an on-going basis. Core expenses In 2018, core expenses amounted to DKK 730m against Rising property prices in the major urban areas have a DKK 851m in 2017. The decline of DKK 121m can be positive effect on Jyske Realkredit’s collateral. The attributed to the on-going adjustment of the staff as number of credit events observed are still falling, both well as savings due to outsourcing to Jyske Bank of a in the personal client as well as the commercial number of work functions/areas. Based on intra-group segment.

Annual Report 2018 / 7

Loans, advances and guarantees, DKKm Index Q1 Q4 2018 2017 18/17 Q4 2018 Q3 2018 Q2 2018 2018 2017 Non-performing loans and guarantees: Loans, advances and guarantees before impairment charges 4,485 8,377 54 4,485 4,463 4,391 4,944 8,377 Impairment charges 508 928 55 508 640 602 714 928 Loans, advances and guarantees after impairment charges 3,977 7,449 53 3,977 3,823 3,789 4,230 7,449

NPL ratio (%) 1.2 2.4 - 1.2 1.2 1.2 1.4 2.4 NPL contribution ratio (%) 11.3 11.1 - 11.3 14.3 13.7 14.4 11.1

Past due mortgage loans (90 days) 406 534 76 406 406 460 463 534 Operational loan impairment charges and provisions for guarantees (- = income) -38 202 - 82 -18 41 428 101 IFRS 9-derived adjustment of impairment charges, beginning of 2018 407 - - - - - 407 - Operating loss 280 294 95 53 21 94 112 89 Non-performing loans, advances and guarantees fell significantly from the fourth quarter of 2017 to the first quarter of 2018, which can materially be attributed to changed definitions in consequence of the implementation of IFRS 9.

Arrears rate The arrears rate measured 90 days after the September repayment date amounted to 0.2%, i.e. an unchanged level relative to the corresponding repayment date in 2017. The arrears rate measured 15 days after the De- cember 2018 repayment date amounted to 0.7% against 0.8% in the corresponding period of 2017.

Arrears rate Dec. Sept. June March Dec. Sept. 2018 2018 2018 2018 2017 2017 After 90 days - 0.2 0.2 0.2 0.1 0.2 After 15 days1) 0.7 1.6 0.9 0.7 0.8 0.9 1) The arrears rate measured 15 days after the September 2018 repayment date has increased by 1.6%. The increase relates primarily to one property for which the entire outstanding debt owed on the loan fell due for payment. Exclusive of this property, the arrears rate measured 15 days after the September 2018 repayment date amounted to 1.1%.

Annual Report 2018 / 8

The fourth quarter of 2018 compared to the third quar- Profit for the year relative to outlook ter of 2018 The Annual Report for 2017 stated expectations of a The profit before tax for the fourth quarter 2018 pre-tax profit for 2018 at an unchanged level relative to amounted to DKK 475m against DKK 409m for the third 2017 exclusive of the IFRS 9 implementation, which was quarter of 2018. The primary reason for the increase estimated at DKK 300m-400m. was a quarterly reversal of impairment charges of DKK 81m (DKK 18m in the third quarter). The profit before the IFRS 9 implementation came to DKK 1,669m for 2018, i.e. DKK 538m better than the Administration margin income, etc. rose from DKK 475m profit for 2017. The deviation can be attributed to a in the third quarter of 2018 to DKK 483m in the fourth gain from the sale of an owner-occupied property in the quarter of, and the increase can be attributed to the amount of DKK 185m; a reduction by DKK 97m in inter- positive development of the loan portfolio. Moreover, est payments following repayment of senior loans; a de- the fall in the average administration margin rate was cline in costs by DKK 121m; lower losses and impair- limited in the fourth quarter. ment charges (exclusive of the IFRS 9 adjustment) by DKK 240m; and a lower return by DKK 125m on the Other interest income rose by DKK 3m from the preced- portfolio of securities. ing quarter. The IFRS 9 implementation amounted to DKK 407m Net fee and commission income fell from DKK 91m in against the expected range of DKK 300m-400m. the third quarter to DKK 74m in the fourth quarter. The reason for the decline was that in the third quarter fee Market risk income increased in connection with the transfer of a Market risk is the risk of loss following movements in part of the loan portfolio relating to Subsidised Housing the financial markets (interest rate, share price and for- (rental housing) to a new capital centre, which is guar- eign currency risks). Jyske Realkredit’s market risks re- anteed by the state. late to the securities portfolio for which the interest- rate risk and the spread risk on the bond portfolio are Value adjustments amounted to an expense of DKK the most important ones. Jyske Realkredit’s risk is lim- 23m in the fourth quarter against an expense of DKK ited, and the funding denominated in EUR was hedged 12m in the third quarter and can be attributed to nega- through currency swaps. Market risks that stem from tive value adjustments of Jyske Realkredit’s portfolio of the other part of the balance sheet are modest due to securities. the balance principle and the close correlation between loans and funding. For the determination of market risk Other income, etc. rose from DKK 2m in the third quar- relative to solvency, Jyske Realkredit’s portfolio of secu- ter to DKK 21m in the fourth quarter, and the increase rities was in 2018 classified as being outside the trading can mainly be attributed to extraordinary dividends. At portfolio, and therefore credit risk has been calculated the end of 2018, Jyske Realkredit had a limited amount in connection with the portfolio of securities. of unlisted shares in the amount of DKK 212m. Interest-rate risk expresses the risk of loss following Relative to the third quarter, core expenses still changes in interest rates corresponding to a parallel amounted to DKK 178m in the fourth quarter. shift of the yield curve by 1 percentage point and is measured on a daily basis. Jyske Realkredit’s interest- Losses and impairment charges amounted to an income rate instruments, etc. are chiefly placed in bonds with a of DKK 81m in the fourth quarter against an income of short time to maturity with a limited interest-rate sensi- DKK 18m in the third quarter. The income in the fourth tivity. At the end of 2017, Jyske Realkredit’s interest- quarter of 2018 related primarily to reversal of impair- rate risk calculated according to the standardised ap- ment charges in the corporate client segment. proach of the FSA came to DKK 43m (2017: DKK 61m), which is considerably below the limit defined by the Su- pervisory Board as well as the statutory limit.

Jyske Realkredit’s shareholding consisted solely of infrastructure shares and strategic shares outside the trading portfolio. If share prices in general fall by 10%, Jyske Realkredit will suffer an investment loss of DKK 21m (2017: DKK 22m).

Annual Report 2018 / 9

The currency positions are very modest in Jyske 6.2% The increase related to DKK 7.5 bn in the personal Realkredit’s balance sheet and amounted to 0.8% of the client area and DKK 12.0 bn in the corporate client area, capital base (2017: 1.4%). of which DKK 7.0 bn are in the property category Private rental properties and DKK 2.9 bn in Subsidised housing Balance sheet (rental housing). At the end of 2018, Jyske Realkredit’s balance sheet amounted to DKK 353 bn (DKK 338 bn at the end of In November 2018, Jyske Realkredit received new share 2017). capital in the amount of DKK 1.0 bn. Equity was affected by the net profit for the year by DKK 999m as The positive business volume growth continued in 2018 well as other comprehensive income of DKK 13m, and as the volume grew from DKK 308 bn at the end of 2017 amounted then to DKK 17,744m at the end of 2018 to DKK 327 bn at the end of 2018, corresponding to (DKK 15,731m at the end of 2017).

Summary of Balance Sheet, end of period, DKKm Index Q4 Q3 Q2 Q1 Q4 2018 2017 18/17 2018 2018 2018 2018 2017

Assets / equity and liabilities 353,280 337,732 105 353,280 344,921 339,696 335,592 337,732 Mortgage loans, nominal value 319,454 299,516 107 319,454 312,892 307,837 303,534 299,516 Loans and advances, fair value 327,403 308,121 106 327,403 319,932 315,717 310,730 308,121 Issued bonds, fair value 332,955 316,305 105 332,955 324,604 319,064 315,379 316,305 Equity 17,744 15,731 113 17,744 16,378 16,057 15,679 15,731

Over the years 2014-2018, Jyske Realkredit’s equity results for the individual years totalling DKK 3,294m; as rose from DKK 10,362m to DKK 17,744m. The increase well as other comprehensive income of DKK 88m. No can be attributed to capital injections in the amount of dividend was distributed over the period. DKK 4,000m from the parent company Jyske Bank; the

Changes in equity, end of period, DKKm 2018 2017 2016 2015 2014 2014 -2018

Beginning of period 15,731 12,812 11,781 11,084 10,362 10,362 Capital injection 1,000 2,000 - 1,000 4,000 Profit for the year 999 886 1,011 685 -287 3,294 Other comprehensive income 13 33 20 12 10 88 Dividend ------End of year 17,744 15,731 12,812 11,781 11,084 17,744

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Capital management, funding and Minimum capital requirement Determination of the minimum capital requirement ex- liquidity presses the regulatory capital requirement and rests on the risk types credit risk, market risk and operational Capital management objective and planning risk. Jyske Realkredit has been approved to apply the Jyske Realkredit's capital-management objective and advanced internal rating-based approach (AIRB) when desired risk profile aim to reach a solvency ratio suffi- determining credit risk. The approval extends to the ap- cient for Jyske Realkredit to continue its lending activi- plication of advanced methods for determining the min- ties during a period of difficult business conditions. The imum capital requirement for the main part of Jyske available capital must be such that regulatory and inter- Realkredit's credit portfolio. nal capital requirements are met during such a period, and it must be possible for Jyske Realkredit to weather The minimum capital requirements for market and op- heavy unexpected losses.Jyske Realkredit’s capital plan- erational risks are measured according to the standard- ning is based on a long-term objective to support and ised approach. ensure mortgage activities. Minimum capital requirement by risk type Capital DKKm 2018 2017 The development of Jyske Realkredit's capital and Core Credit risk 6,112 5,569 Tier 1 capital ratios appears from the table below. Market risk 2 152 Capital Operational risk 284 253 Index Minimum capital requirement, Pillar I 6,398 5,975 Capital requirement, transitional provi- 2018 2017 18/17 sions - 3,726 Capital ratio 22.1 20.8 106 Total minimum capital requirement 6,398 9,701 Core capital ratio incl. hybrid capital Transitional rules for capital requirements according to Basel I (%) 22.1 20.8 106 ended at the end of 2017. Common Equity Tier 1 capital ratio (%) 22.1 20.8 106 ICAAP and individual solvency requirement At the end of 2018, the capital and Core Tier 1 capital Jyske Realkredit’s ICAAP (Internal Capital Adequacy As- ratios were higher than the corresponding ratios at the sessment Process) forms the basis of the assessment of end of 2017, i.e. a solid level relative to Jyske Jyske Realkredit’s capital structure and hence the deter- Realkredit’s long-term capital management objective of mination of the company’s adequate capital base as 17.5%. The increase in the ratios can be ascribed to the well as its individual solvency requirement. The assess- recognition of the profit for the year and the increase of ment is based on the current relation between the com- the share capital by DKK 1 bn in November 2018. Over pany’s risk profile and capital structure as well as for- the same period, the overall risk exposure amount rose ward-looking considerations that may affect this. by about DKK 5.3 bn. Adequate capital base according to the 8+ method Capital base The adequate capital base expresses Jyske Realkredit's At the end of 2018, the Common Equity Tier 1 capital own assessment of the capital requirement given Jyske was identical with the capital base, as was the case at Realkredit’s risk profile. the end of 2017. The high proportion of Common Eq- uity Tier 1 capital is in line with Jyske Realkredit’s wish The determination of the adequate capital base for to have a high quality of its capital base. Jyske Realkredit takes place according to the 8+ method based on the capital requirement of 8% of the total risk Capital base and overall risk exposure exposure with additions to cover further risks that are DKKm 2018 2017 assessed not to be covered by the capital requirement. These may either be risks that are assessed not to be Equity 17,744 15,731 covered by the capital requirement or risks that are as- Intangible assets 0 -1 sessed to above normal in relation to the capital re- Prudent valuation -23 -20 quirement for the risk type in question. Deferred tax assets -4 - Diff. between expected loss and impairment charges (deduction) -29 -181 When assessing the adequate capital base, all circum- Core capital/Common Equity Tier 1 capi- stances as mentioned in appendix 1 in the Executive Or- tal 17,687 15,529 der on Calculation of Risk Exposures, Own Funds and Capital base 17,687 15,529 Solvency Need are included. Based on Jyske Realkredit's Total risk exposure 79,976 74,686 business model and risk profile, the importance of the individual circumstances on Jyske Realkredit's capital

Annual Report 2018 / 11

structure is assessed, and for important circumstances, to 2% of total loans. Due to the end of the transitional the size of the capital addition is quantified based on rule at the end of 2017, the capital buffer has increased. the guidelines in the instructions on adequate capital On an on-going basis, Jyske Realkredit assesses the capi- base and solvency requirements. tal requirements in respect of risk appetite and future capital requirements. For a complete list of capital additions, please see appendix to Jyske Bank's Risk and Capital Management Liquidity Coverage Ratio (LCR) 2018. The binding requirement for Jyske Realkredit’s holding of liquid assets originates from the LCR floor require- Individual solvency requirement and capital buffer ment of 2.5% of total mortgage loans, which at the end At the end of 2018, Jyske Realkredit had calculated an of the fourth quarter of 2018 corresponded to almost individual solvency requirement of 9.7%. (2017: 9.3%). DKK 8.2 bn. Jyske Realkredit has unencumbered liquid assets in the amount of almost DKK 9.9 bn and hence a The table below shows the contribution from the indi- significant liquidity surplus relative to the LCR floor re- vidual types of risk to the adequate capital base and the quirement. individual solvency requirement. In connection with the determination and compliance Individual solvency requirement with the LCR requirement, Jyske Realkredit has been al- DKKm 2018 % of REA 2017 % of REA lowed to offset interdependent incoming and outgoing cash flows related to mortgage loans, cf. Article 26 of Credit risk 7,352 9.2 6,328 8.5 the LCR regulation. This permission came with a specific Market risk 90 0.1 298 0.4 liquidity floor requirement of 2.5% of the total mort- Operational risk 334 0.4 303 0.4 gage loans stipulated by the FSA. Total 7,776 9.7 6,929 9.3 Jyske Realkredit’s HQLA (high-quality liquid assets) is The statutory buffers are currently the SIFI buffer of primarily made up by the bond portfolio. At the end of 1.2% of the total risk exposure and the capital conserva- 2018, the liquidity coverage ratio (LCR) amounted to tion buffer of 1.875% of the total risk exposure. Hence 315% (518% at the end of 2017). The FSA has changed the individual solvency requirement plus statutory buff- its interpretation of what can be included in HQLA in re- ers amount to 12.8% of the total risk exposure. The spect of meeting the LCR requirement. If the bonds are Minister for Industry, Business and Growth has chosen used as supplementary collateral, they cannot be in- to follow the recommendation from The Systemic Risk cluded in HQLA to meet the LCR requirement, which in Council to activate the countercyclical buffer rate by actual fact is a tightening of the requirement. 0.5 percentage point with effect as of the first quarter of 2019 and by another 0.5 percentage point as of the Net Stable Funding Ratio (NSFR) third quarter of 2019, and the effect can in full be in- In the EU, the Commission's proposal for a revision of cluded in Jyske Realkredit’s capital base. CRR/CRD IV, EU is being negotiated, which, among other things, includes a requirement for a structural Net The capital buffer plus earnings from operations denote Stable Funding Ratio (NSFR) to ensure that the funding the maximum sustainable loss without the need for ad- profile of the institutions is sufficiently long and stable ditional capital. Jyske Realkredit’s large proportion of in the 1-year term. Tier 1 capital cements the quality of the total capital. The recommendation acknowledges the Danish mort- Capital buffer gage credit institution's loans a being financed in a sta- DKKm 2018 % of REA 2017 % of REA ble manner as the loans are either match funded during Capital base 17,687 22.1 15,529 20.8 the entire life of the loan or financed with short-term a) Core capital 17,687 22.1 15,529 20.8 bonds permitting extension of maturities in the event of b) Supplementary capital failed refinancing (refinancing trigger). less deductions - - - - Individual solvency requirement 7,776 9.7 6,929 9.3 Leverage ratio Individual solvency re- The leverage ratio is defined as the ratio between Jyske quirement plus buffers 10,236 12.8 8,535 11.4 Realkredit’s core capital and total unweighted expo- Capital requirement, sures (inclusive of items not recognised in the balance transitional provisions - - 9,701 13.0 sheet) and must amount to at least 3%. According to Capital buffer 7,451 9.3 5,828 7.8 the proposal set forth by the EU Commission, the lever-

age ratio as a capital requirement took effect on 1 Janu- The capital buffer also meets the debt buffer require- ary 2019. ment, which when fully phased in in 2020 will amount

Annual Report 2018 / 12

At the end of 2018, the leverage ratio for Jyske The supervisory diamond for mortgage credit institutions Realkredit was 4.95%, which means it had increased by The supervisory diamond defines a number of special 0.4 percentage point relative to the level at the end of risk areas including specified limits that financial institu- 2017. The increase of the leverage ratio was primarily tions should generally not exceed. The supervisory dia- caused by the capital injection in November 2018. The mond limits applicable to Jyske Realkredit are shown leverage ratio, which does not assess risk, may be a sig- below. nificant limitation for an institution with a large proportion of loans with a low risk weighting. Supervisory diamond - benchmarks, % 2018 2017 Leverage ratio Concentration risk <100% 46.2 47.5 DKKm/% 2018 2017 Increase in loans <15% annually in the Core capital 17,687 15,529 segment: - Owner-occupied home and vacation Total exposure value 356,954 342,132 homes 6.3 13.3 Leverage ratio 4.95 4.54 - Residential rental property 2.6 7.1

