Capital Market Day, Copenhagen, 29 June 2000

Risk ManagementJesper Ovesen

Chief Financial Officer

Den Danske Bank

Agenda

u Risk Management as an integrated partof our shareholder value philosophy

u Organisation of risk and capitalmanagement

u Future initiatives and thoughts

Den Danske Bank

Risk and return

Theoretical capital ofcost risk

after tax earnings −

In practice capital ofcost capital

loss /expectedprovisions - costs - income−

Regulatory capital

RORCconcept

RAROCconcept

Economic capital

Den Danske Bank

Den Danske Bank Group 1 quarter resultsRORC concept

(DKr million)Retail Wholesale Danske

SecuritiesAsset

ManagementLife &

Pension

Core earnings before provisions 785 580 103 300 197

Risk weighted assets 171,120 199,728 548 5,257 -

Allocated capital (reg.) 11,974 13,981 38 368 5,373

Return on regulatory capital 26,6% 16,8% 1099,3% 330,6% 14,9%

Growth strategy ì î ì ì è

However.... What about risk and the risk adjusted return ?

RAROC

Den Danske Bank

Risk Management

Problems with RORC-conceptu Accounts only credit and market risku Credit risk recognises only four categories of

risk and give very little consideration to thesecurity provided

u Insufficient market risk calculations

RORC RAROCManagement decision

Difficult to use as a “stand-alone-concept” whentrying to optimise the risk/return equation

Den Danske Bank

Risk Management

Why RAROC?u Response to insufficient risk measures in the existing

BIS-rulesu Shareholder value creation

u Return compared to the true economic risku Optimising return through economic capital

allocationu Management of scarce resources

u Response to coming changes in the BIS-rules

Den Danske Bank

REVENUESREVENUES FULLY LOADEDCOSTS

FULLY LOADEDCOSTS

Economic CapitalEconomic Capital

Risk-Adjusted Annual ValueAdded

Risk-Adjusted Annual ValueAdded

+ –

RISKRISK

CreditCredit MarketMarket InsuranceInsurance OperatingOperatingIncludingCapital Benefit

IncludingCapital Benefit

Including ExpectedCredit Loss

Including ExpectedCredit Loss

Cost of Capital

RAROCRAROC

Integration of economic risk and financialperformance management

Den Danske Bank

Cost of capital - how have we estimated it ?

u We have estimated the CoE to 13% pre taxu Capital Asset Pricing model

u long term interest rateu risk premium

u Estimates from external sourcesu Average: 12,9% pre taxu High: 14,1% pre taxu Low: 11,4% pre tax

Den Danske Bank

CREDIT RISKCREDIT RISK

u Credit exposure

u Counterparty quality

u Collateral/ covenants

u Concentrations/ diversification

u Credit exposure

u Counterparty quality

u Collateral/ covenants

u Concentrations/ diversification

MARKET RISKMARKET RISK

u Value at Risk

u P&L volatility

u ALM gap

positions

u Floor risk

u Value at Risk

u P&L volatility

u ALM gap

positions

u Floor risk

INSURANCE RISKINSURANCE RISK

u Mortality/ morbidity histories

u Claims volatility

u One-off catastrophes

u Mortality/ morbidity histories

u Claims volatility

u One-off catastrophes

OPERATING RISKOPERATING RISK

u Business mix

u Revenue volatility

u Cost rigidity

u Potential adverse

events

u Business mix

u Revenue volatility

u Cost rigidity

u Potential adverse

events

ECONOMIC CAPITALECONOMIC CAPITAL

Definition - Required capital to cover potential economic lossesConfidence - Depends on Bank’s debt rating (AA ↔ 1 in 3000 default probability)Time Period - One year

Definition - Required capital to cover potential economic lossesConfidence - Depends on Bank’s debt rating (AA ↔ 1 in 3000 default probability)Time Period - One year

True economic risk captured consistent

Den Danske Bank

Risk Management

Some of you might think.. “If you are so keen on RAROC, whydon’t you publish the numbers?”

