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Danske Bank Annual Report 2020
3359_rns_2021-02-09_07b1f7a4-ee59-42bb-96c6-8cc02904fe26.pdf
Annual Report
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Annual report 2020
Danske Mortgage Bank Plc
DANSKE MORTGAGE BANK PLC BOARD OF DIRECTORS' REPORT 2020
Contents
| DANSKE MORTGAGE BANK PLC | |
|---|---|
| BOARD OF DIRECTORS' REPORT 2020 3 | |
| Financial Highlights10 | |
| Corporate Governance12 | |
| Risk Management Disclosure15 | |
| IFRS FINANCIAL STATEMENTS23 | |
| Statement of Comprehensive Income23 | |
| Balance sheet23 | |
| Statement of changes in Equity 24 | |
| Cash Flow Statement25 | |
| NOTES TO THE FINANCIAL STATEMENTS26 | |
| Summary of Significant Accounting Policies and Estimates26 |
|
| SEGMENT INFORMATION28 | |
| OTHER NOTES29 | |
| DANSKE MORTGAGE BANK PLC'S BOARD OF DIRECTORS' PROPOSAL TO THE ANNUAL GENERAL MEETING FOR THE DISTRIBUTION OF PROFIT AND SIGNING OF |
|
| ANNUAL REPORT 2020 54 | |
| THE AUDITOR'S NOTE55 | |
| ACCOUNTING MATERIAL 202056 |
Danske Mortgage Bank Plc is a Finnish bank which is part of the Danske Bank Group. Danske Bank Group is one of the largest financial enterprises in the Nordic region. This Financial Statement and Board of Directors' report covers Danske Mortgage Bank Plc.
Danske Mortgage Bank Plc Board of Directors' Report 2020
Danske Mortgage Bank Plc in brief
Danske Mortgage Bank Plc is a wholly-owned subsidiary of Danske Bank A/S, the parent company of Danske Bank Group. Danske Bank Group operates in 13 countries. The Group is headquartered in Copenhagen and Danske Bank's share is quoted on the Nasdaq OMX Copenhagen.
Danske Mortgage Bank Plc is operating as an issuer of covered bonds. Bonds issued by the Bank are covered by a pool of loans consisting of Finnish household mortgages. The Bank does not act as the originator of housing loans as it purchases loans from Danske Bank A/S, Finland Branch. Loan servicing process as many other processes are outsourced to Danske Bank A/S. This way loan purchases are not having an effect on the service provided to customers. Loans included in the Bank's balance sheet are Finnish households' mortgage loans with residential real estate or shares of housing company as collateral.
Danske Mortgage Bank Plc's operations continued stable during 2020, but due to the coronavirus pandemic, impairment charges were increased. As the Bank sold non-performing loans also the amount of write-offs increased. The quality of the loan portfolio, and the Bank's profitability, have remained at good level.
In January 2020 the Bank issued a covered bond with nominal value EUR 1 billion. In the first quarter of the year the Bank purchased almost EUR 1.9 billion mortgage loans to enable issuances, but new issuances were not made and the loan portfolio matured evenly during rest of the year. A covered bond EUR 1.0 billion matured in November and the balance sheet contains free mortgage loans to cover new issuances in the future. Hedging and short-term funding were executed normally through Danske Bank A/S. The amount of cover pool eligible loans in the Danske Bank Group's Finnish operations has been stable.
Throughout this Annual Report the term "Bank" refers to Danske Mortgage Bank Plc. The Danske Bank Group is referred to as "Group".
Danske Mortgage Bank Plc is domiciled in Helsinki and its business identity code is 2825892-7.
Operating environment
Coronavirus pandemic caused a deep recession to Finnish economy in 2020. The recession hit powerfully especially service industries, because consumers avoided human contact and the government restricted restaurant operations. All the main subcomponents of GDP contracted steeply in H1 2020. GDP contracted over 6 per cent year-on-year in Q2, but a noticeable recovery took place in Q3, when the corona restrictions were lifted, and better epidemic situation made economic activity brisker. Finnish manufacturing and construction industries have so far coped reasonably well with the corona crisis, although flow of new orders in manufacturing weakened. Business and consumer confidence indicators plummeted in spring but confidence recovered during summer. At the end of 2020 business and consumer confidence indicators were slightly below historical averages. Nevertheless, consumers felt that their financial situation was good. Public debt grew noticeably in 2020 due to a contraction in tax revenues and social security contributions, a rise in unemployment expenditure, increased business aid, and higher health care expenditure.
Vaccination programme against the corona virus begun in December 2020. Finnish economy is expected to recover gradually in 2021, but a full recovery will take time, which causes risks on corporate and household ability to service debt.
The Finnish labour market started the year 2020 from a good position. In February, the trend of employment rate reached record-breaking 73.4 per cent. However, the corona epidemic turned employment levels to a steep decline in spring. Initial adjustment in the labour market has come mainly through temporary layoffs in labour intensive service industries. The number of layoffs rose to over 170,000 but layoffs came down significantly since end of May once the corona lockdown was gradually lifted. Less than 60.000 persons were laid-off in late 2020. Actual unemployment rose relatively moderately compared to previous recessions, but unemployment
stays elevated also in 2021. Household financial situation stayed reasonably good, because savings rate went up, while consumption of travel and many other services decreased.
Construction permits have declined for over two years but the volume of housing construction remains high. The flow of new finished apartments has slowed down a little but it is still noticeably above the average level in the 2000s. The Finnish housing market slowed down temporarily in spring due to the corona epidemic. Number of transactions fell by roughly one third in April and May but the situation returned quickly to normal in summer. So far, the epidemic has had no clear impact on housing prices. Housing prices remained nearly flat on average in H1. Afterwards housing prices rose in growth centers. Local differences in price development are significant. Household home purchase intentions remained high in summer and autumn 2020. The Finnish housing market looks relatively stable.
Monetary policy has been accommodative for a long time. Market interest rates stayed low in 2020, and interest rates are not expected to change significantly in 2021. The European Central Bank established a new pandemic emergency purchase programme (PEPP) worth EUR1,850 billion to combat the corona crisis. Low interest rates make debt burden easier for households and corporates. In addition, many households have utilized interest only periods. Housing loan stock has grown at the modest rate of approximately 3 per cent.
Financial review
The comparison figures in parentheses refer to 2019 figures.
The Bank's profit before taxes was EUR 28.4 million (23.1 million). The result was EUR 22.7 million (18.5 million).
Return on equity amounted to 7.2 per cent for 2020 (6.5 per cent). Equity has increased by EUR 18.5 million during 2020. Increase was due to the decision to refrain from distribution of profit in 2020 as recommended by the FIN-FSA due to uncertainty created by the coronavirus pandemic.
Total operating income for 2020 amounted to EUR 44.9 million (38.2 million) and the net interest income was EUR 42.2 million (35.6 million). The positive development was due to the decrease in financing costs and due to the increased loan portfolio. The Bank's net fee
income totalled EUR 2.3 million (2.1 million). Net trading income was EUR 0.4 million (0.5 million).
The Bank's cost to income ratio was 35.2 per cent (36.9 per cent) and the Bank's operating expenses totaled EUR 15.8 million (13.8 million). The increase in costs is explained by the higher Resolution Fund payment for 2020 and increase in the Group's internal recharges.
Impairment charges and final write-offs totaled to EUR 0.7 million (1.4 million) of which final write-offs were 1.0 million euros (0.3 million). The weakened economic outlook due to the outbreak of the coronavirus pandemic resulted in a slight increase in final write-offs and impairment charges. Non-performing loans are sold regularly to Danske Bank A/S, Finland Branch and final-write offs realizes from loan sales.
Balance sheet and funding
Danske Mortgage Bank Plc's total balance sheet for 2020 was EUR 5,949.0 million (5,286.5 million). Loans and receivables from customers amounted to EUR 5,624.0 million (4,994.5 million). The growth in the balance sheet was due to loan purchases for the covered bond issued in January 2020 with nominal value EUR 1,000 million, and also due to later loan purchases from Danske Bank A/S, Finland Branch.
The Bank's other investment securities portfolio consists of liquidity coverage ratio (LCR) eligible bonds. Other investment securities amounted to EUR 40.8 million at the end of 2020 (40.3 million).
The financial and liquidity situation was good. All shortterm funding was received from the Group. The Bank's liquidity buffer was EUR 228.9 million at the end of 2020 (185.0 million) and it consisted of deposits in central bank and central bank eligible high quality liquid bonds.
With a liquidity coverage ratio (LCR) of 906 per cent end of 2020 (172 per cent), the Bank was compliant with the regulatory minimum requirement of 100 per cent at the end of reporting period. According to the Capital Requirements Regulation (EU) No 575/2013 banks must have a LCR of at least 100 per cent.
At the beginning of 2020 the Bank's equity was EUR 303.5 million. The Bank refrained from distribution of profits in 2020 as recommended by the FIN-FSA. The result for 2020 was EUR 22.7million. At the end of 2020 the amount of equity totaled EUR 326.2 million
Prime quality Finnish housing loans
Danske Mortgage Bank Plc loan portfolio consists of prime quality Finnish housing loans. Customers are concentrated to best rating classes on the rating scale. Impairments are 0.04 per cent of the loan portfolio and on the low level. The balance of non-performing loans is low as they are sold back to Danske Bank A/S, Finland Branch.
RELATIVE NUMBER OF COLLATERAL IN COVER POOL BY TYPE
Collateral types include shares of housing companies and single properties. Other collateral types include typically deposits or securities that are not counted as eligible collateral for cover pool purposes.
LOAN VOLUME IN COVER POOL BY LOCATION
Loan exposures are concentrated to customers in Helsinki capital area. In general loans have a high collateral degree and they are predominantly located in the growth areas.
Capital and solvency
The objective of the Bank's capital and solvency management is to have an adequate amount of capital to support its business strategy and to fulfil the regulatory capital requirements. The Bank also needs to ensure that it is sufficiently capitalized to withstand severe macroeconomic downturns.
The Bank is using the internal rating based (IRB) approach for calculation of capital requirements for credit risk for retail exposures. Otherwise, standard method is applied for credit risk. For operational risk standard method is applied in calculating capital requirement.
Capital management and practices are based on an internal capital and liquidity adequacy assessment process (ICLAAP). In this process, the Bank identifies its risks and determines its solvency need.
Total capital consists of tier 1 capital that is common equity tier 1 capital after deductions. On 31 December 2020, the total capital amounted to EUR 297.6 million (280.9 million), and the total capital ratio was 33.6 (35.8) per cent. The common equity tier 1 capital ratio was 33.6 (35.8) per cent. Total capital ratio calculation includes 15 per cent risk weight floor set by the FIN-FSA for residential mortgage loans. The Board of the Financial Supervisory Authority has decided on 30 September 2020 not to continue to use the risk weight floor after 1 January 2021. This will further improve the Bank's capital ratio. Total capital has increased due to the decision to refrain from distribution of profit in 2020 as recommended by the FIN-FSA due to uncertainty created by the coronavirus pandemic.
Risk exposure amount (REA) was EUR 885.2 million (783.8 million).
Profit after taxes is not included in Tier 1 distributable capital.
Leverage ratio
According to the Capital Requirements Directive (CRD IV) credit institutions must have a well-established practice to identify, manage and monitor risks to avoid excessive leverage. Indicators for excessive leverage shall include the leverage ratio and shall be monitored under the Pillar II process. Credit institutions must also be able to withstand a range of different stress events with respect to the risk of excessive leverage.
The CRR/CRD IV requires credit institutions to calculate, report and monitor their leverage ratios. The leverage ratio is defined as ratio of tier 1 capital from the total exposure. In order to count in the leverage ratio, the tier 1 capital must be eligible under CRR. The total exposure measure is the sum of the exposure values of all assets and off-balance sheet items not deducted from tier 1 capital. Specific adjustments apply to derivatives.
The Bank has processes in place for the identification, management and monitoring of the risk of excessive leverage. The leverage ratio is also part of the Bank's risk appetite framework.
The Bank´s leverage ratio was 5.0 (5.4) per cent on 31 December 2020. The leverage ratio is calculated based on the fourth quarter end figures whereby the tier 1 capital was EUR 297.6 million (280.9 million) and leverage ratio exposure EUR 5 912.2 million (5,225.7 million). Leverage ratio table is presented after the solvency table as per 31 December 2020.
Capital buffers
In June 2018 the FIN-FSA decided to impose on credit institutions a structural additional capital requirement, i.e. systemic risk buffer. The additional capital requirement based on the systemic risk buffer entered into effect on 1 July 2019. For Danske Mortgage Bank Plc it was at a level of 1.0 per cent. In April 2020 the FIN-FSA decided to lower the Finnish credit institutions' capital requirements. The decision entered into force immediately. The reduction was implemented by removing the systemic risk buffer and by adjusting credit institutionspecific requirements so that the structural buffer requirements of all credit institutions fell by 1 percentage point.
In December 2020 the FIN-FSA decided not to increase the countercyclical capital buffer requirement (variable capital add-on) applicable to banks. The requirement will remain at zero until further notice.
The minimum own funds requirements and capital buffers are listed under the leverage ratio table for Danske Mortgage Bank Plc.
| SOLVENCY Own funds |
||
|---|---|---|
| EURm | 31/12/2020 | 31/12/2019 |
| Common Equity Tier 1 capital before deductions | 326.2 | 303.5 |
| Share capital | 70.0 | 70.0 |
| Reserves for invested unrestricted equity | 215.0 | 215.0 |
| Retained earnings | 18.5 | - |
| Total comprehensive income for the period | 22.7 | 18.5 |
| Deductions from CET1 capital | -28.6 | -22.5 |
| Proposed/paid dividends /part of profit not included in CET1 | -22.7 | -18.5 |
| Value adjustments due to the requirements for prudent valuation | -0.1 | -0.1 |
| IRB shortfall of credit risk adjustments to expected losses | -5.8 | -4.0 |
| Common Equity Tier 1 (CET1) | 297.6 | 280.9 |
| Additional Tier 1 capital (AT1) | - | - |
| Tier 1capital (T1 = CET1 + AT1) | 297.6 | 280.9 |
| Tier 2 capital (T2) | - | - |
| Total capital (TC = T1 + T2) | 297.6 | 280.9 |
| Total risk exposure amount (REA) | 885.2 | 783.8 |
| Capital requirement ( 8% of risk exposure amount) | 70.8 | 62.7 |
| Credit and counterparty risk | 65.9 | 57.9 |
| Operational risk | 4.9 | 4.8 |
| Common equity tier 1 capital ratio (%) | 33.6% | 35.8% |
| Tier 1 capital ratio (%) | 33.6% | 35.8% |
| Total capital ratio (%) | 33.6% | 35.8% |
The Bank's capital adequacy ratio has been calculated both in accordance with Credit Institutions Act Sect 9-10 and EU Capital Requirement Regulation (CRR).
| LEVERAGE RATIO | ||
|---|---|---|
| EURm | 31/12/2020 | 31/12/2019 |
| Total assets | 5,949.0 | 5,286.5 |
| Derivatives accounting asset value | -74.1 | -89.5 |
| Derivatives exposure to counterparty risk ex. collateral | 43.1 | 32.6 |
| Undrawn committed and uncommitted facilities, guarantees and loan offers | - | - |
| Adjustment to CET1 due to prudential filters | -5.8 | -4.0 |
| Total exposure for leverage ratio calculation | 5,912.2 | 5,225.7 |
| Reported tier 1 capital (transitional rules) | 297.6 | 280.9 |
| Tier 1 capital (fully phased-in rules) | 297.6 | 280.9 |
| Leverage ratio (transitional rules) | 5.0% | 5.4% |
| Leverage ratio (fully phased-in rules) | 5.0% | 5.4% |
| Minimum own funds requirements and capital buffers | ||
|---|---|---|
| (% of total risk exposure amount): | 31/12/2020 | 31/12/2019 |
| Minimum requirements: | ||
| Common Equity Tier (CET) 1 capital ratio | 4.5% | 4.5% |
| Tier 1 capital ratio | 6.0% | 6.0% |
| Total capital ratio | 8.0% | 8.0% |
| Capital buffers: | ||
| Capital conservation buffer 1) | 2.5% | 2.5% |
| Institution-specific countercyclical capital buffer | 0.0% | 0.0% |
| Countercyclical buffer 2) | - | - |
| Systemic risk buffer 3) | - | 1.0 % |
| Minimum requirement including capital buffers: | ||
| Common Equity Tier (CET) 1 capital ratio | 7.0% | 8.0% |
1) Valid from 1.1.2015 onwards.
