Finansiel Stabilitet – Annual Report 2019

Finansiel Stabilitet has published its 2019 annual report. The annual report is available at www.fs.dk

Result
Finansiel Stabilitet posted a surplus of DKK 1,068 million for 2019 Finansiel Stabilitet’s performance can be broken down into the three segments that Finansiel Stabilitet handles, i.e. the Resolution Fund, the Bank Package I-V activities and the Guarantee Fund. All three segments made positive contributions to the overall performance for 2019.

The most significant contribution was the Resolution Fund’s surplus of DKK 725 million, while the Bank Package I-V activities and the Guarantee Fund reported DKK 229 million and DKK 114 million in surplus, respectively.

The surplus in the Resolution Fund mainly consisted in contributions to the Fund by banks, mortgage credit institutions and certain investment companies in the amount of DKK 724 million.

The result of the Bank Package I-V activities reflect the result of the continuing resolution of the remaining activities. Reversal of impairment losses on loans, advances and receivables for the period amounted to DKK 128 million. In addition, the ruling of the European Commission in the FIH case resulted in the recognition of income of DKK 206 million in 2019.

The surplus of the Guarantee Fund primarily resulted from the positive results of FS Finans I-IV, in which the Guarantee Funds has financial interests relating to past guarantees and purchase price adjustment agreements.

Balance sheet and capital
The Group’s total assets at 31 December 2019 amounted to DKK 21.8 billion. Of this amount, the Bank Package I-V activities accounted for DKK 7.0 billion, the Guarantee Fund accounted for DKK 12.4 billion, the Resolution Fund accounted for DKK 3.3 billion, while a negative amount of approximately DKK 0.9 billion related to an intra-group balance.

Total equity stood at DKK 20.7 billion, of which DKK 12.4 billion was attributable to the Guarantee Fund, DKK 5.2 billion to the Bank Package I-V activities and DKK 3.1 billion to the Resolution Fund. Due to a legislative amendment concerning the amount of assets held in the Guarantee Fund’s Restructuring Department, the Guarantee Fund’s equity was, seen in isolation, reduced by DKK 1.0 billion.

Of the Guarantee Fund’s equity, DKK 8.8 billion was attributable to the Banking Department of the Guarantee Fund. The Banking Department thus continued to meet the target level, which was set at DKK 5.4 billion in 2019. Since special types of deposits, including pension funds, are not included in the calculation of the target level, the actual excess coverage is lower. The target level is estimated to be approximately DKK 7 billion if the special types of deposits are included.

The Resolution Fund remains in the build-up phase. The target level for 2019 was DKK 6.8 billion, and based on presently calculated covered deposits for the institutions that have an obligation to pay contributions it is expected to be DKK 7.1 billion in 2020. In recent years, Finansiel Stabilitet has observed an increase in covered deposits in Danish banks. So far, practice in Denmark has been not to recognise the increase in covered deposits in the individual years. As a result, relatively less funds have been collected as against the target level in Denmark when compared with many other EU member states.

In connection with the contribution collection for 2020, Finansiel Stabilitet has decided to apply an equalisation factor to calculate the Resolution Fund’s target level. The equalisation factor used is based on an estimated projection of the observed historical increase in covered deposits. Overall contributions collected in 2020 are expected to be about 30% larger than they were in 2019. The principal explanation for the increase is the use of an equalisation factor, but even without this the contributions would have increased by approximately 10%.

At 31 December 2019, total loans and guarantees were recognised in the amount of DKK 0.6 billion, and the portfolio of financial assets amounted to DKK 9.8 billion. The majority of the remaining loans and guarantees related to the segment Bank Package I-V activities, while a minor portion of loans related to FS Finans V A/S (formerly Andelskassen J.A.K. Slagelse) and FS Finans VI (formerly Københavns Andelskasse).

The investment strategies of both the Guarantee Fund and the Resolution Fund were more or less fully phased in during 2018 and 2019. The portfolio of related financial assets at 31 December 2019 amounted to almost DKK 9.6 billion. The new, more active, investment strategy was initially pursued by investing in short-term mortgage bonds. In 2019, falling interest rates caused portfolios under management to yield a return of DKK 37 million (equal to 0.39%). Compared with an alternative placement with Danmarks Nationalbank, the strategy improved the return relatively by approximately DKK 90 million.