- Other sectors 4.0 5.5 Other capital requirements In addition to the regulatory capital requirements, there Borrower's interest-rate risk <25% are further requirements to the size of Jyske - Residential property 19.7 20.8 Realkredit’s capital in the form of requirements from Interest-only schemes <10% Standard & Poor's as regards over-collateralisation as - Owner-occupied home and vacation well as supplementary collateral for covered bonds homes 7.3 7.9 (SDO). Loans with frequent interest-rate fixing: - Refinancing (annually) <25% 14.7 19.9 To maintain the AAA rating for all Jyske Realkredit’s cap- - Refinancing (quarterly) <12.5% 3.1 4.7 ital centres (B, E and General Capital Centre), Jyske The comparative figures were changed in connection with the revision Realkredit must meet the overcollateralisation from of the supervisory diamond Standard & Poor's. The individual capital centres must At the end of 2018, Jyske Realkredit met all benchmarks met various requirements depending on the composi- of the supervisory tion of the portfolios. At the end of 2018, the requirement amounted to DKK 10.8 bn (2017: DKK 11.3 bn) On an on-going basis, Jyske Realkredit reviews the insti- and must be met through liquid assets financed with tution's positions relative to the benchmarks. both debt instruments and capital instruments. Basel III/IV Issue of covered bonds (SDO) for the financing of loans The final version of the Basel rules for the calculation of takes place in Jyske Realkredit via capital centres E and risk-weights both according to the standardised ap- S. Loans based on the issue of covered bonds (SDO) proach and IRB was published at the end of 2017 and must be monitored on an on-going basis to ensure that included requirements for a lower level for the overall the LTV limit is complied with for each individual prop- risk weights as well as higher minimum floors for the es- erty. If the LTV limit is exceed, for instance, due to a de- timates of the advanced models. The Basel require- cline in the value of the property value, Jyske Realkredit ments will be fully effective when implemented in the must provide supplementary collateral. At the end of Capital Requirements Directive. 2018, the requirement of the supplementary collateral was calculated at DKK 6.6 bn against DKK 7.4 bn at the The lower level of the future capital rules will be phased end of 2017. in over the period 2022 to 2027. Currently it is still expected that the capital requirements will be higher than Debt buffer the ones today, but also at a level that the institution In 2016, the debt buffer was introduced for Danish will honour in 2022. mortgage credit institutions. At the end of 2018, the requirement was 1.6% of the institution’s loans, and the Group recovery plan requirement will increase to 2% in 2020. The debt Being part of the Jyske Bank Group, Jyske Realkredit is buffer requirement can be met through core capital and covered by the Group's recovery plan, which can be supplementary capital that is not already applied to used in the event that the Group or one of the compa- cover regulatory capital requirements, as well as senior nies gets into critical financial problems. debt. Currently, Jyske Realkredit’s overcollateralisation as regards the regulatory capital requirements suffices The recovery plan specifies a number of qualitative and to meet the debt buffer requirement. quantitative recovery indicators. The purpose of the in-

Annual Report 2018 / 13

dicators is, at an early point in time, to identify an ad- In 2018, Jyske Realkredit and Jyske Bank adjusted the verse development in the Group's or Jyske Realkredit’s product range, which resulted in changes to the funding capital, liquidity, profitability or asset quality as well as processes. Previously personal home loans were first in relevant macroeconomic and market-based indica- granted and registered with Jyske Bank on terms and tors. conditions similar to those for mortgage loans, and subsequently the loans were transferred to Jyske Realkredit The recovery plan aims to ensure continuation of the and financed through mortgage credit bonds through Group's critical business processes in a situation of sig- the joint funding agreement. This structure was nificant financial stress. Also, the recovery plan includes changed in 2018 to that adjustable-rate loans and calla- a series of recovery options that can be initiated with a ble loans on mortgage conditions will in future mainly view to improvement of solvency, etc. The Group recov- be financed directly by Jyske Realkredit. ery plan is revised annually and is submitted to the FSA in October. Issues in euro As the first Danish mortgage credit institution, Jyske In addition, as other Danish credit institutions, Jyske Realkredit issued in 2016 bonds denominated in euro to Realkredit pays an annual contribution to the Resolu- be used for the funding of 1-year adjustable-rate loans tion Fund, which is administered by Finansiel Stabilitet in Danish kroner. Issues take place at fixed benchmark (the Danish resolution authority). sizes of minimum EUR 500m and with maturities from five to ten years. In 2019, Jyske Realkredit will look into Risk and Capital Management 2018 the possibilities of issuing another euro bond in the Additional information about Jyske Realkredit’s internal benchmark size. risk and capital management procedures and the regulatory capital requirements is available in Jyske Bank's Breakdown of equity interest ‘Risk and Capital Management 2018', available via links In 2018, particularly foreign investors increased their on jyskerealkredit.dk . ownership share of mortgage bonds from Jyske Realkredit. Funding and bond issues Distribution of investors in Jyske Realkredit’s bond issues In 2018, Jyske Realkredit implemented several measures in order to comply with national and interna- 100% tional regulation and at the same time to be able to offer the clients the products they demand. 90% 80% Distribution of issues from capital centres 70% In 2018, Jyske Realkredit opened Capital centre S for 60% funding of loans for subsidised housing. It applies to 50% bonds issued by Capital Centre S that the Danish gov- 40% ernment will indemnify mortgage credit institutions for 30% all possible losses on loans and investors for losses on bonds. So far Danmarks Nationalbank, the central bank 20% of Denmark, has chosen to buy all bonds issued from 10% Capital Centre S. The loans from Capital Centre S origi- 0% nate mainly from Jyske Realkredit’s other capital cen- 2013 2014 2015 2016 2017* 2018** tres. PrivatePrivate investorer investors Bank Banking og realkredit and mortgage institutions ForsikringInsurance & & pension pension POffentlig Public sector sektor Udenlanske Foreign investors investorer In addition to bonds issued from Capital Centre S, Jyske Realkredit has chosen, in order to establish as large se- * Changes to the statement by Danmarks Nationalbank, the central ries as possible, to issue all new bonds in 2018 as cov- bank of Denmark. Danish companies’ foreign fund holdings changed to domestic investors. ered bonds (SDO) from Capital Centre E. Moreover, to ** November 2018 the extent possible Jyske Realkredit has moved the Source: Nationalbanken.dk and own calculations funding of mortgage loans from Capital Centre B to Cap- ital Centre E when refinancing the mortgages.

By far the largest proportion of bonds issued by Jyske Realkredit were issued as covered bonds (SDO) from Capital Centres E and S (95%).

Changes to the funding structure

Annual Report 2018 / 14

Jyske Realkredit’s mortgage bonds are mainly owned by Due to the 100% guarantee against losses issuded by Danish institutional investors, i.e. banks, investment as- the Danish government, bonds issued by Capital Centre sociations/mutual funds, pension funds, insurance com- S are classified as Level 1A according to LCR. panies, etc. Over the past couple of years, an increasing number of foreign investors buy Jyske Realkredit bonds Proportion of issued bonds broken down by LCR level for open Capital - and this trend continued in 2018. Foreign investors are Centres (B, E and S) especially interested in callable bonds. Previously, Jyske 90% 90% Realkredit had a lower proportion of foreign investors 80% 80% than other Danish mortgage credit companies, but at the end of November 2018 the proportion was practi- 70% 70% cally at the same level. 60% 60%

Funding of home loan with interest rate ceiling 50% 50% In 2018, Jyske Realkredit issued bonds to fund mortgage 40% 40% loans, where the borrower has an interest rate ceiling 30% 30% on the loan. The loans are funded either by long-term cibor bonds, where Jyske Realkredit buys interest-rate 20% 20% caps to hedge the borrowers' interest rate ceiling or by 10% 10% issuing cap-floater bonds. By funding loans through bonds with caps, Jyske Realkredit minimises the re-fi- 0% 0% nancing risk by issuing bonds with a longer maturity at Level 1A/1B level 2A Non level the same time as Jyske Realkredit grants loans at a 1. jan 2017 1. jan 2018 1. jan 2019 lower interest-rate and instalment risk.

Jyske Realkredit’s loan portfolio by time of refinancing CRR Article 129(7) The information according to the Article 129(7) CRR on covered bonds (SDO) (among other things, disclosure of 16% the value of the cover pool and outstanding covered bonds (SDO), geographical distribution and type of cov- 36% ered assets, maturity structure and loans more than 90 days past due) will be disclosed in an ECBC label tem- plate quarterly simultaneously with interim and annual reports. Please see jyskerealkredit.dk.

48% Rating Jyske Bank and Jyske Realkredit's joint issuer rating by Standard & Poor's (S&P) is A- (positive outlook), and Jyske Realkredit's bonds issued by Capital Centre E, Cap- RefinancingRefinansiering and og maturity fundingudløb of funding inden within for det the næste next åryear ital Centre B and the General Capital Centre are rated RefinancinRefinansieringg and og maturity fundingudløb of funding efter after mere more end 1than år 1 year AAA (stable). WithoutØvrige lånetyper refinancing

Ratings Sizes of series under LCR Rat- Date of rating / change of

To ensure that the issued bond series are of a sufficient As at 31 December 2018 ing rating size to be categorised as High Quality Liquid Assets Covered bonds (HQLA) in the LCR statement, Jyske Realkredit has cho- - issued out of Capital Centre E AAA 17-10-2011 sen to carry out the refinancing of F2 - F10 loans in Mortgage credit bonds April; the refinancing of F1 loans in January and Octo- - issued out of Capital Centre B AAA 17-10-2011 ber; and the loans funded by CIBOR in July. - issued out of the General Capi-

tal Centre AAA 27-12-2013 By gathering the refinancing events and issuing euro Issuer rating (long-term rating) A-1) 12-10-2011 bonds in benchmark sizes while the portfolio is gener- Issuer rating (short-term rating) A-21) 12-10-2011 ally growing, the proportion of bonds meeting the se- 1) On 5.april 2018, S&P confirmed Jyske Realkredit's senior issuer ries size requirements of liquid bonds in LCR increased rating at A-/positive/A-2 over 2018.

Annual Report 2018 / 15

Standard & Poor's percentage requirements of supplementary collateral to obtain the rating AAA for Jyske Governance Realkredit’s bonds fell in 2018 and amounted on aver- Jyske Realkredit is wholly owned by Jyske Bank A/S. age to 3.6% of total loans. Since S&P began to rate Jyske Consequently, the guidelines for corporate governance Realkredit’s bonds in 2011, the percentage requirement are stated in the Jyske Bank Group's Annual Report to achieve an AAA rating has not been lower than the 2018 and reference is made to this. level at the end of 2018. One reason for this is the improved credit quality of Jyske Realkredit’s loan portfolio. See also the 2018 Annual Report for the Jyske Bank

Supplementary collateral requirement to achieve an AAA rating from Group for information as regards issues such as corpo- S&P rate social responsibility, employee issues, Group Audit DKKbn % of loans Committee and Risk Committee, diversity and gender 25 10% composition.

20 8% Internal control and risk-management systems relating to financial reporting 15 6% The Supervisory Board and the Executive Board have overall responsibility for Jyske Realkredit’s financial re- 10 4% porting. The financial reporting process is based on the assumption that all relevant financial transactions are 5 2% entered correctly in the financial management system. To ensure that all financial transactions are entered cor- 0 0% rectly in the financial management system, and for the purpose of preventing, detecting and correcting any errors, deviations and omissions, daily, monthly and quarterly internal controls are performed as described in Mia.DKKbn kr. %% afof udlån loans (højre(right- akse)hand axis) procedures. Controls comprise both system controls

and manual controls. Internal controls are performed

regularly through reconciliation and proof on a balance S&P's overcollateralisation requirement for the capital of probability for all financial accounts, and the finance centres are met through funds from Jyske Realkredit's function checks and verifies the reconciliation made. equity. The overcollateralisation relative to S&P’s AAA The extent of reconciliation and control is based on an rating requirements is so high that Jyske Realkredit's is- assessment of the risk of errors, deviations and omis- suer rating can be downgraded by two notches without sions in the financial transactions and accounting items. this having any effect on the rating of Jyske Realkredit's Special focus is on the financial transactions and ac- bonds. Jyske Realkredit anticipates stable requirements counting items where estimates and assessments can of overcollateralisation in 2019 and is therefore ex- have a significant impact on the value of assets and lia- pected, with the current level of equity, to meet the bilities. See note 50 in the financial statements for a de- AAA requirement. tailed specification.

Reporting to the Supervisory Board, the Executive Board and business area managements takes place on an on-going basis. This reporting includes, among other financial data: - Income statement and balance sheet with comments on main items - Review of assets - Returns and risks on Jyske Realkredit’s securities portfolio, including interest rate and foreign currency risk - Credit risks, loan losses and impairment charges - Counterparty risks - Operational risks - Capital adequacy and solvency requirement - Liquidity - Outsourced activities

Annual Report 2018 / 16

All reporting is based on joint data. Jyske Realkredit through self-reviews in business areas and the securi- monitors developments in relevant legislation and regu- ties area as well as regular controls performed by the lations with a view to ensuring full compliance. In con- credit function, the compliance function and the fi- nection with the financial reporting process, detailed nance function. In addition, the internal audit regularly checklists are also filled in to ensure that all require- reviews selected areas in accordance with the audit ments are met. The Internal Audit Department continu- plan approved by the Group Audit Committee. The fi- ously reviews and reports on significant areas relating nance function collects and checks financial data on a to internal controls, risk management and reporting. monthly basis and reports this to Jyske Realkredit's Ex- Moreover, the Group Audit Committee of the Jyske ecutive Board. Bank Group, to which Jyske Realkredit belongs, will also review accounting, auditing and security matters. The Group Audit Committee and the Executive Board continuously monitor compliance with business proce- Risk Management function dures, internal controls, relevant legislation and other The purpose of the risk management function is to as- rules and regulations in connection with financial re- sist the Executive Board of Jyske Realkredit in gaining an porting and submit reports to the entire Supervisory overview of all materials risks, ensuring a clear and un- Board. ambiguous allocation of responsibility for proactive risk management, assessing the adequacy of the risk tar- Company auditors gets, reports and models employed in risk management The Annual General Meeting elects an independent au- and communicating its positions on the material risks ditor on the recommendation of the Supervisory Board. and their size. Risk management at Jyske Realkredit forms part of the Jyske Bank Group's overall risk man- Prior to the election, the Group Audit Committee has agement. The function is an entity in Finance and Risk evaluated the skills, the independence, etc. of the nomi- Management at Jyske Bank, with which professional in- nated auditor. Jyske Realkredit is also covered by the teraction has been established. Jyske Bank Group's Internal Audit, which reports to the Supervisory Board. Internal Audit audits the financial For a more detailed description of Jyske Realkredit’s statements in cooperation with the auditors elected by credit management, reference is made to Jyske Bank the Annual General Meeting. In addition, Internal Audit Risk and Capital Management 2018, which is available performs audits of selected areas in accordance with an via links on jyskerealkredit.dk.1 audit plan approved by the independent auditors and submitted to the Group Audit Committee and the Su- Compliance function pervisory Board. As part of the audit, the auditors will In accordance with Danish legislation, Jyske Realkredit report any weaknesses identified in business proce- has a compliance function responsible for assisting dures and internal controls etc. to the Executive Board management in ensuring that Jyske Realkredit complies and the Supervisory Board, and also Internal Audit will with current laws and regulations as well as ethical regularly follow up on the implementation of recom- standards to minimise the risk of financial losses and mendations made. The Head of Internal Audit partici- loss of trust from clients, public authorities and the ex- pates in Group Audit Committee meetings. ternal environment in general. The compliance activities primarily consist of reviews of selected areas. The re- Whistleblower scheme views are made in close cooperation with the depart- Jyske Realkredit is covered by the joint whistleblower ments of Jyske Realkredit responsible for the area un- scheme of the Jyske Bank Group. der review. The work is concluded with a report to the Executive Board and an annual report to the Supervi- sory Board of Jyske Realkredit.

Internal control procedures The Supervisory Board sets policies and limits for the conduct of business, and the Supervisory Board and the Executive Board lay down and approve the overall requirements for business procedures and internal controls in key business areas. The internal control system is based on a separation of functions between client- oriented functions, authorisation and control. Controls are performed at several levels and are initiated

1 https://jyskerealkredit.dk/Regnskaber

Annual Report 2018 / 17

Other information The mortgage credit market 2018

For further information, please see jyskerealkredit.dk, Housing market 2018 which website gives detailed financial information Price in the housing market saw positive trends and about Jyske Realkredit. therefore prices across all categories over most of the country rose. Prices of detached houses rose by 3.6%, Dividend prices of flats by 3.1% and prices of vacation homes by At the Annual General Meeting, the Supervisory Board 6.4%. Prices of flats rose towards the end of the year af- will propose a dividend of 0% for 2018. ter having lost momentum over the year. The reasons were that prices had reached very high levels and also Financial calendar the tighter credit rules following the 2017 adjustment Jyske Realkredit anticipates releasing financial state- of the Executive Order on Good Business Practice, ments on the following dates in 2019: which had a strong effect on the market for flats. At a national level, this development also spread to the mar- 8 May Interim Financial Report, first quarter of 2019 ket for detached houses. 20 August Interim Financial Report, first half of 2019 30 October Interim Financial Report, first nine months of 2019 Price development in the housing market 130 2006 = 100 6.000 Events after the end of the financial year 120 No events have occurred after the balance sheet date 5.000 that would influence the income statement or balance 110 4.000 sheet set out in these financial statements. 100 3.000 90 2.000 80

70 1.000

60 0

Handler huse Handler ejerlejligheder Enfamiliehuse Ejerlejligheder, i alt

Source: Finans Danmark

The tighter credit rules, which the entire sector was subject to due to the Executive Order on Good Business Practice, also resulted in fewer home sales in 2018.

The mortgage credit market 2018 The year saw a lower level of activity in the mortgage market, which was reflected in the lower number of loan offers. In 2018, the mortgage credit institutions issued about 212,000 loan offers, while the historical average is about 300,000 offers. This could to some extent be explained by the tighter regulation. Moreover, due to the attractive, low level of interest rates, borrowers have for an extended period been offered attractive refinancing possibilities. Hence it will take a major move in interest rates to trigger renewed refinancing activity, as was witnessed most recently in 2015.

