Ringkjøbing Landbobank’s interim report for the first half of 2021

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4 August 2021

Ringkjøbing Landbobank’s interim report for the first half of 2021

The bank delivers core earnings of DKK 727 million and profit before tax of DKK 716 million in the first half of 2021. The profit before tax is equivalent to a return on equity of 17.4% p.a.

Core earnings

Highlights of the first half of 2021

·The profit before tax is DKK 716 million, equivalent to a return on equity of 17.4% p.a.

·Core income increases by 11% to DKK 1,179 million following a high level of activity in the first half of the year

·Expenses increase by 3% to DKK 404 million

·The rate of costs decreases to 34% in the half-year

·Continued increase in new customers results in growth of 6% in the bank’s loans compared to the end of June 2020

·The expectations for profit before tax were upwardly adjusted to DKK 1,200-1,500 million in June

·An extra share buy-back programme of DKK 242.5 million is planned to start on 1 October 2021

·The purchase of BIL Danmark adds more clients and strengthens the bank’s position in private banking

Management’s review

Core income

Interest
Net interest income was DKK 652 million in the first half of 2021, compared to DKK 616 million in the same period in 2020, an increase of 6%. The bank is highly satisfied with this development.

The development is partly attributable to a 6% increase in lending compared to the end of June 2020. The increase in lending is broadly based and relates to both niches and retail.

A further reason for the positive development in interest is that the bank lowered the threshold for negative interest on personal customers’ deposits to DKK 100,000 with effect from the beginning of January 2021.

Fee, commission and foreign exchange income
Fee, commission and foreign exchange income amounted to DKK 439 million in the first half of 2021, compared to DKK 374 million in the same period in 2020, an increase of 17%. The bank is also highly satisfied with this development, and the increase reflects a very high level of activity – especially in the first quarter of the year. However, the activity level remained high in the second quarter of 2021.

The bank’s focus on the private banking segment has had a positive effect on the “Securities trading”, “Foreign exchange income” and “Asset management and custody accounts” items in particular.

Due to the high level of activity and the continued increase in new customers, the items “Guarantee commission and mortgage credit commission etc.” and “Loan fees” also developed positively compared to the first half of 2020.

Initiatives aimed at normalising the income from payment handling activities were announced with effect from 1 April 2021. These initiatives are reflected in the income from “Payment handling”, which has improved compared to the first half of 2020.

The income from “Other fees and commission” also developed positively compared to the first half of 2020. This is partly attributable to the bank’s focus on the pension and insurance activities.

Sector shares and other operating income
Earnings of DKK 83 million from banking sector shares in the first half of 2021 were DKK 13 million higher than in the first half of 2020, when earnings were DKK 70 million. The earnings derive primarily from returns on the bank’s ownership interests in DLR Kredit, BankInvest (BI Holding) and PRAS.

Other operating income stood at DKK 5 million in the first half of the year, in contrast to 2020, when the figure was DKK 1 million. The other operating income for the year relates primarily to the sale of a property.

Core income
Total core income increased by 11%, from DKK 1,061 million in the first half of 2020 to DKK 1,179 million in 2021.

Expenses, depreciation and write-downs
Total expenses including depreciation and write-downs on tangible assets amounted to DKK 404 million in the first half of 2021, compared to DKK 390 million in 2020, an increase of 3%. 

The increase in the cost level relates to the high level of activity, but an even bigger increase in income compensates for this. 

The rate of costs was 34.2% in the first half of the year, compared to 36.8% in 2020.

Impairment charges for loans etc.
The bank’s expenditure for losses and impairment charges was DKK 48 million in the first half of 2021 – which breaks down into DKK 19 million in the second quarter of 2021 and DKK 29 million in the first quarter of 2021, compared to DKK 38 million and DKK 75 million respectively in the second and first quarters of 2020.

The credit quality of the bank’s loans portfolio is generally judged to be good. During the first half of 2021 the bank has seen a decrease in the need for individual impairment charges. At the same time the bank judged that an increase in the management estimates for losses and impairment charges was needed.

