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Conference call speech National Irish Bank 17 December 2010 Andrew Healy & Martin Gottlob CORPORATE PARTICIPANTS SPEECH Andrew Healy Martin Gottlob - Danske Bank - Head of IR National Irish Bank CEO Martin Gottlob Good morning and welcome. Thank you for taking the time to Danske Bank Head of Investor Relations attend this presentation on Ireland and National Irish Bank. I will conduct the conference call here from Copenhagen, but most of the talking will be made by my colleagues in Dublin and therefore I will hand over the microphone to Andrew Healy, CEO of National Irish Bank. Please go ahead, Andrew. Andrew Healy National Irish Bank - CEO Thank you, Martin. Welcome, and thank you all for attending this update on developments in the Irish economy and the implications of these developments for Danske Banks activities in Ireland via National Irish Bank. With me today are Chief Financial Officer, Grellan Dunne and Chief Economist, Ronnie OToole. Please go to slide 2 Agenda In todays presentation we will provide an update on the economic situation in Ireland and the prospects for National Irish Bank, with particular focus on asset quality and the banks strategy in the changing banking marketplace here in Ireland. After the presentation we will open up for a Questions & Answers session. Please go to slide 3 4 Year Plan to tackle Government Finances From last August onwards, there was a surge in the cost of Irish sovereign borrowing, which was largely driven by fears over the scale of losses in the banking sector. While the state had funding until well into 2011, its hand was forced by a run on the Irish banks by wholesale and private investors. In addition, there was considerable pressure placed on Ireland by the European Commission to accept financial 2 support in order to reduce the contagion risk for other eurozone countries, particularly Portugal. Please go to slide 5 Ultimately a package of 85bn was agreed. The Irish Economy has some good underlying fundamentals government has committed to implement a four year plan Given all the bad news flow from Ireland, it is understandable involving 15bn of austerity measures tax increases and that the external perception of the long run potential of the spending cuts - from 2011 to 2014. This will be front-loaded Irish economy is poor. There is undoubtedly a painful period of to the tune of 6bn in 2011. adjustment ahead but the underlying economy retains some The plan involves funds being made available to the Irish good strengths. I have already mentioned the export sector State as well as to the Irish banks. In terms of the banks, which is growing at a rate of over 10% and which is expected there are stringent conditions associated with this support, to remain strong. Ireland is a very open economy and will including increased capital requirements. Ill talk a little more benefit from an upturn in global demand. about that later. Ireland retains a strong Multinational sector with a good pipeline of new investment from abroad. Many of the worlds Please go to slide 4 leading pharmaceutical, technology and financial services Medium Term Economic Prospects companies use Ireland as their export base into the European We expect domestic demand will contract by almost 3% next single market. year, impacted by further reductions in construction activity as public infrastructure spending is scaled back, as well as a While unpopular among other European countries, Ireland reduction in current public spending. has successfully defended its low 12.5% corporation tax rate, which is one of the key attractions for multinationals to Consumer spending will also weaken due to higher tax bills invest in Ireland. These companies also like Ireland because and lower welfare payments. of its English-speaking workforce and its pro-business regulatory environment. Unemployment has broadly stabilised at 13.5% over the last 6 months, though there will be no meaningful improvement There has already been a significant improvement in Irelands any time soon given the weakness of domestic demand. international cost competitiveness, with labour costs down Having said all this, we do not expect Ireland to fall back into 5% since the end of 2008, though costs will have to come recession. down more. We anticipate overall GDP growth of 0.9% in 2011 driven by In the domestic economy, a lack of confidence has resulted in continued export growth. The performance of exports has the household savings rate tripling from 4% to 12% from been particularly strong, and has been boosted by a 2008 to 2009. Households therefore have capacity to significant improvement in competitiveness as costs of stimulate the domestic economy by using disposable income production have rapidly reduced in the Irish economy. As long but confidence is key. as global demand recovers, Irish exports should continue to outperform and to be the main engine for economic growth in Ireland has one of the youngest populations in Europe and is the future. well recognised for its high education standards and welleducated workforce. Our forecast is that the level of gross Government debt could Please go to slide 6 peak around 120% in 2014. However the Government have indicated that they are going to run down some of their cash reserves, notably the National Pension Reserve Fund, so the Property Market net debt figure could turn out lower than this. The property market remains in very poor shape, and the additional austerity measures will not help. Much of course will depend on the trajectory of economic Residential property prices across the country are down growth. from peak by at least 36% and, in many areas, up to 60%. 