• Measure 1: Denmark considers that the completion of the capital increase does not constitute State aid as this was done in full accordance with the market economy investor principle and as a consequence the measure does not constitute State aid.

• Measure 3: Denmark argues that the sale of a minority shareholding in a Danish mortgage credit institution to the Danish Central Bank does not constitute State aid as the transfer did not involve State resources, as the Danish Central Bank is an independent institution and, in any case, did not constitute an advantage for the Bank, as the price was calculated according to a pre-defined methodology that applies to any shareholder.

Denmark submitted that Vestjysk Bank is a viable yet at this point in time vulnerable bank. In the opinion of Denmark, the Bank is coming to the end of the restructuring phase and is on the way to entering a phase of stabilization.

In addition, Denmark claims in its submission that the Bank has a solid basis for continuing core-earnings but, due to the low solvency buffer, the Bank is vulnerable to external macroeconomic factors, mainly factors that influence the agricultural sector due to the large exposure to this segment.

Denmark considers that the Bank has actively worked to reduce its commercial footprint by reducing its overall balance sheet and gross lending and focusing its business on its core region composed of parts of Jutland. In addition, the Bank has substantially reduced its number of branches and full time employees as well as reduced its operating costs.

In addition, the Bank has, since mid-2012, complied with a number of behavioural measures and corporate governance rules, that Denmark had proposed in the context of the draft restructuring plan referred to in recital 24, with the aim to limit the distortions of competition.

Hence, Denmark concludes that the steps already taken have been more than adequate to limit the distortion of competition produced by the State aid measure.

With reference to one of a number of liability management exercises completed since 2012 in which a price above the theoretical maximum price for the buyback of subordinated capital was paid, Denmark notes that the amount of such overprice to the benefit of the creditor (and not the Bank) amounted to 2 % of the principal corresponding to NOK 800 000 (about EUR 108 000). As a consequence the Bank paid an equivalent amount to Denmark thus offsetting any inadequate burden sharing this relatively small amount might have caused. The amount was paid in full at the beginning of 2014.

In accordance with the general principle of law tempus regit actum, which requires that a rule of law must be non-retroactive, and with the settled case law of the Union Courts, the compatibility of a State aid measure has to be assessed under the legal framework in force at the time of its implementation. Point 90 of the 2013 Banking Communication further specifies that notifications registered by the Commission prior to 1 August 2013 will be examined in the light of the criteria in force at the time of notification.

The measures were notified on 13 April 2012. Hence these measures should be assessed in the light of the new restructuring plan, having regard to the Restructuring Communication, the 2008 Banking Communication and the 2010 and 2011 Prolongation Communications.

In its reply to the Opening Decision Denmark submitted that the overpayment that was made was paid back by the Bank to the Danish State in the beginning of 2014, thus offsetting any inadequate burden sharing that that relatively small amount would have caused.

In view of the above, the Commission considers that the doubts raised in the Opening Decision on the compliance with burden sharing requirements are fully dispelled.

The Bank has limited its commercial footprint by further reducing its branch network by an additional three branches compared to what was submitted by Denmark in its reply to the Opening Decision, bringing the total reduction since the rescue aid to nine branches (the Bank had 24 branches in 2012, 18 branches in 2015 and 15 from the end of 2016 onwards, giving a total reduction since 2012 of 37,5 %). Such a reduction of the branch network, coupled with the characteristics of the Danish banking sector affects the Bank's capacity to generate new business and gather new deposits, thereby contributing to a limitation of the distortions of competition.

The Nykredit plan also shows a greater reduction in the Bank's staff numbers (a [30-40] % reduction by 2017 and a [35-45] % reduction by 2018) than what was projected at the time of the Opening Decision (a [20-30] % reduction by 2017). This increased reduction results from the Bank's efforts to further reduce costs and the efficiency improvements that result from the reduction of the branch network.

Vestjysk has not been able to expand its business since it received the rescue aid, given its bad performance. The size of the Bank's balance sheet has been shrinking in the last five years, with a 39,5 % reduction from DKK 32 865 million at the end of 2012 to DKK 19 895 million at the end of 2016. The same trend can be observed in the Bank's loan book: gross lending went down by about 36 % in the same period, gross lending to agriculture fell by about 26 % while gross lending to the construction and real estate sectors decreased by 48 % and 44 % respectively.