The bank thus increased its management estimates for losses and impairment charges considerably during 2020, from DKK 126 million to DKK 566 million. During the first half of 2021, the management estimates increased further to a total of DKK 609 million.

A significant part of the management estimates is attributable to the current economic risks associated with the coronavirus pandemic. Until the first quarter of 2021, the vast majority of the bank’s customers managed the economic situation relating to the coronavirus pandemic and the need for new individual impairment charges was thus limited. This pattern continued in the second quarter of 2021. However, it continues to be the bank’s assessment that considerable risks are associated with how the economy will develop as and when the many state aid schemes are scaled down and discontinued etc. The management estimates relating to the coronavirus pandemic are therefore maintained at a relatively high cumulative level.

In June 2021, the EU reached a political agreement on its common agricultural policy for 2023-2027. A consequence of the agreement is a decrease in the direct support paid to farmers. The actual implementation and detailed consequences are not yet known. The bank has consequently allocated a management estimate to losses and impairment charges with regard to this uncertainty.

In addition, certain parts of the bank’s loans to fisheries are affected by significant quota reductions, primarily as a result of the political agreement with Great Britain in connection with Brexit. The economic framework conditions for large parts of Danish fisheries are thus pending political clarification. The bank allocated management estimates related to this risk as early as 2020. The estimate was further increased in the first half of 2021. The bank’s total exposure to the fisheries sector is 1.6% and the majority of this exposure is judged to be covered by first mortgages on fishing vessels and quotas.

The credit quality of the bank’s personal customers is generally judged to be good. The marked price increases on the housing market in the past few quarters have increased the wealth of many of them. On the other hand, the bank is aware that rising house prices may increase its risk exposure – in particular in respect of first-time buyers.

The bank’s total account for impairment charges was DKK 2,273 million at the end of June 2021 compared to DKK 2,205 million at the end of 2020. At the end of June 2021, 51% of the total account for impairment charges was classified as stage 1 or 2 exposures.

The bank’s total loans to customers with suspended calculation of interest were DKK 179 million at the end of June 2021, compared to DKK 211 million at the end of March 2021. The decline relative to the end of December 2020, when the amount was DKK 265 million, thus continued.

Core earnings
Core earnings for the first half of 2021 were DKK 727 million compared to last year’s DKK 530 million, an increase of 37%.

Core earnings per share were DKK 25.3 for the first half of 2021 compared to DKK 18.2 in 2020.

Result for the portfolio etc.
The result for the portfolio etc. including funding costs for the portfolio was negative by DKK 3 million net for the first half of the year. In the first half of 2020, the result for the portfolio etc. was negative by DKK 41 million net, as a result of the turmoil on the financial markets due to the coronavirus pandemic.

The bank has thus recovered some of the negative result of DKK 10 million for the portfolio in the first quarter of 2021, which was attributable to the increase in the long-term interest rates.

Amortisation and write-downs on intangible assets
The bank treats amortisation and write-downs on intangible assets as a special item, since expensing them enhances the quality of equity and helps to reduce the deduction when computing total capital. Amortisation and write-downs on intangible assets amounted to DKK 8 million in the first half-year, unchanged relative to 2020.

Profit before and after tax
The profit before tax was DKK 716 million, equivalent to a return on average equity of 17.4% p.a.

The profit after tax was DKK 573 million, equivalent to a return on average equity of 13.9% p.a.

Balance sheet items and contingent liabilities
The bank’s balance sheet total at the end of June 2021 stood at DKK 57,123 million, compared to DKK 53,984 million at the end of June 2020.

Relative to June 2020, the bank’s deposits including pooled schemes increased by 4% from DKK 39,670 million to DKK 41,376 million at the end of June 2021, while its loans in the same period increased by 6% from DKK 35,260 million to DKK 37,268 million. Loans increased by 0.2% in the second quarter of 2021.

The bank’s contingent liabilities including guarantees at the end of June 2021 amounted to DKK 11,811 million, compared to DKK 9,379 million at the end of June 2020.

Credit intermediation
In addition to the traditional bank loans shown on its balance sheet, the bank also arranges mortgage loans on behalf of both Totalkredit and DLR Kredit.

