Outlook 2011

The global economic recovery remains a substantialchallenge for central banks and political systems. The expected improvement in the global economy has failed to materialise. Structural challenges in the economies of southern Europe and Ireland and a heavy budget deficit in the US are still constraining economic growth and affecting the stability of and confidence in the financial markets.

The European economies are expected to see generally lower growth in 2011 than in 2010. The Danish economy is set to grow at a slower pace than the euro zone generally, whereas the other Nordic economies are likely to see higher growth rates.

Interest rates are forecast to be generally unchanged in the remainder of 2011. Renewed financial turbulence is preventing the European Central Bank (ECB) from hiking rates any further. It may even decide to cut rates if the financial crisis worsens. The Danish central bank lowered its certificate of deposit rate twice in the third quarter of 2011. These rate changes were made to stabilise the Danish krone rather than in response to interest rate changes in the euro zone.

In May, Danske Bank raised interest rates generally by 0.25% because of monetary policy changes. When the ECB and the Danish central bank hiked rates in July, Retail Banking Denmark did not change its administratively fixed interest rates. Similarly, the Danish central bank’s latest lowerings of its certificate of deposit and current account rates in August and September did not bring about any changes in the administratively fixed interest rates. But on 1 August and 20 October 2011, Retail Banking Denmark made extraordinary increases of up to 0.5% in a number of lending rates to cover higher expenses for the resolution of distressed Danish banks and higher funding costs.

Stricter requirements for supplementary collateral for mortgage-covered bonds will raise funding costs and necessitate increases in administration margins. The Group has therefore announced margin increases to take effect in 2012.

The implemented and announced initiatives are expected to boost the Group’s income by about DKK 2.5 billion a year. At the release of its interim report for the first half of 2011, the Group forecast an increase in net interest income in the second half of 2011 of about DKK 500 million. Because of the two extraordinary rate increases, the Group still expects to meet this target despite the recent rate cuts from the Danish central bank and the ECB’s decision not to make further rate hikes.

Expenses are estimated to be about 3% higher than in 2010 because of the unforeseen commitment to the Danish Guarantee Fund for Depositors and Investors and other one-off expenses. In the first nine months of the year, expenses for the Fund amounted to DKK 1.0 billion. Danske Bank’s share is just over one third of the total sector commitment to cover the losses incurred by the Fund.

The global economic developments could contribute to making the Group’s loan impairment charges higher in the fourth quarter than in the third quarter, but the figure for the full year is still expected to be lower than the 2010 figure. Despite a small decline in property prices, relatively low interest rates and slightly declining unemployment give reason to expect generally better credit quality for both personal and business customers in the remainder of 2011.

The Irish economy will continue to face structural challenges, and because of the economic climate, the level of future impairment charges is uncertain. The situation for rental property and property developers in the Northern Ireland market is also uncertain. Loan impairment charges at the units in Ireland and Northern Ireland are likely to remain high in coming quarters.

The performance of capital market activities – at Danske Markets and Danica Pension – will depend greatly on financial market trends, including the level of securities prices at the end of the year. Danica Pension’s net income is expected to be substantially lower than in 2010. Depending on its performancerelated fees, Danske Capital expects its profit to increase.

The Group’s effective tax rate is expected to be high.