2) On 18 December 2020, the FIN-FSA decided not to set any countercyclical buffer.
3) Valid from 1.7.2019 onwards until the FIN-FSA decided on 6 April 2020 to remove Systemic risk buffer requirement.
Credit ratings
Issued covered bonds are rated 'Aaa' by Moody's Investor Services.
Employees and organization
The Bank had 6 (7) employees at the end of the financial year. The average during financial period was 6 (6).
Danske Mortgage Plc's Board of Directors, auditors and committees
On 3 November 2020 Kimberly Bauner was elected to join the Bank's Board of Directors and Lisbet Kragelund resigned from the Board. Glenn Söderholm (chairman), Robert Wagner, Riikka Laine-Tolonen, Tomi Dahlberg and Maisa Hyrkkänen remained on the Board.
Pekka Toivonen is the CEO of the Bank and Jari Raassina is his deputy.
On May 6, 2020 the annual general meeting of the Bank elected Deloitte Ltd Audit Firm, as auditor of Danske Mortgage Bank Plc, with Aleksi Martamo, APA, as the Key audit partner.
Related party loans and receivables are listed in note 19 and corporate governance principles are found on page 12.
Danske Mortgage Bank Plc's shares, ownership and group structure
Danske Mortgage Bank Plc is part of the Danske Bank Group. The parent company of the Danske Bank Group is Danske Bank A/S.
Danske Mortgage Bank Plc's share capital is EUR 70.0 million, divided into 106,000 shares. Danske Bank A/S holds the entire stock of Danske Mortgage Bank Plc.
Risk management
The Bank's principles for risk management are based on legislation for mortgage banks. The main objective of risk management is to ensure that the capital base is adequate in relation to the risks arising from the business activities. The Board of Directors of the Bank establishes the principles of risk management, risk limits and other general guidelines according to which risk management is organized at the Bank.
To ensure that the Bank's risk management organization meets both the external and internal requirements, the Board of Directors has also set up a Risk Council composed of the operative management members. The Risk Council's main objective is to ensure that the Bank is compliant with the risk management guidelines issued by the Board of Directors and that the Bank monitors all types of risk and provides reports to concerned parties.
The main risks associated with the Bank's activities are credit risk, interest rate and liquidity risks of banking book, non-financial risks and various business risks. The credit risk exposure has the largest impact on capital requirement. The majority of the non-financial risks are related to outsourced services and processes.
The Bank's risk position has been low. The main risks associate with the development in the general economic environment and investment market and future changes in financial regulations.
In relation to the loan portfolio, non-performing loans were at a low level. Non-performing loans that are delayed for over 90 days amounted to EUR 0.5 million (0.4 million). Impairment charges and final write-offs totaled EUR 0.7 million (1.4 million).
More detailed information of risks and risk management can be found in the Risk Management Disclosure on page 15.
Events after the reporting period
There are no material events after the reporting period.
Outlook for 2021
Both the shortest market interest rates and the 12-month Euribor rate are expected to remain negative in 2021. We do not anticipate further cuts top ECB interest rates, unless the global economic outlook deteriorates in an unforeseen way.
The global economy recovers from the recession in 2021, after the coronavirus pandemic has been suppressed with the help of vaccines. Finland's GDP begins to grow, but higher unemployment remains a challenge. Households' financial situation is good on average, because of accumulated savings in 2020. Residential construction continues at a relatively fast pace especially in growth centers. Demographic development influences housing markets regionally.
The development of the Bank's business volume is dependent on the development of volume of Danske Bank A/S, Finland Branch's stock of housing loans and Danske Bank A/S Group's funding demand. In the future, the Bank seeks to issue at least one benchmark-size covered bond per year.
The Bank is rather well protected against changes in the level of interest rates. Therefore, impact from interest rate risk to net profit is limited. The development in the Finnish economy affects it mostly through credit losses and level of new sales loan margins. The refinancing cost of the Bank is dependent on the credit rating of Danske Bank A/S and development in the global and Finnish economy. The Bank's business is stable and the number of personnel is expected to remain at the current level.
We expect that the Group's liquidity situation is strong, and because of this the average outstanding volume of the Bank's covered bonds will be slightly lower than in 2020. Also the average loan balance in cover pool as consequence will be lower, which causes the Bank's net profit for the year to be lower than for 2020 yet remaining profitable.
This guidance is generally subject to uncertainty related to future macroeconomic and business development.
Helsinki, 9 February 2021
Danske Mortgage Bank Plc Board of Directors
| FINANCIAL HIGHLIGHTS | |||
|---|---|---|---|
| EURm | 2020 | 2019 | 2018 |
| Revenue | 89.3 | 94.4 | 96.9 |
| Net interest income | 42.2 | 35.6 | 37.5 |
| % of revenue | 47.2 | 37.7 | 38.7 |
| Profit before taxes | 28.4 | 23.1 | 28.2 |
| % of revenue | 31.8 | 24.4 | 29.1 |
| Total income 1) | 44.9 | 38.2 | 40.0 |
| Total operating expenses 2) | 15.8 | 13.8 | 11.6 |
| Cost to income ratio | 35.2 | 36.0 | 28.9 |
| Total assets | 5,949.0 | 5,286.5 | 5,863.2 |
| Equity | 326.2 | 303.5 | 261.6 |
| Return on assets, % | 0.4 | 0.3 | 0.4 |
| Return on equity, % | 7.2 | 6.5 | 8.9 |
| Equity/assets ratio, % | 5.5 | 5.7 | 4.5 |
| Solvency ratio, % 3) | 33.6 | 35.8 | 26.8 |
| Impairment on loans and receivables 4) | 0.7 | 1.4 | 0.2 |
| Off-balance sheet items | - | - | 0.0 |
| Average number of staff | 6 | 6 | 5 |
| FTE at end of period | 6 | 7 | 5 |
The financial highlights have been calculated as referred to in the regulations of the Finnish Financial Supervision Authority, taking into account renamed income statement and balance sheet items due to changes in the accounting practice.
1) Total income comprises the income in the formula for the cost to income ratio.
2) Total operating expenses comprise the cost in the formula for the cost to income ratio.
3) Capital adequacy ratio has been calculated both in accordance with Credit Institutions Act Sect 9-10 and EU Capital Requirement Regulation (CRR). For calculation of credit risk exposure amount in Retail, the Bank applies internal model (IRB) and otherwise standard method. For calculation of risk exposure amount in operational risk, it applies standard method.
4) Impairment on loans and receivables includes impairment losses, reversals of them, write-offs and recoveries. (-) net loss positive.
Definition of Alternative Performance Measures
The Bank's management believes that the alternative performance measures (APMs) used in the Board of Directors' report provide valuable information to readers of the financial statements. The APMs provide more consistent basis for assessing the performance of the Bank. They are also important aspect of the way in which the Bank's management monitor's performance.
The Annual report contains a number of key performance indicators (so-called alternative performance measures - APMs), which provide further information about the Bank. There are no adjusting items, which means that net profit is the same in the financial highlights and in the IFRS income statement. The differences between the financial highlights and the IFRS financial statements relate only to additional figures being presented in Board of Directors' disclosure which are not required by the IFRS -standards.
Definitions of additional performance measures presented in Financial Highlights:
| Revenues: | interest income, fee income, net result from items at fair value, other operating income and share of profit from associated undertakings |
|---|---|
| Cost to income ratio, %: | staff costs + other operating expenses + depreciations and impairments net interest income + net result from items at fair value + net fee income + share of profit from associated undertakings + other operating income |
| Return on equity, % | profit before taxes - taxes equity (average) + non-controlling interests (average) |
| Return on assets, % | profit before taxes - taxes average total assets |
| Equity/assets ratio, % | equity + non-controlling interests total assets |
Corporate Governance
The Bank's corporate governance complies with the general requirements laid down in Chapters 7, 8 and 9 of the Act on Credit Institutions. Further information on the Bank's corporate governance is available on the web: www. danskebank.com/investor-relations/debt/danskemortgage-bank under section Corporate Governance.
General meeting
The supreme decision-making power in the Bank is exercised by its shareholders at a General Meeting of shareholders.
Board of Directors
The Board of Directors shall consist of at least three and not more than seven ordinary members. The term of office of a member of the Board of Directors ends at the end of the first Annual General Meeting following the election.
At their first meeting following the Annual General Meeting, the members of the Board of Directors shall elect a Chairperson from amongst themselves and a Vice Chairperson for a term of office that ends at the end of the first Annual General Meeting following the election.
At the end of the financial year the members of the Board of Directors were Glenn Söderholm (chairman), Kimberly Bauner, Riikka Laine-Tolonen, Robert Wagner, Tomi Dahlberg and Maisa Hyrkkänen.
Tomi Dahlberg and Maisa Hyrkkänen are independent of the Danske Bank Group.
The Board of Directors is responsible for the Bank's administration and for organizing operations, and for ensuring that the supervision of the Bank's accounting and asset management has been arranged properly. The Board handles all important and significant issues of general scope relevant to the operation of the Bank. The Board takes decisions on matters such as the Bank's business strategy. It approves the budget and the principles for arranging the Bank's risk management and internal control. The Board also decides the basis for the Bank's remuneration system and other far-reaching matters that concern the personnel. In accordance with the
principles of good governance, the Board also ensures that the Bank, in its operations, endorses the corporate values set out for compliance.
The Board of Directors has approved written rules of procedure defining the Board's duties and its meeting arrangements. The Board of Directors and the chief executive officer (CEO) shall manage the Bank in a professional manner and in accordance with sound and prudent business principles.
The Board of Directors of the Bank convened 10 times during 2020. The fee resulting from 2020 was EUR 32.0 thousand for the Bank's Board members who are not within the Group.
Chief Executive Officer and Management team
The Bank's Board of Directors appoints the CEO and Deputy CEO. The CEO is responsible for the Bank's dayto-day management in accordance with the Limited Liability Companies Act and the instructions and orders issued by the Board of Directors. The CEO's duties include managing and overseeing the Bank's business operations, preparing matters for consideration by the Board of Directors and executing the decisions of the Board.
The Bank's CEO is Pekka Toivonen (b. 1967) and Deputy CEO Jari Raassina (b. 1965).
In 2020 the CEO and Deputy CEO were paid a salary and fringe benefits of EUR 293.5 thousand.
CEO's period of notice is six (6) months and the severance compensation to the CEO in addition to the salary paid for the period of notice equals to six (6) months' salary.
The Management Team assists the CEO. It convenes at the invitation of its chairman once a month. The Management team is responsible for supporting the CEO in the preparation and implementation of the Bank's strategy, coordination of the Bank's operations, preparation and implementation of significant or fundamental matters, and ensuring internal cooperation and communication.
In its operations the Bank has high moral and ethical standards. The Bank constantly ensures that its operations comply with all applicable laws and regulations. The responsibility for supervising compliance with laws and regulations lies with the operating management and the Board of Directors. Various rules and regulations have been issued to support operations and ensure that applicable laws and regulations are respected throughout the organisation.
Remuneration
Preparation of the Bank's remuneration policy is based on the remuneration policy of the Group taking into account the Finnish regulations. The remuneration policy is subject to the approval of the Bank's Board of Directors, which also monitors the implementation and functioning of the policy each year.
The Bank has a remuneration scheme covering the entire personnel. The aim of the remuneration scheme is to support the implementation of the Bank's strategy and to achieve the targets set for the business areas.
More information regarding remuneration can be found in the Bank's remuneration policy www.danskebank.com/ investor-relations/debt/danske-mortgage-bank under section Remuneration.
Auditors
The Bank has one auditor, which must be a firm of authorised public accountants approved by the Finnish Patent and Registration Office. The term of the auditor lasts until the next Annual General Meeting following the auditor's appointment.
The Bank's auditor is Deloitte Ltd Audit Firm with Aleksi Martamo, Authorized Public Accountant as the Key audit partner. The primary function of the statutory audit is to verify that the Bank's financial statements provide a true and fair view of the Bank's performance and financial position for each accounting period.
Description of the main features of the internal control and risk management systems related to the financial reporting process
The Bank is a wholly owned subsidiary of Danske Bank A/S. Danske Bank A/S is a listed company and is the parent company of the Group. The governance of the Danske Bank A/S Group accords with the legislative requirements concerning Danish listed companies and especially with the legislative requirements concerning companies in the financial sector. The Bank complies in all essential respects with the good governance recommendations issued by Denmark's Committee on Corporate Governance. Further information on the principles concerning corporate governance in the Group is available on: www.danskebank.com.
The Bank is a bond issuer and therefore publishes the following description of the main features of the internal control and risk management systems related to its financial reporting process. Further information on the principles concerning corporate governance in the Bank is available on www.danskebank.com/investor-relations/ debt/danske-mortgage-bank.
The Bank uses internal control to insure
- the correctness of financial reporting and of other information used in management decision-making
- compliance with laws and regulations and with the decisions of administrative organs and other internal rules and procedures.
The Bank's management operates the system of control and supervision in order to reduce the financial reporting risks and to oversee compliance with reporting rules and regulations. With the controls imposed the aim is to prevent, detect and rectify any errors and distortions in financial reporting, though this cannot guarantee the complete absence of errors.
The Bank's Board of Directors regularly assesses whether the company's internal control and risk management systems are appropriately organised. The Board's assessment is based on e.g. reports prepared by the Group's Internal Audit unit. The Board and the CEO regularly receive information on the Bank's financial position, changes in rules and regulations and compliance with these within the Group.
The work of Internal Audit is subject to the Group's Term of Reference. This guidance states that the internal auditing tasks include ensuring the adequacy and efficiency of internal control and of the controls on administrative, accounting and risk management procedures. Internal Audit also ensures that reporting is reliable and that laws and regulations are complied with appropriately. In the auditing process Internal audit complies with the international internal auditing standards and ethical principles and audit also uses auditing procedures
approved by the Group that are based on examining and testing the functioning of the control arrangements.