Annual Report 2018 / 18

Development in number of mortgage offers Of the total loans of just above DKK 319 bn, loans to private homeowners amounted to almost DKK 170 bn, and 400.000 in respect of home loans and loans for vacation homes, 350.000 Jyske Realkredit achieved an overall market share of 300.000 10.6%. In terms of new loans, the Personal Clients area

250.000 378.339 363.103

360.271 achieved a market share of 20.1%, which means that 357.630 200.000 345.129

312.003 every fifth Danish krone that was lent to homeowners 300.017

150.000 270.753

258.755 in 2018 was lent by Jyske Realkredit. 235.049

100.000 218.312

212.600 203.123 50.000 The Corporate Client segment also saw an increase in 0 the loan portfolio in 2018 and achieved a market share of 14% of the total volume of mortgage loans. In terms of new loans, Corporate Clients achieved a market LånetilbudLoan offer Gns.Average share of 31.2% in 2018. Subsidised Housing (rental

Source: Finans Danmark. housing) achieved a market share of just above 27% of total loans over the period. The lower demand for loan offers was reflected in the development of mortgage loans, which rose by just Market share (%) of total mortgage loans above DKK 60 bn in 2018. About DKK 40 bn of this in- 30,00% crease could be attributed to owner-occupied homes and vacation homes. Hence the development in mort- 25,00% gage loans was somewhat more modest at industry 20,00% level than what was observed years ago. The reason 15,00% was the stronger focus on consolidation on the part of the borrowers. 10,00% 5,00% In 2018, borrowers focused on being sure of the size of 0,00% their payments and on reduction of debt, as the most SubsidisedAlment CorporateErhverv PersonalPrivat SamletTotal popular type of loan among new bank loans were amor- byggerihousing client client tised loans, thanks to the very attractive, low interest- rate levels.

Borrowers choice of loans, DKKbn

1.400 1.200 1.000 800 600 400 200

2008K1 2008K4 2009K3 2010K2 2011K1 2011K4 2012K3 2013K2 2014K1 2014K4 2015K3 2016K2 2017K1 2017K4 2018K3

Fast Fixed forrentede rate lån Rentetilpasning Floating rate up to op1 year til og med 1 år

Jyske Realkredit's market share In 2018, Jyske Realkredit increased its loan portfolio by about DKK 20 bn to just above DKK 319 bn (nominally) at the end of the year despite the contraction of the mortgage credit market in 2018. Jyske Realkredit obtained an overall market share of 11.5% of total mortgage loans, equal to an increase in net lending of all business areas by almost 30% in 2018.

Annual Report 2018 / 19

Business areas Corporate clients Jyske Realkredit offers loans and financial services to Corporate clients are serviced by Corporate and Institu- personal clients, corporate clients and clients in the tional Banking and Jyske Bank's other corporate client subsidised housing segment. The basis of the loan is the branches. client's property. With a view to ensuring the best possible offer in relation to the client's individual needs and In the corporate client area, cooperation takes place requirements, Jyske Realkredit is organised in an area with the largest players in the professional property catering to personal clients and an area catering to cor- market. Focus is primarily on residential rental property porate and subsidised housing clients. as well as office and business properties. The year was characterised by a number of large property transac- It is the ambition of Jyske Realkredit to make property tions. financing simpler for current and future homeowners, and in 2018 several digital solutions were developed to The market for cooperative housing societies was posi- support this ambition. tively affected by the low interest-rate level, resulting in favourable opportunities for advantageous financing. Personal clients However, in respect of establishment of new coopera- The personal client area covers lending to owner-occu- tive housing societies, the market was negatively af- pied homes and vacation homes in Denmark. fected by new government regulation.

Throughout 2018, the activity level was high, and Jyske In the area of subsidised housing, the entire sector fo- Realkredit communicated extensively with new and ex- cused on the implementation of the new government- isting clients in a market with a continuing low interest- guarantee model, which was adopted at the end of rate level. This resulted in loan offers in the amount of 2017, following which the government guarantees DKK 20.8 bn distributed over almost 11,800 offers. 100% for mortgage loans based on the special sector- focused mortgage credit bond. In 2018, the market was In 2018, the majority of Danish homeowners still chose still affected by refinancing of the existing portfolio, fixed-rate home loans. There is, however, still strong where the department contributed financial solutions demand for short-term floating-rate loans, which Jyske for new construction, renovation, etc. Realkredit offers despite the decline in 2018 relative to the level in 2017. Activity level 2018 The year 2018 was still characterised by a high level of Homeowners’ choice of loans investments in residential rental property in most parts of the country. Also in respect of other property types, 25.000 a high level of activity was observed. 20.000 Due to the very satisfactory lending activity in 2018, the 15.000 portfolio within the areas of corporate clients and coop- 10.000 erative housing societies had passed the DKK 100 bn landmark as at 31 December 2018. 5.000 0 RTL 1-2 RTL 3-4 RTL 5-6 FixedFastforrentet rate loans

2017 2018

Jyske Realkredit's loans for personal clients are distributed through Jyske Bank. In addition, Jyske Bank coop- erates with a number of independent estate agents and other players in respect of referral of clients.

Annual Report 2018 / 20 Income statement and statement of comprehensive income DKKm

Note 2018 2017

Income statement 4 Interest income 6,182 6,511 5 Interest expenses 4,222 4,565 Net interest income 1,960 1,946 Dividends, etc. 27 4 6 Fees and commission income 317 314 Fees and commission expenses 60 52 Net interest and fee income 2,243 2,212 7 Value adjustment (- is an expense) -81 -67 Other operating income 189 20 8.9 Employee and administrative expenses 707 823 19.20 Amortisation, depreciation and impairment charges 4 7 Other operating expenses 18 21 10 Loan impairment charges 369 202 Profit on investments in associates and group enterprises 10 19 Pre-tax profit 1,262 1,131 11 Tax 263 245 Profit for the year 999 886 Distributed to: Jyske Realkredit A/S shareholders 999 886 Total 999 886

Statement of Comprehensive Income Profit for the year 999 886 Other comprehensive income: Items that cannot be recycled to the income statement: Value adjustment of owner-occupied properties 17 24 Value adjustment of equity investments in group enterprises - 12 Tax on other comprehensive income -4 -2 Other comprehensive income after tax 13 33 Comprehensive income for the year 1,013 919 Distributed to: Jyske Realkredit A/S shareholders 1,013 919 Total 1,013 919

Annual Report 2018 / 21 Balance sheet DKKm

Note 2018 2017

Assets Cash balance and demand deposits with central banks 49 49 13 Due from credit institutions and central banks 6,438 9,762 14.15 Loans and advances at fair value 327,403 308,121 17 Bonds at fair value 18,381 18,182 Shares, etc. 212 215 Equity investments in group enterprises - 122 Intangible assets 0 1 Land and buildings, total - 434 18 of which investment property - 1 19 of which owner-occupied properties - 434 20 Other property, plant and equipment 3 5 21 Deferred tax assets 4 - 22 Assets in temporary possession 376 435 23 Other assets 414 394 Deferred income 1 13 Total assets 353,280 337,732

Equity and liabilities Liabilities 24 Due to credit institutions and central banks 76 741 25 Issued bonds at fair value 332,955 316,305 Issued bonds at amortised cost - 1,871 Current tax liabilities 262 252 Liabilities relating to assets held temporarily 7 7 26 Other liabilities 2,228 2,807 Deferred income 4 11 Total liabilities 335,533 321,995

Provisions 21 Provisions for deferred tax - 0 27 Other provisions 3 5 Total provisions 3 6

Equity Share capital 4,306 3,306 Share premium 102 102 Revaluation reserve - 73 Reserve according to the equity method - 74 Retained profit 13,335 12,176 Total equity 17,744 15,731 Total equity and liabilities 353,280 337,732

28 Off-balance sheet items Guarantees, etc. 0 8 Other contingent liabilities, etc. (loan offers, etc.) 15,434 19,152 Total guarantees and other contingent liabilities 15,434 19,160

Annual Report 2018 / 22 Statement of changes in equity DKKm

Share Share Revaluation Reserve Retained Total capital 1) premium reserve according to profit equity 2) the equity method

Equity at 1 January 2018 3,306 102 73 74 12,176 15,731 3) Adjustment at beginning of period according to new accounting rules - - - - -0 -0 Equity after adjustment at beginning of period 3,306 102 73 74 12,176 15,731

Profit for the year - - - - 999 999 Transferred from Retained profit - - -87 -74 160 - Other comprehensive income - - 13 - - 13 Comprehensive income for the year - - -73 -74 1,160 1,013 Capital injection 1,000 - - - - 1,000 Equity at 31 December 2018 4,306 102 - - 13,335 17,744

Equity at 1 January 2017 1,306 102 49 - 11,354 12,812

Profit for the year - - - - 886 886 Transferred from Retained profit - - - 74 -74 - Other comprehensive income - - 24 - 9 33 Comprehensive income for the year - - 24 74 822 919 Capital injection 2,000 - - - - 2,000 Equity at 31 December 2017 3,306 102 73 74 12,176 15,731

1) Share capital: All shares are owned by Jyske Bank A/S, and the share capital consists of 43,064,800 shares of DKK 100 each.

2) Of the equity an amount of DKK 16,942m (2017: DKK 14,465m) was allocated to meet the capital requirement at Capital centre E, Capital centre B, Capital Centre S, Jyske Realkredit’s series with joint and several liability and Husejernes Kreditkasse. The remaining equity of DKK 802m (DKK 1,266m) was allocated to meet the capital requirement of the General Capital Centre. Reference is also made to note 52, summary of Series financial statements. 3) Adjustments at beginning of period according to new accounting rules relate to Impairment charges on the item Due from credit institutions and central banks, etc. in the amount of DKK 72,000.

Capital statement

2018 2017

Equity 17,744 15,731 Intangible assets -0 -1 Difference between expected loss and the carrying amount of impairment charges -29 -181 Prudent valuation -23 -20 Deferred tax assets -4 - Common Equity Tier 1 capital / Core capital 17,687 15,529 Capital base 17,687 15,529

Weighted risk exposure involving credit risk etc. 76,396 69,615 Weighted risk exposure involving market risk 29 1,906 Weighted risk exposure involving operational risk 3,551 3,165 Total weighted risk exposure 79,976 74,686

Capital requirement, Pillar I 6,398 5,975 Capital requirement, transitional provisions - 3,726 Capital requirement, total 6,398 9,701

Capital ratio 22.1 20.8 Core capital ratio (%) 22.1 20.8 Common Equity Tier 1 capital ratio (%) 22.1 20.8

Transitional rules for capital requirements according to Basel I ended at the end of 2017.

For further information on the individual solvency requirement, please see the section in the Management's Review on "Capital management, funding and liquidity".

The determination of the individual solvency requirement was not covered by the audit.

Annual Report 2018 / 23 Notes

Table of contents, notes section No. Note

1 Key figures and ratios 2 Segmental financial statements 3 Segments - sales, geography and public subsidies 4 Interest income 5 Interest expenses 6 Fees and commission income 7 Value adjustments 8 Employee and administrative expenses 9 Number of employees 10 Loan impairment charges 11 Tax 12 Contractual time to maturity 13 Due from credit institutions and central banks 14 Loans and advances at fair value 15 Mortgage loans at fair value broken down by property category 16 Collateral by type 17 Bonds at fair value 18 Investment properties 19 Owner-occupied properties 20 Other property, plant and equipment 21 Deferred tax assets/Provisions for deferred tax 22 Assets held temporarily 23 Other assets 24 Due to credit institutions and central banks 25 Issued bonds at fair value 26 Other liabilities 27 Other provisions 28 Off-balance sheet items 29 Collateral 30 Security provided for financial assets and liabilities 31 Notes on fair value 32 Recognised financial instruments 33 The fair value hierarchy 34 Fair value of non-financial assets and liabilities 35 Fair value of financial assets and liabilities recognised at amortised cost 36 Risk exposure 37 Credit risk 38 Credit exposures by rating class 39 Maximum credit exposure 40 Impaired credit exposures, individual impairment charges and provisions 41 Market risk 42 Interest-rate risk 43 Currency risk 44 Share price risk 45 Liquidity risk 46 Operational risk 47 Derivatives 48 Transactions involving related parties 49 Group overview 50 Accounting policies 51 Definition of financial ratios 52 Summary of series financial statements

Annual Report 2018 / 24 Notes

1 Key figures and ratios 2018 2017 2016 2015 2014

Net interest and fee income 2,243 2,212 2,128 2,196 2,127 Value adjustment (- is an expense) -81 -67 -67 -270 -598 Employee and administrative expenses 707 823 815 848 857 Loan impairment charges (- is income) 369 202 -32 186 843 Profit on investments in associates and group enterprises 10 19 4 0 -168 Profit for the year 999 886 1,015 685 -287 Loans and advances 327,403 308,121 278,407 250,892 220,340 Equity 17,744 15,731 12,812 11,781 11,084 Total assets 353,280 337,732 307,027 269,975 256,145

Capital ratio 22.1 20.8 19.0 19.1 18.6 Core capital ratio (%) 22.1 20.8 19.0 18.8 18.5 Common Equity Tier 1 capital ratio (%) 22.1 20.8 19.0 18.8 18.5 Pre-tax profit as a pct. of average equity 7.5 7.9 10.6 7.9 -3.0 Net profit as a percentage of average equity 6.0 6.2 8.3 6.0 -2.7 Income/cost ratio (%) 2.1 2.1 2.6 1.9 0.8 Currency position (%) 0.8 1.4 1.1 1.2 1.2 Accumulated impairment ratio (%) 0.4 0.4 0.4 0.6 0.7 Impairment ratio for the year (%) 0.11 0.07 -0.01 0.07 0.38 Increase in loans and advances for the year (%) 6.7 9.8 10.0 16.5 6.1 Loans and advances relative to equity 18.5 19.6 21.7 21.3 19.9 Return on capital employed 0.28 0.26 0.33 0.25 -0.11

Reference is made to definitions of financial ratios, cf. note 51.

Annual Report 2018 / 25 Notes DKKm

2 Segmental financial statements

Core profit (mortgage credit) Core profit is defined as the pre-tax profit exclusive of investment portfolio earnings. In addition, the reporting format has been adjusted in order to obtain a better reflection of the earnings from clients than the income statement according to the Danish Executive Order on the Preparation of Financial Statements.

Investment portfolio earnings Until 2017, investment portfolio earnings included the return on Jyske Realkredit’s portfolio of securities. As of 2018, the return on the portfolio of securities is recognised as core income under ‘Other net interest income, etc.’ and ‘Value adjustments’ as the purpose of the portfolio of securities is now primarily to support mortgage operations, including compliance with LCR rules, etc.

2018 2017 Core profit Reclassi- Total Core profit Investment Reclassi- Total (Mortgage fication (Mortgage portfolio fication loans) loans) earnings

Administration margin income, etc. 1,895 - 1,895 1,881 - - 1,881 Other net interest income, etc. 77 -13 64 -60 115 10 65 Net interest income 1,973 -13 1,960 1,821 115 10 1,946 Dividends, etc. - 27 27 - - 4 4 Net fee and commission income 256 - 256 262 - - 262 Net interest and fee income 2,229 14 2,243 2,083 115 14 2,212 Value adjustments -84 3 -81 28 -66 -29 -67 Profit from equity investments - 10 10 - - 19 19 Other income 216 -27 189 24 - -4 20 Income 2,361 - 2,361 2,135 49 - 2,184 Expenses 730 - 730 851 - - 851 Profit before loan impairment charges and provisions for guarantees 1,631 - 1,631 1,284 49 - 1,333 Loan impairment charges and provisions for guarantees (- = income) -38 407 369 202 - - 202 IFRS 9-derived adjustment of impairment charges, beginning of 2018 407 -407 - - - - - Pre-tax profit 1,262 - 1,262 1,082 49 - 1,131

Alternative performance targets The alternative performance targets applied in the management's review constitute valuable information for readers of financial statements as they provide a more uniform basis for comparison of accounting periods.

No adjusting entries are made, and therefore the pre-tax profit for the year will be the same in the alternative performance targets of the management's review and in the profit according to the provisions of the Danish Executive Order on the Preparation of Financial Statements.

The above table illustrates relationships between income statement items under Jyske Realkredit (key financial data), page 2, and income statement items according to the Danish Executive Order on the Preparation of Financial Statements, page 21. Expenses in the above table relate to Employee and administrative expenses, Amortisation, depreciation and impairment charges as well as Other operating expenses in the income statement according to the Danish Executive Order on the Preparation of Financial Statements.

Reclassification relates to the following:

• Income of DKK 13m (2017: expenses of DKK 10m) due to value adjustments relating to the balance principle was reclassified from value adjustments to interest income.

• Dividend on shares, etc. of DKK 27m (2017: DKK 4m) is recognised under Other income.

• Profit from equity investments of DKK 10m (2017: DKK 19m) is recognised under Value adjustments.

• IFRS 9-derived adjustment of impairment charges at the beginning of 2018 of DKK 407m (2017: DKK -m) is shown on a separate line.

Annual Report 2018 / 26 Notes DKKm

3 Segments - sales, geography and public subsidies In 2018, Jyske Realkredit’s total sales amounted to DKK 6,687m (2017: DKK 6,845m).

The only activity of Jyske Realkredit is mortgage lending, which takes place solely in Denmark.

In 2018, Jyske Realkredit did not receive any special subsidies related to mortgage banking activities.

2018 2017

4 Interest income 1) Due from credit institutions and central banks -8 -4 Loans and advances 4,344 4,652 Administration margin 1,660 1,676 Bonds 201 242 Derivatives 146 114 Other interest income 0 0 Interest income before offsetting of interest on own bonds 6,343 6,679 Interest on own bonds, set off against interest on issued bonds 162 168 Total 6,182 6,511

1) of which interest income on reverse repos carried under "Due from credit institutions and central banks" -5 -2

5 Interest expenses 1) Due to credit institutions and central banks 18 22 Issued bonds 4,279 4,645 Other interest expenses 87 67 Interest expenses before offsetting of interest on own bonds 4,384 4,734 Interest on own mortgage bonds, set off against interest on issued bonds 162 168 Total 4,222 4,565

1) Of which interest expenses on repos carried under "Due to credit institutions and central banks" -4 -1

6 Fees and commission income Securities trading and custody services 211 225 Loan application fees 105 88 Other fees and commissions 0 1 Total 317 314

7 Value adjustment (- is an expense) 1) Mortgage loans -434 3,005 Other loans, advances and receivables at fair value - 2 Bonds -149 -24 Shares, etc. -0 17 Investment properties - 0 Currency -1 0 1) Currency, interest-rate and other contracts as well as other derivatives 254 -162 1) Issued bonds 251 -2,906 Total -81 -67

1) Value adjustments of the balance principle for Jyske Realkredit amounted to a total expense of DKK 16m (2017: DKK 0m), resulting from net value adjustments of the following items: Mortgage loans by DKK -434m (DKK +3,005m), issued mortgage bonds by DKK +251m (DKK -2,885m) and derivatives by DKK +167m (DKK -120m), recognised under "Currency, interest-rate and other contracts as well as other derivatives".