Risk weighted assets also shrank from DKK 25 600 million at the end of 2012 to DKK 16 081 million at the end of 2016 (– 37 %), while in the same period the Bank's workforce decreased from 621 to 459 FTEs (– 26 %).

All the figures shown in recitals 71 and 72 suggest that the Bank's footprint has already been reduced over the last five years, partially out of necessity. However, the aid amount received in 2012 was significant in relation to the RWA of the Bank (8,1 %), and as such specific measures to tackle competition distortions need to be envisaged. At the same time, should be recognised that the Bank will have reduced its staff by almost [30-40] % by the end of 2017 and had already cut branches by 37,5 % by the end of 2016.

In addition to the measures implemented prior to the adoption of this Decision, Denmark offered commitments (see recital 44) aimed at further limiting the distortions of competition during the restructuring period.

Firstly, the Bank's balance sheet size is capped for 2017 at its 2016 level, for 2018 at DKK 20 300 million and for 2019, if applicable, to DKK 21 000 million. Those caps explicitly limit the possibility of the Bank to gather new deposits and to grant new loans during the restructuring period. The capability of the Bank to gain market shares at the expense of its competitors is hence restricted in a way that ensures the limitation of distortions of competition.

In addition, the Bank will not grant new loans outside Denmark, and can only provide new lending outside the Jutland Region if the customer provides own financing of at least [35-45] % and the loan is collateralised. That commitment effectively inhibits the Bank's potential to expand its business outside its core region of activity where it also has its historical base, again protecting market players from a potential aggressive behaviour from the bank.

Finally, the Bank is subject to an acquisition ban. Acquisitions are a standard way for a market player to expand to new activities, products or business areas. Hence the prohibition of acquiring any stake in any undertaking clearly hinders the expansion potential of the Bank. The Bank is also subject to a ban on using the aid measures for advertising purposes, which also protects competitors.

As explained in recitals from 68 to 70, and summarized in Table 2, the Bank has made an important additional effort (compared to what was envisaged at the time of the Opening Decision) to further reduce its commercial footprint, being a small local player, and to increase its efficiency. In this way, the risk of distortions of competition will be limited sufficiently by the end of 2017. Nevertheless, through the commitments given by Denmark the Bank has also taken substantive additional measures to limit distortions of competition during the remainder of the restructuring period which ends at the latest at the end of 2019. For this reason, the Commission considers that the doubts in the Opening Decision regarding the distortion of competition have been sufficiently addressed.

In its Opening Decision, the Commission expressed doubts as to whether the draft restructuring plan submitted at that time provided sufficient grounds to ensure the viability of the Bank within the restructuring period. In particular, the Commission questioned some of the assumptions underlying the restructuring plan and considered there were still considerable uncertainties. Finally, the Commission questioned whether the Bank's capital position was sufficiently strong to endure additional impairments.

On 1 January 2017, the Bank had a total capital ratio of 13,1 %. However, due to the phasing-in of the capital conservation buffer (‘CCB’) requirement the Bank's total capital requirement has increased to 13,8 % resulting in a capital shortfall of about 0,7 % or DKK 116 million (approximately EUR 15,6 million). If no action were to be taken, the Bank would continue to have a capital shortfall (albeit smaller) on 1 January 2018 (namely 0,4 % of its total capital ratio or DKK 63 million). Following the share issuance and the refinancing of its subordinated capital instruments, the Bank will no longer have a capital shortfall. In particular, on 1 January 2018 the Bank expects to have a capital surplus of approximately DKK 667 million (approximately EUR 90 million) or a buffer of 4,3 % above its total capital ratio requirement. In addition, Denmark committed (see recital 44) that the Bank will maintain a specific amount of excess capital above the regulatory required amount.

