Presentation of the Nationalbank's Accounts

The Nationalbank's accounts for 1998 show a profit of kr. 5,428 million. The profit from financial items was kr. 5,843 million, of which positive value adjustments, etc. were kr. 995 million. After allocations to the Value Adjustment Reserve and to the General Reserves the remainder of kr. 3,104 million is payable to the central government.

The Nationalbank's management of financial risks

The Nationalbank holds considerable financial assets and liabilities. The principal assets are foreign deposits and securities, domestic debt securities and loans to Danish banks. The principal liabilities are banknotes and coins in circulation, certificates of deposit and the deposits of the central government.

The financial assets and liabilities expose the Nationalbank to various financial risks which can affect its financial results. These are primarily the credit

Credit risk
The credit risk is the risk of loss due to default on commitments by counterparty.

To reduce the credit risk the Nationalbank seeks to hold assets only with counterparties with a high credit standing. Moreover, to a large extent collateral is required. The Nationalbank's credit risk is therefore very small.

The credit risk on the foreign assets, i.e. accounts with foreign banks, governments, etc. is managed on the basis of the ratings given by international rating agencies. It is important that the counterparty has a high rating. Moreover, most outstandings are subject to maximum limits.

Furthermore, for deposits with foreign banks repo agreements are used to a great extent. In repo agreements, the Nationalbank receives government securities as collateral. Should the foreign bank be subject to compulsory liquidation, the Nationalbank's deposit is covered by the collateral provided.

The Nationalbank's foreign bonds are almost exclusively issued by OECD states with a high rating, or are guaranteed by such states. The Nationalbank thus does not hold corporate bonds or bonds issued by governments with a low credit rating.

The credit risk on the domestic assets is limited by the collateral requirement, as well as a prudent investment policy. When Danish banks borrow from the Nationalbank they provide bonds as collateral. This applies to lending in conjunction with the Nationalbank's monetary-policy operations, the bank's intraday credits and the cash depots.

On placement of the domestic securities portfolio great weight is attached to the high credit standing of the issuers. The securities portfolio predominantly comprises government bonds, mortgage-credit bonds and Ship Credit Fund bonds, i.e. "gilt-edged" securities.

Interest-rate risk
The interest-rate risk is the risk of capital losses as a consequence of a change in interest rates. Since the Nationalbank holds significantly more fixed-rate assets than liabilities an increase in interest rates will impose a loss. The Nationalbank could avoid this loss by exclusively holding outstandings at floating rates. However, experience shows that the returns on fixed-rate debt securities are higher than on placements at floating rates. Over an extended period the Nationalbank will therefore obtain a higher return for assuming an interest-rate risk. Placement in bonds with a high credit rating also ensures the Nationalbank a lower, more widely spread credit risk than on placement with banks alone.

In 1998 the sensitivity to changes in interest rates of the Nationalbank's portfolio of domestic and foreign bonds was increased by kr. 1.0 billion to kr. 3.4 billion, cf. Table 10. At the close of 1998 the holdings of foreign bonds comprised five currencies (D-mark, French franc, pound sterling, dollar and yen) and the sensitivity to changes in interest rates of these bonds constituted approximately 2/3 of the overall interest-rate sensitivity.

After the increase in the sensitivity to changes in interest rates a general increase by 1 per cent in the domestic and international interest rates will entail a capital loss of kr. 3.4 billion on the Nationalbank's bond portfolio, equivalent to 8 per cent of the total net capital.

The Nationalbank increased its interest-rate risk in expectation of higher earnings in the long term. Placements in fixed-yield bonds were hereby increased, while deposits with banks were reduced.

Exchange-rate risk
The exchange-rate risk is the risk of exchange-rate losses due to fluctuations in exchange rates. The Nationalbank holds considerable foreign-exchange assets, first and foremost the foreign-exchange reserve. Like other central banks, the Nationalbank therefore cannot avoid an exchange-rate risk.

The Nationalbank's exchange-rate risk is subject to coordinated management with the exchange-rate risk on the central government's foreign-exchange denominated debt. This coordinated management entails that in principle the central-government debt denominated in dollars, yen, pounds sterling and Swiss francs is set off by an equivalent asset held by the Nationalbank. The net position, i.e. the difference between the Nationalbank's foreign-exchange assets and the central government's foreign-exchange liabilities, has in recent years been primarily in the core EMS currencies, mainly D-mark. In view of Denmark's fixed-exchange-rate policy these currencies were found to entail the lowest risk.

In addition, the objective is to ensure a moderate exchange-rate risk on both the central government's foreign-exchange denominated debt and the Nationalbank's foreign-exchange denominated assets. In recent years a large proportion of both the central government's debt and the Nationalbank's assets have been converted to D-mark. The Nationalbank's financial result is thus only influenced to a moderate extent by fluctuations in the krone against the dollar, yen, pound sterling and Swiss franc, cf. Table 11. At the close of 1998 depreciation of the dollar by e.g. 10 per cent would entaiI a loss of approximately kr. 200 million, or 0.5 per cent of the total net capital.

The individual foreign-exchange positions in Table 11 do not typically reflect the size of the Nationalbank's placements in debt securities and with banks, etc. in the relevant currency. The Nationalbank holds considerable portfolios in dollars, yen and pounds sterling. In order to limit the exchange-rate risk on those currencies, however, the Nationalbank on an ongoing basis sells dollars, yen and pounds sterling forward against euro (up to the 1998/99 turn of the year mainly sales against D-mark). For example, at the close of 1998 the Nationalbank held dollar-denominated assets for kr. 31 billion, but had sold dollars forward for kr. 29 billion. The total net dollar position was therefore only kr. 2 billion.