Annual Report 2018 / 27 Notes DKKm

2018 2017

8 Employee and administrative expenses Employee expenses Wages and salaries, etc. 32 323 Pensions 4 36 Payroll tax 8 41 Social security 0 1 Total 44 401

Salaries and remuneration to the Executive Board and the Supervisory Board Executive Board 6 7 Supervisory Board 0 0

Total 6 7

Other administrative expenses IT 24 88 Rent, lighting, heating, etc. 9 31 Other administrative expenses inclusive of intra-group service agreement 623 296 Total 657 414 Employee and administrative expenses, total 707 823

Wages and salaries, etc. Wages, salaries and short-term employee benefits 32 323 Total 32 323

Remuneration of the Supervisory Board (DKK '000) Laila Busted (resigned on 30 June 2018) 15 60 Kim Henriksen 60 60 Anette Lykke Poulsen (joined on 1 July 2018 - resigned on 30 November 2018) 25 - Directors' remunerations, total 100 120

Except for employee-elected members of the Supervisory Board, members employed by Jyske Bank do not receive any directors' remuneration from Jyske Realkredit.

Members of the Supervisory Board receive no shares, options, warrants or any other types of incentive pay. Moreover, members of the Supervisory Board receive no pension in the performance of their duties and obligations as members of the Supervisory Board.

The following members of Jyske Realkredit’s Supervisory Boards have as members of other supervisory boards or executive boards of other companies in the Jyske Bank Group earned remuneration from these companies in 2018: Per Skovhus an amount of DKK 8.5m (2017: DKK 9.2m), Niels Erik Jakobsen an amount of DKK 7.8m (DKK 8.0m), Peter Schleidt an amount of DKK 8.3m (elected to the Supervisory Board in 2018), Anders Dam an amount of DKK 9.9m (DKK 10.3m) (elected to the Supervisory Board in 2017 and resigned in 2018) and Sven A. Blomberg in an amount of DKK - (DKK 10.6m) (resigned from the Supervisory Board in 2017).

Remuneration of the Executive Board Carsten Tirsbæk Madsen (resigned on 30 June 2018) 2.1 4.0 Lars Waalen Sandberg 3.8 3.4 Torben Hansen (joined on 1 October 2018) 0.5 - Total remuneration of the Executive Board 6.4 7.4

The above allows for the value for tax purposes of provisions such as company car, company-paid telephone, etc. Of the above remuneration, an amount of DKK 0.1m is a variable remuneration for Lars Waalen Sandberg in 2018 (2017: DKK - m). Other amounts are fixed remuneration amounts. The Executive Board does not participate in any incentive programme. Jyske Realkredit has no contractual obligations concerning annual contributions to the Executive Board's pension schemes. Jyske Realkredit has no pension obligations or special termination obligations towards the Executive Board.

Remuneration of risk takers Number of members 10 20 Contractual remuneration 9.8 16.4 Variable remuneration - 0.3 Defined contribution pensions 1.3 2.1

The group comprises employees (exclusive of the Executive Board) with a special impact on the Group’s risk profile. For further information of the Jyske Bank Group's remuneration policy, reference is made to:

https://www.jyskebank.dk/wps/wcm/connect/24e6c342-e6d4-4899-99b3-1c1d2350bf6f/Lonpolitik-210317.pdf?MOD=AJPERES

Annual Report 2018 / 28 Notes DKKm

2018 2017

9 Number of employees Average number of employees for the financial year (full-time employees) 48 443 No. of employees at year-end 28 212

10 Loan impairment charges Loan impairment charges for the year 220 124 Recognised as a loss, not covered by impairment charges 221 206 Recoveries -72 -128 Total 369 202

Balance of impairment charges Balance of impairment charges, beginning of year 1,219 1,183 Implementation of IFRS 9 (changes to accounting rules) 0 - Loan impairment charges for the year 220 124 Recognised as a loss, covered by impairment charges -59 -88 Balance of impairment charges, end of year 1,380 1,219

Mortgage loan impairment charges 1,317 1,139 Impairment charges on other loans and receivables, etc. 63 81 Impairment charges on balances due from credit institutions and central banks, etc.' 0 - Balance of impairment charges, end of year 1,380 1,219

Breakdown of balance of impairment charges by stage Stage 1 Stage 2 Stage 3 Total Balance at the beginning of year 1,219 Transitional effect, IFRS 9, incl. effect on loans at fair value 407

Balance of impairment charges after IFRS implementation 258 781 587 1,626 Transfer to impairment charges at the beginning of the period for stage 1 151 -73 -78 - Transfer to impairment charges at the beginning of the period for stage 2 -5 96 -91 - Transfer to impairment charges at the beginning of the period for stage 3 -1 -96 97 - Impairment charges relating to new loans 129 165 105 399 Decline in balance of impairment charges due to repaid loans -120 -166 -158 -444 Effect from recalculation -162 9 11 -142 Previously recognized as impairment charges, now losses -2 -11 -47 -59 Balance of impairment charges, end of year 248 705 427 1,380

The above primarily relate to Loans and advances at fair value through the income statement. Of the balance of impairment charges at the end of 2018, DKK 41,000 relate to financial assets amortised cost.

In 2018, Jyske Realkredit did not grant loans that were credit-impaired at initial recognition.

The extent of the recalculation reflects some migration between stages over the period. In addition, some minor model adjustments also affected the recalculation. Due to a general improvement of the clients’ credit quality, the period saw more migration from stage 3 to stages 1 and 2 than vice versa. To a great extent, the development relating to new loans and repaid loans at stage 2 can be ascribed to refinancing of loans.

11 Tax Current tax 267 253 Change in deferred tax -8 -9 Adjustment of tax for previous years 4 1 Total 263 245

Effective tax rate: Current tax rate 22.0 22.0 Adjustments as regards previous years 0.3 0.1 Non-taxable income and non-deductible expenses, etc. -1.5 -0.4 Effective tax rate 20.8 21.7

The effective tax rate for 2018 was affected by the sale of the property Klampenborgvej 205, as the accounting gain exceeded the taxable gain.

Annual Report 2018 / 29 Notes DKKm

2018 2017

12 Contractual time to maturity Assets Due from credit institutions and central banks Demand deposits 754 779 Up to 3 months 5,684 8,982 Over 3 months and up to 1 year - - Over 1 year and up to 5 years - - Over 5 years - - Total 6,438 9,762 Loans and advances at fair value 1) Up to 3 months 2,082 1,983 Over 3 months and up to 1 year 6,590 6,451 Over 1 year and up to 5 years 37,740 34,928 Over 5 years 280,991 264,760 Total 327,403 308,121

Bonds at fair value Up to 3 months 1,474 4,470 Over 3 months and up to 1 year 6,639 8,044 Over 1 year and up to 5 years 10,221 5,580 Over 5 years 47 87 Total 18,381 18,182

Liabilities Due to credit institutions and central banks Demand deposits 57 2 Up to 3 months 19 739 Over 3 months and up to 1 year - - Over 1 year and up to 5 years - - Over 5 years - - Total 76 741 Issued bonds at fair value 1) Up to 3 months 5,083 8,527 Over 3 months and up to 1 year 45,544 23,316 Over 1 year and up to 5 years 151,147 162,270 Over 5 years 131,181 122,191 Total 332,955 316,305

Issued bonds at amortised cost Up to 3 months - 1,871 Over 3 months and up to 1 year - - Over 1 year and up to 5 years - - Over 5 years - - Total - 1,871

The above amounts are exclusive of interest. 1) The cash flow imbalance between mortgage loans (the main item of "Loans and advances at fair value") and "Issued bonds at fair value" is due to the fact that 30-year adjustable rate mortgage loans (ARM) are financed by bonds with maturities of 1-10 years.

For further details on Jyske Realkredit’s liquidity risk, please see note 45.

Annual Report 2018 / 30 Notes DKKm

2018 2017

13 Due from credit institutions and central banks At notice with central banks - 3,683 Due from credit institutions 6,438 4,936 Reverse repos - 1,142 Total 6,438 9,762

The major part of 'Due from credit institutions' were reduced in connection with the mortgage payments due on 2 January 2019. Cash is deposited with Danmarks Nationalbank, the central bank of Denmark, and Danish banks with ratings between A- and AA- (Standard & Poor’s).

14 Loans and advances at fair value Mortgage loans, nominal value 319,454 299,516 1) Adjustment for interest-rate risk, etc. 8,762 9,189 2) Adjustment for credit risk -1,317 -1,139 Mortgage loans at fair value 326,899 307,566

Arrears before loan impairment charges 97 85 Outlays before loan impairment charges - 71 Impairment charges for arrears and outlays - -55 Arrears and outlays, total 97 101 Other loans and receivables 406 455 Total 327,403 308,121

1) Adjustment for interest-rate risk is determined on the basis of the price of the bonds financing the mortgage loans. Part of this price adjustment can be attributed to the development in the credit risk on the mortgage bonds. Reference is made to note 25 on Issued bonds at fair value and the measurement of this credit risk. 2) Adjustment for credit risk is calculated so it allows for objective evidence whether loans and advances are impaired compared to the time of the establishment of the loans and advances.

15 Mortgage loans at fair value broken down by property category Owner-occupied homes 164,271 157,198 Vacation homes 8,136 7,699 Subsidised housing (rental housing) 53,116 50,167 Cooperative housing 16,300 15,893 Private rental properties (rental housing) 44,219 37,225 Industrial properties 1,783 1,156 Office and business properties 34,380 34,077 Agricultural properties, etc. 83 56 Properties for social, cultural and educational purposes 4,508 4,041 Other properties 103 55 Total 326,899 307,566

16 Collateral by type Guarantees 37,722 31,514 Real property, residential 169,020 157,544 Real property, commercial 118,026 112,785 Total 324,768 301,843

The amounts are determined at fair value.

No material changes were made to the practice relating to provision of collateral.

Guarantees mainly relate to central and local government guarantees that were provided in connection with loans for subsidised housing societies, etc. as well as urban renewal projects.

Collateral relating to real property was calculated at Jyske Realkredit’s current assessment of the mortgaged properties less a haircut of 5%. Hence the collateral value of mortgages on real property equals loans at a LTV ratio of up to 95%.

Annual Report 2018 / 31 Notes DKKm

2018 2017

17 Bonds at fair value Own mortgage bonds 17,837 25,457 Other mortgage bonds 17,819 17,487 Government bonds 561 544 Other bonds - 150 Total before offsetting of own mortgage bonds 36,218 43,638 Own bonds (offset against Issued bonds) -17,837 -25,457 Total 18,381 18,182

An important part of the holding of securities is included in Jyske Realkredit's fixed portfolio of securities.

Other securities relate to the investment of temporary excess liquidity resulting from bonds for refinancing of ARM loans, immediate redemptions at par where the bonds have not yet been drawn as well as advance issues of bonds in connection with hedging of fixed-price agreements with loan clients. Investment is solely made in bonds where the issuer's credit rating is within the limits of the company's risk policy.

18 Investment properties Fair value, beginning of year 1 4 Disposals 1 4 Adjustment to fair value - 0 Fair value, end of year - 1

19 Owner-occupied properties Fair value, beginning of year 434 408 Additions during the year - 6 Disposals for the year 635 - Depreciation 1 3 Changes in values recognised in other comprehensive income in the course of the year 17 24 Changes in values recognised in the income statement in the course of the year 185 - Carrying amount, end of year - 434

The company’s owner-occupied property was sold in 2018.

Owner-occupied properties are recognised at fair value. The fair value is determined according to the income method where the operating income of the properties is set in relation to the required return on the properties. Valuation is made by internal valuers specialising in assessment of commercial properties.

Annual Report 2018 / 32 Notes DKKm

2018 2017

20 Other property, plant and equipment Total cost, beginning of year 30 27 Additions 1 3 Disposals 1 - Total cost, end of year 30 30

Amortisation, depreciation and impairment charges, beginning of year 25 22 Amortisation for the year 3 3 Reversed amortisation, depreciation and impairment 1 - Amortisation, depreciation and impairment charges, end of year 27 25 Recognised value, end of year 3 5

Other property, plant and equipment consisted primarily of IT hardware, etc.

21 Deferred tax assets/Provisions for deferred tax Intangible Provisions Issued bonds Other Total assets and for liabilities at amortised property, cost plant and Broken down into the following balance sheet items: equipment

Carrying amount at beginning of 2017 3 7 -22 2 -9 Adjustment in income statement -4 -6 21 -2 9 Carrying amount at end of 2017 -1 1 -1 - -0 Adjustment in other comprehensive income (through equity) -4 - - 0 -4 Adjustment in income statement 8 -1 1 - 8 Carrying amount at end of 2018 4 1 - 0 4

22 Assets held temporarily 1) Properties acquired through foreclosure 181 204 2) Subsidiary in possession with a view to sale 195 231 Total 376 435

The sales strategy for all assets acquired temporarily by the company is to ensure that active efforts are made to sell these assets as quickly as possible at a realistic price and within 12 months. 1) Properties acquired temporarily in connection with loan facilities. At end of 2018, Jyske Realkredit had 37 (2017: 37) properties acquired through foreclosure, of which 15 were acquired within the last 12 months. 2) At the end of 2018, Jyske Realkredit had 1 property company in temporary possession (2017: 1 property company) in connection with loans granted.

23 Other assets 1) Positive fair value of derivatives, etc. 165 119 Interest and commission receivable 58 107 Loan applications in process 154 124 Other assets 36 44 Total 414 394

1) Financial derivatives are used for hedging transactions solely where the counterparty's credit rating is within the limits of the company's risk policy.

Annual Report 2018 / 33 Notes DKKm

2018 2017

24 Due to credit institutions and central banks Due to credit institutions 76 6 Repos - 735 Total 76 741

25 Issued bonds at fair value Issued mortgage bonds, nominal value 341,859 332,462 1) Adjustment to fair value 8,933 9,300 Own mortgage bonds, fair value -17,837 -25,457 Total 332,955 316,305

Of issued mortgage bonds, nominal value: Pre-issued 11,700 20,994 Drawn for redemption at next repayment date 17,264 22,383

1) The change in the fair value of issued mortgage bonds (including covered bonds) that is attributable to credit risk can be calculated on the basis of the change in the Option-Adjusted Spread (OAS) relative to the swap curve. The calculation takes maturity and nominal portfolio into account. The calculation involves some estimate. The change in fair value that is attributable to credit risk was DKK 0.4 bn in 2018 (2017: DKK 4.2 bn). The accumulated change in credit risk since 1 January 2008 has been calculated at DKK 1.9 bn. Equity and earnings performance were not affected by the change since the value of mortgage loans changed correspondingly.

26 Other liabilities Negative fair value of derivatives 260 418 Interest and commission payable 1,767 2,085 Other liabilities 202 304 Total 2,228 2,807

Financial derivatives are used for hedging transactions solely where the counterparty's credit rating is within the limits of the company's risk policy.

27 Other provisions Beginning of year 5 56 Provisions used 0 10 Provisions reversed 3 40 End of year 3 5

Provisions are expected to fall due: Within 1 year 1 3 Over 1 years 2 3

Other provisions relate to payable expenses, liabilities in the form of commitments of support and other liabilities where either the size of the amount or the due date is uncertain. The uncertainty of the provisions made is considered limited.

Annual Report 2018 / 34 Notes DKKm

2018 2017

28 Off-balance sheet items Guarantees, etc. Other guarantees 0 8 Total 0 8

Other guarantees include other forms of guarantees, etc. with a limited risk.

Other contingent liabilities, etc. Operating leases - 1 Other long-term contracts 1 1 Irrevocable loan commitments (mortgage offers) 15,406 19,102 Other contingent liabilities 28 48 Total 15,434 19,152

Irrevocable credit commitments Irrevocable credit commitments relate materially to the obligation to pay out loans according to offers for mortgage loans with a term of op to six months made by Jyske Realkredit (the term may be longer within the subsidised housing sector). All offers were made in accordance with Jyske Realkredit's credit policy and constitute a customary part of the process of paying out mortgage loans. However, in the event that a client is subsequently registered with the RKI debtor register, etc., Jyske Realkredit shall not be bound by the loan offer.

Jyske Realkredit is jointly taxed with the Jyske Bank Group, of which Jyske Bank A/S is the administration company. Therefore, Jyske Realkredit is liable according to the rules of the Danish Corporation Tax Act on income tax, etc. for jointly taxed companies.

Jyske Realkredit a/s is registered jointly with the Jyske Bank Group for settlement of VAT and payroll tax. The companies are jointly and severally liable for such settlement.

At the balance sheet date, Jyske Realkredit was a party to pending lawsuits. On the balance sheet date, pending lawsuits represented a total exposure for the company of maximum DKK 2m. The lawsuits relate to circumstances that are part of the company's normal business and must be considered part of its day-to-day operations. No provisions were made in connection with these lawsuits as the company does not expect to suffer any financial losses from these lawsuits.

29 Collateral Margin accounts, derivatives, etc. 109 107 Total 109 107

Repo transactions involve an arrangement where bonds are provided as collateral for the amount borrowed. See note 30 for further details.

Annual Report 2018 / 35 Notes DKKm

30 Security provided for financial assets and liabilities Carrying Offsetting, Collateral Net value amount master netting 2018 agreement

Financial assets Derivatives with positive fair value 165 149 9 8 Total 165 149 9 8

Financial liabilities Derivatives with negative fair value 260 149 97 14 Total 260 149 97 14

2017 Financial assets Derivatives with positive fair value 119 107 - 12 Reverse repos 1,142 - 1,142 - Total 1,261 107 1,142 12

Financial liabilities Derivatives with negative fair value 418 107 105 206 Repo transactions 735 - 735 - Total 1,153 107 840 206

On the balance sheet, reverse repo transactions are classified as 'Due from credit institutions and central banks'. On the balance sheet, repo transactions are classified as 'Due to credit institutions and central banks'.

