Vestjysk Bank's Half-Year Report 2017

The Danish Financial Supervisory Authority
Nasdaq Copenhagen A/S

10 August 2017

Vestjysk Bank's Half-Year Report 2017

H1 2017 Highlights

Capital plan
The most important issue in the Bank's action plan has been to strengthen its capital resources. On 12 June 2017, the Bank announced that a group of long-term investors had made a voluntary offer to buy all shares in Vestjysk Bank A/S. The Ministry of Finance accepted the offer on behalf of the Danish State on 18 July 2017. The agreement to buy the Danish State's shareholding interest in the Bank was part of an overall solution ensuring a future for Vestjysk Bank as a strong regional bank. The Bank was challenged by low capitalisation, but the contemplated solution will strengthen its total capital considerably.

The key elements of the overall plan were:

• The investor group has submitted a voluntary offer to the shareholders of Vestjysk Bank and will buy shares from those of Vestjysk Bank's shareholders who accept the voluntary offer, including the stake held by the Danish State.
• The investor group will effect a share issue raising approximately DKK 745 million in fresh equity to Vestjysk Bank and ensuring that the shareholders who decline the investor group's offer will be able to participate in the overall solution on an equal footing with the investor group.
• The plan will also enable Vestjysk Bank to issue new subordinated debt in the form of additional tier 1 capital for approximately DKK 150 million and tier 2 capital for between DKK 175 million and DKK 225 million.
• Redemption of DKK 666 million of existing subordinated capital, including approximately DKK 287.6 million in state-funded capital, which according to the loan terms are redeemable at price 110, equal to approximately DKK 316 million.

The overall solution came about after Vestjysk Bank requested Nykredit to lead the efforts to secure a long-term solution to the Bank's capital situation. Nykredit has subsequently arranged for the overall solution and secured the backing of long-term Danish investors.

Interim report - first half year of 2017
Vestjysk Bank realised a profit after tax of DKK 108 million in the first half of 2017. The Bank's core operations are still sound, and a profit before impairment charges of DKK 257 million for H1 2017 is considered very satisfactory. Impairment losses relating to the Bank's agricultural customers are now at a lower level than they were for the corresponding period of 2016. This is the main reason the Bank is reporting profit after tax for the H1 2017 period in line with the guidance provided at the beginning of the year, making for a satisfactory performance under the circumstances.

Summary of Vestjysk Bank's results in H1 2017:

• Profit after tax of DKK 108 million (H1 2016: DKK 10 million).
• Core income of DKK 512 million (H1 2016: DKK 477 million), including value adjustments of DKK 35 million (H1 2016: DKK 23 million).
• Cost ratio of 49.9 per cent (H1 2016: 52.4 per cent), corresponding to a decrease of 2.5 percentage points.
• Core earnings of DKK 257 million before impairment (H1 2016: DKK 227 million).
• Impairment of loans and receivables, etc. of DKK 142 million (H1 2016: DKK 216 million). Impairment charges on agriculture accounted for the majority of the Bank's impairment charges.
• The minimum requirements for continued banking operations are 8.0 per cent (total capital ratio) and 4.5 per cent (common equity tier 1 capital ratio), respectively, of weighted risk exposures. At 30 June 2017, the Bank's surplus relative to these requirements was 5.9 percentage points, or DKK 924 million, and 5.2 percentage points, or DKK 811 million, respectively.
• The total capital ratio stood at 13.9 per cent and the individual solvency need at 12.8 per cent, corresponding to a surplus of 1.1 percentage points or DKK 180 million at 30 June 2017, which equals the gap to the point that will trigger a requirement for the Bank to initiate its recovery plan.
• Common equity tier 1 capital ratio of 9.7 at 30 June 2017, compared with a requirement of 9.8. That means a shortfall of 0.1 of a percentage point, or DKK 16 million (DKK 116 million at 1 January 2017). As a consequence of the approval by the Danish State and the EU on 18 July of the voluntary offer published on 19 June 2017, the Bank no longer has a capital shortfall effective from 19 July 2017.
• At 30 June 2017 the Bank's LCR was 240 per cent (343 per cent at 30 June 2016).