Local internal auditing is undertaken in cooperation with the Group's Internal Audit. The Bank's Board of Directors approves the yearly plan of internal audit. Internal audit reports its auditing work to the Board of Directors and monitors the measures taken in order to reduce the risks detected.
Good control environment practice is based on carefully specified authorisations within the Group, appropriate division of work tasks, regular reporting and the transparency of activities. In management's internal reporting the same principles are observed as in external reporting, and the principles are the same throughout the Group. The Group's common IT system creates the basis for reliable documentation of accounting data and reduces the financial reporting risks.
Management Reporting supports the the Banks's senior management by producing monitoring and analysis of the performance. The indicators monitored vary from monitoring of the quantity and quality of activities and sales to reporting of risk-adjusted profitability. Most of the indicators are monitored monthly, but selected indicators are monitored weekly or even daily. Internal Accounting also monitors the Bank's market share and developments among competitors and in the operating environment.
Besides the parties referred to above, supervision at the Bank is also undertaken by the Company's Risk Council. The Committee's chairman is the Company's CEO. The purpose of the Risk Committee is to oversee the Bank's compliance with all guidance on risk management set by the Board.
More on the Bank's risk management can be read on page 15.
Risk Management Disclosure
Risk management general principles and governance
The main objectives of the risk management processes are to ensure that risks are properly identified, risk measurement is independent and the capital base is adequate in relation to the risks. The risks related to the Bank's activities and the sufficiency of the Bank's capitalisation in relation to these risks are regularly evaluated. Clearly defined strategies and responsibilities, together with strong commitment to the risk management process, are our tools to manage risks.
The Board of Directors of the Bank is responsible for ensuring that the Bank's risks are properly managed and controlled. The Board sets the principles of risk management and provides guidance on the organisation of risk management and internal controls. To ensure that the risk governance structure is adequate both in terms of internal and external needs, the Board has established the Risk Council, which is composed of members of the executive management and nominated the Bank's CEO as Chairman of the Council.
The Risk Council's main tasks are:
- to ensure that the Bank is compliant with the risk instructions issued by the Board of Directors
- to ensure that all risk types in the Bank are monitored and reported to relevant parties including the Board of Directors
- to ensure that the Bank's risk position is aligned with the Group's risk strategy
- to ensure that the Group's risk policies are implemented in the Bank
- to ensure that the Bank fulfils all regulatory requirements.
The Bank's day-to-day risk management practices are organised in three lines of defence. This organization ensures a segregation of duties between (1) units that enter into business transactions with customers or otherwise expose the Bank to risk, (2) units in charge of risk oversight and control and (3) the internal audit function.
The first line of defence is represented by the operations and service organisations and their support functions. Each unit operates in accordance with the risk policies and delegated mandates. The units are responsible for having adequate skills, operating procedures, systems
and controls in place to comply with the policies and mandates to exercise sound risk management.
The second line of defence is represented by functions that monitor whether the operations and service organisations adhere to the general policies and mandates. These functions are located in Risk Management and Compliance units.
The third line of defence is represented by Internal Audit.
The Bank's Risk Management, which is an independent unit, monitors the Bank's risk position according to the principles and limits set by the Board of Directors of the Bank. The Chief Risk Officer (CRO) is responsible for adequate and sound oversight of the Bank's risk management, providing an overview of the Bank's risks and creating an overall risk picture.
Finance is responsible for solvency reporting including the ICLAAP process.
The principles and practices of risk management in the Bank are carried out consistently with the risk policies of the Group and supported by the corresponding Group functions. Additional information on the Group level risks and risk approaches can be found in the Group's Annual Report and Risk Management Report for 2020.
Minimum regulatory capital
Banking is a highly regulated business. There are formal rules for minimum capital and capital structure in capital adequacy regulation. Also bank's largest exposures are limited based on the own funds of the bank.
The credit Institutions Act gives multiple options for methods institutions may use in capital adequacy calculation. In December 2017 the Bank got approval from its supervisors to use the Internal Rating Based methodology (IRB) for retail exposures. Hence, the Bank uses IRB approach to its retail portfolio and standard method to other credit risk portfolios. Standard method is used for operational risks.
Capital adequacy is reported quarterly to Finnish Financial Supervisory Authority (FIN-FSA). The Bank fulfilled the regulatory minimum capital requirements in 2020. Minimum capital requirements set by capital adequacy regulation are presented in the Risk Table 1 below. Total capital requirement was EUR 70.8 million at end of 2020 (EUR 62.7 million). It increased EUR 8.1 million from 2019 mainly due to change in residential mortgage portfolio. In addition to this Pillar II requirement from the interest risk is EUR 6 million (EUR 6 million). The Bank
applies15 per cent risk weight floor for the residential mortgage portfolio as set by the FIN-FSA for institutions that apply IRB approach for calculating capital requirement. However, the Board of the Financial Supervisory Authority has decided on 30 September 2020 not to continue to use the risk weight floor after 1 January 2021.
| RISK TABLE 1 Pillar 1 regulatory capital requirements by portfolio, |
Capital requirement | Risk exposure amount | |||
|---|---|---|---|---|---|
| EURm | 2020 | 2019 | 2020 | 2019 | |
| Credit and counterparty credit risk: | |||||
| Standardised approach: | |||||
| Institutions | 0.4 | 0.7 | 5.0 | 8.8 | |
| Corporates | 0.6 | 0.1 | 7.9 | 1.6 | |
| Covered bonds | 0.2 | 0.2 | 2.6 | 2.0 | |
| Other items | 0.0 | 0.0 | 0.0 | 0.1 | |
| Standardised approach, total | 1.2 | 1.0 | 15.5 | 12.6 | |
| IRB approach: | |||||
| Retail | 64.7 | 56.9 | 808.2 | 711.6 | |
| Other non-credit obligation | 0.0 | 0.0 | 0.0 | 0.0 | |
| IRB approach, total | 64.7 | 56.9 | 808.2 | 711.6 | |
| Credit and counterparty credit risk, total | 65.9 | 57.9 | 823.7 | 724.3 | |
| Operational risk - standardised, total | 4.9 | 4.8 | 61.5 | 59.5 | |
| Total risk exposure amount | 885.2 | 783.8 | |||
| Total minimum capital requirement | 70.8 | 62.7 |
Capital management process
The Bank follows the capital management practices in the ICAAP (Internal Capital Adequacy Assessment Process) for Pillar II that are defined in the regulatory framework in the Capital Requirements Directive (CRD).
The Bank's ICAAP consists of evaluating all relevant risks that the Bank is exposed to. Besides the Pillar I risk types – credit and operational risks – the Bank sets capital aside for interest rate risk of the banking book, business risk and, if required by stress tests, for business cycle volatility buffer. Liquidity risk is taken into account through stress testing.
The Bank's ICLAAP (Internal Capital and Liquidity Adequacy Assessment Process) 2019 report has been prepared and approved by the Board of Directors and delivered to supervisors. The ICLAAP 2020 report will be prepared during Q1 2021 as requested by supervisors.
Main risk types
The major risk associated with the Bank's activities is the credit risk arising from the loans. Interest rate risk arising from loan portfolio and its refinancing is hedged by derivatives. Liquidity risk is not significant. Non-financial and business risks are inherent in all business areas.
The mortgage banking result mainly depends on loan and deposit margins, business volumes, the size and structure of the balance sheet, impairment losses and cost efficiency. The margin between loans and deposits in banking, with a hedged interest rate and liquidity risk profile, changes slowly. Possible sources of result fluctuations are unexpected losses in the credit and nonfinancial risk areas.
Credit risk
Credit risk is the risk of losses arising because counterparties or debtors fail to meet their payment obligations to the Bank. Credit risk includes country, settlement and counterparty credit risk.
The Bank's loan portfolio consists of Finnish mortgages that have been granted based on the Group's credit policy, and in addition the loans bought to the Bank need to be cover pool eligible. The Bank buys loans regularly. The Group's guidelines lay down uniform principles for credit risk taking, with the aim of ensuring high quality in the
credit process. Loans that are not cover pool eligible are sold to Danske Bank A/S, Finland Branch on regular basis.
Credit decision authority in the Bank is delegated to the management of the Danske Bank A/S, Finland Branch Credit department and to authorised credit officers in the business units. The amount of the authorisation varies according to customer rating, total exposure and collateral level. All credit applications are initiated and prepared in the business units. Credit decisions are primarily based on rating, loan repayment ability, collateral and other risk mitigates offered, as well as acceptable return on allocated capital.
Customer classification
All customers of the Group are assigned a credit grade describing the creditworthiness of customer prior to granting of credit facilities in order to ensure good credit quality and provide credit to the customers in the most capital efficient manner. The main objective of the risk classification is to rank customer base according to default risk by estimating the probability of default (PD) of each customer. This credit grade consists of 11 main rating grades and 26 subgrades.
The Bank assigns credit scores to retail customers. The Bank has developed statistical models based on the information it possesses about customers to predict the likelihood that a customer will default. These scoring models utilise public and internal information on the borrower's payment behaviour, The important variables in scoring are e.g. education, employment and other relevant factors in forecasting customer credit worthiness. On top of the statistical calculation, the score can be downgraded to another classification if a risk event is registered on the customer. Risk events are registered
both automatically and manually by an advisor. The credit scores are updated monthly through an automated process. For more information about the Bank's classification models, including changes and improvements to the models, see Risk Management 2020 -report of the Group.
Credit risks of customers
As part of loan granting process, the debt servicing capacity is assessed and stressed by using materially higher interest rates compared to current levels. Loans are collateralised by housing company shares or residential real estate. Delinquencies are followed daily.
Credit exposure
The figures in Risk Tables 2 and 3 show the Bank's credit exposure. At the end of 2020 the Bank's lending-related credit exposure activities amounted to EUR 5.8 billion (5.2 billion). Exposures to Danske Bank Group were EUR 0.1 million (0.0 million) and they were excluded from the tables.
| RISK TABLE 2 | ||
|---|---|---|
| Credit exposure relating to lending | ||
| activities by segments, EURm | 2020 | 2019 |
| Public Institutions | 208.2 | 159.4 |
| Personal Customers | 5,624.0 | 4,994.5 |
| Total | 5,832.2 | 5,153.9 |
The Bank's credit exposure by credit classification is presented in Risk Table 3. The rating distribution is good. At the end of 2020, the share of customers classified into the seven best rating classes was 94 per cent of the total exposure (96 per cent). Exposures are concentrated to the capital area and to largest cities.
RISK TABLE 3
Credit portfolio broken down by rating category and stages in IFRS 9, EURm
| PD level | Gross exposure | Expected Credit Loss | Net exposure | Net exposure, ex collateral |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | Upper | Lower | Stage 1 | Stage 2 Stage 3 Stage 1 | Stage 2 | Stage 3 | Stage 1 | Stage 2 | Stage 3 | Stage 1 | Stage 2 | Stage 3 | ||
| 1 | 0.00 | 0.01 | 0.0 | - | - | 0.0 | - | - | 0.0 | - | - | 0.0 | - | - |
| 2 | 0.01 | 0.03 | 323.2 | 0.1 | - | 0.0 | 0.0 | - | 323.2 | 0.1 | - | 209.0 | 0.0 | - |
| 3 | 0.03 | 0.06 | 956.0 | 2.9 | - | 0.0 | 0.0 | - | 956.0 | 2.9 | - | 5.9 | 0.0 | - |
| 4 | 0.06 | 0.14 | 1 693.8 | 5.2 | - | 0.0 | 0.0 | - | 1 693.8 | 5.2 | - | 17.3 | 0.0 | - |
| 5 | 0.14 | 0.31 | 1 416.8 | 9.5 | - | 0.0 | 0.0 | - | 1 416.8 | 9.5 | - | 19.2 | 0.2 | - |
| 6 | 0.31 | 0.63 | 703.6 | 32.3 | - | 0.1 | 0.0 | - | 703.6 | 32.3 | - | 12.7 | 1.1 | - |
| 7 | 0.63 | 1.90 | 234.6 | 110.3 | - | 0.2 | 0.3 | - | 234.4 | 110.0 | - | 5.3 | 1.5 | - |
| 8 | 1.90 | 7.98 | 24.3 | 22.3 | - | 0.1 | 0.1 | - | 24.2 | 22.2 | - | 0.8 | 0.4 | - |
| 9 | 7.98 | 25.70 | 29.3 | 261.3 | 2.1 | 0.0 | 1.2 | 0.0 | 29.3 | 260.1 | 2.1 | 0.4 | 3.8 | 0.0 |
| 10 | 25.70 | 99.99 | 0.2 | 6.0 | 0.3 | 0.0 | 0.1 | 0.0 | 0.2 | 5.9 | 0.3 | 0.0 | 0.2 | 0.0 |
| 11 *) | 100.00 | 100.00 | 0.0 | 0.1 | 0.3 | 0.0 | 0.0 | 0.0 | 0.0 | 0.1 | 0.3 | 0.0 | 0.0 | 0.0 |
| Total | 5 381.9 | 449.9 | 2.7 | 0.5 | 1.7 | 0.0 | 5 381.5 | 448.2 | 2.7 | 270.7 | 7.2 | 0.0 |
*) Default
| PD level | Gross exposure | Expected Credit Loss | Net exposure | Net exposure, ex collateral |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | Upper | Lower | Stage 1 | Stage 2 Stage 3 Stage 1 | Stage 2 | Stage 3 | Stage 1 | Stage 2 | Stage 3 | Stage 1 | Stage 2 | Stage 3 | ||
| 1 | 0.00 | 0.01 | 0.6 | - | - | 0.0 | - | - | 0.6 | - | - | 0.0 | - | - |
| 2 | 0.01 | 0.03 | 729.4 | 0.2 | - | 0.0 | 0.0 | - | 729.4 | 0.2 | - | 162.7 | - | - |
| 3 | 0.03 | 0.06 | 1 366.5 | 2.7 | - | 0.0 | 0.0 | - | 1 366.5 | 2.7 | - | 15.9 | 0.0 | - |
| 4 | 0.06 | 0.14 | 1 468.6 | 6.7 | - | 0.0 | 0.0 | - | 1 468.6 | 6.7 | - | 21.2 | 0.1 | - |
| 5 | 0.14 | 0.31 | 932.6 | 11.2 | - | 0.0 | 0.0 | - | 932.6 | 11.2 | - | 18.9 | 0.3 | - |
| 6 | 0.31 | 0.63 | 281.3 | 21.8 | - | 0.0 | 0.0 | - | 281.3 | 21.8 | - | 6.6 | 0.5 | - |
| 7 | 0.63 | 1.90 | 106.9 | 40.4 | - | 0.1 | 0.1 | - | 106.9 | 40.3 | - | 2.7 | 0.8 | - |
| 8 | 1.90 | 7.98 | 18.8 | 32.2 | 0.1 | 0.0 | 0.1 | - | 18.7 | 32.1 | 0.1 | 0.4 | 0.7 | - |
| 9 | 7.98 | 25.70 | 4.5 | 97.2 | 0.0 | 0.0 | 1.5 | - | 4.5 | 95.7 | 0.0 | 0.1 | 1.9 | - |
| 10 | 25.70 | 99.99 | 19.3 | 12.5 | 0.4 | - | 0.0 | 0.0 | 19.3 | 12.5 | 0.4 | 0.3 | 0.4 | - |
| 11 *) | 100.00 | 100.00 | 0.2 | 0.8 | 0.9 | - | - | 0.0 | 0.2 | 0.8 | 0.9 | - | 0.0 | 0.0 |
| Total | 4 928.7 | 225.7 | 1.4 | 0.2 | 1.7 | 0.0 | 4 928.5 | 224.0 | 1.3 | 228.7 | 4.8 | 0.0 |
*) Default
In relation to loan portfolio, non-performing loans were at low level. Non-performing loans that are delayed for over 90 days amounted to EUR 0.5 at the end of 2020 (0.4 million). Impairment charges and final write-offs totalled to EUR 0.7 million (1.4 million) of which final write-offs were 1.0 million euros (0.3 million). Non-performing loans are sold regularly to Danske Bank A/S, Finland Branch.