Master netting agreements and similar agreements will entitle a party to offsetting if a counterparty is in default. It lowers the exposure further when a counterparty is in default, but this does not meet the conditions for accounting offsetting on the balance sheet.

Mortgage loans at fair value in the amount of DKK 326,899m (2017: DKK 307,566m) and other assets of DKK 20,842m (22,176m) were at the end of 2018 registered as collateral for issued mortgage bonds, including covered bonds (SDO).

According to the Danish mortgage legislation, the issued mortgage bonds, including covered bonds, are secured against the underlying mortgage loans.

31 Notes on fair value

Methods for measuring fair value Fair value is the price which can be obtained at the time of measurement by selling an asset or which must be paid for transferring a liability in an ordinary transaction between independent market participants (exit value).

For all assets listed on active markets, fair values are measured at official prices. Where no price is quoted, a different official price is used which is taken to reflect most closely the fair value. Financial assets and liabilities of which quoted prices or other official prices are not available or are not taken to reflect the fair value are measured at fair value according to other evaluation techniques and other observable market information. In cases where observable prices based on market information are not available or are not taken to be useful for measuring fair value, the fair value is measured by recognised techniques, including discounted future cash flows, and our own expertise. The basis of the measurement may be recent transactions involving comparable assets or liabilities, interest rates, exchange rates, volatility, credit spreads, etc.

Generally, quoted prices and observable data are obtained in the form of interest rates, share and bond prices, exchange rates, forward premiums, volatilities, etc. from recognised stock exchanges and providers.

Specific details on methods for measuring fair value Bonds at fair value, Shares, Derivatives, Loans and advances at fair value and Issued bonds are measured at fair value in the financial statements. Generally Bonds are measured at prices quoted on a recognised stock exchange. If such listed price is not available for the past 7 days, a calculated price based on the official market rate will be applied for determining the value. The calculated price is received from SIX Financial Information. Shares that are listed are measured at prices quoted on a recognised stock exchange. However, at the end of 2018, Jyske Realkredit’s holding consisted solely of unlisted shares, where the value is measured, among other things, on the basis of the companies' most recent financial statements available. Derivatives are valued on the basis of discounted future interest payments. Interest payments are calculated by taking into account payment frequencies and market conventions. Variable interest payments are estimated on the basis of market expectations for future values of the benchmark interest rate.

Annual Report 2018 / 36 Notes DKKm

31 Notes on fair value, cont. Loans at fair value comprise mortgage loans. These are generally measured at prices of the underlying issued bonds quoted on a recognised stock exchange. If a market price is not available for the preceding 7 days, a calculated price based on the official market rate will be applied for determining the value. The calculated price is received from SIX Financial Information. If derivatives are part of the financing of the loans, the value of these will be integrated in the valuation of the loans. Generally Issued bonds at fair value are measured at prices quoted on a recognised stock exchange. If a market price is not available for the preceding 7 days, a calculated price based on the official market rate will be applied for determining the value. The calculated price is received from SIX Financial Information.

Information about differences between recognised value and measurement of fair value A small holding of the issued bonds is measured at amortised cost supplemented with the fair value of the hedged interest-rate risk. The difference to fair value is calculated on the basis of own-issue prices obtained externally.

For the items 'Cash, cash equivalents and demand deposits with central banks', 'Due from credit institutions and central banks' and 'Due to credit institutions and central banks', the carrying amount is assessed to amount to a reasonable approximation of fair value.

2018 2017

32 Recognised financial instruments Financial assets at fair value adjusted through the income statement Bonds 18,381 18,182 Other assets - derivatives 165 119 Shares, etc. 212 215 Loans and advances 327,403 308,121 Financial assets at amortised cost Cash balance and demand deposits with central banks 49 49 Due from credit institutions and central banks 6,438 9,762 Financial liabilities at fair value adjusted through the income statement Other liabilities - derivatives 260 418 Issued bonds 332,955 316,305 Financial liabilitie at amortised cost Due to credit institutions and central banks 76 741 Issued bonds - 1,871

Annual Report 2018 / 37 Notes DKKm

33 The fair value hierarchy Quoted Observable Non- Fair value, Recognised prices prices observable total value 2018 prices

Financial assets Loans and advances at fair value - 327,403 - 327,403 327,403 Bonds at fair value 17,346 1,035 - 18,381 18,381 Shares, etc. - - 212 212 212 Derivatives 6 159 - 165 165 Total 17,353 328,596 212 346,161 346,161

Financial liabilities Derivatives - 260 - 260 260 Issued bonds at fair value 272,930 60,025 - 332,955 332,955 Total 272,930 60,285 - 333,215 333,215

2017 Financial assets Loans and advances at fair value - 308,121 - 308,121 308,121 Bonds at fair value 18,042 139 - 18,182 18,182 Shares, etc. - - 215 215 215 Derivatives 10 109 - 119 119 Total 18,053 308,369 215 326,636 326,636

Financial liabilities Derivatives - 418 - 418 418 Issued bonds at fair value 297,120 19,185 - 316,305 316,305 Total 297,120 19,603 - 316,723 316,723

2018 2017

Non-observable prices Fair value, beginning of year 215 211 Capital gain and loss recognised in the income statement -0 17 Purchases made over the year 0 0 Sales or redemption -2 -14 Fair value, end of year 212 215

No considerable transfers took place between the three levels in 2017 and in 2018.

Non-observable prices Non-observable prices at the end of 2018 referred to unlisted shares recognised at DKK 212m (2017: DKK 215m). At the end of 2018, Jyske Realkredit's shareholding consisted solely of unlisted shares, where the value is measured on the basis of the companies' most recent financial statements available. Individual assessment of the individual financial statements is regarded as the best valuation technique. As the majority of the company's assets (most of which are properties) and liabilities is recognised at fair value, the majority of the unlisted shares is measured at net asset value. The measurement of the fair value of a property will, however, be subject to some uncertainty, and it is therefore assessed that there is an uncertainty of +/-10% in connection with the price determination.

Jyske Realkredit finds it of little probability that the application of alternative prices in the measurement of fair value would result in a material deviation from the recognised fair value.

Annual Report 2018 / 38 Notes DKKm

34 Fair value of non-financial assets and liabilities Quoted Observable Non- Total prices prices observable 2018 prices

Non-financial assets Assets held temporarily - - 376 376 Total - - 376 376

2017 Non-financial assets Investment properties - - 1 1 Assets held temporarily - - 435 435 Total - - 435 435

No transfers took place between the three levels in 2017 and in 2018.

Assets held temporarily Assets held temporarily comprise properties and property companies acquired temporarily in connection with loan facilities. The value of this group of assets is determined according to the returns method where the operating income of the property is set in relation to the required return on the property. Valuations are made by the company's internal valuers who have specialised in property valuation. The valuations are less of estimated sales costs.

35 Fair value of financial assets and liabilities recognised at amortised cost

The re-statement at fair value of financial assets and liabilities recognised at amortised cost shows a total non-recognised unrealised loss of DKK - m at the end of 2018 (2017: DKK 3m).

2018 2017 Recognised Fair value Recognised Fair value value value

Financial liabilities Issued bonds at amortised cost - - 1,871 1,874 Total - - 1,871 1,874

For other financial assets and liabilities that are not recognised at fair value, the carrying amount corresponds in essence to fair value.

36 Risk exposure

The risk involved in Jyske Realkredit’s activities is materially related to credit risks on loans granted. The market risk assumed by Jyske Realkredit consists primarily of interest-rate risk from the portfolio of securities. Risk management in Jyske Realkredit is a central element of day-to-day operations and contributes actively to ensuring that the Supervisory Board and Executive Board have the necessary decision-making basis for conducting Jyske Realkredit’s business. Focus is continuously on the quality of risk management, particularly on the credit risk models. This is a natural step in the company’s continued ambition to develop tools and establish procedures for valid quantification of the various risks to which the company is exposed.

37 Credit risk

By credit risk is understood the risk of a loss resulting from a counterparty’s failure to meet its payment obligation to the company. Jyske Realkredit’s business model is lending secured against real property. Therefore loans will always be secured by mortgages on immovable property and, also, in a number of cases guarantees are provided by third parties. In connection with loans for social housing, guarantees are provided by municipalities and the state.

Jyske Realkredit’s credit risk is calculated on the basis of internal models approved by the FSA.

Credit policy and responsibility The Supervisory Board determines the general lending limits at Jyske Realkredit, including requirements of the types of properties that can be mortgaged with a view to ensuring that only properties of a good quality are mortgaged. Moreover, the Supervisory Board delegates authority to the members of the Group Executive Board.

Annual Report 2018 / 39 Notes DKKm

37 Credit risk, cont.

Credit risk is managed through the credit policy, of which the objective is to keep Jyske Realkredit’s risk at an acceptable level in relation to the capital base and business volume of Jyske Realkredit, given the general trend in the Danish economy. Client transactions with Jyske Realkredit must generate a satisfactory long-term return according to RAROC principles.

Specific credit policies have been formulated for all areas in which Jyske Realkredit assumes credit risk, and credit risk levels and undesirable business and property types have been identified.

Limits and authorisation Jyske Realkredit attaches importance to its decentralised credit-authorisation process. The limit structure states which amounts, instances and segments are covered by the limit. The main principle is that regularly occurring credit cases can be authorised locally, and credit-related decisions for major or more complicated cases are authorised centrally.

Credit risk and property price models Jyske Realkredit uses the advanced internal rating-based method (AIRB) to calculate the capital requirement for the majority of the credit risk. For other exposures, including government exposures and exposures to financial institutions, the standardised approach is used.

The use of the AIRB approach means that Jyske Realkredit calculates credit risk for the individual client on the basis of internally developed credit models. The models estimate the client’s probability of default (PD), loss given default (LGD) and exposure at default (EAD) to Jyske Realkredit.

Many factors are relevant for the calculation of a client's PD. Specific factors relating to the client are considered, but factors relating to the situation of the client are also taken into account. The calculation of PD therefore takes into account financial data, changes in transaction data, management and market circumstances, industrial assessments, etc. Also included are specific danger signals in relation to the client’s credit quality, payment profile and loss history.

At Jyske Realkredit, the PD is translated into 9 rating classes, where rating class 9 designates clients in default. In order to reach the best possible overview of client credit quality across the Jyske Bank Group, PD is mapped into internal credit ratings ("STY") at the Jyske Bank Group, cf. the below mapping.

Internal rating and PD band JB Credit rating Jyske Realkredit rating PD band (%) External rating equivalence 1 0.00-0.10 Aaa-A3 2 1 0.10-0.15 Baa1 3 0.15-0.22 Baa2 4 0.22-0.33 Baa3 5 2 0.33-0.48 Ba1 6 0.48-0.70 Ba2 7 3 0.70-1.02 Ba3 8 1.02-1.48 B1 9 4 1.48-2.15 B1-B2 10 5 2.15-3.13 B2 11 3.13-4.59 B3 12 6 4.59-6.79 Caa1 13 6.79-10.21 Caa2 1) 14 7 and 8 10.21-20.00 Caa3/Ca/C 1) Jyske Realkredit rating 8 includes PDs above 20%.

In the calculation of the capital requirement, LGD estimates are used which reflect the expected loss rates of the Group in the event of an economic slowdown. The levels of loss have been calibrated to the period at the end of the 1980s and the beginning of the 1990s.

The models are used for various purposes, including advisory services for Jyske Realkredit’s clients, automatic approval of properties for mortgaging, compliance with covered bond requirements and reporting to management.

Apart from the implementation of IFRS 9 at the beginning of the financial year, no material changes were made in the impairment set-up over the remainder of the year.

Annual Report 2018 / 40 Notes DKKm

37 Credit risk, cont.

Risk categories At Jyske Realkredit exposures with objective evidence of impairment are divided into three categories: exposures with low, high and full risk. The latter two risk categories consist of defaulted clients. Exposures with low risk are exposures for which it is assessed more probable that the exposure will again become sound, while exposures with high risk are exposures for which it is assessed more probable that the exposure will result in losses and/or forced sale of assets provided as security.

The loan-to-value (LTV) ratio is a central risk management concept for Jyske Realkredit as LTV expresses the ratio between the unpaid principal amount of a home loan and the market value of the mortgaged property. In addition to physical surveys, Jyske Realkredit uses property price models in its on-going monitoring of market values.

Mortgage loans before impairment charges by LTV band and per property category Borrowing (DKKbn) 0-20% 20-40% 40-60% 60-80% >80% Total limit

Owner-occupies homes 57.2 50.4 37.7 17.5 2.4 165.2 80% Vacation homes 3.3 2.9 1.7 0.3 0.1 8.2 75% Residential property incl. cooperative housing 19.8 17.0 14.2 8.3 1.5 60.8 80% Office and business properties 12.6 11.2 8.0 1.8 0.6 34.2 60-70% Other property categories 2.7 2.0 1.2 0.4 0.1 6.4 60-80% Total excl. Subsidised Housing (rental housing) 95.5 83.4 62.9 28.4 4.7 274.9

Loans for Subsidised Housing (residential housing) are not included in the statement of LTV bands as the loans are guaranteed in full or in part by central and/or local government.

Loan impairment charges Jyske Realkredit recognise loan impairment charges and provisions for guarantees already as of the first recognition. All loans are segmented into three stages, depending on the credit-impairment of the individual loans relative to the first recognition:

1. Loans with no significant increase in credit risk

2. Loans with significant increase in credit risk

3. Credit-impaired loans

On an on-going basis, account managers secure that the credit assessment and credit rating is true and fair, and they assess on an on-going basis - and at least every quarter - the risk classification of the largest exposures, including whether objective evidence of impairment has been established for Jyske Realkredit’s clients. For small clients, some of the monitoring takes place automatically. Where easier conditions have been granted to clients with financial problems, this will be regarded as individual objective evidence of impairment.

At Jyske Realkredit, all loans are assessed for objective evidence of impairment. Objective evidence of impairment exists if one or more of the following events have occurred:

• The borrower is facing considerable financial difficulties.

• The borrower is in serious breach of contract, for instance by failing to observe its liability to pay instalments and interest.

• The borrower is granted easier terms that would not be considered if the borrower was not facing financial difficulties.

• The borrower will go bankrupt or undergo some other financial restructuring.

Foreclosures Jyske Realkredit acquires properties by forced sale if it turns out that no buyers are willing to pay a reasonable market price. In essence, Jyske Realkredit’s strategy for selling the foreclosed properties is to sell them within a relatively short period of time, but with due regard to the importance of obtaining a market price for the property.

Annual Report 2018 / 41 Notes DKKm

38 Credit exposures by rating class

Rating category (STY) PD level (%) Stage 1 Stage 2 Stage 3 Total

Loans and advances at fair value 1 0.00-0.10 18.0 0.1 - 18.2 2 0.10-0.15 0.6 - - 0.6 3 0.15-0.22 16.9 - - 16.9 4 0.22-0.33 25.0 0.0 - 25.1 5 0.33-0.48 77.2 0.1 - 77.3 6 0.48-0.70 64.3 0.2 - 64.5 7 0.70-1.02 49.6 0.7 - 50.3 8 1.02-1.48 24.9 0.2 - 25.2 9 1.48-2.15 20.2 0.4 - 20.6 10 2.15-3.13 4.8 0.7 - 5.5 11 3.13-4.59 3.0 2.1 - 5.1 12 4.59-6.79 1.1 1.5 - 2.6 13 6.79-10.21 0.9 4.0 - 4.8 14 10.21-20.00 0.4 4.3 - 4.7 Non performing loans 0.00-100.00 0.3 0.5 3.2 4.0 Loans not calculated according to the IRB model 2.2 0.0 - 2.2 Total 309.3 14.9 3.2 327.4

Irrevocable loan commitments (mortgage offers) 8 1.02-1.48 7.1 - - 7.1 10 2.15-3.13 1.4 - - 1.4 11 3.13-4.59 6.9 - - 6.9 Total 15.4 - - 15.4

In 2018, Jyske Realkredit did not grant loans that were credit-impaired at initial recognition.

39 Maximum credit exposure

Jyske Realkredit’s maximum credit exposure consisted of the following:

· Jyske Realkredit’s receivables from credit institutions and central banks amounted to DKK 6.4 bn (2017: DKK 9.8 bn).

· Jyske Realkredit’s loans and other receivables at fair value amounted to DKK 327.4 bn (2017: DKK 308.1 bn).

· Jyske Realkredit’ irrevocable loan commitments (mortgage offers) amounted to DKK 15.4 bn. (2017: DKK 19.1 bn).

· Jyske Realkredit’s guarantees amounted to DKK 0.0 bn (2017: DKK 0.0 bn).

· Jyske Realkredit’s interest-bearing investments in bonds, etc. amounted to DKK 18.4 bn (2017: DKK 18.2 bn).

· Jyske Realkredit’s shareholding amounted to DKK 0.2 bn (2017: DKK 0.2 bn).

The calculation of maximum credit risk is theoretically based on the carrying amounts of the financial assets listed above. In practice, the credit risk is significantly lower, and if defined on the basis of the statutory capital requirement, it amounted to DKK 6.4 bn (2017: DKK 9.7 bn).

Annual Report 2018 / 42 Notes DKKm

2018

40 Financial assets credit-impaired on the balance sheet date Balance before impairment charges: Personal clients 1,695 Corporate clients 2,084 Total 3,779

Collateral: Real property, residential 1,496 Real property, commercial 1,829 Total 3,325

41 Market risk

Market risk is the risk of loss following movements in the financial markets (interest rate, share price and foreign currency risks). The most material market risks relate to Jyske Realkredit’s securities portfolio for which the interest-rate risk and the price risk on the bond portfolio are the most important ones. Jyske Realkredit has practically no exposure to foreign currencies. Market risks that stem from the other part of the balance sheet are modest due to the balance principle and the close correlation between loans and funding.

Legislation and market risk policy limits ensure that Jyske Realkredit’s market risks are at a moderate level, and the on-going close monitoring of risks, combined with short decision-making paths at Jyske Realkredit, means that a reduction of market risks can quickly be implemented if considered necessary in the interests of Jyske Realkredit’s general risk profile and capital requirements.