The development in the bank’s total credit intermediation is positive by 8% compared to the end of 2020.

The development is shown in the following summary:

Securities and market risk
The item “Shares etc.” amounted to DKK 1,373 million at the end of June 2021, with DKK 27 million in listed shares and investment fund certificates and DKK 1,346 million in sector shares etc., mainly in the companies DLR Kredit, BI Holding and PRAS.

The bond portfolio amounted to DKK 6,966 million, of which the vast majority consisted of AAA-rated Danish government and mortgage credit bonds.

The total interest rate risk – impact on profit of a one percentage point change in interest level – was computed as 1.1% of the bank’s tier 1 capital on 30 June 2021.

The bank’s risk of losses based on a Value at Risk model (computed with a 10-day horizon and 99% probability) was as follows in the first half of 2021:

The bank’s total market risk within exposures to interest rate risk, listed shares etc. and foreign currency remains at a moderate level, and this policy will continue.

Liquidity
The bank’s liquidity situation is good. The bank’s short-term funding with term to maturity of less than 12 months thus amounts to DKK 1.2 billion, balanced by DKK 10.7 billion in short-term deposits in Danmarks Nationalbank, the central bank of Denmark, and in liquid tradable securities.

The bank’s deposits (excluding pooled schemes) and equity exceeded its loans by DKK 7.3 billion and these two items therefore more than fully finance the loan portfolio. In addition, part of the loan portfolio for renewable energy projects is financed back-to-back with KfW Bankengruppe, which means that DKK 1.1 billion can be disregarded in terms of liquidity.

In terms of liquidity coverage ratio (LCR), the bank must comply with the statutory requirement of at least 100%. On 30 June 2021, the bank’s LCR was 185%, which thus met the statutory requirement by a good margin.
Capital structure
The bank’s equity at the beginning of 2021 was DKK 8,146 million. The profit for the period must be added to this, while the dividend paid and the value of the bank’s own shares bought must be subtracted. After this, equity at the end of June 2021 was DKK 8,333 million.

The bank’s total capital ratio and tier 1 capital ratio were 21.3% and 17.7% respectively at the end of June 2021. 

A new five-year phasing-in period for the dynamic component of the IFRS 9 transitional arrangements was introduced in 2020. The bank now uses both the static and the dynamic components of the IFRS 9 transitional arrangements, including the simplified approach to recalculation of capital requirements.

Calculated without the IFRS 9 transition programmes, the bank’s total capital ratio was 20.1% and the common equity tier 1 capital ratio 16.4% on 30 June 2021.

In the second quarter of 2021, the bank has started using a new system for calculating the risk-weighted assets. The system was delivered by Moody’s and implemented at the bank’s IT supplier, Bankdata. The system ensures continuous updating of future amendments to acts.

At the end of June 2021, the bank has calculated the individual solvency requirement at 9.3%. To this should be added a capital conservation buffer of 2.5% and a countercyclical buffer of 0%. The total requirement for the bank’s total capital was thus 11.8% at the end of June 2021.

On 22 June 2021, the Systemic Risk Council issued a press release containing a recommendation to re-activate the countercyclical capital buffer at 1.0% with effect from 30 September 2022. The Systemic Risk Council also stated that, unless the build-up of risk in the financial system is curbed considerably, the Council expects to recommend a further increase of the buffer rate to 2.0% by the end of 2022.

On 24 June 2021 the Minister for Industry, Business and Financial Affairs decided to re-activate the countercyclical capital buffer at 1.0% from 30 September 2022.

Compared with the actual total capital of DKK 8.8 billion, the bank had excess capital cover of DKK 4.9 billion relative to the individual solvency requirement, equivalent to 12.0 percentage points at the end of June 2021, and excess capital cover of DKK 3.9 billion compared to the total requirement, equivalent to 9.5 percentage points.

In December 2020, the bank received an MREL requirement of 17.9% applicable from 28 December 2020.

The bank operates with three different capital targets. The capital targets specify that the common equity tier 1 capital ratio must be at least 13.5%, the total capital ratio at least 17% and the MREL capital ratio for covering the MREL requirement at least 23.5%, including the capital buffers.