Credit risk mitigation and collateral management
In order to mitigate credit risk, the Bank applies a number of credit risk mitigation measures. The most important ones are collaterals and guarantees. Loans in the Bank have shares of housing company or residential real estates as collateral. All collaterals are located in Finland. Collateral is also a key component in the Group's calculation of economic capital and risk exposure amount.
Collateral is valued in accordance with the Group's written collateral valuation instructions. All collaterals are valued at the time they are pledged and regularly thereafter.
Residential properties, shares in a housing companies and shares in real estate companies in residential use must be assessed by a valuer who is independent of the credit decision process. An independent valuer refers to a person who has sufficient qualifications for and experience in valuation. Valuations are made within the Group by an independent valuator or in some cases, external independent valuators are used. The requirement for an independent valuation is also met if there exists a maximum one year old genuine contract of sale, meaning a contract is not between related parties.
Regional housing price indices are used to incorporate latest price information into the quarterly model based evaluation process, when calculating fair value estimates for these collateral types. The risk of changes in fair value is covered by a similar haircut process throughout the Group. Risk Table 4 presents the amount of collateral allocated to agreements after haircuts.
| RISK TABLE 4 | ||
|---|---|---|
| Types of collateral, EURm | 2020 | 2019 |
| Real property | 5,529.3 | 4,893.5 |
| Bank accounts | 9.2 | 7.5 |
| Custody accounts/securities | 0.9 | 0.9 |
| Guarantees | 97.3 | 55.3 |
| Other assets | 0.1 | 0.0 |
| Total | 5,636.8 | 4,957.2 |
Internal credit exposure relating to derivatives
At the end of 2020 the Bank's credit exposure relating to derivatives with positive fair value amounted to EUR 74.1 million (89.5 million). Exposure consists entirely of internal exposures.
Non-performing assets and forbearance
The Bank applied the same principles as the Group in non-performing asset and forbearance loan management.
From the beginning of 2018, the Group has defined nonperforming loans as facilities in stage 3. For retail exposures, only impaired facilities are included in non-performing loans. For non-retail exposures with one or more non-performing loans, the entire amount of the customer's exposure is considered to be non-performing.
The Group excludes exposures in stage 3 with no impairment charges or where the allowance account is considered immaterial to the gross exposure.
The Bank can make use of forbearance measures to assist the customers in financial difficulties and to minimize credit losses. Concessions granted to customers include interest-only schedules, temporary payment holidays, term extensions, cancellation of outstanding fees and in exceptional cases temporary interest-reduction schedules. Because of the length of the workout processes, the Group is likely to maintain impairments for these customers for several years.
Forbearance plans must comply with the Group's Credit Policy. They are used as an instrument to maintain longterm customer relationships during economic downturn if there is a realistic possibility that the customer will be able to meet obligations again. The purpose of the plans is therefore to minimise loss in the event of default.
If it proves impossible to improve a customer's financial situation by forbearance measures, the Group will consider whether to subject the customer's assets to a forced sale or whether the assets could be realised later at higher net proceeds.
COVID-19 concessions
In 2020, the Group and the Bank increased the use of concessions to assist customers affected by the corona crisis. In the Bank, interest only periods were used and they increased remarkably during the spring, but number of new concessions have returned to normal level already during summer. In average, length of payment holidays has been less than six months. Part of the COVID-19 concessions were defined to be forbearances. See Accounting principles for the definition when such concessions are considered to be a forbearance measure.
Market risk
Market risk is defined as the risk of losses caused by changes in the market value of financial assets, liabilities and off-balance sheet items resulting from changes in market prices or rates. Market risk in the bank consists of the EUR interest rate risk and credit spread risk in the banking book. Interest rate risk is composed of yield curve risk, basis risk, and option risk arising from reference rate floors on floating rate loans. The Bank measures the effects of interest rate risk on valuation changes based on net present value and earnings at risk.
Governance and limit structure
The Bank's Board of Directors approves the market risk policy and overall limits for market risk. The Board also decides on the general principles for managing and monitoring market risks based on the market risk policy and delegated market risk limits provided by the Group. The Chief Executive Officer (CEO) is responsible for the market risks. The Bank's Treasury actively manages market risks within the set of allocated limits. Trades related to position management are executed in the Treasury and Trading function of the Group.
Measurement, monitoring and management reporting on market risks is carried out in Risk Management. Market risk exposure is calculated in a limit control system that is linked to the trading systems. Limits are monitored systematically, and in case of limit violations, follow-up
procedures have been established. In addition, Risk Management monitors risk levels intraday and conducts intra-day spot checks.
Market risk position
The Bank's banking book interest rate risk arises primarily from issued covered bonds, mortgages and derivatives hedging both of these items. Also the liquidity buffer bonds and short-term funding have an impact on the interest rate risk. The goal is to hedge the balance sheet in a way that interest rate risk changes do not have essential impact -on the Banks profitability. During 2020 the Bank had only EUR denominated business activities. As part of the limit monitoring the banking book interest rate position is stress tested by a 1 percentage point parallel increase and decrease of yield curves as well as a 1 percentage point increase and decrease of volatilities.
The bank also estimates interest rate risk exposure in the banking book from the earnings perspective, called net interest income (NII) risk. It is measured as the projected loss of earnings over a 12 month period upon a parallel shift up or down in yields of 1 percentage point while balance sheet structure remains unchanged. In risk measurement, interest rate levels cannot fall below the determined floor level of -1 per cent.
At the year-end of 2020, net present value based interest rate risk of the Bank in the scenario of parallel downward shift of one percent across the yield curve is EUR -0.2 million (EUR -1.0 million). Correspondingly, earnings based risk of the Bank in the scenario of parallel shift of one percent across the yield curve is EUR -0.9 million (EUR -2.6 million).
Liquidity risk
Liquidity risk means the risk that the costs to obtain funds becomes excessive, lack of financing prevents the Bank from maintaining its current business model, or the Bank ultimately cannot fulfil its payment obligations due
to lack of funds. The Board of Directors has approved a liquidity policy for the Bank. The policy specifies the aims, limits, calculation and responsibilities of all parts of the Bank's liquidity risk control and management.
The Bank minimises the short liquidity risk. The Bank conforms to the Liquidity Coverage Ratio (LCR) defined in Capital Requirements Directive (CRD) and Capital Requirements Regulation (CRR).
Structural liquidity risk is an inherent part of the Bank's business strategy and it is managed in support of a cautious and conservative risk profile. The Bank adapts and anticipates foreseeable regulatory requirements on structural liquidity risk management and complies with requirements of net stable funding ratio (NSFR) that will be binding in June 2021.
The Bank's Treasury is responsible for the practical and day-to-day liquidity management and execution of the Policy. Risk Management is responsible for day-to-day monitoring, controlling and reporting the liquidity risk limits. The Bank has a liquidity line from Danske Bank A/S for short and medium term funding needs.
Liquidity management is based on monitoring and management of short-term and long-term liquidity risks. The management of operational liquidity risk aims primarily at ensuring that the Bank always has a liquidity buffer that is able, in the short term, to absorb the net effects of current transactions and expected changes in liquidity, under both normal and stressed conditions. The Bank's liquidity buffer consists of deposits in central bank and central bank eligible high quality liquidity bonds.
Risk Table 5 presents the Bank's financial liabilities at the end of 2020 divided by maturity profile. The liabilities, which have no contractual maturities, are included in section "< 3 months".
RISK TABLE 5 Maturity profile of financial liabilities based on contractual maturities, EURm. 2020 Liabilities Total < 3 months 3-12 months 1-5 years > 5 years Due to credit institutions and central banks 1,789.3 78.3 - 1,711.0 - Debt securities in issue 3,800.3 - 2,017.4 765.9 1,017.0 Financial liabilities total 5,589.6 78.3 2,017.4 2,476.9 1,017.0 Undrawn loans, overdraft facilities and other - - - - - 2019
| Liabilities | Total | < 3 months | 3-12 months | 1-5 years | > 5 years |
|---|---|---|---|---|---|
| Due to credit institutions and central banks | 1,129.6 | 349.6 | 538.0 | 242.0 | - |
| Debt securities in issue | 3,818.3 | 0.0 | 1,003.5 | 2,814.8 | - |
| Financial liabilities total | 4,947.8 | 349.6 | 1,541.5 | 3,056.8 | - |
| Undrawn loans, overdraft facilities and other | - | - | - | - | - |
Non-financial risk
Non-financial risk is the risks of losses resulting from inadequate or failed internal processes or systems, staff or from external events.
In the Bank reputation risk is assessed and managed in line with the non-financial risk management approach and can be seen as a consequence of non-financial risk events or a failure to comply with the laws and rules, or self-regulatory organisation standards and code of conduct applicable to the Bank.
Non-financial risks are divided into the following categories:
- Model risks
- Operational risks
- Technology risks
- Financial crime risks
- Regulatory Compliance risks
- Financial control and strategic risks
The Bank defines non-financial risk events as non-financial risks, which have occurred and have resulted in financial losses/gains or could have resulted in financial losses/gains (a near miss event). Non-financial risk event may also have a reputational impact, customer impact or regulatory impact. The management of non-financial risks enhances the efficiency of the Bank's internal processes and decreases fluctuations in returns.
The Bank's Board of Directors approves proper and effective non-financial risk policy, which creates a framework for managing non-financial risks. Risk Management is responsible for the independent oversight of non-financial risk management and governance, and it performs a consulting and review role to the Bank's approach to nonfinancial risk management. Internal audit assesses the adequacy and efficiency of internal control and risk management. The compliance function assists management in ensuring that the Bank and its employees comply with applicable laws and regulations as well as ethical standards in order to mitigate the Bank's compliance risk.
The Bank applies the Group's approach for identification, assessment and management of non-financial risks. The Bank conducts on ongoing basis the non-financial risk identification and assessment process to identify all material internal and external non-financial risks facing the organisation. In addition, likelihood, monetary, customer, regulatory and reputational impacts of the identified risks are assessed. The process also includes monitoring of the identified risks. Local key controls and possible key risk indicators are identified for the material risks, so that the status of the risks can be monitored over time. Action plans for material risks where the level of internal control has been assessed to be ineffective are established. General mitigation strategies for key risks are developed and implemented by the Group and local mitigation strategies are developed and implemented by the Bank. The Bank's Management Team, Risk Council and the Board of Directors are regularly informed about the Bank's material non-financial risks.
The Bank operates under a culture of open disclosure of risks in which staff should report errors and weaknesses within the Bank so future losses may be minimised by taking preventative measures. Each employee within the Bank is responsible for the day-to-day management of non-financial risks and reporting of actual events within their respective area. It is the responsibility of persons in charge of the outsourced services in resource areas to identify and manage the risks for which they are accountable and disclose information on non-financial risk events. Non-financial risk events are regularly reported to the Bank's Risk Council and Board of Directors.
IFRS financial statements
| Statement of comprehensive income | |||
|---|---|---|---|
| EURm | Note | 1–12/2020 | 1–12/2019 |
| Interest income calculated using the effective interest method | 1 | 42.2 | 42.3 |
| Other interest income | 1 | 44.4 | 49.4 |
| Interest expense | 1 | 44.4 | 56.1 |
| Net interest income | 1 | 42.2 | 35.6 |
| Fee income | 2 | 2.3 | 2.1 |
| Fee expenses | 2 | 0.0 | 0.0 |
| Net result from items at fair value | 3 | 0.4 | 0.5 |
| Other income | 0.1 | 0.1 | |
| Total operating income | 44.9 | 38.2 | |
| Staff costs | 4 | 0.7 | 0.7 |
| Other operating expenses | 5 | 15.1 | 13.1 |
| Total operating expenses | 15.8 | 13.8 | |
| Loan impairment charges | 6 | 0.7 | 1.4 |
| Profit before taxes | 28.4 | 23.1 | |
| Taxes | 7 | 5.7 | 4.6 |
| Net profit after tax | 22.7 | 18.5 | |
| Total comprehensive income for the financial year | 22.7 | 18.5 |
| Balance sheet | |||
|---|---|---|---|
| EURm | Note | 12/2020 | 12/2019 |
| Assets | |||
| Cash and balances with central banks | 11 | 208.2 | 159.4 |
| Loans and receivables to credit institutions | 11 | 0.1 | - |
| Trading portfolio assets | 12 | 74.1 | 89.5 |
| Loans and receivables to customers | 6 | 5,624.0 | 4,994.5 |
| Tax assets | 13 | 0.1 | 1.1 |
| Other investment securities | 10 | 40.8 | 40.3 |
| Other assets | 14 | 1.6 | 1.8 |
| Total assets | 5,949.0 | 5,286.5 | |
| Liabilities | |||
| Due to credit institutions and central banks | 15 | 1,789.3 | 1,129.6 |
| Trading portfolio liabilities | 12 | 12.1 | 13.9 |
| Debt securities in issue | 16 | 3,800.3 | 3,818.3 |
| Other liabilities | 17 | 21.2 | 21.3 |
| Total liabilities | 5,622.8 | 4,983.0 | |
| Equity | |||
| Share capital | 70.0 | 70.0 | |
| Reserves | 215.0 | 215.0 | |
| Retained earnings | 41.2 | 18.5 | |
| Total equity | 326.2 | 303.5 | |
| Total equity and liabilities | 5,949.0 | 5,286.5 |
| Statement of changes in equity EURm |
Share capital | Reserve for invested un restricted equity |
Retained earnings |
Total |
|---|---|---|---|---|
| Equity at 1 January 2020 | 70.0 | 215.0 | 18.5 | 303.5 |
| Total comprehensive income | 22.7 | 22.7 | ||
| Equity at 31 December 2020 | 70.0 | 215.0 | 41.2 | 326.2 |
| Statement of changes in equity EURm |
Share capital | Reserve for invested un restricted equity |
Retained earnings |
Total |
|---|---|---|---|---|
| Equity at 1 January 2019 | 70.0 | 170.0 | 21.6 | 261.6 |
| Total comprehensive income | 18.5 | 18.5 | ||
| Dividend distribution | -21.6 | -21.6 | ||
| Shareholders contribution | 45.0 | 45.0 | ||
| Equity at 31 December 2019 | 70.0 | 215.0 | 18.5 | 303.5 |
Cash flow statement
The Bank has prepared its cash flow statement according to the indirect method. The statement is based on the pre-tax profit for the year and shows the cash flows from operating activities and the increase or decrease in cash and cash equivalents during the financial year.
