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Presentation of the Nationalbank's Accounts

The Nationalbank's accounts with notes are shown on pp. 114-119.

The accounts reflect that the Nationalbank issues banknotes and coins, administers the foreign-exchange reserve and functions as banker to the banks and the central government. The Nationalbank's profit not allocated to the reserves shall be paid to the central government.

In 1997 the result from ordinary operations was kr. 4.797 million, and thus virtually unchanged from 1996.

With extraordinary expenditure of kr. 187 million and positive value adjustments, etc. of kr. 1,014 million the profit for the year amounted to kr. 5,624 million, or kr. 244 million less than in 1996.

Total net interest income was kr. 5,224 million, which is equivalent to the level in 1996.

The considerable augmentation of the foreign-exchange reserve, is reflected in an increase in interest income on foreign assets by kr. 819 million to kr. 4,888 million.

Interest on lending to and deposits from the banks gave net interest expenditure of kr. 1,195 million in 1997, against net interest expenditure of kr. 283 million in 1996. The rates of interest for deposits and lending, i.e. the rate of interest for certificates of deposit and repurchase agreements respectively, are identical. However, current-account deposits, accounting for only a small proportion of deposits, accrue interest at the discount rate, which is 1/4 per cent below the rate of interest for certificates of deposit. The average interest rate on certificates of deposit was slightly lower in 1997 than in 1996. In 1997 the banks' net position was positive and rising since the Nationalbank's foreign-exchange purchases have led to an improvement in the banks' liquidity.

The Nationalbank's interest expenditure on the central government's deposit fell by kr. 182 million to kr. 1,271 million. On average the central government's deposit was lower than in 1996. The rate of interest on the central government's deposit is the discount rate.

Interest and dividend on bonds and shares, etc. fell by kr. 80 million to kr. 2,628 million.

Total expenditure increased by kr. 23 million to kr. 427 million.

Administrative expenses amounted to kr. 328 million. Direct and indirect staff expenses increased by 3.6 per cent. Expenditure on purchases of equipment and machinery and on data processing increased, whereas expenditure on operation of properties remained unchanged. Expenditure on information concerning the new 200- and 500-krone notes amounted to approximately kr. 10 million.

Expenses related to the banknote production fell by kr. 10 million to kr. 78 billion, of which kr. 8 million is attributable to a change in the accrual of large prepaid and outstanding expenses and to the capitalization of stocks of raw materials.

Expenses incidental to The Royal Mint fell by kr. 3 million reflecting inter alia the discontinuation of production of coin blanks in 1996. Income decreased by kr. 9 million due to e.g. lower income from sales of metal. Net expenses incidental to The Royal Mint thus increased by kr. 6 million.

Extraordinary expenditure in 1997 amounted to kr. 187 million, of which the major part concerns the ship credit scheme.

As an element of the political shipyard agreement of 1986, at the government's request the Nationalbank acquired index-linked bonds issued by the Ship Credit Fund to finance newbuildings. The Nationalbank acquired the index-linked bonds at par. Irrespective of the market price of the underlying bonds these loans can be prematurely redeemed at par. In recent years a proportion of the bonds have been redeemed prematurely. In that case the Nationalbank must either deliver equivalent bonds to the Ship Credit Fund or undertake to cover the future payments on the bonds. Since in 1997 the market value of the bonds was higher than the bonds' nominal value these early redemptions entailed expenditure. The Nationalbank has supplied bonds for kr. 2,117 million, resulting in a capital loss of kr. 165 million. Moreover, an obligation has been incurred to cover future payments for a nominal amount of kr. 1,011 million. The cost will affect the accounts in the coming years.

A commemorative coin was issued on the occasion of Queen Margrethe's silver jubilee on January 14, 1997. Since claims for encashment of the commemorative coin are considered unlikely, on the issue of the commemorative coin an estimated profit of kr. 19 million is distributed at half to the Crown and half to the Ministry of Economic Affairs for charity purposes.

Value adjustments, etc. resulted in a gain of kr. 1,014 million.

Value adjustment of the Nationalbank's gold stock gave a loss of kr. 469 million due to a drop in the gold price which was only partly set off by a strengthening of the dollar, the currency used for gold price-fixing.