All capital targets must be met at the end of the year, but the capital ratios may fluctuate over the year. However, the MREL requirement must always be met.

To comply with the MREL requirement, the bank had established funding by the end of 2017 to meet the requirements for grandfathering of contractual senior capital. DKK 0.9 billion of the funding was included to meet the bank’s MREL requirement at the end of June 2021. In addition, the bank issued non-preferred senior capital totalling the equivalent of DKK 1.3 billion from December 2018 to December 2020. In May and June 2021, the bank has issued additional non-preferred senior capital totalling the equivalent of DKK 638 million, meaning that the bank has now issued non-preferred senior capital to the equivalent of DKK 1.9 billion in total. The bank judges that the issues in the second quarter of 2021 have met the need for issues in 2021.

The bank’s capital for covering the MREL requirement totalled DKK 11.6 billion on 30 June 2021, equivalent to an MREL capital ratio of 28.2%. The excess cover relative to the MREL requirement on 30 June 2021 was thus 10.3 percentage points.

Share buy-back programme and capital reduction
The bank’s annual general meeting of 3 March 2021 renewed the previous authorisation of the board of directors to permit the bank, in accordance with applicable law, to acquire its own shares to a total nominal value of 10% of the bank’s share capital. The share buy-back programme for the period 4 February to 29 July 2021 was completed by DKK 225 million. On 30 June 2021, 305,500 shares had been bought back and, when the programme ended on 29 July 2021, a total of 361,605 shares had been bought back, which the overview below shows. The remainder of the DKK 255 million share buy-back programme, equivalent to DKK 30 million, will be executed in the period 5 August to 30 September 2021.

The general meeting further decided to cancel the 160,600 of the bank’s own shares that were bought in 2020. The capital reduction was finalised on 6 May 2021.

On 30 June 2021, the bank’s actual share capital was thus DKK 28,762,221 in nom. DKK 1 shares: see below.

In August 2021, the bank has received the Danish FSA’s approval of a new share buy-back programme totalling DKK 242.5 million for implementation from 1 October 2021. The amount of the share buy-back corresponds to the part of the 2020 share buy-back programme totalling DKK 300 million, which was not completed in 2020.

The board of directors is expected to make the final decision to initiate the share buy-back programme during the second half of 2021.

The Supervisory Diamond
The bank complies with the Danish FSA’s Supervisory Diamond which contains a number of benchmarks and associated limit values which Danish banks must observe.

The Supervisory Diamond benchmarks and limit values and the bank’s key figures are given in the following table.

* The increase was mainly caused by the merger with Nordjyske Bank. The pro forma growth in loans for the full year 2018 was 7.0%.

As shown above, Ringkjøbing Landbobank meets all five current limit values by a good margin.

Rating
The bank is rated by the international credit rating agency Moody’s Investors Service.

Moody’s confirmed the bank’s ratings on 30 March 2021, including Aa3 for long-term bank deposits, P-1 for short-term bank deposits and A1 for long-term issuer – all with stable outlook.

BIL Danmark
On 23 June 2021, the bank entered into an agreement with Banque Internationale à Luxembourg S.A., of Luxembourg, regarding takeover of all BIL Danmark’s clients. The Danish FSA’s approval of a Section 204 takeover pursuant to the Danish Financial Business Act was received on 25 June 2021.

BIL Danmark has branches in both Copenhagen and Aarhus. The clients taken over will primarily be attached to the bank’s private banking branches in Holte and Aarhus.

Ringkjøbing Landbobank took over the client portfolio on 1 July 2021. The clients will be transferred to Ringkjøbing Landbobank during the third quarter of 2021 and will continue to be served by BIL Danmark until then.

The takeover comprises

• Loans of DKK 1.2 billion
• Deposits of DKK 0.9 billion
• Assets under management and custody account holdings of DKK 6.0 billion

distributed across approximately 500 families and companies.

In connection with the transaction, eight client-oriented employees were transfered from BIL Danmark to Ringkjøbing Landbobank.

Payment for the client portfolio will take the form of an earn-out, based on earnings over a two-year period. In this connection, intangible assets in the form of client relationships equivalent to DKK 45 million will be capitalised on the bank’s balance sheet.