The European Commission
In April 2012, the Commission gave temporary approval of state aid to Vestjysk Bank. Further to that approval, the Commission began an investigation in December 2015 of the state aid provided. See company announcements of 25 April 2012 and of 4 December 2015 for more information.

As announced in a company announcement of 18 July 2017, the Commission has approved the state aid subject to certain conditions, which include the implementation of the overall solution announced by the Bank in a company announcement of 12 June 2017 and the Bank complying with certain conditions:

• The Bank must have a capital base corresponding to the higher of (i) 2% of the total risk exposure and (ii) DKK 325 million in addition to the solvency requirement and the combined capital buffer requirement under applicable law.
• The Bank must maintain an LCR of at least 100%, surplus liquidity coverage of at least 50% and a funding ratio of maximum 1; all measured in compliance with applicable rules.
• The Bank's 2017 balance sheet cannot be higher than for 2016 and cannot exceed DKK 20,300 million in 2018 and DKK 21,000 million in 2019 (if applicable).
• The Bank must re-balance its lending with specific caps to lending in respect of real estate (25% of total lending) and agriculture, hunting, forestry and fishery (a total of 20% of all lending).
• The Bank cannot provide new lending outside the region of Jutland, unless the customer self-finances a specific minimum part at a level to be fixed in the interval between 35-45% and the loan is collateralised. The Bank shall not provide new lending outside Denmark.
• The Bank cannot assume exposure with new customers constituting on its own more than 10% of the Bank's total capital.
• The Bank will, with certain limited exceptions, be subject to an acquisition ban and restrictions on advertising.
• The Bank must restructure its risk management and in relation to pricing comply with certain requirements for average gross income and return on equity pre-tax (at a fixed level in the interval between 8-12% for business customers) for new loans in 2018 and for all customer relationships in 2019 (if applicable).
• The Bank will be subject to certain restrictions in relation to the size of the Bank's cost base with the effect that ongoing operating costs cannot exceed certain fixed levels in the intervals between DKK 435-475 million in 2017, DKK 420-460 million in 2018 and DKK 405-445 million in 2019 (if applicable).
• The Bank must redeem its state hybrids within 6 months following the European Commission's decision.

The restructuring period ends on 31 December 2019. If the Bank generates a return on equity after tax in 2018 in the 7-11 per cent interval, the restructuring period will end on 31 December 2018. The European Commission will regularly monitor the terms and the development of the restructuring plan through an independent monitoring trustee to be approved by the Commission.

The Bank is pleased that a decision has been made in the matter and finds the terms of the decision to be in line with the Bank's present action plan. As a result, the decision, including the terms, does not give rise to revising the Bank's strategy or profit guidance for 2017.

Outlook for 2017 maintained
Given an unchanged economic climate, the Bank's total business volume is expected to have the capacity to generate core earnings before impairment at around DKK 400-450 million. Lower impairment losses are expected. Assuming an unchanged economic climate, Management expects that impairment losses can be absorbed by the Bank's core earnings, resulting in a significant improvement of its consolidation in 2017 compared to last year.

Please address any enquiries regarding the present announcement to Jan Ulsø Madsen, CEO, at tel. +45 96 63 21 04.

Vestjysk Bank A/S

Vagn Thorsager                               Jan Ulsø Madsen
Chairman                                        CEO

Vestjysk Bank A/S
Torvet 4-5
DK-7620 Lemvig
Denmark
Phone +45 96 63 20 00

CVR no. 34631328
www.vestjyskbank.dk

Vedhæftede filer:

Company announcement - Vestjysk Bank Half-Year Report 2017.pdf

Vestjysk Bank Half-Year Report 2017.pdf