3 While there are recent signs of increased activity in the Detailed asset disposal and deleveraging plans must be put in second hand housing market in greater Dublin, over-supply place by the Banks by April 2011. outside Dublin is likely to depress house prices for a number Many of the foreign owned banks have downsized and we of years. have seen the exit of a number of others. The overhang is estimated to be around 90,000 units, or 6% Now I would like to move on to National Irish Bank. of the residential stock, though this is disproportionately higher outside of the main urban areas. Please go to slide 8 There was a surprise announcement in last weeks Budget that Irelands very high rate of tax on house-purchases was to NIB Loan Portfolio be greatly reduced to a flat 1% for transactions less than The table shows the breakdown of the loan book as at the end 1m and 2% for values greater than that level. Previously the of quarter 3, and the Banks impairments by category. rate had been as high as 9%. Cumulative impairments to 30th September amounted to This will help the property market, but its influence is likely to 1.4bn, of which 1.1bn, almost 80%, relates to commercial be limited in the short term given the many other challenges property. 59% of commercial property loans have an facing the market. impairment charge with an average impairment of 50%. From peak, values for commercial property have fallen by Looking at the commercial property book in more detail, around 60%, with development land values down by as much investment property makes up 2/3rds of the total as 80-90%. Vacancy rates average at about 20%, however commercial property exposure and this sector has the lowest this number varies across regions. Over the course of 2010, impairment rate of 18%. This is due to the fact that while the the rate of reduction in commercial property prices has values of properties have fallen, these tend to be let out to eased, with only a 1% fall in the most recent quarter. good tenants and are generating sufficient cashflow to service the loans. Please go to slide 7 The Development and Landbank books are impaired by 54% Banking in Ireland and 46% respectively. However, within these there are some The main reason why the Irish Government was ultimately performing assets in good locations which have little or no forced to go to the EU/IMF was the market uncertainty which impairment, while the non-performing assets in poor surrounded the Irish banks. locations have up to 90% impairment. The EU/IMF programme includes a range of measures Please go to slide 9 designed to restore market confidence in the Irish banks. Under the programme, the target capital ratio has been Mortgages raised from 8% Core Tier 1 to 12%. It seems clear the Impairments on the mortgage book remain relatively low at Government will increase its stake in the Irish banks and that 1.3% with arrears well below market levels. it will play a prominent role in the banking market over the 1.6% of loans (247 loans) are in arrears over 90 days coming years. compared to a market average of more than 3 times that level. Under the programme, there is also a requirement for the Irish banks to be significantly downsized. The Credit Institutions Stabilisation Bill, which is currently going through The quality of our book reflects the strategy we pursued the houses of parliament, provides the Irish Government with during the boom years. We did not use brokers to originate unprecedented and extraordinary powers to implement a new business and we did not market 100% mortgages. Our fundamental restructuring of the Irish banking market. average LTV is currently 83% despite the fall in property 4 prices which reflects the low LTV of these loans at Further, it is reported that NAMA has written down the value origination. of assets where it has concerns that there are flaws in the underlying documentation, which is not an issue for us. Please go to slide 10 There is also a very wide difference between the haircuts applied to the loans of the 5 banks participating in NAMA. Business Lending The business lending book SME and Corporate lending - We do of course monitor developments relating to NAMA, accounts for 25% of all lending. and the market more generally, very closely. But reliable Impairments are 11% across this book, representing direct comparisons with NAMA are virtually impossible and individual businesses that have encountered difficulties. NAMA discounts do not influence our impairments. While all sectors are facing cash-flow pressures, there are no major concentrations within the SME and Corporate books. Please go to slide 13 Please go to slide 11 National Irish Bank: Financials For the 9 months ended 30th September, income declined by Impairments 11% to 124m due to reduced customer demand, the We expect impairments in Ireland to remain high in 2011 impact of impaired loans and lower deposit margins. also, but we expect that Q2 2010 was a spike and we do not Costs reduced by 3% to 88m, but the full benefits of our expect it to be repeated. restructuring programme will not flow through until next year. I will cover our actions around costs on a later slide. We hope that the gradual trend of declining impairments will After loan impairment charges of 504m, we reported a net continue, but of course there can be no guarantees. loss of 486m for the period. While the austerity measures do not help, they have not Please go to slide 14 materially changed our expectations. As mentioned earlier, impairments are concentrated in commercial property, Balance Sheet and Margins accounting for almost 80% of the total and we expect National Irish Banks loan portfolio is reducing slowly through commercial property to continue to account for the majority amortization and weak demand, and is down 1bn or 10% of impairments in 2011. from the peak in Q1 2009. Impairments will remain high due to the continuing fall in The trends in deposit growth are strong, with growth in property values/collateral, and mainly relate to increased average balances of 14% year on year up to Q3 2010. We impairments on customers already impaired rather than new have seen further growth in Q4 as customers are attracted impairments. by our capital strength as a branch of Danske Bank. Our loan to deposit ratio has improved from 40% to 51% during Please go to slide 12 2010. NAMA We have made substantial improvements in our lending It is not possible to directly compare the impairments on margin over the past two years where we have been working NIBs property book with the NAMA discounts. to reprice our loan book to more accurately reflect risks and funding costs. NAMA loans are coming from 5 different banks, consist of a Please go to slide 15 different mix of properties and are in different locations. We do not know the original LTV of the loans or whether they are currently performing