Presentation of the Nationalbank's accounts

The Nationalbank's accounts with notes are shown on p. 116ff. The accounts for 1998 have been prepared in accordance with the same accounting policies as in the previous year, with the exception of reclassification of individual items of the profit and loss account and the balance sheet, and the inclusion of value adjustments in the profit from financial items. The reclassification does not affect the profit for the year or the value of assets and liabilities.

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 1998 the profit from financial items was kr 5,843 million and thereby kr. 395 million lower than in 1997. Of this profit positive value adjustments, etc. were kr. 995 million After other income of kr. 68 million and expenses of kr. 482 million the profit for the year was kr. 5,428 million, or kr. 196 million less than in 1997.

Net income from interest
Net income from interest totalled kr. 4,848 million, which is kr. 376 million less than in 1997.

Income from interest on foreign assets rose by kr. 213 million to kr. 5,102 million, due to a larger average foreign-exchange reserve in 1998 than in 1997.

Interest on lending to and deposits from the banks gave net interest expenditure of kr. 721 million in 1998, against net interest expenditure of kr. 1,195 million in 1997. The rates of interest for deposits and lending, i.e. the rates 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 below the rate of interest for certificates of deposit. As an annual average the rate of interest on certificates of deposit was higher in 1998 than in 1997, but the banks' net position with the Nationalbank was smaller, cf. p. 46.

The Nationalbank's interest expenditure on the central government's deposit rose by kr. 775 million to kr. 2,045 million. Both the central government's deposit and the discount rate, which is the rate of interest on the central government's deposit, were on average higher than in 1997.

Interest on loans to other borrowers fell by kr. 77 million, mainly due to the Danish Export Finance Corporation's ongoing reduction of its borrowing.

Interest to other depositors, etc. rose by kr. 73 million to kr. 138 million, primarily as a consequence of higher interest expenditure on the Nationalbank's commitments to the Ship Credit Fund, cf. the 1997 Annual Report, p. 96. In 1998 index-linked bonds for kr. 623 million were redeemed prematurely.

Interest and dividend on bonds and shares, etc. fell by kr. 108 million to kr. 2,520 million.

Value adjustments, etc.
Value adjustments. etc. resulted in a gain of kr. 995 million.

Value adjustment of the Nationalbank's gold stock gave a loss of kr. 296 million, since both the gold price, which is fixed in dollars, and the dollar's exchange rate fell.

Value adjustment of foreign-exchange positions, which in addition to the foreign-exchange reserve comprise forward contracts and domestic foreign-exchange balances, provided a gain of kr. 844 million, derived from an exchange-rate loss of kr. 389 million and a market-value gain of kr. 1,233 million. The exchange-rate loss is related to the lower exchange rates for the dollar, D-mark and yen, while the market-value gain is attributable mainly to falling interest rates in Germany and the USA.

The value adjustment of bonds and shares, etc. gave a total gain of kr. 447 million. The gain on Danish bonds was kr. 149 million.

The Nationalbank's sale of shares in Finance for Danish Industry (FIH), cf. p. 97, realised a capital gain of kr. 252 million since in general the shares are booked at kr. 1 per shareholding in the Nationalbank's accounts.

The net proceeds to the Nationalbank from the reimbursement of capital contributions to the EMI/ECB were kr. 46 million.

The drop in yields on domestic and foreign bonds entails an increase in market values. However, part of the bond portfolio comprises securities at high nominal interest rates, for which market prices have fallen as a consequence of the reduction of remaining maturity. Capital losses as a consequence of a reduction of remaining maturity on domestic and foreign bonds are estimated at almost kr. 1.5 billion. These capital losses are set off by higher net income from interest. The distribution of earnings between net income from interest and value adjustments is thus affected by the high nominal interest rates of the bonds.

Other income from ordinary operations
Other income in 1998 amounted to kr. 68 million, of which the greatest part concerns the liquidation of the War Risk Cargo Insurance for Danish Ships. In connection with the liquidation the original guarantee capital and the total net capital were distributed among the guarantors. Kr. 55 million was disbursed to the Nationalbank.

The Nationalbank has furthermore received VAT reimbursements on IT services.

Expenses
Total expenses increased by kr. 56 million to kr. 482 million.

Administrative expenses amounted to kr. 376 million. Direct and indirect staff expenses rose by 5.1 per cent. Expenditure on purchases of machinery and equipment and on data processing increased, while expenditure on operation of properties remained almost unchanged. The expenditure on the presentation of the new 1,000-krone banknote was kr. 5 million.

Result for the year
The result for the year is a profit of kr. 5,428 million, against a profit of kr. 5,624 million in 1997. In accordance with the practice for allocation of profits the gain on value adjustments for the year of kr. 995 million is allocated to the Value Adjustment Fund, and kr. 1,330 million, equivalent to 30 per cent of the profit excluding value adjustments, is allocated to the General Reserves. The remainder of kr. 3,104 million is payable to the central government.

Copenhagen, end-February 1999.

At the meeting of the Board of Directors held on 18 March 1999 the Board of Governors reported on the activities of the Nationalbank in 1998. The report was noted.

The Nationalbank's Accounts for 1998 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. 5,428 million an amount of kr. 3,104 million is thus payable to the central government.