Lawsuits
Finansiel Stabilitet is still party to a substantial number of lawsuits which have arisen in connection with the takeover of failing banks, including liability lawsuits instituted against the former managements, etc. of nine of the failing banks taken over. These lawsuits will contribute to assigning liability and determining what is applicable law in a very important area. Status of the lawsuits:

• In the lawsuit against the former management of Capinordic Bank, the Danish Supreme Court in January 2019 delivered its decision, which was in reality an affirmation of the High Court's judgment. Final damages were established at approximately DKK 141 million, including statutory interest accrued.
• In the liability lawsuit against the former management of Amagerbanken, the Eastern High Court delivered its decision in June 2019. The Eastern High Court reversed the district court’s decision to the extent that eight of the former members of management were to pay damages of approximately DKK 225.5 million plus statutory interest.
• In the lawsuit against the former management and auditors of Roskilde Bank, the Eastern High Court delivered its decision in November 2017. The decision was given in favour of all the defendants, and Finansiel Stabilitet was ordered to pay legal fees of approximately DKK 73 million. Finansiel Stabilitet appealed the decision with respect to the CEO and the Board of Directors. The external auditors had been granted permission to appeal the high court decision on legal costs separately. In April 2019, the Supreme Court delivered a decision in the appeal case regarding legal costs, awarding the auditors an additional DKK 11 million in legal costs.
• In October 2018, the Eastern High Court delivered a decision in the case against the former management and auditors of Eik Bank Danmark, ordering four members of management to pay damages plus statutory interest in the total amount of approximately DKK 43 million. Finansiel Stabilitet was ordered to pay legal costs in the amount of DKK 39 million. The four members of management found liable have appealed the decision to the Supreme Court, and Finansiel Stabilitet has subsequently appealed the decision in respect of all six members of management. The trial hearing of the case before the Supreme Court is scheduled to take place in May 2020.
• In November 2019, a decision was delivered in the case against the former management and auditors of Eik Bank Færøerne, by which four defendant management members were ordered to pay damages in the total amount of DKK 150 million plus statutory interest. The court found in favour of one management member, and Finansiel Stabilitet was ordered to pay DKK 8.9 million in legal costs. The four management members found liable have appealed the decision to the Eastern High Court. In connection with the decision, the court also decided on the issue of legal costs in relation to the discontinued lawsuit against the external auditors. Finansiel Stabilitet was ordered to pay DKK 12 million in legal costs. Finansiel Stabilitet has appealed the issue of legal costs.
• In November 2019, a decision was delivered in the lawsuit against the former management of Andelskassen J.A.K. Slagelse. One former management member was ordered to pay approximately DKK 1.2 million in damages, while another management member was ordered to pay DKK 200,000 in damages jointly and severally with the first-mentioned management member. Finansiel Stabilitet was ordered to pay a total amount of DKK 700,000 in legal costs to the public funds. One of the defendants who was found liable has appealed the case to the Eastern High Court.
• In January 2020, a decision was delivered by the Western High Court in the case against the former management and auditors of ebh bank. One former management member – the CEO – was ordered to pay a little more than DKK 2 million plus statutory interest. The court found in favour of the other management members, and Finansiel Stabilitet was ordered to pay legal fees of approximately DKK 121 million. Finansiel Stabilitet has appealed parts of the decision against the management member found liable with a claim for DKK 100 million.
• In February 2020, a decision was delivered by the Western High Court in the case against the former management and external auditors of Løkken Sparekasse. The decision was given in favour of the defendants, and Finansiel Stabilitet was ordered to pay approximately DKK 34 million. The deadline for appeal expires on 27 March 2020.
• With respect to Københavns Andelskase, lawsuits have been filed against members of the former management in relation to two onerous transactions. Trial hearings have not yet been scheduled.

Outlook for 2020
The outlook for 2020 is determined for each of the three segments of the Finansiel Stabilitet Group. For the Resolution Fund, a financial result of approx. DKK 900 million is expected, corresponding to the expected payments from the institutions that have an obligation to pay contributions to the Resolution Fund. The Bank Package I-V activities and the Guarantee Fund are expected to post small losses. However, any change in interest rates could have a material impact on financial performance in the Guarantee Fund and the Resolution Fund.

The outlook is generally subject to some uncertainty due to the continued substantial uncertainty about the 2020 results of the activities relating to the Bank Package I-V activities. Accordingly, the guidance provided above does not include any potential effect on operations of value adjustments of assets, should the resolution results prove either better or worse than the carrying amounts. Moreover, the outcome of contingent liabilities, including lawsuits and disputes, is subject to substantial uncertainty.

In addition, the outbreak of Covid-19 in Denmark could affect the company’s results. Finansiel Stabilitet monitors developments and not least the economic consequences.

For additional information, please contact:
Henrik Bjerre-Nielsen, CEO, on tel. +45 21 14 21 11, or alternatively via the press contact, on tel. +45 24 76 35 90, e-mail: mail@fs.dk.