Cash and cash equivalent consists of cash in hand and demand deposits with central banks and amounts due from credit institutions and central banks with original maturities shorter than three months.
| EURm | 1–12/2020 | 1–12/2019 |
|---|---|---|
| Cash flow from operations | ||
| Profit before tax | 28.4 | 23.1 |
| Loan impairment charges | 0.7 | 1.4 |
| Tax paid | -4.7 | -7.1 |
| Other non-cash operating items | -0.7 | -4.0 |
| Total | 23.7 | 13.3 |
| Changes in operating capital | ||
| Due to credit institutions | 659.7 | 421.2 |
| Trading portfolio | 14.2 | 34.4 |
| Other financial instruments | -0.5 | 5.2 |
| Loans and receivables | -630.2 | 505.4 |
| Debt securities in issue net 1) | -18.0 | -1,030.4 |
| Other assets/liabilities | 1.4 | -13.3 |
| Cash flow from operations | 50.3 | -64.3 |
| Cash flow from financing activities | ||
| Dividends | - | -21.6 |
| Investment to reserve for unrestricted equity | - | 45.0 |
| Cash flow from financing activities | - | 23.4 |
| Cash and cash equivalents, beginning of period | 146.2 | 187.1 |
| Change in cash and cash equivalents | 50.3 | -40.9 |
| Cash and cash equivalents, end of period | 196.4 | 146.2 |
| Cash in hand and demand deposits with central banks 2) | 196.3 | 146.2 |
| Amounts due from credit institutions and central banks within 3 months | 0.1 | - |
| Total | 196.4 | 146.2 |
1) Debt securities in issue are presented separately including both debt securities issued and matured during the financial year.
Comparison period corrected correspondingly.
2) The minimum reserve is not included in the amount.
Reconciliation of liabilities arising from f inancing activities
On 31st December 2020 there were no liabilities arising from financing activities.
Danske Mortgage Bank Plc notes to the financial statements
Accounting principles
Summary of Significant Accounting Policies and Estimates
General
The Bank prepares its financial statements in accordance with the International Financial Reporting Standards (IFRSs), issued by the International Accounting Standards Board (IASB) and IFRIC Interpretations issued by the IFRS Interpretations Committee, as endorsed by the EU. In addition, certain requirements in accordance with the Finnish Accounting Act, the Finnish Act on Credit Institutions, the Finnish Financial Supervisory Authority's regulations and guidelines and the decision of the Ministry of Finance on financial statements and consolidated statements of credit institutions have also been applied.
The financial statements are presented in euro (EUR), in million euros with one decimal, unless otherwise stated. The Risk management Disclosure is presented in euro (EUR), in million euros with one decimal. The figures in notes are rounded so combined individual figures might differ from the presented total amount.
For the purpose of clarity, the primary financial statements and the notes to the financial statements are prepared using the concepts of materiality and relevance. This means that the line items not considered material in terms of quantitative and qualitative measures or relevant to financial statement users are aggregated and presented together with other items in the primary financial statements. Similarly, information not considered material is not presented in the notes.
Significant accounting policies have been incorporated into the notes to which they relate. Except the changes presented below, the Bank has not changed its significant accounting policies from those applied in the Annual Report 2019.
Changes to signif icant accounting policies and presentation during the year
On 1 January 2020, the Bank implemented the amendments to IAS 1 and IAS 8 (definition of material), IFRS 3, Business Combinations (definition of a business) and amendments to references to the Conceptual Framework in IFRS Standards. None of the changes had an impact on the financial statements.
Standards and interpretations not yet in force The International Accounting Standards Board (IASB) has issued one new accounting standard (IFRS 17) and amendments to existing international accounting standards (IFRS 1, IFRS 3, IFRS 4, IFRS 7, IFRS 9, IFRS 16, IAS 1, IAS 16, IAS 37, IAS 39 and IAS 41) that have not yet come into force. The Bank has not early adopted any of the changes. No significant impact is expected from the changes to IFRS.
Critical judgements and estimation uncertainty
Management's judgement, estimates and assumptions of future events that will significantly affect the carrying amounts of assets and liabilities underlie the preparation of the financial statements. The estimates and assumptions that are deemed critical to the financial statements are regarding the measurement of loans and receivables.
The estimates and assumptions are based on premises that management finds reasonable but are inherently uncertain and unpredictable. The premises may be incomplete, unexpected future events or situations may occur, and other parties may arrive at other estimated values.
Measurement of expected credit losses on loans, f inancial guarantees and loan commitments and bonds measured at amortised cost
The three-stage expected credit loss impairment model in IFRS 9 depends on whether the credit risk has increased significantly since initial recognition. The impairment charge for expected credit losses depends on whether the credit risk has increased significantly since initial recognition. If the credit risk has not increased significantly, the impairment charge equals the expected credit losses resulting from default events that are possible within the next 12 months (stage 1). If the credit risk has increased significantly, the loan is more than 30 days past due, or the loan is in default or
otherwise impaired, the impairment charge equals the lifetime expected credit losses (stages 2 and 3). The allowance account is relatively stable in terms of changes to the definition of significant increase in credit risk. Non-performing loans are sold back to Danske Bank A/S, Finland Branch.
The expected credit loss is calculated for all individual facilities as a function of probability of default (PD), exposure at default (EAD) and loss given default (LGD) and it incorporates forward-looking information. The estimation of expected credit losses involves forecasting future economic conditions over a number of years. Such forecasts are subject to management judgement and those judgements may be sources of measurement uncertainty that have a significant risk of resulting in a material adjustment to a carrying amount in future periods. The incorporation of forward-looking elements reflects the expectations of the Group's senior management and involves the creation of scenarios (base case, upside and downside), including an assessment of the probability for each scenario. The purpose of using multiple scenarios is to model the non-linear impact of assumptions about macroeconomic factors on the expected credit losses.
Accounting treatment of the impacts from the COVID-19 pandemic
The effect of the coronavirus pandemic began to affect the Bank's credit portfolio in the first quarter of 2020. We remain to see further credit deterioration as the effect is currently limited and mitigated by the continued government support packages. Based on the measures taken by governments across the world and in the Bank's market area to contain the virus, economies are seeing lower activity in the short-term, although especially in the Nordic economies, the activity in many sectors is back to a normal activity level already in the second quarter of 2020 after the reopening of societies. However, in the fourth quarter of 2020 a second wave of the corona pandemic evolved and new lock-downs were introduced. The economies continue to be supported by government packages. Significant continued uncertainty remains on the effectiveness of actions taken by governments to contain the virus and from when the roll-out of the vaccine programme will have a sufficient coverage to limit the spread of the virus. The economic activity is likely to be impacted in the shorter term and it is yet unknown to which extent governments will continue to support the economies.
For most of the Bank's credit portfolio, the negative impact on individual customers of corona crisis is
expected to materialise over the coming quarters. Customer assessments were made on an ongoing basis since the second quarter of 2020, and impairments were revisited in light of the changed outlook. While customer activity in 2020 was higher than usual, portfolio impact is still awaiting as customers are still assessing the consequences. As a result the financial consequences for the customers still remain to be seen when, for instance, government support comes to an end and as the pandemic evolves.
The Bank's forbearance practices have been updated to pay particular attention to customers affected by the corona crisis. This includes additional guidance to ensure that concessions due to the corona crisis are considered forbearance only if they relate to customers that are not deemed creditworthy combined with the customer's long-term financial position being further weakened by the outbreak. For the majority of the credit portfolio, short-term concessions to otherwise creditworthy customers are not considered forbearance. In practice, this means that short-term concessions to customers in rating categories 1 to 5 are not considered a forbearance measure when taking the ongoing customer assessments into account. For customers in rating categories 6 and 7, an individual assessment of the customer's financial strength is made, whereas concessions to lower-rated customers are considered forbearance.
A large part of the impact on the expected credit losses resulting from the corona crisis relates to changes to forward-looking information with the macroeconomic scenarios applied being significantly different from those applied in 2019. The Bank's base case scenario is based on the Group's Nordic Outlook from October and reflects a significant decline in economic activity in 2020 followed by a recovery in 2021. The downside scenario has been updated to a W-shaped trend, where the second wave of the coronavirus pandemic causes lock-downs in the fourth quarter of 2020 and the first quarter of 2021. The base case scenario is considered the most likely scenario with a likelihood of 60% while the downside scenario has a likelihood of 25%.
Based on these assessments, the allowance account at 31 December 2020 amounted to EUR 2.2 million (31 December 2019 EUR 1.9 million). Loans accounted at 31 December 2020 for about 94.5 % of total assets (31 December 2019: 94.5 %).
Except as described above, all other policies and principles remain in place. Staging criteria are unchanged,
including the 30 days past due criteria and PD-based criteria for transfer to stage 2. Staging transfers will largely be reflected in the coming months as specific information on customers becomes available.
More information regarding expected credit losses, nature and extent of risks arising from financial instruments can be found from Risk Management Disclosure starting from page 15.
Translation of transactions in foreign currency The presentation currency of the financial statement is euro which is also the functional currency. Transactions in foreign currency are translated at the exchange rate of the transaction date. Gains and losses on exchange rate differences between the transaction date and the settlement date are recognised in the income statement.
Nonmonetary assets and liabilities in foreign currency that are subsequently revalued at fair value are translated at the exchange rates at the date of revaluation. Exchange rate adjustments are included in the fair value adjustment of an asset or liability. Other non-monetary items in foreign currency are translated at the exchange rates at the transaction date.
Segment information
The Bank has only one business segment and therefore separate segment report outlined in IFRS 8 is not presented.
Other notes
1. Net interest income
Interest income and expenses arising from interestbearing financial instruments measured at amortised cost are recognised in the income statement according to the effective interest method on the basis of the cost of the individual financial instrument. Interest includes amortised amounts of fees that are an integral part of the effective yield on a financial instrument, such as origination fees and amortised differences between cost and redemption price, if any.
Interest income and expenses also include interest on financial instruments measured at fair value through profit or loss, but not interest on assets and deposits under pooled schemes and unit-linked investment contracts; the latter is recognised under Net result from items at fair value.
| EURm | ||
|---|---|---|
| Interest income calculated using effective interest method | 1–12/2020 | 1–12/2019 |
| Loans and receivables to credit institutions | -1.4 | -2.0 |
| Loans and receivables to customers | 43.2 | 43.8 |
| Other interest income | 0.4 | 0.4 |
| Total | 42.2 | 42.3 |
| Interest income | ||
| Debt securities | 0.2 | 0.2 |
| Derivatives, net | 44.2 | 49.2 |
| Total | 44.4 | 49.4 |
| Interest expenses | ||
| Amounts owed to credit institutions | -2.5 | -2.4 |
| Debt securities in issue | 46.9 | 58.5 |
| Other interest expenses | 0.0 | 0.0 |
| Total | 44.4 | 56.1 |
| Net interest income | 42.2 | 35.6 |
| Of which entities of the same group | ||
| Interest income | 44.0 | 49.4 |
| Interest expenses | -2.5 | -2.4 |
Negative interest income and negative interest expenses during 2020 amounted to 1.4 million euros (2019: 2.0 million euros) and 2.5 million euros (2019: 2.4 million euros), respectively. Negative interest income is offset against interest income and negative interest expenses against interest expenses.
2. Fee income and expenses
Fee income and expenses are presented on a net fee income basis as presented to key management for decision making purposes. Net fee income is broken down by fee type, on the basis of the underlying activity. Fee income consists mainly of loan invoicing fees and loan change fees. Fees that form an integral part of the effective rates of interest loans, advances and deposits are carried under Interest income or Interest expense.
Fee income is recognised to reflect the transfer of services to customers at an amount that reflects the consideration that is expected to be received in exchange for such services. The Bank identifies the performance obligation agreed with the customer, and recognises consideration and income in line with the transfer of services.
| EURm | ||
|---|---|---|
| Net fee income by fee type | 1–12/2020 | 1–12/2019 |
| Loan fees and Guarantees | 2.3 | 2.1 |
| Other | 0.0 | 0.0 |
| Fee income, total | 2.3 | 2.1 |
| Fee expenses | 0.0 | 0.0 |
| Total | 2.3 | 2.1 |
3. Net result from items at fair value
Net result from items at fair value includes realised and unrealised capital gains and losses on financial assets and financial liabilities recognised at fair value through profit or loss as well as exchange rate adjustments.
For financial assets and liabilities subject to fair value hedge accounting, the fair value adjustments of the hedged financial instrument and the hedging instruments are recognised in Net result from items at fair value. Therefore, any hedge ineffectiveness is presented in Net result from items at fair value.
| EURm | 1–12/2020 | 1–12/2019 |
|---|---|---|
| Net result from items at fair value | 0.4 | 0.5 |
| Net result from categories of financial instruments | ||
| Loans and deposits | -0.4 | -2.6 |
| Bonds (investment securities) | 0.1 | -0.3 |
| Issued bonds | 13.8 | 33.6 |
| Trading portfolio assets and liabilities (Derivatives) | -13.1 | -30.2 |
| Total | 0.4 | 0.5 |
4. Staff costs
Salaries and other remuneration that the Bank expects to pay for work carried out during the year are expensed under Staff costs and administrative expenses. This item includes salaries, holiday allowances, pension costs and other remuneration. Performance-based pay is expensed as it is earned. Part of the performance-based pay for the year is paid in the form of conditional shares to Management and other material risk takers. More about remuneration can be read in the Bank's remuneration policy on Internet: www.danskebank.com/investor-relations/debt/danske-mortgage-bank under section Remuneration.
The Bank's pension obligations consist of defined contribution benefit pension plan for its personnel under the Employees' Pensions Act (TyEL) in Finland and no voluntary supplimentary pension benefits has been
granted. Under defined contribution pension plans, the Bank pays regular contributions to insurance company and has no legal or constructive obligations to pay future contribution. Such payments are expensed as they are earned by the staff, and the obligations under the plans are taken over by the insurance companies and other institutions. The retirement age of the Managing Director and Deputy Managing Director is statutory.
The Group is required to identify all employees whose professional activities could have a material impact on the risk profile of the Bank in accordance with current legislation. In Danske Mortgage Bank Plc, there are four Risk Takers including managing Director and Deputy managing Director.
| EURm | ||
|---|---|---|
| Staff costs | 1–12/2020 | 1–12/2019 |
| Wages and salaries | 0.6 | 0.6 |
| of which variable remuneration | 0.0 | 0.0 |
| Pension costs - defined contribution plans | 0.1 | 0.1 |
| Other social security costs | 0.0 | 0.0 |
| Other | 0.0 | 0.0 |
| Staff costs, total | 0.7 | 0.7 |
Compensation paid by the Bank for termination of employment contracts is determined in accordance with legislation in force. During the accounting period the Bank has not paid any signing bonuses for new employees or granted severance packages.
| Average | ||
|---|---|---|
| staff numbers | 1–12/2020 | 1–12/2019 |
| Full-time staff | 6 | 6 |
Key management personnel
The key management personnel in Danske Mortgage Bank Plc consists of the members of the Board of Directors of the Bank, Managing Director and Deputy Managing Director.
| Management's and board of directors' remuneration | |||||
|---|---|---|---|---|---|
| EUR 1,000 | 1–12/2020 | 1–12/2019 | |||
| Remuneration for Managing Director, Deputy Managing Director |
293.5 | 282.6 | |||
| Remuneration for the members of Board of Directors |
32.0 | 32.0 |
The members of the Board of Directors of the Bank, who are employees of the Group, receive no remuneration for the membership of the Bank's Board of Directors .