or not. 5 Costs channel approach involving a range of direct banking and We embarked on a major restructuring of our operations this advisory channels. time last year. Please go to slide 17 The strategic objective was to put the business on a lower cost platform suited to a low growth environment and, at the Outlook for NIB same time, reposition our customer proposition so that we In concluding, I would say that the short-term economic could maximise our competitive strengths. outlook for the Irish economy has deteriorated because of the necessary additional austerity measures being taken by the Government. The programme has now been completed, well ahead of schedule. We will continue our focus on actively managing our loan It involved closing more than half our branches with our book, though impairments are likely to remain high in 2011 remaining branches now converted to a cashfree model. We as the Irish economy struggles. entered into a partnership deal with the Irish Post Office to provide cash services for our customers across their Through our restructuring programme, a lot of heavy lifting network of 1,200 post offices around the country. has been completed in 2010 and we have successfully Staff headcount has reduced by 20%. moved our organisation to a position which provides us with a good platform for the future. The full benefit of these cost savings will be evident in our We believe we have made more changes than most to handle 2011 results. the dramatically changing banking landscape in Ireland. And having Please go to slide 16 moved more quickly, there should be good opportunities for us in our target segments. Strategic Repositioning The restructuring programme was more than just a cost Its going to continue to be tough next year but we have made reduction programme. It was also an important strategic the changes necessary to put us on a good footing for the repositioning of our business model, to give us more focus on future. the customer competitive segments strengths, where particularly we in have important Corporate Please go to slide 18 and Institutional banking and in the upper end of the business and personal banking sectors. Q&A Session That concludes our presentation, and we are now ready to We are the best online bank for businesses in Ireland and our answer your questions. If you are listening to the conference cash management product is the market leader. call from our website, you are also welcome to ask questions This by e-mail. product is particularly suited to the export sector which is one of our most important customer segments, and as Operator, we are ready for the Q&A session please. outlined earlier, exporters are naturally less exposed to the domestic Irish economy. Claus Højmark ABG - Analyst We have reorganised and expanded our Corporate Banking unit to ensure greater scale and capability to develop our Yes, just two questions. Could you please elaborate a bit on business with institutional, corporate and multinational the split of your impairments this year? How much of it has companies. We are encouraged by the quality of new actually been due to new problem loans coming into your business customers that have moved to us this year. portfolio and how much has been due to collateral falling in values? That's the first question. The second question is: We have implemented a disciplined approach to customer You've now guided for high impairments in 2011. You've also segmentation and channel management, adopting a multi- done that in previous quarterly statements, but I struggle a 6 bit to interpret what you mean by high. High is that high increased the haircut why is it then not possible this time? relative to your earnings in Ireland? High is that relative to That's the first question. The second one is about the past what your losses are going to be in 2010, or can you give due loans and residential mortgages. I talked to AIB earlier some more flavour into what you mean when you say high? this week, and I believe they're at around 2.6% being past due Thank you. 90 days. So my first question: Who is it that is at around 6.0% or what is the market level, and do you know if those have already been written down and what will happen in these Grellan Dunne National Irish Bank - CFO cases? Thank you. In response to the first question, the impairments in 2010 have primarily been related to existing impaired customers, Grellan Dunne National Irish Bank - CFO so it's primarily related to reductions in collateral values. If you look at slide 21, it shows the breakdown of rating If we take the first question, we've said in the presentation category 10 and 11; and you'll see category 11 has been here that NAMA doesn't impact or influence our impairment pretty flat throughout 2010. So it's primarily further falls in levels, but we also do look at what NAMA's doing and the level collateral values. of discounts. In Q2, it did provide us with some more evidence of what the market prices are. With the level of activity being When we say high impairments going forward, we mean high very low, it's very hard to have a definitive guidance to where relative to our earnings. We would expect that impairments values are at. But in Q2, it did give us some further evidence will continue the downward trend, but you can't rule out of where prices or collateral values were at. fluctuations from quarter to quarter. But overall, we would expect the trend to continue downwards. But high relative to In relation to the second question, the past due 2.6%, we our earnings is all we mean. don't know whether they had been written down. In our own book, we have impaired 1.3% of our mortgage book. They haven't been written off at this point, so I'm not sure if that's Claus Højmark ABG - Analyst the answer to your question. So just to mention some number, if losses were five times your pre-provisioned earnings, that would still be high, even Jakob Brink Handelsbanken - Analyst though it's significantly down from '10? Yeah, just one. Who is it in the market that is sitting with those very bad mortgages? Grellan Dunne National Irish Bank - CFO Yes, that's still very high compared to our earnings. Grellan Dunne National Irish Bank - CFO We don't have that information. There've been a number of Claus Højmark ABG - Analyst specialist mortgage lenders in the market who probably have Thank you. been more aggressive at the outset, but we really don't have a breakdown of the market figures. Operator: Jakob Brink from Handelsbanken is online with a question. Andrew Healy National Irish Bank - CEO If our figure is at 1.6% over 90 days and the market is at Jakob Brink Handelsbanken - Analyst three times that level, it's obviously a combination of the rest Yeah hi, it's Jakob from Handelsbanken. Two questions, of the market. You mentioned one institution. But there are a please. The first one is regarding the NAMA and the haircuts number of specialist providers, and there are a range of there. If I'm not mistaken, I believe after the Q2 where you had financial institutions that are have varying levels of arrears. the DKK 1.6 billion charge, you'd mentioned that that was The market figure, though, is a lot higher than ours and the because of new information from the transfer to NAMA. So institution you mentioned there. why is it now that where AIB and others have actually 7 been because of falls in asset values, falls in collaterals. And Jakob Brink Handelsbanken - Analyst while the housing markets and the rate of fall of house prices Great. and property prices in Ireland have eased a bit this year, prices are still falling, and it is of course difficult to call exactly Operator: Nick Davey from UBS is online with a question. where the market is because of the limited level of activity that's going on. Nick Davey UBS - Analyst I mean there are signs of increased activity in certain parts of Yes, good morning, everyone. Nick Davey from UBS. First of the market, but there's oversupply outside Dublin and so on. all, thanks very much for taking the time to arrange this Prices are down on the residential side by 36%, on the conference call, very helpful. Just two questions from my side. commercial side by 59%, and it's possible we'll see further The first, I think coming back to a theme that has been picked falls. It's unlikely that the austerity measures and the up by a few previous questions, just on the provisioning country's fiscal position generally will help a lot in terms of the outlook for next year: outlook. I'm just interested to hear your reference to it being in your When we talk about continued high impairments. view increased provisions against already impaired loans. I We're taking account of the fact that we're likely to see continued just would like if you would be happy just to flesh that out a bit. falls in property prices, but it's difficult to be precise around I mean is the fact that you have a particularly bearish outlook where that will head. Also in terms of private customers, in on asset prices into next year? And if so, would you maybe terms of small businesses, the climate, the outlook is not give us some sense of what your baking in when you are particularly wonderful, but we do expect that the bulk of our cautious into next year as far as a kind of secondary dip in the impairments going forward, as we said, will continue to come regional asset prices? from existing impaired loans being impaired further. And also just to flesh out, I guess your provisioning policy In terms of the outlook for return on equity and performance, more broadly: I mean if you have that outlook into next year. it's difficult again to be precise. In terms of helping a bit with Could you give us a sense as to why your book isn't marked to that, obviously we have made some fairly significant changes your central outlook already? And the second question just to our cost base through removing half our branches, through coming onto slide 13: your ROE before loan impairment moving to a cash-free model, through reducing headcount by charges is ticking down at about 12.5%. I realise you're 20%. That will help a bit on the cost side. In terms of revenue, constructive on the cost outlook. I realise you're constructive the demand will continue to be low. We expect impaired loans on the margin outlook in the new banking sphere, but could will hit our return on equity. you just give us a little bit of a flavour as to where you see that are we moving, just in broad terms? Deposit margins are under pressure. What will happen in the banking market going forward? There certainly will be some I mean, my sense is, I mean, it's likely to be at least in the transformation. How quickly that will take hold is hard to say, medium-term a period of deleveraging ... fiscal austerity but the market will change. There is potentially some upside unlikely to provide a constructive backdrop for margins in the on lending margins out of all of that and some opportunities short- to medium-term. So could you just flesh out for as long for National Irish Bank if other banks are under a bit of as we have impairments in that division, what your sense is pressure. So if we put all that into the mix, what return on on ROEs, what your aiming for, what you're happy with, a bit equity figure do we get? I'm not sure. I'd be quite cautious. more colour there? Thank you. Nick Davey UBS - Analyst Andrew Healy National Irish Bank - CEO Okay, thank you. Yeah. I mean firstly in terms of provisioning, we have said that the trend in terms of our provisions has been that existing Operator: Aaron Ibbotson from Goldman Sachs is online with customers have been impaired further, and that's largely a question. 8 book is fixed margins, so you can't re-price it. And your Aaron Ibbotson Goldman Sachs - Analyst margins have been stable since the interest rates fell in '08, Yes, hi there. Good morning. I just got two questions if I may. so I'm just trying to understand how you see that develop The first one is just trying to square some numbers on the going forward. lending side. Is there any chance you can share with us what you have actually written off? So if I look at this decline of about a billon euros, is that actual amortisation or is some of Grellan Dunne National Irish Bank - CFO it related to write-offs? I'm just trying to understand exactly There's a couple of things you've mentioned there. Firstly on how much you have written off of your assumed property the branch closures: we haven't seen a significant loss of book relative to where you are now. Is there any chance you income as a result of that, and we have a low level of can share that? customer losses as a result. So the income impact of that is negligible. Grellan Dunne National Irish Bank - CFO On the impaired loans: you obviously see a hit on income The write-off levels are very low. In 2009, the amounts there as impairments continue to be raised. Those loans, we written off are around 20 million, and it's a similar figure for stopped accruing the interest on those, so that will impact. 