Value adjustment of foreign-exchange positions, which in addition to the foreign-exchange reserve comprise forward transactions and domestic foreign-exchange balances, provided a gain of kr. 1,617 million derived from an exchange-rate gain of kr. 2,114 million and a market-value loss of kr. 497 million. The exchange-rate gain is related in particular to higher exchange rates for the dollar and the pound sterling, while the value adjustment of stock-exchange prices is due to the falling price of securities with high nominal coupon rates as a consequence of the reduction of remaining maturity.

The value adjustment of bonds and shares, etc. gave a total loss of kr. 134 million. The capital gain on sale of shares was kr. 9 million. Mortgage-credit bonds generated a gain of kr. 172 million, whereas Danish government bonds gave a loss of kr. 277 million and other bonds a loss of kr. 38 million. The drop in bond yields led to bond-price increases, but a large proportion of the portfolio consists of securities at high nominal coupon rates of which the price has fallen as a consequence of the reduction of remaining maturity.

The capital losses on domestic and foreign bonds due to the reduction of remaining maturity, amounting to an estimated just over kr. 1 billion, are set off by high interest income which is included in the profit from ordinary operations. The distribution of income on ordinary operations and

Table 11 Currency distribution of the Nationalbank's foreignexchange positions

value adjustments was thus affected by the high nominal coupon rates of the bonds.

The Nationalbank's considerable purchases of foreign exchange in 1997 led to an increase in foreign-exchange positions by kr. 49 billion to kr. 137 billion, cf. Table 11. This has augmented the potential effect of exchange rates on the profit for the year. A general increase in the value of the krone of 1 per cent would entail an exchange-rate loss of kr. 1.4 billion at the end of 1997, corresponding to 3.3 per cent of the Nationalbank's equity capital, against kr. 1.0 billion at the end of 1996.

The overall framework for the composition of the foreign-exchange position is set out in an agreement on coordinated management of the exchange-rate risk on the foreign-exchange reserve and on the central government's foreign debt concluded with the Ministry of Finance and the Ministry of Economic Affairs. The foreign exchange purchased in 1997 was placed primarily as D-marks, the currency entailing the lowest exchange-rate risk.

A general increase in interest rates by 1 per cent would entail a market-value loss on foreign bonds of kr. 1.4 billion at the end of 1997. The greatest proportion of this loss would be attributable to bonds denominated in D-marks and dollars, cf. Table 12. The interest-rate sensitivity was by and large unchanged from 1996. The background is that additions to the foreign-exchange reserve were placed in assets with short maturities and therefore a small interest-rate risk. This investment strategy was chosen in

Table 12 The Nationalbank's sensitivity to changes in interest rates

order to avoid the sensitivity to changes in interest rates being affected by fluctuations in the size of the foreign-exchange reserve.

Holdings of Danish bonds and shares, etc. amounted to kr. 34 billion at the end of 1997. A general increase in interest rates of one percentage point would entail a market-value loss on domestic bonds of kr. 0.9 billion.

The overall interest-rate sensitivity of foreign and domestic bonds was thus kr. 2.4 billion, equivalent to 5.7 per cent of equity capital.

The Nationalbank is working on the year-2000 problem both externally under the auspices of the data-processing centre, BEC, used by the Nationalbank and internally as a review of each system.

The result for the year is a profit of kr. 5,624 million, against a profit of kr. 5,868 in 1996. In accordance with the guidelines for allocation of profits set out in 1995 an amount of kr. 1,014 million, equivalent to the gain on value adjustments, is allocated to the Value Adjustment Reserve and kr. 1,383 million, equivalent to 30 per cent of the profit before value adjustments, is allocated to the General Reserves. The remainder of kr. 3,227 million is payable to the central government.

Bodil Nyboe Andersen        Torben Nielsen        Jens Thomsen

At the meeting of the Board of Directors held on March 18, 1998 the Board of Governors reported on the activities of the Nationalbank in 1997. The report was noted.

The Nationalbank's Accounts for 1997 were submitted by the Board of Governors for adoption on the recommendation of the Committee of Directors. The Board of Directors and the Royal Bank Commissioner accepted the recommendation. Of the profit for the year of kr. 5,624 million an amount of kr. 3,227 million is thus payable to the central government.