Loans and receivables from management
Management includes key management personnel with close family members and entities that are controlled or significantly inf luenced by these. There has not been loans or receivables from key management personnel in accounting periods 2020 and 2019.
Share-based payments
Ef fective from 2018, Danske Mortgage Bank Plc has granted rights to conditional shares to the Management and other material risk takers as part of the variable remuneration. Incentive payments ref lected individual performance and also depended on financial results and other measures of value creation for a given year. Rights were granted in the first quarter of the year following the year in which they were earned. The fair value of share-based payments at the grant date is expensed over the service period that unconditionally entitles the employee to the payment.
Conditional shares – programme 2018
Rights to the Danske Bank A/S shares under the conditional share programme vest up to four years after being granted provided that the employee, with the exception of retirement, has not resigned from the Group. In addition to this requirement, rights to shares vest only if the Group as a whole and the employee´s department meet certain performance targets within the next three years. Rights to buy the Danske Bank A/S shares under the conditional share programme are granted as a portion of the annual bonus earned.
The fair value of the conditional shares is calculated as the share price less the payment made by the employee. Intrinsic value is expensed in the year in which rights to conditional shares are earned, while the time value is accrued over the remaining service period, which is the vesting period of up to three years.
| Number of shares | Fair value (1000 EUR) | ||||
|---|---|---|---|---|---|
| Top | Employee | ||||
| Manage | payment | End of year | |||
| Conditional shares | ment | Total | price (EUR) | At issue | 2020 |
| Granted 2019 | |||||
| 2019, beg. | |||||
| Granted 2019 | 618 | 618 | 10.3 | 8.9 | |
| Exercised 2019 | -371 | -371 | |||
| Forfeited 2019 | - | - | |||
| Other changes 2019 | - | - | |||
| 2019, end | 247 | 247 | - | 4.1 | 3.6 |
| Vested 2020 | - | - | |||
| Exercised 2020 | - | - | |||
| Forfeited 2020 | - | - | |||
| Other changes 2019 | - | - | |||
| 2020, end | 247 | 247 | - | 4.1 | 3.3 |
| Granted 2020 | |||||
| 2020, beg. | |||||
| Granted 2020 | 1 115 | 1 115 | 14.5 | 15.1 | |
| Exercised 2020 | -669 | -669 | |||
| Forfeited 2020 | - | - | |||
| Other changes 2020 | - | - | |||
| 2020, end | 446 | 446 | - | 5.8 | 6.0 |
| Conditional shares: Calc. used to calculate the fair value of conditional shares as of 31 December 2020 |
Share price at grant date (DKK) |
Share price at year end (DKK) |
EUR : DKK | Share price at grant date (EUR) |
Share price at year end (EUR) |
|---|---|---|---|---|---|
| Granted in 2019 | 124.21 | 100.65 | 7.4393 | 16.70 | 13.53 |
| Granted in 2020 | 96.6 | 100.65 | 7.4393 | 12.99 | 13.53 |
| Conditional shares: Calc. used to calculate the fair value of | |||||
|---|---|---|---|---|---|
| conditional shares as of 31 December 2019 | |||||
| Granted in 2019 | 124.21 | 107.80 | 7.4698 | 16.63 | 14.43 |
5. Other operating expenses and audit fees and financial stability authority contributions
| EURm | ||
|---|---|---|
| Other operating expenses | 1–12/2020 | 1–12/2019 |
| Financial stability fund expenses | 1,3 | 0,8 |
| Other services *) | 13,8 | 12,2 |
| Other operating expenses, total | 15,1 | 13,1 |
*) Other operating expenses is mainly coming from the costs from services bought from the Group.
| 1000 EUR | ||
|---|---|---|
| Audit fees | 1–12/2020 | 1–12/2019 |
| Audit | 68,1 | 63,5 |
| Audit-related services | - | 22,3 |
| Audit fees, total (incl. VAT) | 68,1 | 85,8 |
Financial stability authority contributions The Financial Stability Authority manages the Financial Stability Fund, which includes the Resolution Fund. Contributions used for building up the Resolution Fund are collected from all credit institutions and investment firms within the scope of the resolution legislation. The contributions are determined based on the size of the institution and risks involved in its business.
The contributions of credit institutions are determined on the level of the Banking Union, and they are calculated by the Single Resolution Board (SRB). In the Banking Union, a single target level for the Single Resolution Fund is introduced gradually. In other words, the annual individual contributions of Finnish institutions is increasingly dependent on the aggregate amount of covered deposits in the entire Banking Union, not only in Finland.
Financial stability authority contributions EURm 1–12/2020 1–12/2019 Financial stability authority contributions Resolution contributions 1.3 0.8 Administration fee 0.0 0.0 Financial stability authority contributions, total 1.3 0.8
6. Loan impairment charges and loans and receivables from customers
The Bank buys the loans from Danske Bank A/S, Finland Branch. Loans and receivables consists of loans and receivables that have been granted to customers by Danske Bank A/S, Finland Branch and have been acquired after disbursement. Loans and receivables includes conventional bank loans, except for transactions with credit institutions and central banks.
At initial recognition, loans and receivables are measured at fair value plus transaction costs. Subsequently, they are measured at amortised cost, according to the effective interest method, less impairment charges for expected credit losses. The difference between the value at initial recognition and the redemption value is amortised over the term to maturity and recognised under Interest income. If fixed-rate loans and receivables and amounts due are accounted for under hedge accounting that is determined effective, the fair value of the hedged interest rate risk is added to the amortised cost of the assets.
| EURm | 2020 | |||
|---|---|---|---|---|
| Loans and receivables from customers | Stage 1 | Stage 2 | Stage 3 | Total |
| Gross carrying amount 1 January 2020 | 4,769.3 | 225.7 | 1.4 | 4,996.4 |
| Transferred to Stage 1 | 43.4 | -43.4 | - | - |
| Transferred to Stage 2 | -237.9 | 237.9 | - | - |
| Transferred to Stage 3 | -2.1 | -0.2 | 2.3 | - |
| New assets | 1,526.1 | 137.9 | 0.4 | 1,664.3 |
| Assets derecognised | -544.1 | -94.6 | -1.4 | -640.1 |
| Other | -381.0 | -13.4 | - | -394.4 |
| Gross carrying amount 31 December 2020 | 5,173.7 | 449.9 | 2.7 | 5,626.2 |
*) includes loan repayments
| EURm | 2019 | |||
|---|---|---|---|---|
| Loans and receivables from customers | Stage 1 | Stage 2 | Stage 3 | Total |
| Gross carrying amount 1 January 2019 | 5,237,2 | 264,5 | 0,3 | 5,502,1 |
| Transferred to Stage 1 | 86,4 | -86,4 | - | - |
| Transferred to Stage 2 | -109,6 | 109,6 | - | - |
| Transferred to Stage 3 | -0,8 | -0,4 | 1,2 | - |
| New assets | 540,0 | 14,0 | 0,2 | 554,3 |
| Assets derecognised | -562,1 | -58,8 | -0,3 | -621,3 |
| Other | -421,9 | -16,8 | 0,0 | -438,7 |
| Gross carrying amount 31 December 2019 | 4,769,3 | 225,7 | 1,4 | 4,996,4 |
*) includes loan repayments
Impairment for expected credit losses
The impairment charge for expected credit losses depends on whether the credit risk has increased significantly since initial recognition and follows a three stage model:
- Stage 1: If the credit risk has not increased significantly, the impairment charge equals the expected credit losses resulting from default events that are possible within the next 12 months.
- Stage 2: If the credit risk has increased significantly, the loan is transferred to stage 2 and an impairment charge equal to the lifetime expected credit losses is recognised.
- Stage 3: If the loan is in default or otherwise credit-impaired, it is transferred to stage 3, for which the impairment charge continues to equal the lifetime expected credit losses but with interest income being recognised on the net carrying amount,
The expected credit loss is calculated for all individual facilities as a function of the probability of default (PD), the exposure at default (EaD) and the loss given default (LGD) and incorporates forward looking elements. For facilities in stages 2 and 3, the lifetime expected credit losses cover the expected remaining lifetime of a facility.
Expected credit loss impairment charges are booked in an allowance account and allocated to individual exposures.
The Bank sells non-performing loan agreements back to Danske Bank A/S, Finland Branch.
| Loan impairment charges | ||
|---|---|---|
| 1000 EUR | 1–12/2020 | 1–12/2019 |
| Impact of net remeasurement of ECL (incl. changes in models) | 867.0 | 1,556.6 |
| ECL on assets derecognised | -139.8 | -136.9 |
| Decrease of provisions to cover realised loan losses | -1,012.7 | -310.9 |
| Final write-offs | 1,012.7 | 310.9 |
| Interest income, effective interest method | - | - |
| Total | 727.2 | 1,419.7 |
| Reconciliation of total allowance account | 2020 | |||
|---|---|---|---|---|
| 1000 EUR | Stage 1 | Stage 2 | Stage 3 | Total |
| Balance at the beginning of period | 186.8 | 1,689.8 | 6.7 | 1,883.3 |
| Transferred to Stage 1 during the period | 262.3 | -262.3 | - | - |
| Transferred to Stage 2 during the period | -37.9 | 47.8 | -9.9 | - |
| Transferred to Stage 3 during the period | -4.6 | -377.8 | 382.4 | - |
| ECL on new assets | 451.8 | 174.1 | - | 625.9 |
| ECL on assets derecognised | -27.9 | -111.5 | -0.4 | -139.8 |
| Impact of net remeasurement of ECL (incl. changes in models) | -385.1 | 990.5 | 266.4 | 871.8 |
| Write-offs debited to the allowance account | -3.3 | -426.8 | -582.5 | -1,012.7 |
| Other changes | 15.6 | 24.6 | -42.1 | -1.9 |
| Balance at end of period | 457.9 | 1,748.2 | 20.9 | 2,226.7 |
| Reconciliation of total allowance account | 2019 | |||
|---|---|---|---|---|
| 1000 EUR | Stage 1 | Stage 2 | Stage 3 | Total |
| Balance at the beginning of period | 156,6 | 635,9 | 3,0 | 795,5 |
| Transferred to Stage 1 during the period | 176,2 | -173,8 | -2,4 | - |
| Transferred to Stage 2 during the period | -11,8 | 19,8 | -8,0 | - |
| Transferred to Stage 3 during the period | -0,6 | -23,2 | 23,9 | - |
| ECL on new assets | - | 118,7 | 4,8 | 123,5 |
| ECL on assets derecognised | -26,0 | 85,8 | 114,2 | 174,0 |
| Impact of net remeasurement of ECL (incl. changes in models) | -118,2 | 1,239,3 | 8,4 | 1,129,5 |
| Write-offs debited to the allowance account | -2,0 | -230,6 | -78,4 | -310,9 |
| Other changes | 12,6 | 17,8 | -58,8 | -28,3 |
| Balance at end of period | 186,8 | 1,689,8 | 6,7 | 1,883,3 |
Signif icant increase in credit risk (transfer from stage 1 to stage 2)
The classification of facilities between stages 1 and 2 for the purpose of calculating expected credit losses depends on whether the credit risk has increased significantly since initial recognition. The assessment of whether credit risk has increased significantly since initial recognition is performed by considering the change in the risk of default occurring over the remaining life time of the facility and incorporating forward-looking information. A facility is transferred from stage 1 to stage 2 based on observed increases in the probability of default:
- For facilities originated below 1% in PD: An increase in the facility's 12-month PD of at least 0.5 percentage points and a doubling in the facility's lifetime PD since origination.
- For facilities originated above 1% in PD: An increase in the facility's 12-month PD of 2 percentage points or a doubling of the facility's lifetime PD since origination.
In addition, facilities that are more than 30 days past due are moved to stage 2. Finally, customers subject to forbearance measures are placed in stage 2, if the Bank, in the most likely outcome, expects no loss, or if the customers are subject to the two-year probation period for performing forborne exposures.
Stage 3 (credit-impaired facilities)
A facility is transferred from stage 2 to stage 3 when it becomes credit-impaired. A facility becomes creditimpaired when one or more events that have a detrimental impact on the estimated future cash flows have occurred. This includes observable data about
- (a) significant financial difficulty of the issuer or the borrower;
-
(b) a breach of contract, such as a default or past due event;
-
(c) the borrower, for financial or contractual reasons relating to the borrower's financial difficulty, having been granted a concession that would not otherwise have been considered;
- (d) it is becoming probable that the borrower will enter into bankruptcy or other financial restructuring; and
- (e) the purchase or origination of a financial asset at a high rate of discount that reflects the incurred credit loss.
It may not be possible to identify a single individual event – instead, the combined effect of several events may cause financial asset to become credit-impaired. Credit-impaired facilities are placed in rating category 10 or 11. For customers in rating category 10, the stage 3 classification applies only to customers where a loss is expected in the most likely scenario. For rating category 11 (default), all facilities are classified as stage 3 exposures.
Definition of default
The definition of default used in the measurement of expected credit losses and the assessment to determine movements between stages is consistent with the definition of default used for internal credit risk management purposes and is aligned with the CRR. As a result, exposures which are considered to be in default for regulatory purposes will always be considered stage 3 exposures. This applies both to 90-days-past-due considerations and to unlikelyto-pay factors leading to a regulatory default.
Calculation of expected credit losses
The expected credit loss is calculated for all individual facilities as a function of the probability of default (PD), the exposure at default (EaD) and the loss given default (LGD). In general, the Bank's IFRS 9 impairment models and parameters draw on the Group's internal models in order to ensure
alignment of models across the Group. New models and calculations have been developed especially for IFRS 9 purposes, including models for lifetime PD, prepayment and forward-looking LGD. All expected credit loss impairment charges are allocated to individual exposures.
Expected remaining lifetime
For most facilities, the expected lifetime is limited to the remaining contractual maturity and is adjusted for expected prepayment. For exposures with weak credit quality, the likelihood of prepayment is not included. For exposures that include both a loan and an undrawn commitment and where a contractual ability to demand prepayment and cancellation of the undrawn commitment does not limit the Bank's exposure to credit losses to the contractual notice period, the expected lifetime is the period during which the Bank expects to be exposed to credit losses. This period is estimated on the basis of the normal credit risk management actions.
Incorporation of forward-looking information
The forward-looking elements of the calculation ref lect the current unbiased expectations of the Bank's senior management. The process consists of the creation of macroeconomic scenarios (base case, upside and downside), including an assessment of the probability of each scenario, by the Group's independent macroeconomic research unit, the review and sign-of f of the scenarios (through the organization) and a process for adjusting scenarios given new information during the quarter.