2010 up to Q3. But I think you can see going forward the next There is some potential upside on deposit margins if interest few quarters. You can see an increase in write-offs as the rates increase from the low levels they're at the moment. The impairments that have been raised will be actually ... the loans mortgage book 70% of that tracks the ECB refinancing rate will be written off in some cases. so that moves in line with the ECB rate. Aaron Ibbotson Goldman Sachs - Analyst Aaron Ibbotson Goldman Sachs - Analyst So you have actually seen 1 billion of amortisation then. Okay. So could I just ask one final question just following up on Nick's question previously? On these prices, when you sort of make your forward-looking impairments, you're saying that Grellan Dunne National Irish Bank - CFO you're not using NAMA discounts as a guide price for asset Sorry, could you repeat the question? values. Can I just ask what exactly are you using because my Aaron Ibbotson Goldman Sachs - Analyst understanding is that it's extremely low turnover, particularly Yeah. So you've actually seen 1 billion Euros? I'm just a little on the secondary commercial property market. So I would've bit confused if I compare to the sort of movement in the assumed that NAMA would be the most sort of transparent balance sheet of other Irish banks because it looks... I sort of guide for asset prices, so that they would have a direct assumed that there was some write-offs included in that, but implication on your impairment? we were looking at net loans. But your ... you've actually seen 1 billion of amortisation. Grellan Dunne National Irish Bank - CFO What we use for valuations is professional independent Grellan Dunne National Irish Bank - CFO valuers, which is pretty much the same as what NAMA used. Correct, that's natural amortisation and repayments across In some cases, we may use the same external companies; in the various parts of the book. some cases we may not. NAMA, I understand, have a range of valuers working for them and we would have also depending Aaron Ibbotson Goldman Sachs - Analyst on the different parts of the country and the different type of Okay, but ... Okay, fine, perfect. Secondly, can I just ask on sort assets. of outlook for income considering that you're downsizing quite dramatically and quite recently on the branch side. And also my understanding is that quite a significant proportion of your 9 In terms of the NAMA question, the comparison: are we at a Andrew Healy National Irish Bank - CEO disadvantage because 40% of NAMA book is in UK? You And the key point to add to that is just to repeat that we can't could argue yes, we are at a disadvantage because the benchmark against NAMA. Their loans come from different market there is performing better. On the other side, you banks. They consist of a different mix of property types, and could argue that: Well, less of our book is in land and they're in different locations. We raise our impairments on a development, so we have an advantage there. quarterly basis based on the cash flows on individual loans and the value of our collateral. So that's the approach we Equally there have been loans transferred to NAMA where take. NAMA has given no value at all because there been issues with documentation. So there's so many variables within NAMA. And we don't have precise, detailed information on Aaron Ibbotson Goldman Sachs - Analyst the loan, so it's impossible to make that direct comparison. Okay, perfect. Thank you very much. In terms of the expert group on mortgage arrears, there have Operator: Simon Christensen from Nordea Markets is online been a number of recommendations that have come out. We with a question. have adopted some of them and because their good practice. In relation to the deferred interest scheme, we have opted not Simon Christensen Nordea Markets - Analyst to participate in that. We don't believe there's one blanket Yes, good afternoon, gentlemen, and once again thank you for solution to mortgage arrears. So our policy has been and will taking this call. I have four questions, if I may. On the NAMA continue to be to work with customers on an individual basis again (inaudible...) that NAMA is roughly 40% UK, where NIB to find solutions, and I think our policy that we've adopted is is around 4%, shouldn't that... I mean that would be your proven when you look at our mortgage arrears compared to disadvantage if we should compare the two books. I totally the market. So at this point, we won't participate in the agree that you cannot. deferred interest scheme. Secondly, there has been this expert group on mortgage arrears, which has proposed a few things to be implemented Ronnie Otoole National Irish Bank - Chief Economist in law. It looks likes to me that the banks will be punished We did downgrade our GDP expectation for a few reasons. somewhat different interest schemes, et cetera. How will Most obvious is the austerity measures that the government that affect you? have announced and increased. Secondly, I suppose because the momentum of the economy has slowed down a lot, even Thirdly, I can see now that you say that your loan losses will within 2010. So the consensus forecast a few months back be high in 2011. What kind of run rate do you think we should was for GDP growth of around 1% this year, but it's now going use? EUR 130 million has been roughly the run rate for 2010 to be around minus 0.4%. So the momentum going into 2011 if we exclude the second quarter. And lastly, you downgraded is a lot worse, particularly on the domestic side. As I said, 2011 GDP for Ireland from 3% at the third quarter 2010 to consumer spending, which had been picking up in the early now roughly 1%. Should we expect to be a link to your months of the year, has started to trend down. collective impairments going