For the determination of market risk relative to solvency, Jyske Realkredit’s portfolio of securities was in 2018 classified as being outside the trading portfolio, and therefore credit risk has been calculated in connection with the portfolio of securities. At the end of 2018, risk-weighted assets caused by the portfolio of securities amounted to DKK 1,820 m in credit risk as well as DKK 29m due to foreign-currency risk. Jyske Realkredit has a large holding of bonds, which can, among other things, be attributed to compliance with the LCR requirement (see note 45).

2018 2017

42 Interest-rate risk Interest-rate risk, the FSA's method 43 61 Interest-rate risk, internal method 43 62

Interest-rate risk expresses the risk of loss following changes in interest rates corresponding to a parallel shift of the yield curve by 1 percentage point and is measured on a daily basis. In line with legislation, an interest-rate risk of 8% of the capital base is allowed. At the end of 2018, this amounted to DKK 1,415m (2017: DKK 1,242m). In this statement, only partial offsetting between Danish kroner and euros is allowed.

Also, due to the close correlation between the Danish krone and the euro, the interest-rate risk of Jyske Realkredit is measured on the basis of an internal method allowing full offsetting between Danish kroner and euros. Jyske Realkredit’s Supervisory Board has chosen to reduce the limits in the internal method considerably relative to the statutory provisions.

The scope of responsibilities delegated by the Supervisory Board to the Executive Board has also been delegated to the securities area with additional restrictions. For risk management purposes, daily updated option-adjusted risk ratios are used to calculate the interest rate risk on Jyske Realkredit’s portfolio of mortgage bonds. Interest-rate risk is managed on the basis of measurement of net interest-rate risk as well as risk measurements that limit Jyske Realkredit’s interest-rate risk across currencies and maturities. In addition, supplementary limits have been set for other types of risk, such as OAS and gamma risk, associated with interest bearing investments.

Jyske Realkredit’s interest rate risk essentially stems from its bond portfolio, which is mainly made up of Danish mortgage bonds, and from derivatives, which are used to manage overall interest rate risk. The majority of Jyske Realkredits’s portfolio of Danish mortgage bonds is invested in the most liquid bonds - including many 1-year adjustable rate mortgage bonds. Jyske Realkredit’s activities are close to being risk neutral to general changes in interest rates, but due to the strong concentration in Danish mortgage bonds, Jyske Realkredit is sensitive to changes in the mortgage yield spread.

To manage interest-rate risk, Jyske Realkredit uses derivatives, and to limit counterparty risk, Jyske Realkredit has entered into relevant netting agreements.

Annual Report 2018 / 43 Notes DKKm

43 Currency risk

Jyske Realkredit’s currency risk on its securities portfolio is limited as most investments are denominated in Danish kroner. As a result of its trading in euro-denominated interest rate swaps, Jyske Realkredit has a small exposure in euro.

The currency exposure for other items that are not included in the portfolio of securities was also very limited. Jyske Realkredit’s funding denominated in euro is fully hedged and does not, therefore, involve any foreign-currency risk.

Overall, at the end of 2018, Jyske Realkredit’s foreign exchange risk was calculated at 0.8% of the capital base (2017: 1.4%).

44 Share price risk

The share price risk expresses the risk of loss caused by changing share prices. Jyske Realkredit’s shareholding consists solely of infrastructure shares and strategic positions. At the end of 2018, Jyske Realkredit’s shareholding measured at market value amounted to DKK 212m (2017: DKK 215m), corresponding to 1% (2017: 1%) of the capital base. If share prices in general fall by 10%, Jyske Realkredit will suffer an investment loss of DKK 21m (2017: DKK 22m).

45 Liquidity risk

The Danish mortgage legislation prescribes a balance within a narrow range between payments on issued bonds and mortgage loans granted. Hence, the liquidity risk of Jyske Realkredit’s loan portfolio is very limited as Jyske Realkredit funds mortgage lending through continuous issuance of bonds. Furthermore, there is a limited liquidity risk associated with clients who default on their mortgage payment. Furthermore, there is a limited liquidity risk associated with clients who do not make their mortgage payments on time. Jyske Realkredit operates with a very low liquidity risk given the Danish mortgage finance model.

LCR expresses a ratio defined by regulation between liquid assets and the amount of net payments over the next 30 days. The ratio must always be at least 100%. Jyske Realkredit meets the requirement. In addition to meeting the LCR requirement, Jyske Realkredit performs on an on-going basis liquidity stress tests as part of the on-going monitoring of the robustness of the liquidity buffer.

46 Operational risk

By operational risk is understood the risk of a loss arising from inappropriate or inadequate internal procedures, human or system errors as well as external events, including legal risks. Losses arising from operational risks are thus due to a non-financial event.

As a natural part of its business management, Jyske Realkredit is focused on identifying and managing operational risks. Hence, Jyske Realkredit pays particular attention to minimising the risk of losses arising from system errors, computer breakdowns, procedural mistakes, fraud, wrong advice, etc. Jyske Realkredit continuously updates business procedures and work routines and has also established emergency plans and safety procedures to ensure swift resumption of operations in case of errors, computer breakdowns or the like.

To meet operational risks, Jyske Realkredit’s Supervisory Board has adopted a policy on how to manage operational risks, and Jyske Realkredit’s Executive Board has formulated guidelines on how to write process descriptions. The purpose of the process descriptions is to make sure that the company, at all times, has written instructions for all significant work routines. Besides, the process descriptions must at all times specify the allocation of responsibilities for the work tasks in regard to departments, managers and employees. The responsibility for the preparation and the professional content of the individual process descriptions rests with the people responsible for the relevant areas.

The risk management function of Jyske Realkredit reviews the company once a year to identify operational risks. Jyske Realkredit calculates the capital requirements for operational risk on the basis of the standardised approach.

For further information about Jyske Realkredit’s risks, management of risks as well as capital structure, see the report on the Jyske Bank Group's Risk And Capital Management 2018, available at jyskebank.dk.

Annual Report 2018 / 44 Notes DKKm

47 Derivatives Principal Net fair value Gross fair value amount Up to 3 Over 3 Over 1 year Over 5 Positive Negative Net Nominal months months and and up to 5 years value up to 1 year years

2018 Currency contracts Swaps - - 57 46 102 - 102 18,529 Total - - 57 46 102 - 102 18,529

Interest-rate contracts Forwards/futures, bought 0 - - - 0 - 0 0 Forwards/futures, sold 6 - - - 9 -3 6 7,975 Swaps -7 -40 -28 -90 57 -222 -165 76,961 Caps - - -8 -30 - -38 -38 7,875 Total -1 -40 -36 -120 66 -263 -197 92,812 Total -1 -40 21 -74 168 -263 -95 111,341 Outstanding spot transactions 0 -0 0 8,731

2017 Currency contracts Swaps -12 - 19 55 74 -12 63 22,260 Total -12 - 19 55 74 -12 63 22,260

Interest-rate contracts Forwards/futures, sold 10 - - - 12 -2 10 13,108 Swaps 1 -3 -35 -307 35 -380 -345 76,029 Caps - - -10 -17 - -27 -27 7,184 Total 11 -3 -45 -324 47 -409 -362 96,321 Total -1 -3 -26 -269 121 -420 -299 118,581 Outstanding spot transactions 1 -0 0 379

48 Transactions involving related parties

Jyske Realkredit A/S is 100% owned by Jyske Bank A/S.

In the financial year 2018, Jyske Realkredit’s related parties comprise:

· the parent company, Jyske Bank.

· the subsidiary Ejendomsselskabet Nørreport 26, 8000 Århus C. A/S until the sale of this company in May 2018.

· subsidiaries and associates of Jyske Bank.

· companies in temporary possession, see note 49.

· Byggeriets Realkreditfonds Understøttelsesfond, which is a pension fund for certain employees of the company.

· the company's Supervisory Board and Executive Board and the parent company's Supervisory Board and Executive Board and also their related parties.

Jyske Realkredit has, on an on-going basis transactions with a number of related parties, characterised as regular financial transactions and services of an operational nature.

Jyske Realkredit has concluded agreements on joint administrative tasks with the parent company, Jyske Bank A/S, and Byggeriets Realkreditfond's Understøttelsesfond.

Transactions between Jyske Realkredit and related parties were executed on an arm’s length basis.

For the management's remuneration, see note 8.

Annual Report 2018 / 45 Notes DKKm

48 Transactions involving related parties, cont.

The following transactions have been concluded with related parties: Interest Interest Fees and Value Other Employee income expenses commission adjustments ordinary and admini- expenses income strative expenses 2018

The parent company 113 485 7 247 4 604 Subsidiaries ------Associates ------Supervisory Board and Executive Board, etc. 1 - - - - 7 Other related parties - 2 - 1 0 - Total 114 486 7 248 4 611

2017 The parent company 103 489 7 -64 18 216 Subsidiaries - - - - 0 2 Associates - - - - - 51 Supervisory Board and Executive Board, etc. 1 - - - - 7 Other related parties - 2 - 4 0 5 Total 104 491 7 -60 19 282

The parent company did not receive dividend from subsidiaries in 2018 (2017: DKK -).

The following outstanding balances with related parties existed at year-end: Due from Loans and Other Due to credit Issued bonds Other credit advances at assets institutions, at fair value liabilities, institutions, fair value etc. etc. 2018 etc.

The parent company 6,304 1,116 137 57 8,231 165 Subsidiaries ------Associates - - - - - 0 Supervisory Board and Executive Board, etc. - 47 - - - - Other related parties - - - - 80 1 Total 6,304 1,163 137 57 8,312 166

2017 The parent company 5,374 1,277 92 738 12,351 306 Subsidiaries - - 1 - - - Associates - - - - - 1 Supervisory Board and Executive Board, etc. - 54 - - - - Other related parties - - - - 88 1 Total 5,374 1,331 93 738 12,439 308

Supervisory Board and Executive Board, etc. comprise Jyske Realkredit’s Supervisory Board and Executive Board, the Supervisory Board and Executive Board of the parent company Jyske Bank and their related parties.

In November 2018, Jyske Realkredit received new share capital in the amount of DKK 1,000m (2017: DKK 2,000m) from the parent company Jyske Bank.

In 2018, Jyske Realkredit bought loans in the amount of DKK 21,915m from the parent company Jyske Bank (2017: DKK 27,256m).

In 2018, a joint taxation contribution in the amount of DKK 256m (2017: DKK 283m) was paid to companies in the Jyske Bank Group.

Jyske Realkredit has granted mortgage loans to members of its Supervisory Board and the Executive Board and their related parties with an outstanding loan balance of DKK 18m at 31 December 2018 (2017: DKK 23m). All the loans have been granted on normal business terms. Floating-rate loans amounted to DKK 11m (2017: DKK 16m), carrying interest at -0.1% to 1.4%, and fixed-rate loans amounted to DKK 7m (2017: DKK 6m), carrying interest at 0.5% to 3.0%.

Jyske Realkredit has granted mortgage loans to members of the parent company's Supervisory Board and Executive Board (exclusive of the members of Jyske Realkredit's Supervisory Board) and their related parties with an outstanding loan balance of DKK 28m at 31 December 2018 (2017: DKK 32m). All the loans have been granted on normal business terms. Floating-rate loans amounted to DKK 20m (2017: DKK 23m), carrying interest at 0.4% to 2.0%, and fixed-rate loans amounted to DKK 8m (2017: DKK 9m, carrying interest at 1.0% to 2.0%.

The company has not provided guarantees to the Supervisory Board and Executive Board of the company, the parent company Jyske Bank's Supervisory Board and Executive Board or their related parties.

Annual Report 2018 / 46 Notes DKKm

49 Group overview Activity Share Ownership Voting share Assets Liabilities Shareholders’ Profit capital, end interest (%) (%) DKKm DKKm funds at the DKKm of year, end of the year Name and head office 1000 units DKKm

Subsidiaries held temporarily: Bytorv Horsens ApS, Property 1,080 100 100 242 412 -170 -33 Gentofte

Accounting figures are stated according to the most recently published annual report.

Financial data for subsidiary held temporarily are stated according to annual reports as at 31 December 2017. A part of the company's liabilities relate to the company's loans with Jyske Realkredit. As at 31 December 2018, the company was recognised in Jyske Realkredit’s balance sheet at its expected sales price, cf. note 22.

Parent company prepares consolidated financial statements Jyske Realkredit A/S is a subsidiary 100% owned by Jyske Bank A/S, which is domiciled in Silkeborg.

Jyske Realkredit is included in the consolidated financial statements of the Jyske Bank Group, which are the largest and smallest consolidated financial statements in which the company is included.

50 Accounting policies

Basis of accounting The Annual Report of Jyske Realkredit has been prepared in accordance with the Danish Financial Business Act, including the Danish Executive Order on Financial Reports for Credit Institutions, Stockbrokers, etc., which is consistent with IFRS.

The financial statements are presented in Danish kroner (DKK), which is the company’s functional currency and presentation currency.

All figures in the financial statements are presented in millions of DKK rounded to zero decimal places. Grand totals in the financial statements are based on actual figures, which is the most correct method of calculation from a mathematical point of view. A control check to verify the correctness of the grand totals will in some cases result in a rounding difference, which indicates that the hidden decimals are not visible to the reader of the financial statements. Where ‘-’ is stated instead of a figure in the financial statements, it means that the actual figure for the relevant accounting item is DKK 0.00, whereas ‘0’ means that the figure for the item is between DKK 0.01 and DKK 499,999.99 and, therefore, has been rounded to zero.

On 1 January 2018, a number of new and changed rules took effect in the Danish Executive Order on the Preparation of Financial Statements caused by the implementation of IFRS 9.

Classification and measurement According to the new rules, classification and measurement of financial assets are made on the basis of the business model for the financial assets and the contractual cash flows that relate to these. In consequence of this, financial assets must be classified as one of the following categories:

• Financial assets that are held to generate the contractual cash flows, and where the contractual cash flows solely consist of interest and instalments on the outstanding amounts, are measured after the time of the first recognition at amortised cost. These include, among other things, receivables from credit institutions. • Financial assets held in a mixed business model where financial assets are held both with a view to generating the contractual cash flows and returns on sales and where the contractual cash flows on the financial assets in the mixed business model solely consist of interest and instalments on the outstanding amount are measured after the time of the first recognition at fair value through other comprehensive income. In connection with a subsequent sale, recirculation of the change in fair value will take place to the income statement. As a typical example, this measurement category comprises bonds included in the day-to-day liquidity management, unless they are used by a risk management system or an investment strategy based on fair values, cf. below. • Financial assets that do not belong under one of the above-mentioned business models or where the contractual cash flows do not solely consist of interest and instalments on the outstanding amounts are measured after the time of the first recognition at fair value through the income statement. As a typical example, this measurement category comprises shares, derivatives and financial assets, which are otherwise included in the trading portfolio, in a risk management system or an investment strategy based on fair values and, on this basis, are included in the company’s internal management reporting. Moreover, financial assets can be measured at fair value through the income statement, if the measurement according to the two above-mentioned business models results in a recognition or accounting mismatch.

Based on Jyske Realkredit’s assessment of the business models, the implementation of the above has not resulted in changes in classification and measurement of the company’s financial assets. Mortgage loans, etc. are still measured at fair value through the income statement. Jyske Realkredit has no financial assets that fall under the new measurement category with recognition of financial assets at fair value through Other comprehensive income. Instead Jyske Realkredit’s holding of financial assets is measured at fair value through the income statement when they are used by a risk management system based on fair values and on this basis are included in the company’s internal management reporting.

Annual Report 2018 / 47 Notes

50 Accounting Policies, cont.

Moreover, in line with the accounting policies until now, issued mortgage bonds will by Jyske Realkredit still be measured at fair value through the income statement.

Hence the implementation of the changes to the Danish Executive Order on the Preparation of Financial Statements will not result in in any changes to Jyske Realkredit’s accounting policies, and therefore as of 1 January 2019 the equity is materially unchanged.

Change of accounting estimates for loan impairment charges (adjustment for credit risk) According to the Danish Executive Order on the Preparation of Financial Statements and the accompanying instructions on loan impairment charges measured at fair value, the calculation of the credit risk for loans measured at fair value shall take place according to the principles applied to the calculation of loan impairment charges measured at amortised cost.

The new rules imply earlier recognition of impairment charges, as the existing impairment model, which is based on losses incurred, will be replaced by an impairment model based on expected losses. Therefore, already at the first recognition, impairment charges corresponding to a 12-month expected credit loss must be recognised. If, subsequently, the credit risk on the asset increases materially, the expected credit loss over the remaining life of the loan will be recognised.

According to the new rules, financial assets are divided into three stages depending on the deterioration of the debtor's credit rating relative to the first recognition. Exposures with no significant increase in credit risk are placed in stage 1, while assets with a significant increase in credit risk are placed in stage 2, and credit-impaired exposures in stage 3.

Implementation by and effect on Jyske Realkredit Due to the implementation of the new impairment rules, Jyske Realkredit’s balance of impairment charges increased by DKK 407m. The amount is accounted for as a changed estimate and, with the ensuing tax effect of DKK 90m, it is recognised in the income statement for the first quarter of 2018.

Future standards and interpretations At the time of the publication of the annual report, new rules for leasing have been adopted, but they have not yet taken effect.

The changes to the Danish Executive Order on the Preparation of Financial Statements relate to IFRS 16, which is a new standard that has been approved for use in the EU and takes effect on 1 January 2019. In consequence of the standard, practically all lease agreements must be recognised in the balance sheet of the lessee's financial statements in the form of a lease liability and an asset representing the lessee's right of use of the underlying asset. A distinction will no longer be made between operating and financial leases. The accounting treatment of leasing in the lessor's financial statements is practically unchanged.

It is not expected that the changes will have any material effect on Jyske Realkredit’s financial statements as Jyske Realkredit only have a few, insignificant lease agreements.