The purpose of using multiple scenarios is to model the non-linear impact of assumptions about macroeconomic factors on the expected credit losses. Management's approval of scenarios can include adjustments to the scenarios, probability weighting and management overlays to cover the outlook for particular high-risk portfolios, which are not provided by the Group's macroeconomists. The approved scenarios are used to calculate the impairment levels. Technically, the forward-looking information is used directly in the PDs through an estimate of general changes to the PDs and the LGDs in the expected credit loss calculation.
The forward-looking information is based on a three year forecast period converging to steady state in year seven. The base case is based on the macroeconomic outlook as disclosed in the Group's Nordic Outlook reports.
Modification
When a loan is replaced by a new loan or the original loan contract is modified it is assessed whether this should be accounted for as derecognition of the loan and recognition of a new loan, or as a modification of the old loan. This depends on whether the changes to the contractual cash f lows or other contractual terms are significant or not. If the change is significant, it is accounted for as derecognition of the old loan and recognition of the new loan. If the change is not significant, the modification is accounted for as a modification of the old loan. In general, if the modification results in a new loan contract and loan identification, the modification is considered significant and leads to derecognition of the old loan and recognition of a new loan. If this is not the case, the modification does not lead to derecognition of the original loan.
If the old financial asset is not derecognised, the original ef fective interest rate remains unchanged, and the net present value of the changed contractual cash f lows represents the carrying amount of the financial asset after the modification. The dif ference between the net present value of the original contractual cash f lows and the modified contractual cash f lows are recognised in P/L as a modification gain or loss. If the modification loss relates to modifications on loans subject to forbearance measures the modification loss is presented in the income statement under Loan impairment charges.
In terms of stage allocation, it is important whether a modification leads to derecognition of the old loan and recognition of a new loan or not. If the replacing loan is considered to be a new loan, the loan will (unless the new loan is credit-impaired at initial recognition) be recognised in stage 1 at initial recognition, i.e. the initial credit risk is reset. If the replacing loan is considered an amendment to the old loan, the initial credit risk is not reset.
The Bank buys new loans from Danske Bank A/S, Finland Branch. However, there might be modifications to the loans that are in the Bank's balance sheet if the modifications do not result in derecognition of the old loan and recognition of the new loan.
Further information on the accounting treatment of the impacts from the COVID-19 crisis can be found in the Accounting principles in a separate section under Critical judgements and estimation uncertainty.
7. Taxes
Calculated current and deferred tax on the profit for the year are recognised in the income statement. Current tax is calculated based on the valid tax rate.
| 1–12/2020 | 1–12/2019 |
|---|---|
| 5.7 | 4.5 |
| - | 0.1 |
| 5.7 | 4.6 |
| 20.00% | 20.00% |
| 23.1 | |
| 5.7 | 4.6 |
| 5.7 | 4.6 |
| 28.4 |
8. Classification of financial instruments and non-financial assets
The purchase and sale of financial assets and liabilities at fair value through profit or loss are recognised in the balance sheet on the settlement date, or the date on which the Bank agrees to buy or sell the asset or liability in question. Loans are recognised as financial assets on the settlement date mentioned in the loan purchase contract between Danske Mortgage Bank Plc and Danske Bank A/S, Finland Branch. Derivative instruments, quoted securities and foreign exchange spot transactions are recognized on and derecognized from the balance sheet on the settlement date.
Financial assets are derecognised when the contractual right to receive cash flows from the financial
Classif ication and measurement of f inancial assets and financial liabilities under IFRS 9 – general Under IFRS 9, financial assets are classified on the basis of the business model adopted for managing the assets and on their contractual cash f low characteristics (including embedded derivatives, if any) into one of the following measurement categories:
- Amortised cost (AMC)
- Fair value through other comprehensive income (FVOCI)
- Fair value through profit or loss (FVPL)
assets has expired or all risks and rewards of ownership have been transferred. Financial liabilities are derecognised when they are extinguished, i.e. when the obligation is discharged, cancels or expires.
Financial assets and liabilities are offset and the net amount reported in balance sheet only if there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis. Transaction costs are included in the initial carrying amount, unless the item is measured at fair value through the profit and loss. The Bank uses the option in IFRS 9 to continue to apply the hedge accounting provisions in IAS 39.
Financial assets are measured at AMC if they are held within a business model for the purpose of collecting contractual cash f lows (held to collect) and if cash f lows are solely payments of principal and interest on the principal amount outstanding. In general, this is the case for the Bank's loan portfolio.
Danske Mortgage Bank Plc does not have financial assets that are measured at FVOCI.
All other financial assets are mandatorily measured at FVPL including financial assets within other
business models such as financial assets managed at fair value or held for trading and financial assets with contractual cash f lows that are not solely payments of principal and interest on the principal amount outstanding.
Generally, financial liabilities are measured at amortised cost with bifurcation of embedded derivatives not closely related to the host contract. Derivatives are measured at fair value.
The SPPI test (solely payment of principal and interest on the principal amount outstanding) The second step in the classification of the financial assets in portfolios being "held to collect" and "held to collect and sell" relates to the assessment of whether the contractual cash f lows are consistent with the SPPI test. The principal amount ref lects the fair value at initial recognition less any subsequent changes, e.g. due to repayment. The interest must represent only consideration for the time value of money, credit risk, other basic lending risks and a profit margin consistent with basic lending features. If the cash f lows introduce more than de minimis exposure to risk or volatility that is not consistent with basic lending features, the financial asset is mandatorily recognised at FVPL.
In general, the Company's portfolios of financial assets that are "held to collect" (loans) have contractual cash f lows that are consistent with the SPPI test, i.e. they have basic lending features.
The table below shows the classification of the Bank's financial instruments.
| Amortised cost | Fair value through profit or loss |
|||||
|---|---|---|---|---|---|---|
| Assets, EURm | Held to collect financial assets |
Liabilities | Managed at fair value |
Hedge | Non-financial assets and liabilities |
Total |
| Cash and balances with central banks | 208.2 | 208.2 | ||||
| Loans and receivables to credit institutions | 0.1 | 0.1 | ||||
| Trading portfolio assets | ||||||
| Derivatives | 74.1 | 74.1 | ||||
| Investment securities, bonds | 40.8 | 40.8 | ||||
| Loans and receivables to customers | 5,611.7 | 12.3 | 5,624.0 | |||
| Tax assets | 0.1 | 0.1 | ||||
| Other assets | 1.6 | 1.6 | ||||
| Total 31.12.2020 | 5,820.0 | - | 40.8 | 86.4 | 1.7 | 5,949.0 |
| Liabilities, EURm | ||||||
| Due to credit institutions and central banks | 1,789.3 | 1,789.3 | ||||
| Trading porfolio liabilities Debt securities in issue |
12.1 | 12.1 | ||||
| -> Bonds | 3,742.3 | 58.0 | 3,800.3 | |||
| Other liabilities | 21.2 | 21.2 | ||||
| Total 31.12.2020 | - | 5,531.6 | - | 70.0 | 21.2 | 5,622.8 |
| Amortised cost | Fair value through profit or loss |
|||||
|---|---|---|---|---|---|---|
| Assets, EURm | Held to collect financial assets |
Liabilities | Managed at fair value |
Hedge | Non-financial assets and liabilities |
Total |
| Cash and balances with central banks | 159.4 | 159.4 | ||||
| Trading portfolio assets | ||||||
| Derivatives | 89.5 | 89.5 | ||||
| Investment securities, bonds | 40.3 | 40.3 | ||||
| Loans and receivables to customers | 4,980.6 | 13.9 | 4,994.5 | |||
| Tax assets | 1.1 | 1.1 | ||||
| Other assets | 1.8 | 1.8 | ||||
| Total 31.12.2019 | 5,139.9 | - | 40.3 | 103.4 | 2.9 | 5,286.5 |
| Liabilities, EURm | ||||||
| Due to credit institutions and central banks | 1,129.6 | 1,129.6 | ||||
| Trading porfolio liabilities | 13.9 | 13.9 | ||||
| Debt securities in issue | ||||||
| -> Bonds | 3,746.5 | 71.8 | 3,818.3 | |||
| Other liabilities | 21.3 | 21.3 | ||||
| Total 31.12.2019 | - | 4,876.1 | - | 85.7 | 21.3 | 4,983.0 |
9. Balance sheet items broken down by expected due date
The balance sheet items are presented in order of liquidity instead of distinguishing between current and non-current items. The table below shows the balance
sheet items expected to mature within one year (current) and after more than one year (non-current).
| 2020 | |||
|---|---|---|---|
| EURm | Total | < 1 year | > 1 year |
| Assets | |||
| Cash and balances with central banks | 208.2 | 208.2 | - |
| Loans and receivables to credit institutions | 0.1 | 0.1 | - |
| Trading portfolio assets | 74.1 | 44.9 | 29.2 |
| Other investment securities | 40.8 | 0.1 | 40.7 |
| Loans and receivables to customers | 5,624.0 | 444.3 | 5,179.7 |
| Tax assets | 0.1 | 0.1 | - |
| Other assets | 1.6 | 1.6 | - |
| Total | 5,949.0 | 699.3 | 5,249.6 |
| Liabilities | |||
| Due to credit institutions and central banks | 1,789.3 | 78.3 | 1,711.0 |
| Derivatives and other financial liabilities held for trading | 12.1 | 6.9 | 5.2 |
| Debt securities in issue | 3,800.3 | 2,017.4 | 1,782.9 |
| Other liabilities | 21.2 | 21.2 | - |
| Total | 5,622.8 | 2,123.8 | 3,499.0 |
| 2019 | |||
| EURm | Total | < 1 year | > 1 year |
| Assets | |||
|---|---|---|---|
| Cash and balances with central banks | 159.4 | 159.4 | - |
| Loans and receivables to credit institutions | - | - | - |
| Trading portfolio assets | 89.5 | - | 89.5 |
| Other investment securities | 40.3 | 30.1 | 10.2 |
| Loans and receivables to customers | 4,994.5 | 420.2 | 4,574.3 |
| Tax assets | 1.1 | 1.1 | - |
| Other assets | 1.8 | 1.8 | - |
| Total | 5,286.5 | 612.5 | 4,674.0 |
| Liabilities | |||
| Due to credit institutions and central banks | 1,129.6 | 887.6 | 242.0 |
| Derivatives and other financial liabilities held for trading | 13.9 | - | 13.9 |
| Debt securities in issue | 3,818.3 | 1,003.5 | 2,814.8 |
| Other liabilities | 21.3 | 21.3 | - |
| Total | 4,983.0 | 1,912.4 | 3,070.7 |
Maturity analysis of past due financial assets, net
| EURm | 2020 | 2019 |
|---|---|---|
| Assets past due 30-90 days | 4.2 | 5.0 |
| Unlikely to pay | 13.0 | 7.0 |
| Nonperforming assets past due at least 90 days but no more than 180 days | 0.5 | 0.4 |
| Nonperforming assets past due at least 180 days - 1 year | - | - |
| Nonperforming assets more than 1 year | - | - |
| Receivables with forbearance measures, gross carrying amount | 269.2 | 104.4 |
| Maturity analysis for derivatives is included in note 12. |
10. Fair value information
Fair value
Financial instruments are carried on the balance sheet at fair value or amortised cost. The fair value of financial assets and liabilities is measured on the basis of quoted market prices of financial instruments traded in active markets. If an active market exists, fair value is based on the most recently observed market price on the balance sheet date.
If a financial instrument is quoted in a market that is not active, the valuation is based on the most recent transaction price. It adjusts the price for subsequent changes in market conditions, for instance by including transactions in similar financial instruments that are motivated by normal business considerations.
If an active market does not exist, the fair value of standard and simple financial instruments, such as interest rate and currency swaps and unlisted bonds, is measured according to generally accepted measurement methods. Market-based parameters are
used to measure fair value. The fair value of more complex financial instruments, such as swaptions, interest rate caps and floors, and other OTC products, is measured on the basis of internal models, many of which are based on valuation techniques generally accepted within the industry.
The results of calculations made on the basis of valuation techniques are often estimates, because exact values cannot be determined from market observations. Consequently, additional parameters, such as liquidity and counterparty risk, are sometimes used to measure fair value.
If, at the time of acquisition, a difference arises between the value of a financial instrument calculated on the basis of non-observable inputs and actual cost [day-one profit and loss] and the difference is not the result of transaction costs, the Bank calibrates the model parameters to the actual cost.
Financial instruments measured at fair value Generally, the Bank applies valuation techniques to OTC derivatives and unlisted trading portfolio assets and liabilities. The most frequently used valuation and estimation techniques include the pricing of transactions with future settlement and swap models that apply present value calculations, credit pricing models and options models, such as Black & Scholes models. In most cases, valuation is based substantially on observable input.
Financial instruments valued on the basis of quoted prices in an active market are recognised in the
Quoted prices category (level 1). Financial instruments valued substantially on the basis of other observable input are recognised in the Observable input category (level 2). Other financial instruments are recognised in the Non-observable input category (level 3).
During the reporting period ending 31 December 2020, there were no transfers between Level 1 (Quoted prices) and Level 2 (Observable input) fair value measurements, and no transfers into or out of Level 3 (Non-observable input) fair value measurements.
| 2020 | Quoted | Observable | Non observable |
|
|---|---|---|---|---|
| EURm | prices | input | input | Total |
| Financial assets | ||||
| Investment securities, bonds | 30.6 | 10.2 | - | 40.8 |
| Derivative financial instruments | - | 74.1 | - | 74.1 |
| Total | 30.6 | 84.3 | - | 114.9 |
| Financial liabilities | ||||
| Derivative financial instruments | - | 12.1 | - | 12.1 |
| Total | - | 12.1 | - | 12.1 |
| 2019 | ||||
| Financial assets | ||||
| Investment securities, bonds | 20.2 | 20.0 | - | 40.3 |
| Derivative financial instruments | - | 89.5 | - | 89.5 |
| Total | 20.2 | 109.5 | - | 129.8 |
| Financial liabilities | ||||
| Derivative financial instruments | - | 13.9 | - | 13.9 |
| Total | - | 13.9 | - | 13.9 |
Financial instruments at amortised cost
For the vast majority of amounts due to the Bank, such as loans and receivables, active market does not exist. Consequently, the Bank bases its fair value estimates on data showing changes in market conditions after the initial recognition of the individual instrument and af fecting the price that would have been fixed if the terms had been agreed at the balance sheet date. Other parties may make other estimates. The maturity of the items included in cash and balances at central bank is so short, that carrying amount represents also fair value.
The fair value of Debt securities in issue amounted to EUR 3,759.8 million (2019: EUR 3,762.1) compared to the carrying amount of EUR 3,800.3 million (2019: EUR 3,818.3). For the majority of the debt securities issued the fair value ref lects the quoted price, i.e. a level 1 measurement. For other financial instruments, no significant dif ference between the estimated fair value and amortised cost exists.
11. Cash and balances at central banks and loans and receivebles from credit institutions
Amounts due from credit institutions and central banks comprise amounts due from other credit institutions and term deposits with central banks.
Amounts due from credit institutions and central banks are measured at amortised cost as described under Loans and receivables at amortised cost.
| EURm | 2020 | 2019 |
|---|---|---|
| Balances with central banks | 208.2 | 159.4 |
| Loans and receivables from credit institutions | ||
| Other loans | 0.1 | - |
| Allowances | 0.0 | 0.0 |
| Total | 208.3 | 159.4 |
Balances with central banks are on stage 1 in the stage division according to IFRS 9 -standard.