forward? Thank you. So given the extra tax increases, the cuts in social welfare that we're going to see next year, there is going to be - or we Grellan Dunne National Irish Bank - CFO expect a further deterioration on that front as well. In terms Maybe take the run rate question first. I mean it's difficult to of the public investment program, the Irish government had say, as we said. We would expect to see the overall trend been doing a very ambitious large infrastructure program continue to decline, so I mean we can't really call more than over the last half a decade or so. They had been planning to that. A lot depends on the level of activity in the market and reduce it gradually over the next number of years, but where valuations go, so we can't be more precise than that. because of the fiscal situation, they're reducing that much more sharply next year. And it'll be (inaudible) a public 10 investment problem which will lead the decline in investment you will have high impairments in the coming quarters. I next year when up to now it's been the decline in residential mean, are there any kind of change in your wording here? construction. Now you're saying that it would be for the entire 2011. I suppose the reason why we're still forecasting a positive Grellan Dunne National Irish Bank - CFO growth rate of 0.9%, which is significantly above the growth rate you see for the likes of Greece and Portugal, is because No, I think the comment is the same in 2011's four quarters, of the continued performance of the export sector. Irish so the comments are the same. Nothing has changed from exports only declined 4% last year against around 13% in the what Peter would've said. We may see fluctuations between eurozone. We're going to outperform the eurozone again, quarters. But overall, again, the overall trend should continue probably this year, but by much smaller margin. But over two the downward trajectory. years, it still represents a significant outperformance. Simon Christensen Nordea Markets - Analyst Simon Christensen Nordea Markets - Analyst Okay. Thank you. Much appreciated. Okay, thank you. And maybe just a follow-up. You shown a slide I think it's 21 that the upgrade in your books in the Grellan Dunne National Irish Bank - CFO third quarters are down and the... I mean how... Is this... First Thank you. of all, is this in a net or gross basis, and how has this turned into the fourth quarter? Operator: Jan Wolter from Deutsche Bank is online with a question. Grellan Dunne National Irish Bank - CFO This is on a gross basis. Sorry, I didn't catch the second part Jan Wolter Deutsche Bank - Analyst of your question. Yes hi. Jan Wolter here at Deutsche Bank. A couple of questions here if I can. First, if we look at the commercial Simon Christensen Nordea Markets - Analyst property book there, you have what you call investment, I mean, how do you see this trend going forward? I mean, has which is EUR 2.4 billion, and that's been written by 18% or so. there been any major developments? The number of Just could elaborate a little bit more on this portion of the downgrades is increasing, and the number of upgrades is book because the write-off is fairly much lower than the rest decreasing into the third quarter. of the book? And second question is: How much on average have you marked down your commercial real estate collateral would you say? And the third question is: How much Grellan Dunne National Irish Bank - CFO sovereign bonds and bonds in Irish banks are on the balance sheet? If you could tell us what that looks like. Thanks. Yeah, I think you got to look at the overall trend rather than individual quarters. Ratings are down on different parts of the book at different times during the year. So I think when you Grellan Dunne National Irish Bank - CFO look at the economic environment, it's probably reflected in the trends here, so we wouldn't see any change in the overall Just to cover the last one. We don't have any sovereign bonds trend here. I still expect an overall downgrade in the book for on the balance sheet in National Irish Bank. the next couple of quarters at least. Going back to your first question elaborate a bit on the commercial property investment the book there, 2.4 billion, Simon Christensen Nordea Markets - Analyst is a mix of retail, office, industrial. The reason the Okay. And just finally to underline this, I think... I remember. I impairments are at 18% is the majority of that is let out to haven't checked the conference call printout, but I think reasonably good tenants, so the impairment levels more Straarup said that at the third quarter conference call that reflect the cash flows rather than the valuations. 11 Six per cent of that book is vacant, so 94% of it is let; 60% of Jan Wolter Deutsche Bank - Analyst it is fully let, and the remaining part is partially let. So there is Okay, thank you. cash flow. These assets are producing cash; that's why they're not as heavily impaired as the land or development loans. Grellan Dunne National Irish Bank - CFO Thanks. In terms of how much we've written down our collateral, it very much depends on the location and the type of the asset. I suppose our write-downs would be in extreme cases 80-90% Martin Gottlob Danske Bank - Head of IR on land, where it's in rural areas and there's no future value in I have a question coming here from the website. It's coming it. In commercial property, it's down to 60% in some cases, from Per Grønborg. He asks the following questions: What but it is very much location-dependent and whether the asset percentage is producing an income stream or not. of the commercial property book is nonperforming? And secondly, regarding business clients. Over exposure to export-oriented clients is still only 40% Jan Wolter Deutsche Bank - Analyst lending to the manufacturing sector; were export-oriented Okay. And just a follow-up there on the investment book: clients hidden in the pie on slide 10? What tenants did you primarily have there? Was it retailoriented, retail shopping mall shopping centres, or was it Andrew Healy National Irish Bank - CEO something else? In response to the first question, the level of nonperforming loans in the commercial property book, again: if you look at Grellan Dunne National Irish Bank - CFO slide 