Accounting estimates When preparing the annual report in accordance with generally accepted accounting principles, management needs to make estimates and set assumptions affecting the financial reporting. Management bases its estimate on experience and various other assumptions considered reasonable and relevant by management under the given circumstances. The management of Jyske Realkredit considers the following estimates and related assessments to be material to the preparation of the financial statements:

Loans and advances at fair value Mortgage lending is the company’s most important asset. Mortgage loans are measured at fair value, which is determined on the basis of the market price of the bonds issued to finance loans. Despite a difference in the credit risk of mortgage loans and issued bonds, the opinion is that the additional earnings on mortgage loans in the form of administration margins, etc. have been determined in an efficient market and hedge the higher credit risk in relation to the issued bonds, administrative expenses, capital adequacy costs and an appropriate profit. Consequently, management is of the opinion that the method applied gives a true and fair view.

In addition, for mortgage loans and other loans and advances, adjustment takes place for credit risk (impairment charges), which is measured as described above in the section on Classification and measurement. Loans with objective evidence of impairment (OEI) are subject to significant uncertainty as regards the value that the mortgaged property might fetch in the event of compulsory realisation, meaning that the impairment in such cases is subjectively estimated. Valuation of the mortgage includes an assessment of the value of the mortgaged properties, the realisable value of the claim, time-on-market expenses in an estimated settlement period and sales costs. Valuation is made by valuers specialised in assessing properties. For a detailed description of the calculation of impairment charges, please see the section on Loans and advances at fair value.

Assets held temporarily Assets held temporarily comprise properties that have been acquired through foreclosure and companies with properties in distress, and Jyske Realkredit attempts actively to sell these. There is significant uncertainty about the value the properties might fetch in the event of a sale, as the valuation of such assets is subjectively estimated, see the description under ‘Mortgage loans and other loans’ above.

Annual Report 2018 / 48 Notes

50 Accounting Policies, cont.

Intra-group transactions Transactions between Jyske Realkredit and companies which are directly or indirectly affiliated to Jyske Realkredit are settled according to written guidelines on an arm’s length basis or at cost.

Foreign currency transactions Transactions in currencies other than Danish kroner are translated at the official exchange rates on the day of the transactions.

Gains and losses arising from the translation of balance sheet items in foreign currencies are translated into Danish kroner at the official rates of exchange ruling at the balance sheet date.

All currency translation adjustments are recognised in the income statement.

Offsetting Assets and liabilities are offset when the company has a legal right to offset the recognised amounts and also intends to net or realise the asset and settle the liability at the same time.

Financial instruments Financial instruments comprise demand deposits with central banks, receivables from credit institutions and central banks, loans at fair value, bonds at fair value, shares, derivatives, debt to credit institutions and central banks and issued bonds.

Financial instruments are recognised either at the trade date or at the settlement date as described below. When recognition takes place at the trade date, recognition is subsequently said to have taken place according to the trade date approach. When recognition takes place at the settlement date, recognition is subsequently said to have taken place according to the settlement approach.

Recognition of financial instruments ceases when the right to receive or deliver cash flows from the financial instrument has expired, or if the financial instrument has been transferred, and the company has essentially transferred all risks and returns associated with the ownership.

Financial instruments are measured at fair value or amortised cost.

Fair value means the amount at which an asset can be sold or a liability transferred at in a transaction between informed, willing and mutually independent parties. The publicly available market price is used for financial instruments traded in a marketplace. Different accepted valuation methods, depending on the type of instrument, are used for financial instruments that are not traded in a marketplace. The valuation of fixed-income instruments is based on the zero-coupon yield curve at the balance sheet date.

Amortised cost means the amount at which a financial asset or a financial liability is measured for the first time, less principal payments and plus or less accumulated amortisation by application of the effective interest method to any premium or discount.

Also, see the section under General information on new accounting rules for financial instruments.

Tax Jyske Realkredit A/S is assessed for Danish tax purposes jointly with Jyske Bank A/S and its Danish subsidiaries. Full intercompany allocation of tax takes place, and tax is allocated between the individual companies on a pro-rata basis. Domestic tax is paid in accordance with the Danish tax prepayment scheme.

The calculated tax on profit or loss for the year is charged to the income statement. The following elements are recognised in tax on profit or loss for the year:

• Current tax on taxable income for the year. • Changes in all timing differences between accounting and taxation treatment (deferred tax). • Any difference between the amount of tax actually paid and calculated tax for prior years.

Deferred tax is recognised in respect of all timing differences between the carrying amount and the tax base of assets and liabilities. Deferred tax is measured on the basis of the statutory tax rules and tax rates that apply on the balance sheet date and when the deferred tax liability is expected to crystallise as current tax. Changes in deferred tax as a result of changed tax rates are recognised in the income statement.

Deferred tax linked to items recognised as an expense or income, other comprehensive income is recognised in other comprehensive income.

Deferred tax assets and liabilities are offset where attributable to tax levied by the same tax authority, and where it is the intention of the Group to net its current tax assets and liabilities.

Annual Report 2018 / 49 Notes

50 Accounting Policies, cont.

Balance sheet

Demand deposits at central banks and amounts due from credit institutions and central banks Demand deposits at central banks, money market investments (deposits) and demand deposits with credit institutions are measured on initial recognition at fair value plus directly attributable transaction costs less fees and commissions received which are directly associated with the amount due. Subsequently, money market investments (deposits) and demand deposits with credit institutions are measured at amortised cost in accordance with the effective interest method.

The item also includes reverse transactions in the form of securities purchased, where, at the time of the purchase, a sell-back at a specific price at a later time is agreed. Furthermore, the item includes margins receivable in connection with financial instruments where the counterparty is a credit institution.

Loans and advances at fair value Mortgage loans are recognised according to the trade date approach and classified as ‘Loans at fair value’. Mortgage loans are measured at fair value on initial and subsequent recognition through the income statement. Index-linked loans are measured on the basis of the index value at the end of the year. The fair value is generally measured at prices of the underlying issued bonds quoted on a recognised stock exchange. If such a market price is not available for the past 7 days, a calculated price based on the official market rate will be applied for determining the value. If derivatives are part of the funding of the mortgage loans, the value of these will be integrated in the valuation of the loans.

Other loans related to mortgage operations are measured at fair value on initial and subsequent recognition.

The fair value is reduced by the calculated impairment charge, which for loans at fair value is measured according to the same principles that apply to impairments of loans and advances at amortised cost. The impairment charges at Jyske Realkredit are calculated by a joint impairment model used in the Jyske Bank Group. Grouping of loans The Jyske Bank Group’s impairment model is based on calculations of expected losses where the loans are divided into three stages depending on the individual loan’s credit impairment relative to the first recognition:

1. Loans with no significant increase in credit risk 2. Loans with significant increase in credit risk 3. Credit-impaired loans

For loans in stage 1, impairment charges corresponding to the expected loss over the following 12 months are recognised, while for loans in stages 2 and 3, impairment charges corresponding to expected losses over the remaining life of the exposures are recognised. At the first recognition, the individual loans are generally placed in stage 1, which means that impairment charges corresponding to the expected losses over the following 12 months are recognised.

Loans with a very low probability of default (PD below 0.2%) and without any other indications of significant increases in the credit risk are considered having a low credit risk and are placed in stage 1 regardless of the probability of default since the first recognition.

The ranking in the various stages will affect the calculation method applied, and it is determined, among other things, on the basis of the change in the probability of default (PD) over the expected remaining life of the loans. Loans in stage 3 are considered to be in default and the same definition that is used in the Group’s advanced IRB set-up is used. See note 37 for specified descriptions of default and the rating classes.

Assessment of changes in credit risk Assessment of whether any significant increase in credit risk has taken place since the first recognition will be based on the following circumstances:

a) An increase in the PD for the expected remaining life of the financial asset by 100% and an increase in the 12-month PD of 0.5 percentage point when, at the first recognition, the 12-month PD was below 1.0%. b) An increase in the PD for the expected remaining life of the financial asset by 100% or an increase in the 12-month PD of 2.0 percentage points when, at the first recognition, the 12-month PD was 1.0% or above. c) Loans in arrears by 30 days or more.

d) The account manager's risk assessment (risk classification), which among other things is based on an assessment of the client's ability and will to honour his payment obligations, possible arrears and/or changes to the initial assumptions on which the client relationship rests.

Clients for which the credit risk has increased significantly and with a probability of default (PD above 5%) will be placed in the weak part of stage 2. If the Group’s most likely scenario points to losses, the client is considered credit-impaired and will be ranked in stage 3.

Hence, the Group’s most important credit management tools are used directly in the segmentation and the determination of the expected future credit loss. Please see note 37 on risk classification, credit rating process and monitoring.

Annual Report 2018 / 50 Notes

50 Accounting Policies, cont.

Calculation of future losses The expected future loss is calculated on the basis of the probability of default (PD), the exposure at default (EaD) and the loss given default (LGD). These parameters rest on the Group's advanced IRB set-up, which is based on the Group's experience of loss history and early repayment, among other things. These parameters are adjusted to IFRS 9 in a number of specific areas. The purpose of the adjustments is to ensure that the parameters reflect a true and fair picture that comprise available information and expectations of the future, including the Group’s expectations of the real economy trends in GDP, unemployment, house prices, etc. Hence the parameters are adjusted to cover a longer time horizon. The projection allows for client-specific circumstances such as client segment, credit rating, industry, etc. Advanced quantitative credit models are applied to all clients in stages 1 and 2 for which there is not evidence of credit impairment.

The forward-looking part of the calculation is based on the Group’s expectations of the macroeconomic development, which is divided into four scenarios (Good, Base, Weak and Hard). The scenarios are defined by a unit in the Group, which is independent of the impairment process. The ‘Hard’ scenario is equal to the hard scenario used in the Group’s internal stress tests. For each scenario, the probability of default (PD) and the value of securities are re-calculated. Hence it is ensured that the results of the models are balanced. The impairment effect of the scenarios are calculated by weighting the results against the assessed event probability, which is defined by management. If a loan is secured in full in all scenarios, the impairment charge is zero.

For most loans in stages 2 and 3, the expected time to maturity is limited to the contractual time to maturity. However, for mortgage loans, allowances are made for expected early repayment.

The assessment of the indication of impairment for the weakest exposures in stages 2 and 3 is based on individual expert assessments of the probability-weighted expected loss. In connection with the most important loans, an individual assessment of the scenarios are made, including definition of cash flows, security values and scenario probability. At the individual assessment, up to 13 scenarios are applied.

In addition to the calculations, a management's assessment is performed of the models and the ability of the expert-assessed impairment calculations to take expectations of the future development into consideration. To the extent that it is assessed that circumstances and risks are not included in the models, an addition to the impairment calculations is made which is based a management's estimate. This estimate is based on specific observations and is calculated on the basis of the expected risks of the loan portfolio.

Loans are written off as a loss when there are no reasonable prospects of collecting the debt. Indications of this are, for instance bankruptcy and debt rescheduling. The company still seeks to collect debts even though they are written off as losses.

Impairment charges determined in this manner are deducted from the respective asset items whereas the shifts in impairment charges over the year and losses realised over the year are charged to the income statement.

Bonds at fair value All listed bonds and other claims priced in active markets are recognised in ‘Bonds at fair value’, the exception being own mortgage bonds, which are set off against the item under equity and liabilities ‘Issued bonds at fair value’. Recognition takes place according to the settlement approach.

The bonds are measured at fair value on initial and subsequent recognition through the income statement. The fair value is generally measured at prices of the underlying issued bonds quoted on a recognised stock exchange. If such a market price is not available for the past 7 days, a calculated price based on the official market rate will be applied for determining the value.

Bonds drawn for redemption and repayable immediately after the financial year end are measured at par, whereas bonds drawn for redemption and repayable at a later repayment date are recognised at a calculated market value.

Index-linked bonds are measured at index values at year-end.

Shares, etc. All shares are recognised according to the settlement approach.

Shares are measured at fair value on initial and subsequent recognition through the income statement.

Unlisted shares are recognised at an estimated fair value on the basis of the available accounting or expected cash flows, etc. of the issuer in question or at management’s best estimate.

Equity investments in group enterprises A group enterprise is an enterprise in which the company holds a controlling interest. Equity investments in group enterprises are recognised according to the equity method.

Annual Report 2018 / 51 Notes

50 Accounting Policies, cont.

Intangible assets All intangible assets with an estimated useful life of more than of 1 year are recognised, including IT software, etc.

Intangible assets acquired separately are capitalised at cost less accumulated amortisation and impairment. Amortisation is provided on a straight-line basis over the expected useful lives of the assets, typically 1-3 years.

Internally generated intangible assets which are not merely maintenance of existing software are capitalised at cost, which is determined as the necessary costs directly related to the generation of the intangible asset.

Amortisation is provided on a straight-line basis over the expected useful lives of the assets, typically 1-3 years.

The residual values and useful lives of the assets are assessed and adjusted if need be on each balance sheet date. Basically, residual value and useful life are 0 in respect of intangible assets.

Investment properties Investment properties are measured on initial recognition at cost, including transaction costs, and subsequently at fair value at the balance sheet date.

Small investment properties (vacation homes) are recognised at the most recent public land assessment value or at the value determined by a local assessment of properties outside Denmark.

Owner-occupied properties Owner-occupied properties are measured on initial recognition at cost, including transaction costs, and subsequently at fair value by means of a revaluation model. The choice of the revaluation model over the cost model was made as the fair value of the properties in question can be determined reasonably reliably, meaning that a more exact value of the asset and equity is achieved.

The fair value is determined according to the income method where the operating income of the properties is set in relation to the required return on the properties. The valuation is solely made by internal valuers.

Increases in the fair value of a property are recognised directly in other comprehensive income under ‘Revaluation reserve’ unless an increase equals a decrease in value previously recognised in the income statement. In that case, the increase is recognised in the income statement. Decreases in the fair value of a property are recognised in the income statement unless a decrease equals an increase in value previously taken to equity under ‘Revaluation reserve’. In that case, the decrease in value is transferred directly as a reduction in ‘Revaluation reserve’ through other comprehensive income. Gains from the sale of an owner-occupied property is recognised directly in the income statement based on the previously revalued amount.

The depreciable amount is determined net of residual value. Depreciation is calculated on a straight-line basis over the expected useful lives of the assets, typically 50 years. The expected useful life is assessed at the time of the annual valuation of the property.

Other property, plant and equipment Plant, equipment and cars are measured at cost less accumulated depreciation and impairment.

Amortisation is provided on a straight-line basis over the estimated useful life. The item comprises IT hardware etc. with a typical expected useful life of 2-4 years and cars with an expected useful life of 5 years.

Costs of repair and maintenance are recognised directly in the income statement.

Gains and losses arising from the sale or other disposal of a tangible asset are measured as the difference between the sales amount and the carrying amount. Gains or losses are recognised in the income statement as Other operating income or Other operating expenses.

The carrying amount is assessed annually to establish whether there is indication of impairment in excess of what is recognised though amortisation or depreciation. In that case, an impairment test is conducted to establish whether the recoverable amount is lower than the carrying amount. The recoverable amount is the higher value of the net sales price and the value in use.

Assets held temporarily Assets in temporary possession primarily comprise properties that have been acquired through foreclosure, etc. that are only held temporarily and where a sale is very likely.

Properties held temporarily are recognised at the lower of fair value less costs of sale and the carrying amount.

Liabilities relating to the assets in question are presented in the balance sheet as liabilities relating to assets held temporarily.

Annual Report 2018 / 52 Notes

50 Accounting Policies, cont.

Other assets Interest receivable and balances with clients in connection with loan applications in process etc. are recognised in ‘Other assets’. These assets are measured at amortised cost.

The item also includes positive market values of fixed-rate agreements with clients, swap transactions, etc., which are measured at fair value on initial and subsequent recognition.

Due to credit institutions and central banks Money market loans and other debt due to credit institutions are on initial recognition measured at fair value fair value equal to payments received less directly attributable transaction costs incurred. Subsequently, they are measured at amortised cost according to the effective interest method.

The item also includes repo transactions in the form of securities sold, where, at the time of the sale, a buy-back at a specific price at a later time is agreed. The amount received is recognised as 'Due to credit institutions and central banks', whereas the ‘lent’ securities remain recognised in the balance sheet.

Issued bonds at fair value Issued mortgage bonds are recognised according to the settlement approach and measured at fair value through the income statement on initial and subsequent recognition. The fair value is generally measured at prices of the underlying issued bonds quoted on a recognised stock exchange. If such a market price is not available for the preceding 7 days, a calculated price based on the official market rate will be applied for determining the value.

Mortgage bonds drawn for redemption and repayable immediately after the financial year end are measured at par.

The portfolio of own mortgage bonds is deducted.

Issued bonds at amortised cost Issued senior secured bonds and senior bonds are on initial recognition measured according to the settlement approach at fair value equal to payments received less directly attributable transaction costs incurred. Subsequently, they are measured at amortised cost according to the effective interest method.

Other liabilities Interest payable and balances in connection with loan applications in process are recognised in ‘Other liabilities’. These liabilities are measured at amortised cost.

Negative bond portfolios (bonds received as collateral for a reverse transaction and sold) are also recognised. These negative portfolios, which equal the repurchase obligation, are recognised according to the settlement approach and measured at fair value on initial and subsequent recognition.

Negative market values of derivative financial instruments, including swap transactions etc., are also recognised. Provisions Provisions, including provisions for losses on guarantees, are recognised when as a result of an event occurred on or before the balance sheet date, a legal or factual obligation exists and it is probable that an outflow of economic benefits will be required to settle the obligation and that a reliable estimate of the liability can be made. Provisions for debt expected to be payable later than 12 months after the balance sheet date are measured at present value, if this is considered of material importance, otherwise at cost. Provisions are measured at management’s best estimate of the amount which is expected to be required to settle the liability.

Equity Share capital is classified as equity where there is no obligation to transfer cash or other assets. A proposed dividend is recognised as a liability when the motion has been approved at the Annual General Meeting. Dividend for the year is stated separately under equity.

Share premium comprises amounts paid as share premium when subscribing for the shares.

The revaluation reserve relates to the revaluation of property, plant and equipment less deferred tax on the revaluation. A reserve is dissolved once the assets are sold or lapse.

Annual Report 2018 / 53 Notes

50 Accounting Policies, cont. Reserves according to the equity method include value adjustment of investments in associates and group enterprises. The reserve is reduced by the distribution of dividend to the parent company and adjusted by other changes in equity in associates and group enterprises.

Reserves in series relate to capital set aside to meet the capital requirement in "Series not subject to reimbursement/repayment obligation".