We considered it, however... “The RAROC-concept also gives achallenge in many ways”Lots of questions could be aheadè Do we have quality in our historical loss

data?è Do we use the correct parameters?è Do our internal rating system threat our

customers correctly in terms of risk?è Are our calculations of operational risk

in line with best practise?

We implemented the concept in 1999. We will have to get usedto it. Thereafter we will publish the numbers.

Den Danske Bank

The RAROC-concept is a cornerstone inour risk/return management

RetailBanking

WholesaleBanking

DanskeSecurities

AssetManagement

Life &Pension

Risk adjusted return- cost of capital

= Annual Value Added

CustomerA

CustomerB

CustomerC

CustomerD

CustomerE

Risk adjusted return- cost of capital

= Annual Value Added

Capital structure- growth expectations

Equity capital (Tier 1) = 7% Economic capital><=

Dividend policy

Den Danske Bank

Agenda

u Risk Management as an integrated partof our shareholder value philosophy

u Organisation of risk and capitalmanagement

u Future initiatives and thoughts

Den Danske Bank

Organisation of risk and capital management

RetailBanking

WholesaleBanking

DanskeSecurities

AssetManagement

Life &Pension

u Risk and capital management are segregated from those responsible for customer relationships

u Risk are being transferred to centralised unit through transfer pricing

FinanceDepartment

Credit &Market Risk

GroupTreasury

Asset / Liability Committee

Den Danske Bank

ALCO

u Members of ALCO are the members of theexecutive board and the heads of Group Finance,Group Treasury, Danske Markets and the CreditSecretariat

u ALCO meets approximately once every monthu The ALCO Operative Committee meets every

second week and consists of ALCO excluding theexecutive board

Den Danske Bank

The ALCO has the responsibility of:

u The overall development in thebalance sheet

u The funding structure of thebank

u The bank’s market risksu The bank’s credit risksu Internal Transfer Pricing derived

from risks

Den Danske Bank

The ALCO’s responsibilities on the overallbalance sheet cover:

u Goals for the overall growth andcomposition of the balance sheet

u Goals for risk weighted assetsand solvency ratios

u Goals for Economic Capital

Den Danske Bank

Agenda

u Risk Management as an integrated partof our shareholder value philosophy

u Organisation of risk and capitalmanagement

u Future initiatives and thoughts

Den Danske Bank

Future initiatives and thoughts

Positive attitude towards changes in the BIS-rulesu We support the ongoing process and look forward to

a more comprehensive risk frameworku We believe the risk framework should include credit,

market and operational risku On operational risk we take part in several working

groups and will improve the present methodology

è No specific expectations to capital impact fromthe new capital adequacy rules

Den Danske Bank

What drives the future development?

Focus on profitability.....u Willingness to expand and use opportunities in our well

defined business units within Retail banking, Wholesalebanking, Investment banking, Asset Management and Life& Pension if.....”its profitable and meet our target returnlevel”

u Benchmarking, peer group analysis and target setting tovisualise where to go and why!

u Implementation of an overall planning cycle includingstrategic review, action plan and budgets, estimates andmonthly follow-up

Den Danske Bank

Peer Group Analysis

P/B Pay-out1999 C/I value P/E RoE Tier 1 ratio

Peer Group Scandinavia 63% 1.8 10.9 17% 7.7% 42%Peer Group Europe 64% 3.6 19.3 21% 8.3% 38%Cutting Edge 47% 5.1 26.8 47% 11.0% 57%Den Danske Bank 62% 1.4 8.5* 17% 7.3% 26%

* ex. sale of non-life incurance P/E=9.9%

Remarks: Be carecul - C/I-ratio reflects the composition of business units

Den Danske Bank

Future initiatives and thoughtsInvestors and bank analysts demand to Den Danske Bank...apart from producing shareholder valueu Clear and open-minded information in the annual and quarterly

reportu Segmentation and portfolio managementu Targets on Group and business unit levelu Optimal resource allocation

u RORCu RAROC

u Frequent informationu International approved accounting principlesu Capital structure

è We will work very hard to meet your expectations

Den Danske Bank