21, it shows the nonperforming loans across the entire There's probably no major concentration. As I said, it's a mix book. There's a pie chart on the right that gives a breakdown; of retail, and they're generally high-quality tenants there. The and the figure there ... it actually says "Credit 82%" that's other parts of it are office, industrial, so there isn't one ... it commercial property. So just over 80% of the total isn't concentrated in retail. nonperforming loans are commercial property, so I think from that you can work out the level of nonperforming loans in the commercial property book. Jan Wolter Deutsche Bank - Analyst Okay. And one last question. The level of nonperforming In relation to the export sector, I mean, there's a mix, there's assets in the total Irish book. I mean, the portion which is not companies within all the sectors on the SME book and the paying any interest, so that would be the nonperforming part, corporate book that are export-oriented, so we don't classify and then restructured loans, et cetera, what is that level? them as one group within this list that you see on slide 10. Operator: Tom Hedges from Gartmore is online with a Grellan Dunne National Irish Bank - CFO question. You can see that in slide 21 with raising category 11, so you'll see that the level of loans in default. Tom Hedges Gartmore Investment - Investor Hi. Good morning. A couple of questions on the capital ratio. Jan Wolter Deutsche Bank - Analyst Could you confirm what the current equity (inaudible) ratio is Okay. So no ... the rest of the loans in the book are paying for the bank and whether you've had any discussions with the some kind of interest? regulator about the need to raise the capital ratio to perhaps similar levels to the major banks which have now gone to 12% and ... or do you anticipate having to move that level? Grellan Dunne National Irish Bank - CFO Those are the two questions please. Correct. 12 12.5% rate, plus there's no indication of that. We don't Grellan Dunne National Irish Bank - CFO believe it will happen. Ireland has shown great determination In terms of the capital ratio, we're a branch of Danske Bank, to ensure that the low corporation tax rate is protected. It's so we don't hold capital separately, so we're regulated by the central to our industrial strategy, and its success can be seen Danish FSA. in the performance of Irish exports over the last decade. Tom Hedges Gartmore Investment - Investor The state is very determined to protect the 12.5% rate, and Okay. there were no indications as of the interaction with the EU and IMF that that would have to be changed. In fact, quite the opposite. The government came out with some very strong Grellan Dunne National Irish Bank - CFO statements around the protection of that rate, so we don't So we don't have discussions locally with the local regulator believe it will be forced upwards. about capital levels. But I do agree that if that were to happen, it would be a Tom Hedges Gartmore Investment - Investor negative. I did say earlier on that there are other factors that Okay. Thank you. attract multinational businesses to Ireland. We have an English-speaking workforce, a young, very well-educated Operator: Claus Therp from SEB Enskilda is online with a workforce, and Ireland is seen as a good location to do question. business, but there's no doubt the corporation tax rate is a significant attraction for businesses coming here. Claus G. Therp SEB Enskilda - Analyst Claus G. Therp SEB Enskilda - Analyst Yes, hello, and thank you for hosting this call. I have a question Thank you very much. in relation to your future outlook for export companies. Can you elaborate to what extent you will take on new clients if they have a net lending equity (inaudible), either they will not Operator: Peter Werleus from Carnegie Fonder is online with contribute with deposit and funding so your loan-to-deposit a question. ratio will develop in a negative way. That's the first question. Peter Werleus Carnegie Fonder - Investor Another question is relating to the Irish corporate tax. If the Okay, Peter Werleus, Carnegie Fonder. Can you comment a EU and IMF will come in with requirements to Ireland that bit on the deposit market in Ireland? There has been usual they will have to increase the Irish tax level, which I personally flows from ... for other banks and it seems like you are getting think is very likely in this future development, how do you market share, so could you give me a flavour on that market? think the outlook for the Irish corporate and your fully bullish And also if you have any target on depositto-loan ratio as statement on the exporting companies will develop if the shown in slide 13 or something? corporate tax will increase? That's all. Andrew Healy National Irish Bank - CEO Andrew Healy National Irish Bank - CEO Well, a number of Irish banks have recently reported publicly Okay. Well, in terms of new clients, I mean we look at each that they've seen quite large reductions in their deposit book opportunity on its merits. We don't necessarily look in since the beginning of the year, and this was confirmed by our isolation at lending or at deposits. Our ideal customer central bank's statistics recently. As a branch of Danske, one obviously builds up a holistic significant relationship with the of the stronger banks in Europe from a capital perspective, bank, so it's difficult to be any more detailed than that. it's not really surprising for us that we have been seeing some deposit inflows to the bank. In terms of the corporation tax situation, I probably would agree with you that it would be a negative where the hand of the Irish governments to be forced around changing the 13 Particularly over the last number of weeks, we've seen some Aaron Ibbotson Goldman Sachs - Analyst inflows. Not at the level that would suggest a run on the Irish Hey there. Yeah, sorry, just a very quick follow-up. Could you banks, but we have seen good growth. talk just a little bit about the corporate and SME sector that seemed to be behaving quite well despite all the problems in Our most recent published figures would indicate a growth the economy? What are you seeing there at the moment and rate of 14% average deposits year-on-year. We don't set how have you