Annual Report 2011 The Nykredit Realkredit Group CONTENTS ABOUT NYKREDIT MANAGEMENT STATEMENT AND AUDIT REPORTS Foreword 1 Management Statement 57 Company information 2 Internal Auditors' Report 58 Group chart 3 Independent Auditors' Report 59 Financial highlights 4 2011 – in brief 6 Outlook for 2012 6 FINANCIAL STATEMENTS 2011 Income statements 60 Statements of comprehensive income 61 MANAGEMENT'S REVIEW Balance sheets 62 Nykredit Realkredit group results 7 Statement of changes in equity 64 Results relative to forecasts 9 Capital base and capital adequacy 66 Outlook for 2012 9 Cash flow statement 67 Equity and capital adequacy 10 Core earnings and investment portfolio income 68 Events occurred after the end of the financial year 11 Notes 69 Business areas 12 New regulation 22 SERIES FINANCIAL STATEMENTS 138 Other 22 Group capital management 24 Capital policy and structure 24 OTHER INFORMATION Required capital base and internal capital adequacy requirement 24 Financial calendar for 2012 141 Stress tests and countercyclical buffer 25 Nykredit's Management 142 Organisation, management and corporate responsibility 26 Board of Directors 142 Financial sustainability and corporate responsibility 26 Executive Board 143 Strategy to strengthen growth in banking 26 Organisation and delegation of responsibilities 26 Corporate Governance 28 Staff 28 Internal control and risk management systems 29 Group risk management 31 Group characteristics 31 Credit risk 32 Market risk 35 Liquidity risk 38 Operational risk 38 Uncertainty as to recognition and measurement 39 Lending 40 Mortgage lending 41 Bank lending 45 Funding 47 Bond issuance 47 Ratings 47 Issued SDOs and ROs 48 Bond liquidity 49 Bond investors 50 Supplementary collateral 50 Group entities 52 Nykredit Holding A/S 52 Nykredit Realkredit A/S 52 Totalkredit A/S 54 The Nykredit Bank Group 55 Nykredit Mægler A/S 56 Nykredit Ejendomme A/S 56 The Ejendomsselskabet Kalvebod Group 56 FOREWORD 2011 – a robust profit of DKK 1.3bn despite low activity and Further, we decided to make organisational adjustments and make the euro crisis Danish mortgage system even safer, decisions that will actively im- prove Nykredit's business potential going forward. 2011 was a year of strong turbulence in European financial markets. In Denmark the euro crisis caused low economic growth and record-low In Nykredit we put customers first, and we continuously endeavour to interest rates. Homeowners, for instance, benefited from the fact that provide our customers with better and more efficient services. There- the bonds funding their adjustable-rate mortgages (ARMs) were sold fore, we simplified our organisation at the beginning of 2012 by amal- at lower rates than even French government bonds. gamating a number of customer-facing functions to improve customer services. A completely new banking concept has seen the light of day, The European turmoil left its mark on Nykredit's financial statements Nykredit Direkte®. Through this concept, customers may have a per- in the form of low gross mortgage lending, declining income on cus- sonal call centre adviser. Nykredit's Internet bank continues to supple- tomer-driven securities trading, a higher cost of capital and low in- ment our centres, and Nykredit Direkte® and was ranked no 1 in 2011 vestment portfolio income. for the second year running by the consumer magazine "Tænk Penge" published by the Danish Consumer Council. The year 2011 nevertheless offered brighter prospects for the future. From mid-2012 we will also make technical changes to our mortgage We continue to record growth in total lending. Nykredit's lending model. Today retail mortgage lending is exclusively funded by SDOs. mounted by DKK 35bn to DKK 1,123bn in 2011. Both retail lending This has the disadvantage that supplementary collateral must be and commercial lending went up. provided for loans with a current LTV ratio above 80%, which raises costs and entails liquidity risk when housing prices decline. In future, Having declined to DKK 1.4bn, loan impairment losses normalised, or the part of a loan which exceeds an LTV of 60% will be funded by maybe even fell below the normal level. traditional ROs. This way we avoid the liquidity risk pertaining to SDOs through a new system ensuring long-term stability regardless of hous- Housing prices fell by about 6% in 2011. This is not good news – or ing market trends. perhaps it is. Thanks to current housing prices, housing costs for new homebuyers are low as in the 1990s, even with a fixed-rate repayment Overall, 2011 was a year full of challenges stemming from the euro mortgage. Therefore, market psychology rather than the economic crisis. But 2011 was also a year which prepared the ground for a climate prevents the housing market from