The purchase of the BIL Danmark client portfolio will strengthen the bank’s position in private banking.

New mobile banking service
The bank’s IT supplier, Bankdata, has supplied a new mobile banking app. The new mobile banking app establishes a new future-proofed communication platform with the customers and also offers good possibilities for customer self-compliance, better security and integration with third parties.

Roll-out of the new mobile banking app will take place during the third quarter of 2021.

Bank of the year
In June 2021, the bank was awarded the accolade of Bank of the Year among major banks for the sixth time in a row.

As in previous years, the award was made by the online news portal FinansWatch in collaboration with the audit and consultancy firm EY. We are very humbled by this, since happy customers and skilled staff are fundamental to a good bank.

Enlarging the head office
The bank has entered into agreements with a number of builders in the second quarter of 2021 and thus made the final decision to enlarge the head office in Ringkøbing. The plan is that the builders will start the construction work in the fourth quarter of 2021 for completion in December 2022. The enlargement will add just over 1,200 m².

The enlargement of the head office will help ensure that the bank can continue to pursue an organic growth strategy.

Job appraisal reviews
The annual job appraisal reviews were completed in June. We are pleased to note that the preceding evaluation process and subsequent interviews showed that both wellbeing and collaboration in the bank are generally really good – which is particularly gratifying after five quarters coping with the coronavirus.
The coronavirus situation
We see support of our customers and business partners during the coronavirus pandemic as an important part of our task. From the start of the pandemic we have, of course, also placed great emphasis on protecting our employees to lessen the risk of transmission of the virus.

The bank has thus prepared for operating in an ever-changing environment due to the coronavirus situation and if varying kinds of restrictions may be reintroduced.

Expected results for 2021
On publication of the 2020 annual report, the bank announced its expectations for core earnings for 2021 in the range DKK 1,100-1,300 million and profit before tax in the range DKK 1,000-1,300 million.

On 8 June 2021, the bank upwardly adjusted its expectations for 2021, primarily as a result of a better income flow than previously expected, primarily as a result of a continued big increase in customers and a high level of activity.

The upwardly adjusted expectations for the full year are now core earnings in the range DKK 1,300-1,500 million and profit before tax in the range DKK 1,200-1,500 million. The upwardly adjusted expectations are maintained.

Accounting policies
The accounting policies are unchanged relative to those in the submitted and audited 2020 annual report.

Key figures

Quarterly overviews

Core earnings

Quarterly overviews – continued

Balance sheet items and contingent liabilities

Statement of capital

Statements of income and comprehensive income

Core earnings

Balance sheet

Balance sheet – continued

Statement of changes in equity

Statement of changes in equity – continued

Statement of capital                

Statement of capital – continued

Notes

Notes – continued

Notes – continued

Notes – continued

Notes – continued

Notes – continued

Notes – continued

Notes – continued

Notes – continued

Notes – continued      

Notes – continued

Notes – continued

Notes – continued

Notes – continued

Main figures

The Danish FSA’s official key figures/ratios etc. for Danish banks
 

Management statement

The board of directors and the general management have today discussed and approved the interim report of Ringkjøbing Landbobank A/S for the period 1 January to 30 June 2021.

The interim report is drawn up in accordance with the provisions of the Danish Financial Business Act and other Danish disclosure requirements for listed financial companies. We consider the chosen accounting policies to be appropriate and the estimates made responsible, so that the interim report provides a true and fair view of the bank’s assets, liabilities and financial position as at 30 June 2021 and of the result of the bank’s activities for the period 1 January to 30 June 2021. We also believe that the management’s review contains a true and fair account of the development in the bank’s activities and financial circumstances as well as a description of the most important risks and uncertainties which can affect the bank.

The interim report has not been audited or reviewed, but the bank’s external auditors have verified the profit by carrying out procedures corresponding to those required for a review and have thereby checked that the conditions for ongoing recognition of the profit for the period in the common equity tier 1 capital have been met.

Ringkøbing, 4 August 2021

Attachment

• Q2 Rapport 2021 – EN