Income statement Income is recognised in the income statement as earned. This includes recognition of value adjustments of financial assets and liabilities measured at fair value or amortised cost. All costs and expenses incurred to generate earnings for the year are also recognised in the income statement.

Interest income and interest expenses All interest and interest-like items that are determined according to the effective interest method are recognised in Interest income and Interest expenses. All interest income and expenses as well as commissions are included on an accruals basis, i.e. taken to the income statement for the financial year to which they relate.

Dividends, etc. Dividends on investments in shares are recognised as income in the income statement in the financial year in which the dividends are declared.

Fees and commission income Income from fees, charges and commissions and expenses from fees and charges are recognised in the income statement as paid. Fees, charges, etc. that are part of transaction costs in connection with financial assets and financial liabilities, which are measured at amortised cost, are included in the calculation by application of the effective interest method.

Value adjustments Value adjustments comprise realised and unrealised value adjustments of equity investments, loans, bonds, investment properties and issued bonds at fair value. Moreover, currency translation adjustment and realised and unrealised gains and losses regarding financial derivatives are included.

Exceptions are value adjustment of credit risk on loans and advances recognised in the income statement under Loan impairment charges and provisions for guarantees.

Other operating income Other operating income comprises income resulting from intra-group service agreements as well as gains on sales of tangible and intangible assets.

Employee and administrative expenses All payroll costs as well as expenses for administration, sales, etc., including expenses resulting from intra-group service agreements, are included in Employee and administrative expenses.

Other operating expenses Other operating expenses comprise commission payments to the Resolution Fund as well as losses on sales of intangible and tangible fixed assets.

Loan impairment charges Value adjustments of loans and advances, etc. that can be attributed to changes in the credit risk of the loan as well as recognised losses are recognised under Loan impairment charges and provisions for guarantees. Here also recoveries of claims previously written off as well as value adjustments of properties acquired through foreclosure are recognised.

Other remarks

Comprehensive income Comprehensive income comprises the profit or loss for the year plus other comprehensive income relating to property revaluations and adjustments directly in subsidiaries' equity as well as related tax adjustments.

Segmental financial statements Information is given about the company’s business segments. Segment information has been prepared in accordance with the internal reporting applied by Jyske Realkredit. The presentation of the segments is based on the on-going reporting to the company’s management and thus the principles used in internal financial planning and control. The segments reflect the company’s return and risks and are considered to be the company’s primary segments. The distribution of costs and expenses between segments is based on a qualified estimate.

Since Jyske Realkredit mainly operates in Denmark, no geographical segmentation has been made.

Annual Report 2018 / 54 Notes

51 Definition of financial ratios Financial ratios and key figures Definition

Capital ratio Capital base divided by weighted risk exposure.

Tier 1 Capital ratio (%) Tier 1 Capital after deductions divided by weighted risk exposure.

Common Equity Tier 1 capital ratio (%) Tier 1 Capital after deductions divided by weighted risk exposure.

Pre-tax profit as a pct. of average equity Pre-tax profit divided by average equity during the year.

Net profit as a percentage of average equity Net profit divided by average equity during the year.

Income/cost ratio (%) Income divided by expenses inclusive of loan impairment charges and provisions for loss on guarantees.

Currency position (%) Currency exposure indicator 1 at year-end divided by core capital after deductions at year-end.

Accumulated impairment ratio (%) Total of loan impairment charges and provisions for loss on guarantees at year-end divided by the total of loans, advances, guarantees, provisions and impairment charges at year-end. Discount for acquired loans and advances is not included.

Impairment ratio for the year (%) The year's loan impairments charges and provisions for loss on guarantees divided by total loans, advances, guarantees and provisions and impairment charges at year-end.

Increase in loans and advances for the year (%) The increase in loans and advances divided by opening loans and advances.

Loans and advances relative to equity Loans and advances at year-end divided by equity at year-end.

Return on capital employed Net profit for the year divided by total assets.

The above financial ratios are used in note 1 and are based on the definitions and guidelines laid down by the Danish Financial Supervisory Authority.

Annual Report 2018 / 55 Summary of series financial statements DKKm

52 Summary of series financial statements

The series financial statements of Jyske Realkredit have been prepared in compliance with the FSA's Order of 20 November 1995 on series financial statements of mortgage credit institution. The series financial statements have been summarised below at 'association level', cf. section 30(3) of the Order.

The summary and the transfers between the series have been prepared in compliance with the Supervisory Board's proposal for distribution of net profit. The full and complete series financial statements are available from Jyske Realkredit on demand.

Summary of series financial statements Husejernes Jyske Jyske Jyske Jyske General Total Kreditkasse Realkredit Realkredit Realkredit Realkredit Capital Series with Capital Capital Capital Centre joint and Centre B Centre E Centre S several liability

Income statement for the financial year 2018 Income from lending 0 11 64 1,564 11 11 1,660 Interest, etc. net 0 1 95 334 0 36 467 Administrative expenses, etc. net 0 1 101 355 0 39 496 Loan impairment charges and provisions - -7 -20 399 0 -3 369 Tax (- is income) 0 4 16 238 2 2 263 Profit 0 14 62 906 9 9 999

Balance sheet at 31 December 2018 Assets 1) Mortgage loans, etc. 18 8,166 7,938 290,664 14,781 5,440 327,006 Other assets 4 276 2,296 40,411 321 944 44,252 Total assets 21 8,443 10,233 331,075 15,102 6,384 371,258

Equity and liabilities Issued mortgage bonds, etc. 21 8,392 8,548 315,150 15,009 5,568 352,689 Other liabilities 0 19 23 736 34 14 826 Equity 0 32 1,663 15,189 59 802 17,744 Total equity and liabilities 21 8,443 10,233 331,075 15,102 6,384 371,258 1) Assets in series financial statements Assets in the financial statements 353,280 Assets in series financial statements 371,258 Difference -17,979

The difference is due to: Offsetting of own issued mortgage bonds - note 25 -17,837 Offsetting of interest receivable on own issued bonds -142 Total -17,979

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Statement by the Management and Supervisory Boards on the Annual Report

The Supervisory Board and the Executive Board have In our opinion, the financial statements give a true and today considered and approved the 2018 Annual Report fair view of the company’s financial position at 31 of Jyske Realkredit A/S. December 2018 and also of its financial performance for the financial year 1 January to 31 December 2018. The financial statements and the Management's Review for Jyske Realkredit A/S have been prepared in In our opinion, the Management’s Review gives a fair accordance with the Danish Financial Business Act presentation of the development in the company's Furthermore, the Annual Report was prepared in performance and financial position as well as a accordance with the additional Danish disclosure description of the most material risks and elements of requirements for financial reports of issuers of listed uncertainty that may affect the company. bonds. The Annual Report is recommended for adoption at the Annual General Meeting.

Kgs. Lyngby, 26 February 2019

Executive Board

Lars Waalen Sandberg Torben Hansen Managing Director Director

Supervisory Board

Carsten Tirsbæk Madsen Niels Erik Jakobsen Chairman Deputy Chairman

Per Skovhus Peter Schleidt

Kim Henriksen Employee Representative

Annual Report 2018 / 57

Internal Auditors' Report

Audit opinion Statement on the Management's Review In our opinion, the Financial Statements give a true and We have read the Management's Review pursuant to fair view of the company's financial position at 31 the Danish Financial Business Act. We did not perform December 2018 and of its financial performance for the any procedures additional to those pertaining to the financial year 1 January to 31 December 2018 in audit of the Financial Statements. accordance with the Danish Financial Business Act. Based on this, we believe that the Management's Basis of opinion Review was prepared in accordance with the Danish We have audited the financial statements of Jyske Financial Business Act and the disclosures in the Realkredit A/S for the financial year 1 January - 31 Management's Review are consistent with the financial December 2018. The financial statements have been statements. prepared in accordance with the Danish Financial Business Act. Silkeborg, 26 February 2019

We conducted our audit in accordance with the Executive Order of the Danish Financial Supervisory

Authority on Auditing Financial Enterprises, etc. as well as Financial Groups and in accordance with Henning Sørensen international auditing standards on planning and Head of Audit performance of the audit.

We planned and performed our audit with a view to obtaining a high degree of certainty that the consolidated financial statements and the Parent's financial statements do not contain any material misstatements. We participated in the audit of significant and risky areas.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Annual Report 2018 / 58

Independent Auditors’ Report

To the shareholders of Jyske Realkredit A/S Basis of the audit opinion Audit opinion We conducted our audit in accordance with the We have audited the financial statements for Jyske International Standards on Auditing and the additional Realkredit A/S the financial year1 January – 31 requirements applicable in Denmark. Our responsibility December 2018 comprising the income statement, according to these standards and requirements is statement of comprehensive income, balance sheet, - described in detail in the Auditors' Report under the statement of changes in equity, capital statement and heading 'The auditor's responsibility for the audit of the notes, including accounting policies. The financial financial statements'. We are independent of the statements have been prepared in accordance with the company in accordance with the code of ethics of the Danish Financial Business Act. International Ethics Standard Board for Accountants (IESBA) and also in accordance with the additional In our opinion, the financial statements give a true and requirements applicable in Denmark; also, we have met fair view of the company’s assets, liabilities and financial our ethical obligations according to this code of ethics position at 31 December 2018 and of its financial and requirements. We believe that the audit evidence performance for the financial year 1 January – 31 we have obtained is sufficient and appropriate to December 2018 in accordance with the Danish Financial provide a basis for our audit opinion. Business Act and additional Danish disclosure requirements for issuers of listed bonds. To the best of our knowledge, no prohibited non-audit services as stated in Art. 5(1) of Regulation (EU) No. Our audit opinion is in line with our long-form audit 537/2014, have been performed. report to the Audit Committee and the Supervisory Board. We were elected auditors of the financial year for the first time Jyske Realkredit on 24 March 2015. We have been re-elected annually by the annual general meeting for a total continuous task period of 4 years until an including the financial year2018.

Key audit matters Key audit matters are the matters that in our professional opinion were the most important ones in connection with our audit of the financial statements for the financial year 1 January – 31 December 2018. These matters were discussed in the course of our audit of the financial statements as a whole and the preparation of our audit opinion. We do not issue a separate audit opinion about these matters.

Annual Report 2018 / 59

Loan impairment charges The audit has dealt with the matter in this way Loans amounted to DKK 327,403m on 31 Based on our risk assessment, the audit included an December 2018 (DKK 308,121m on 31 December examination of the institution’s relevant business 2017) and impairment charges on these amounted procedures for loans, tests of relevant controls and to DKK 1,380m on 31 December 2018 (DKK 1,219m analysis of the development of the credit quality of on 31 December 2017). loans and advances, etc., including the extent of the impairment charges. Determination of the indication of loan impairment is associated with considerable uncertainty and to Our audit procedure consisted of tests of design and some extent based on the management's estimate. implementation as well as tests of the operational Due to the materiality of these estimates and the efficiency of relevant controls relating to volume of commercial loans, the audit of loan ‧ On-going assessment of the credit risk impairment charges on commercial loans is a key ‧ Assessment and validation of input and audit matter. assumptions used when calculating the impairment charges The principles for the determination of the ‧ Determination of management's estimates in indication of impairment is described under the model’s determination of loan impairment accounting policies, and the management has charges in stages one and two as well as the described in detail the handling of credit risks as individual measurement of loans in stage three well as the assessment of the indication of impairment in notes 37-40. Our audit procedures also included: Lending issues that involve the most extensive ‧ Examination by random sampling of exposures estimation and therefore require most attention for the assessment of credit impairment during the auditing are: ‧ Test of input applied for the calculation of the ‧ Identification of exposures that are credit- impairment charges with focus on security impaired values in stages one and two ‧ Parameters and management's estimates in ‧ Challenge of the usual assumptions in the the calculation model applied for the calculation model applied with special focus on determination of the expected losses in stages objectivity and the data used. one and two. ‧ For loans classified for stage three, we have ‧ Measurement of securities and future cash through sampling tested whether the flows, including management's estimates in established indication of impairment is in line connection with the determination of with the guidelines of the legislation as well as expected losses in stage three those of the institution. This included tests of ‧ Identification and determination of security values and scenario determination. management's additions to the model ‧ Challenge of management's additions to the model, including an examination of the documentation of this.

Management responsibility for the Financial are free from material misstatement, whether due to Statements fraud or error. Management is responsible for the preparation of financial statements that offer a true and fair view in When preparing the financial statements, accordance with the Danish Financial Business Act management is responsible for assessing the and the additional Danish disclosure requirements company's ability to continue operations, and for for issuers of listed bonds. Moreover, management is disclosing circumstances relating to the continued responsible for the internal control that management operations, where relevant, and to prepare the finds necessary to prepare financial statements that financial statements on the basis of the accounting principle on continued operations, unless

Annual Report 2018 / 60

management intends to wind up the company, obtained, there is any material uncertainty linked to discontinue operations or does not have any other events or circumstances that may result in realistic alternative than doing so. considerable doubt as to the company's ability to continue operations. If we determine that there is The auditor's responsibility for the audit of the material uncertainty, we must in our auditors' report financial statements draw attention to information of this in the financial The objective of our audit is that of obtaining a high statements, or if such information is not sufficient level of assurance and audit evidence that the modify our audit opinion. Our audit opinion is based financial statements are free of material on the audit evidence that is obtained until the date misstatements, whether or not due to fraud or error, of our auditors' report. However, future events or and that of issuing an Auditors' Report expressing an circumstances may result in the company not being audit opinion. A high degree of assurance is a high able to continue operations any longer. level of assurance, but no guarantee that an audit ‧ We make a decision on the overall presentation, performed in accordance with the International structure and contents of the financial statements, Standards on Auditing and the additional including disclosures in the notes, and whether the requirements applicable in Denmark will always financial statements reflect the underlying reveal any material misstatement if such transactions and events in such a way that they misstatement has been made. Misstatements can render a true and fair view of these. also be given due to fraud or error and can be considered material if it is reasonable to assume that We communicate with senior management, among such misstatements will individually or collectively other things, on the planned extent and the timing of affect the financial decisions that financial statement the audit as well as considerable audit observations, users make on the basis of the financial statements. including any considerable shortcomings in the internal control that we identify during our audit. In the course of the audit that is performed in accordance with the International Standards on We also make a statement to senior management to Auditing and the additional requirements applicable the effect that we comply with relevant ethical in Denmark, we make professional assessments with requirements as to independence and disclose to an attitude of professional scepticism during the senior management all relations and other audit. In addition: circumstances that may reasonably affect our independence and, where relevant, related security ‧ We identify and assess the risk of material measures. misstatements in the financial statements, whether or not such misstatements are due to fraud or error; Based on the circumstances communicated to senior we design and perform audit procedures in reaction management, we establish the circumstances that to these risks and also obtain audit evidence were of greatest importance during our audit of the sufficient and suitable for the basis of our audit financial statements covering the relevant period and opinion. The risk of not detecting any material therefore constituted key audit matters. We describe misstatement due to fraud is higher than that in these circumstances in our auditors' report, unless connection with material misstatements caused by acts of law or other regulation preclude publication error, as fraud may comprise conspiracy, forgery, of the circumstance, or in the most rare cases where conscious omissions, misrepresentation or disregard we establish that the circumstance is not to be of internal control. communicated in our auditors' report because the ‧ We gain an understanding of the internal control negative consequences from this could reasonably be relevant for the audit in order to prepare audit expected to carry a heavier weight than the benefit procedures that are appropriate under the from such communication that would be in the circumstances, but not to express an audit opinion public interest. on the efficiency of the company's internal control. ‧ We make a decision whether the accounting policies Statement on the Management's Review applied by management are suitable, and whether The management is responsible for the the accounting estimates and relevant information Management's Review. that management has prepared are reasonable. ‧ We determine whether management's preparation Our audit opinion on the financial statements does of the financial statements on the basis of the not cover the Management's Review, and we do not accounting principle on going concern is suitable, as express any kind of unmodified audit opinion on the well as whether, on the basis of the audit evidence Management's Review.

Annual Report 2018 / 61

In connection with our audit of the financial required information according to the Danish statements, it is our responsibility to read the Financial Business Act. Management's Review and in that connection consider whether the Management's Review is Based on the work performed, we believe that the materially inconsistent with the financial statements Management's Review is consistent with the financial or our knowledge attained through the audit or in statements and that it has been prepared in other ways seems to contain any material accordance with the requirements of the Danish misstatement. Financial Business Act. We did not find any material misstatement in the Management's Review. In addition, it is our responsibility to consider whether the Management's Review contains the

Silkeborg, 26 February 2019

Deloitte Statsautoriseret Revisionspartnerselskab Business Reg. No. (CVR-nr.): 33 96 35 56

Hans Trærup Kasper Bruhn Udam State-Authorised Public Accountant State-Authorised Public Accountant Identification No. (MNE) 10648 Identification No. (MNE) 29421

Annual Report 2018 / 62

Directorships held by members of the Supervisory Board in other commercial enterprises at 31 December 2018

Member of the Supervisory Board Directorships in other commercial enterprises at 31 December 2018

Carsten Tirsbæk Madsen, Director • -

Niels Erik Jakobsen, Deputy Chairman • Board member (deputy chairmen), Letpension A/S • Board member, BI Holding A/S as well as the fully owned BI Asset Management Fondsmæglerselskab A/S

Per Damborg Skovhus, Managing Director • -

Peter Trier Schleidt, Managing Director • Board member (deputy chairman), JN Data A/S • Board member (deputy chairman), VP Securities A/S

Kim Henriksen, Employee Representative • -

Members of the Supervisory Board at 31 December 2018

Name Born Appointed a Board Nomination committee member Carsten Tirsbæk Madsen, Director, Chairman 1962 2018 Chairman Niels Erik Jakobsen, Managing Director, Deputy Chairman 1958 2014 Member Per Skovhus, Managing Director 1959 2014 Peter Schleidt, Managing Director 1964 2018 Employee representatives: Kim Henriksen 1960 2015 Member

Directorships held by members of the Executive Board in other commercial enterprises at 31 December 2018

Member of the Executive Board Directorships in other commercial enterprises at 31 December 2018

Lars Waalen Sandberg • Board member, E-nettet A/S

Torben Hansen • -

Annual Report 2018 / 63