normalising. brighter earnings outlook. In the rental property market, financially strong foreign investors purchased a number of large property complexes in 2011. Properties which used to be a problem changed owners, and there are indications that prices are stabilising. Peter Engberg Jensen Group Chief Executive In late 2011, Nykredit announced that administration margins on mortgage loans would be raised. The reasons were a higher cost of capital and growing rating costs in the wake of sliding housing prices, which necessitated the provision of additional collateral for issued bonds. The changes in administration margins were designed to better reflect the risk associated with the loans. Accordingly, the price of ARMs and interest-only loans will increase more than the price of fixed-rate repayment loans. The slowdown in activity in 2011 caused our gross income to drop by about 4%, contrary to expectations, while costs grew by some 4%. Consequently, we decided to cut costs as early as in summer 2011. We introduced a so-called intelligent hiring freeze and a sharp cost con- tainment focus. This helped reduce costs, but unfortunately not enough. As a result, total staff was reduced by 75 in January 2012. The changes in administration margins and cost reductions were nec- essary decisions in a year of low activity and growing cost of capital. Nykredit Annual Report 2011 1 COMPANY INFORMATION COMPANY INFORMATION For directorships and executive positions of the members of the Board of Directors and the Executive Board, see pages 142-144. Nykredit Realkredit Group Kalvebod Brygge 1-3 * Staff-elected member DK-1780 Copenhagen V Denmark NOMINATION BOARD Steen E. Christensen, Chairman Website: nykredit.com Tel: +45 44 55 10 00 Hans Bang-Hansen CVR no: 12 71 92 80 Steffen Kragh Financial period: 1 January – 31 December Municipality of registered office: Copenhagen Nina Smith Auditors AUDIT BOARD Deloitte Steffen Kragh, Chairman Statsautoriseret Revisionspartnerselskab Weidekampsgade 6 Anders C. Obel DK-2300 Copenhagen S Nina Smith Annual General Meeting The Annual General Meeting of the Company will be held REMUNERATION BOARD on 21 March 2012 Steen E. Christensen, Chairman BOARD OF DIRECTORS Hans Bang-Hansen Steen E. Christensen, Attorney Chairman Steffen Kragh Hans Bang-Hansen, Farmer EXECUTIVE BOARD Deputy Chairman Peter Engberg Jensen Group Chief Executive Steffen Kragh, CEO Deputy Chairman Kim Duus Group Managing Director Kristian Bengaard, Senior Consultant * Michael Demsitz, CEO Søren Holm Merete Eldrup, CEO Group Managing Director Lisbeth Grimm, Professional Consultant * Allan Kristiansen, Senior Relationship Manager * Karsten Knudsen Susanne Møller Nielsen, Support * Group Managing Director Anders C. Obel, CEO Erling Bech Poulsen, Farmer Per Ladegaard Nina Smith, Professor Group Managing Director Jens Erik Udsen, Managing Director Leif Vinther, Chairman of Staff Association * Bente Overgaard Group Managing Director At nykredit.com you may read more about the Nykredit Group and download the following reports: . Annual Report 2011 . About Nykredit 2011 – CSR Report on Financial Sustainability . Risk and Capital Management 2011 Information on Nykredit's corporate governance policy is available at nykredit.com/corporategovernanceuk 2 Nykredit Annual Report 2011 GROUP CHART Foreningen Nykredit Industriens Fond Foreningen Østifterne PRAS A/S Ownership 89.51% Ownership 4.99% Ownership 3.25% Ownership 2.25% Nykredit Holding A/S Profit for the year: DKK 260m Equity: DKK 55,408m The Nykredit Realkredit Group Nykredit Realkredit A/S Profit for the year: DKK 261m Equity: DKK 55,310m Totalkredit A/S Profit for the year: DKK 562m Equity: DKK 13,818m Nykredit Bank A/S Nykredit Portefølje Adm. A/S Profit for the year: DKK 433m Profit for the year: DKK 40m Equity: DKK 14,202m Equity: DKK 194m Nykredit Mægler A/S Nykredit Leasing A/S Profit for the year: DKK 5m Loss for the year: DKK 4m Equity: DKK 118m Equity: DKK 144m Nykredit Ejendomme A/S Loss for the year: DKK 195m Equity: DKK 367m Ejendomsselskabet Kalvebod A/S Loss for the year: DKK 41m Equity: DKK 209m Reference is made to note 53 for the entire group structure. Nykredit Annual Report 2011 3 FINANCIAL HIGHLIGHTS The Nykredit Realkredit Group DKKm 2011 2010 2009 2008 3 2007 EUR 2011 Exchange rate CORE EARNINGS AND RESULTS FOR THE YEAR 743.42 Core income from - business operations 9,188 9,569 8,816 7,053 5,970 1,236 - value adjustment of derivatives and corporate bonds (632) (47) (176) (133) (29) (85) - junior covered bonds (190) (120) (67) (40) - (26) - securities 644 470 829 2,212 2,040 87 Total 9,010 9,872 9,402 9,092 7,981 1,212 Operating costs, depreciation and amortisation, excl special value adjustments 5,709 5,499 5,395 4,678 4,031 768 Operating costs, depreciation and