12. Derivative financial instruments
The Bank uses derivative instruments for hedging purposes. The derivatives used are interest rate derivatives. Derivatives held for hedging purposes are used for hedging loans and issued bonds. Interest rate swaps are designated as fair value hedges. Hedges protect the Bank against fair value changes caused by the changes in market interest rates.
The Bank measures all loans and issued bonds at amortised cost. Majority of the loans in the Bank are floating rate loans. When a floating rate loan has a
fixing to a fixed rate, the interest rate risk against market rates arises on the current period of the floating rate loan. The Bank uses derivatives to hedge the interest rate risk of the fixed interest rate period of the fixed rate loans, floating rate loans and fixed rate issued bonds.
If the hedge criteria cease to be met, the accumulated value adjustments of the hedged items are amortised over the term to maturity.
| 2020 | 2019 | |||||
|---|---|---|---|---|---|---|
| EURm | Fair value | Notional | Fair value | Notional | ||
| Derivatives held for hedging | Assets | Liabilities | amount | Assets | Liabilities | amount |
| Fair value hedges | 74.1 | 12.1 | 8,375.7 | 89.5 | 13.9 | 7,742.9 |
| Interest rate | ||||||
| OTC derivatives | 74.1 | 12.1 | 8,375.7 | 89.5 | 13.9 | 7,742.9 |
| Total derivatives held for hedging | 74.1 | 12.1 | 8,375.7 | 89.5 | 13.9 | 7,742.9 |
| with Group companies: | 74.1 | 12.1 | 8,375.7 | 89.5 | 13.9 | 7,742.9 |
| Nominal value of the underlying instrument | Less than | 1-5 | Over | Less than | 1-5 | Over |
| Remaining maturity | 1 year | years | 5 years | 1 year | years | 5 years |
| 1,000.0 | 6,301.5 | 1,074.3 | 1,000.0 | 6,526.5 | 216.4 | |
| with Group companies: | 1,000.0 | 6,301.5 | 1,074.3 | 1,000.0 | 6,526.5 | 216.4 |
Explanation of hedge accounting
The interest rate risk arising on the fixed-rate periods of assets and liabilities is hedged by derivatives. Hedges are executed when it is required to match the risk arising from assets and liabilities to minimize the total interest rate risk.
For hedged assets and liabilities to which a fixed rate of interest applies for a specified period of time starting at the commencement date of the agreement, future interest payments are divided into basic interest and a customer margin and into periods of time. By entering into swaps or forwards with matching payment profiles in the same currencies and for the same periods, the Bank hedges the risk at a portfolio level from the commencement date of the hedged items. The fair values of the hedged interest rate risk and the hedging derivatives are measured at frequent intervals to ensure that changes in the fair value of hedged interest rate risk lie within a band of 80-125% of the changes in the fair value of the hedging derivatives. Portfolios of hedging derivatives are adjusted if necessary.
Hedge ineffectiveness relates to the fact that the fair value changes to the hedged items are measured based on the interest rate curve relevant for each hedged item while the fair value of the fixed legs of the hedging derivatives are measured based on a swap curve. Further, the adjustment of the portfolios of hedging derivatives to changes in hedged positions is not done instantly, and some hedge ineffectiveness can therefore exist.
The Bank uses the option in IFRS 9 to continue to use the fair value hedge accounting provisions in IAS 39. With effective hedging, the hedged interest rate risk on hedged assets and liabilities is measured at fair value and recognised as a value adjustment of the hedged items. Value adjustments are carried in the income statement under Net result from items at fair value. Any ineffective portion of a hedge that lies within the range for effective hedging is therefore also included under Net result from items at fair value.
The ongoing Interest Rate Benchmark Reform will replace existing benchmark inter-bank offered rates (IBORs) with alternative risk-free rates. There is currently uncertainty as to the timing and the methods of transition for the different IBORs and whether some existing benchmarks will continue to be supported. The calculation methodology behind EURIBOR has been amended and is now recognised as being fully compliant with the EU Benchmark Regulation. Further, it is expected that EURIBOR will continue in a foreseeable future.
At the end of 2020, the carrying amounts of effectively hedged financial assets and liabilities were EUR 5,638.0 million (5,006.8 million) and EUR 2,808.0 million (2,821.8 million), respectively. The table below shows the value adjustments of these assets and liabilities and the hedging derivatives. The value adjustments have been recognised in the income statement as Net result from items at fair value.
| EURm | ||
|---|---|---|
| Effect of interest rate hedging on profit | 2020 | 2019 |
| Effect of fixed-rate assets hedging on profit | ||
| Hedged loans | -1.6 | -2.6 |
| Hedging derivatives | 1.8 | 2.6 |
| Total | 0.2 | 0.0 |
| Effect of fixed-rate liability hedging on profit | ||
| Hedged issues | 13.8 | 33.6 |
| Hedging derivatives | -14.5 | -32.8 |
| Total | -0.7 | 0.8 |
The tables below shows the hedging derivatives and the hedged fixed interest rate financial instruments.
| Carrying amount of hedging derivatives |
||||
|---|---|---|---|---|
| Nominal amount of hedging derivatives |
Assets | Liabilities | Changes in fair value used for calculating hedge ineffectiveness |
|
| Interest rate risk (interest rate swaps). 2020 | 8,375.7 | 74.1 | 12.1 | -12.7 |
| Interest rate risk (interest rate swaps). 2019 | 7,742.9 | 89.5 | 13.9 | -30.2 |
| Carrying amount of hedged items |
Accumulated amount of fair value hedge adjustments on the hedged item included in |
Change in value used for calculating |
|||
|---|---|---|---|---|---|
| Fixed interest rate risk on | hedge | ||||
| 2020 | Assets | Liabilities | Assets | Liabilities | ineffectiveness |
| Loans | 5,638.0 | 12.3 | -1.6 | ||
| Issued bonds | 2,808.0 | 58.0 | 13.8 | ||
| Total, 2020 | 5,638.0 | 2,808.0 | 12.3 | 58.0 | 12.2 |
| 2019 | |||||
| Loans | 5,006.8 | 13.9 | -2.6 | ||
| Issued bonds | 2,821.8 | 71.8 | 33.6 | ||
| Total, 2019 | 5,006.8 | 2,821.8 | 13.9 | 71.8 | 31.0 |
| Hedge ineffectiveness recognised in the income statement, 2020 | -0.5 | ||||
| Hedge ineffectiveness recognised in the income statement, 2019 | 0.8 |
Offsetting
Assets and liabilities are netted when the Bank and the counterparty have a legally enforceable right to set off recognised amounts and intend either to settle the balance on a net basis or to realise the asset and settle the liability simultaneously.
| EURm | ||
|---|---|---|
| Derivatives with positive fair value | 12/2020 | 12/2019 |
| Derivatives with positive fair value before netting | 74.1 | 89.5 |
| Carrying amount | 74.1 | 89.5 |
| Netting (under capital adequacy rules) | 12.1 | 13.9 |
| Net current exposure | 62.1 | 75.6 |
| Collateral | 78.2 | 78.7 |
| Net amount | -16.1 | -3.1 |
13. Tax assets and tax liabilities
Current tax assets and liabilities are recognised on the balance sheet as the estimated tax payable on the profit for the year adjusted for prepaid tax and possible tax payments for previous years. Tax assets and liabilities are netted if permitted by law and provided that the items are expected to be subject to net or simultaneous settlement.
Deferred tax on all temporary differences between the tax base of assets and liabilities and their carrying amounts is accounted for in accordance with the balance sheet liability method. Deferred tax is not recognised on temporary differences of items if the temporary differences arose at the time of acquisition without effect on net profit or taxable income.
Deferred tax is recognised under Deferred tax assets and Deferred tax liabilities.
Deferred tax is measured on the basis of the tax regulations and rates that, according to the rules in force at the balance sheet date, are applicable at the time the deferred tax is expected to crystallise as current tax. Adopted changes in deferred tax as a result of changes in tax rates applied to expected cash flows are recognised in the income statement.
Tax assets arising from unused tax losses and unused tax credits are recognised to the extent that such unused tax losses and unused tax credits can be used.
| EURm | 2020 | 2019 |
|---|---|---|
| Income tax assets | 0.1 | 1.1 |
| Total tax assets | 0.1 | 1.1 |
| Changes in deferred taxes | ||
| Deferred tax assets/liabilities, beginning of the period | - | 0.1 |
| Recognised in the income statement: | ||
| Provisions and impairments on receivables | - | - |
| Other | - | -0.1 |
| Net deferred tax assets (+)/liabilities (-), total 31.12. | - | - |
| Income tax assets, asset (+)/liability (-), net | 0.1 | 1.1 |
| Total tax assets (+)/liabilities (-), net | 0.1 | 1.1 |
14. Other assets
Other assets includes interest and commission due and other receivables.
| EURm | 2020 | 2019 |
|---|---|---|
| Other assets | ||
| Accrued interest | 1.6 | 1.7 |
| Other | 0.0 | 0.1 |
| Total | 1.6 | 1.8 |
15. Amounts owed to credit institutions
Amounts due to credit institutions are measured at amortised cost.
| EURm | 2020 | 2019 |
|---|---|---|
| Amounts owed to credit institutions | ||
| Other | 1,789.3 | 1,129.6 |
| Total | 1,789.3 | 1,129.6 |
16. Debt securities in issue and financial liabilities at fair value through p/l
Other issued bonds comprise bonds issued by the Bank. Other issued bonds are measured at amortised cost plus the fair value of the hedged interest rate risk.
| EURm | 2020 | 2019 | ||
|---|---|---|---|---|
| Debt securities in issue | ||||
| Finnish covered bonds | 3,800.3 | 3,818.3 | ||
| Nominal value | ||||
| EURm | 01/01/2020 | Issued | Redeemed | 31/12/2020 |
| Covered bonds | 3,750.0 | 1,000.0 | 1,000.0 | 3,750.0 |
| Nominal value | ||||
| EURm | 01/01/2019 | Issued | Redeemed | 31/12/2019 |
| Covered bonds | 4,750.0 | - | 1,000.0 | 3,750.0 |
17. Other liabilities
Other liabilities includes accrued interest, fees and commissions that do not form part of the amortised cost of a financial instrument. Other liabilities also includes pension obligations.
A provision is recognised if, as a result of a past event, the Bank has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.
| EURm | 2020 | 2019 |
|---|---|---|
| Provisions | 0.0 | 0.0 |
| Other liabilities | ||
| Accruals and deferred income | ||
| Deferred interest | 20.7 | 20.9 |
| Other accruals | 0.4 | 0.4 |
| Other | 0.0 | 0.0 |
| Total other liabilities | 21.2 | 21.3 |
18. Contingent liabilities and commitments
Off-balance sheet items
Off-balance sheet items consist mainly of commitments to extend credit. Commitments to extend credit are irrevocable commitments and comprise undrawn loans. The commitments are stated to the amount that can be required to be paid on the basis of the commitment.
Provisions for irrevocable loan commitments are recognised under Other liabilities if it is probable that drawings will be made under a loan commitment. Off-balance sheet items are mainly at the stage 1.
Danske Mortgage Bank did not have any material off-balance sheet items at 31 December 2019 and 31 December 2020
| Asset encumbrance | Carrying amount | Fair value of | Carrying amount | Fair value of |
|---|---|---|---|---|
| EURm | of encumbered | encumbered | of unencumbered | unencumbered |
| Assets | assets | assets | assets | assets |
| Assets December 31, 2020 | 6,182.2 | - | 318.6 | 40.8 |
| Equity instruments | - | - | - | - |
| Debt securities | - | - | 40.8 | 40.8 |
| Other assets | 6,182.2 | 277.8 | ||
| Assets December 31, 2019 | 5,469.8 | - | 242.8 | 40.5 |
| Equity instruments | - | - | - | - |
| Debt securities | - | - | 40.5 | 40.5 |
| Other assets | 5,469.8 | 202.4 | ||
Collateral received
Danske Mortgage Bank didn't have any received collaterals at 31 December 2020.
| EURm Encumbered assets/collateral received and associated liabilities |
Matching liabilities, contingent liabilities or securities lent |
Assets, collateral received and own debt securities issued other than covered bonds and ABSs encumbered |
|---|---|---|
| Carrying amount of selected financial liabilities 31.12.2020 | 4,921.2 | 6,182.2 |
| Carrying amount of selected financial liabilities 31.12.2019 | 4,481,0 | 5,469,8 |
Loans and securities serving as collateral for covered bond issuance is the main category of encumbered assets. Coverd bond issuance is a strategic long-term funding measure that entails ring-fencing assets according to statutory regulation. Encumbered assets and associated liabilities are disclosed based on median values of quarterly data.
| Parties with control interest | ||||
|---|---|---|---|---|
| EURm | 2020 | 2019 | ||
| Loans and receivables | 0.1 | - | ||
| Securities | 74.1 | 89.5 | ||
| Deposits | 1,789.3 | 1,129.6 | ||
| Derivatives | 12.1 | 13.9 | ||
| Interest income | 44.0 | 49.4 | ||
| Interest expenses | -2.5 | -2.4 | ||
| Purchases from group companies | 13.3 | 11.7 | ||
| Sales to group companies | 0.1 | 0.1 |
19. Related party transactions with group companies and other related parties
There are not expected credit losses booked for receivables from related parties. Interest expenses from related parties are positive interest.
Related party comprises the parent company, key management personnel and other related-party companies. Parties with significant influence include the parent company and its branches. Key management personnel comprises Board of Directors and executive management, including close family members and companies, in which key management personnel or their close family members have considerable influence.
Information regarding management's related party transactions is presented in Note 4.
Danske Mortgage Bank Plc's Board of Directors' proposal to the Annual General Meeting for the distribution of profit and signing of Annual Report 2020
The company's distributable assets in the financial statements total EUR 256,167,801.20 of which profit for the financial year totals EUR 22,716,859.09.
The Board of Directors proposes to the Annual General Meeting of Shareholders that no dividend will be paid and EUR 256,167,801.20 will be left in shareholders' equity.
Helsinki, 9th February 2021
Glenn Söderholm (Chairman)
Kimberly Bauner
Robert Wagner
Riikka Laine-Tolonen
Tomi Dahlberg
Maisa Hyrkkänen
Pekka Toivonen (CEO)
The auditor's note
A report on the audit performed has been issued today.
Helsinki, 9th February 2021
Deloitte Ltd Audit Firm
Aleksi Martamo Authorized Public Accountant
Accounting material 2020
The Bank uses the accounting system of Danske Bank A/S which is administered by the Group headquarters in Denmark. In the year end this accounting material is filed electronically and stored in Finland as two copies.
Financial statement and Board of Directors' report as bound versions are stored in Danske Bank A/S, Finland Branch's Accounting department.
Financial statement specifications are mainly included in the financial statement material gathered and stored by Accounting department.
General ledger accounting reports are stored electronically:
- Daily journals
- General ledger
- Income statements and balance sheets
- Charts of accounts
- Vouchers for notes to the financial statements