seen that particular sector develop, say over ourselves a specific loan-to-deposit target moving forward, the last couple of quarters, and maybe how you see it going but we hope to keep our deposit base strong. And as I over the next couple of quarters. Thank you. mentioned in the presentation earlier, that ratio is trending in the right direction. Andrew Healy National Irish Bank - CEO Well, I mean, you've probably seen in the numbers there that, Peter Werleus Carnegie Fonder - Investor in terms of impairments, they're coming more from the SME But assuming that you were one of the Irish banks that have side than from the corporate side. The corporate book tends the cheapest funding right now because you fund yourself on to perform better because of the international exposure of a global ... on a corporate level, isn't that an opportunity to that client base. take market share versus other banks and take good credits on book? A lot of our corporate businesses are multinationals. They have a base in Ireland, but much of their business is actually conducted internationally. We do believe we have strengths Grellan Dunne National Irish Bank - CFO in terms of how we service corporates within the Danske Yes, there is, is the answer. But equally the market is very, Group, and that extends to Ireland. So corporates that export very aggressive in terms of interest rates being paid on will continue to be a target growth area for us. deposits, so there's a trade-off. We don't need to pay very, very high rates for funding. So while there is an opportunity, SMEs generally, particularly those that are inwardly focused particularly around the counterparties trend, interest rates are ... do against us a little bit because the market is very, very in Ireland, will undoubtedly continue to experience pressure aggressive. as we move forward into 2011, given the general situation with the economy and the austerity program. But as we've said earlier, we don't have any significant exposures, our Andrew Healy National Irish Bank - CEO concentrations within our SME book. So those two things The other point is that the Irish banks have suffered, as I combined hopefully answer your question there. mentioned earlier on, and there has been at times an overreaction on the part of consumers in particular to the Aaron Ibbotson Goldman Sachs - Analyst safety of their deposits. And there is an onus on us to act Okay. That's good. Thank you very much. responsibly in this situation and not to try and leverage that sort of level of alarm that comes up from time to time, and in Operator: Simon Christensen from Nordea Markets is online trying to do that but we have seen some good deposit inflows. with a question. Peter Werleus Carnegie Fonder - Investor Simon Christensen Nordea Markets - Analyst Okay. Thank you very much. Yes, shortly. Once again on the expert group on mortgages: have you agreed to participate in the other arrangements Operator: Aaron Ibbotson from Goldman Sachs is online with that they're proposing than the deferred interest scheme? a question. And just out of interest, what are the US dollar, euro, and euro UK forecasts that you imply on your export forecast for '11? 14 comes to the asset quality performance of your investment Grellan Dunne National Irish Bank - CFO book there? On the first one, the expert group published quite a long list of proposals, and we will participate in some of them. Some of And lastly also on that 3.4 billion book: what is sort of the them provide for an appeals mechanism for customers, maturities that are coming up in 2011 for repayment and different arrangements for customers in stress or in how much of that do you expect people will be able to roll or difficulty, but nothing that would impact on our expectations would pay and come up with the money basically? Thank you. for impairments or arrears on the mortgage book. Grellan Dunne National Irish Bank - CFO Ronnie Otoole National Irish Bank - Chief Economist In relation to the second question, I don't have a precise figure In terms of the economic projections, they're based on the for the level of maturity. But given the level of activity in the actual GDP growth projections produced by Danske Markets, market, it's inevitable that as these loans mature, that it's which implicit underlying them have currency expectations. I most likely are extended in many cases if there isn't cash flow don't have the precise figures here, but I can get back to you to repay them. on it. In terms of the investment book, again, I don't have specific figures for the coverage in there, but the vacancy rates, as I Simon Christensen Nordea Markets - Analyst mentioned earlier, running at 6% of that book is vacant, 60% Okay. Thank you very much. is fully let, and the remaining 34% is partially let. Operator: Nick Davey from UBS is online with a question. Ronny Rehn KBW - Analyst Okay. Thank you. Nick Davey UBS - Analyst Yeah sorry. Thanks very much, everyone. Just one very quick Operator: We have no further questions at this time. follow-up question. On slide 9, your LTV profile, can you just confirm that that is indexed to market prices currently or is that origination? Martin Gottlob Danske Bank - Head of IR Okay thank you. Thank you all for your interest in our Irish operation and for your questions. As always, you're welcome Grellan Dunne National Irish Bank - CFO to contact us here in Investor Relations if you have further No, that's the current market value. They're revalued on a questions to this topic and/or other topics. A transcript of monthly basis. this presentation will be available on our website shortly and a transcript of the Q&A session will be added within a few days. Thank you all and good-bye for now. Nick Davey UBS - Analyst Thank you. Operator: Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now Operator: Ronny Rehn from KBW is online with a question. disconnect. Ronny Rehn KBW - Analyst Yeah, good morning. Also my thanks for having this call. Just a quick question again on the investment for the commercial real estate book. You mentioned that the cash flow is very important. That's very clear. Can you provide us with a sort of debt service coverage leverage levels that you have in this book and what sort of vacancy levels would be critical when it 15