The Bank also reviewed its strategy and will further reduce its operating costs (see also Table 1). In particular, the Bank has reduced its number of branches from 24 in 2012 to just 15 at the end of 2016. At the time of the Opening Decision, the Bank had only planned to reduce the number of branches to [18-22]. Over the sametime-period, the Bank has cut its workforce from 621 FTE to [460-490] FTE (– [20-30] %). By the end of 2017 this number will be further reduced to [374-425] FTE (– [30-40] %) and the objective is to reach [340-390] FTE by end 2018 (almost – [30-40] %). The Bank's restructuring plan at the time of the Opening Decision envisaged a staff level of [460-490] FTE at the end of 2017 (which only corresponds to a reduction of [20-30] % compared to the end of 2012). These significant additional cost-cutting measures are reflected in the Bank's cost-income ratio which has dropped from 55,3 % in 2012 to 50,3 % in 2016. This ratio is expected to decrease further to [45-55] % at the end of 2017 and even to [40-50] % by the end of 2018. At the time of the Opening Decision, the Bank still targeted a cost-income ratio of [50-60] % in 2017. Thus, it is clear that the Bank has made important additional cost-cutting efforts compared to those envisaged at the time of the Opening Decision. These extra efforts will contribute to the Bank's profitability and hence to its viability. Specific operating cost targets laid down in the commitments will help to ensure that the Bank implements the remaining cost reductions as envisaged to ensure its viability.

With respect to the reduction in loan loss provisions, the Commission is of the opinion that the Bank's forecasts depend on optimistic assumptions. The Commission notes positively that, following several DFSA inspections, the Bank has brought its credit risk policy in line with best practices of similar banks, as stated by the DFSA to the Commission (see recital 43).

Nevertheless, the reduction in loan losses that is expected will be highly dependent on macroeconomic conditions and especially on the performance of the agricultural sector. Given the size of the Bank's agricultural exposures and the large impact the loan loss provisions has had on the Bank's profitability in the past, the Commission has run a sensitivity analysis whereby the loan loss provisions are changed to more prudent levels. In that analysis, the loan loss provisions are set 20 % higher than the respective budgeted amounts for the years 2017 and 2018. Under the revised assumption, the Bank's return on equity would drop by [0-5] % and [0-5] % in 2017 and 2018 respectively but would remain at levels of profitability where the Bank should be able to source further capital from market sources if required. However, the Bank's comfortable capital buffer (see recital 80) would be sufficient to absorb additional loan losses or other downsides and to keep the Bank solvent. For this reason, the chances of the Bank needing new capital or State aid in the next few years seem very limited.

Even under a stressed scenario designed by the DFSA, the Bank would continue to have a sufficiently high capital buffer after the private investors' equity injection. The DFSA scenario assumes, among others, lower interest income, higher amortisations, and in total DKK [400-600] million of additional impairments compared to what was foreseen over the years 2018 and 2019. While the Bank would become loss-making in those two years, its solvency ratios would stay comfortably above regulatory requirements. In other words, the actual impairment rates could even be higher without creating a solvency problem for the Bank in the next few years. As a result, even in a stressed scenario, the Bank is unlikely to need new capital or to require new State aid to ensure its solvency.

On the basis of the above, the Commission considers that the Bank's projected RoE for 2017 would be sufficient to restore the Bank's viability. The Bank would hence meet the requirement laid down in point 15 of the Restructuring Communication that a restructuring should take no more than five years. However, given the Bank's vulnerability to macroeconomic shocks (in particular for the agricultural sector) and the fact that the Bank itself plans to restructure further, the Commission finds it appropriate and prudent to accept commitments by Denmark that run up to the end of 2018 (and that can be prolonged by one year if necessary).

On this basis, the Commission no longer has doubts concerning the adequacy of the Bank's long-term viability. In particular, following the capital increase, the Bank will have a comfortable buffer above the regulatory capital requirements and will be able to absorb additional impairments, should they arise, without breaching those requirements. In addition, the extra cost savings (reducing interest expense and operating costs) will contribute to an improvement in the Bank's profitability. Overall, as a result of all the actions foreseen in the restructuring plan measures, the Bank's profitability will increase sufficiently to allow the Bank to raise further capital on the market if the need arises. Finally, the commitments will ensure that the remaining cost-cutting measures are implemented, that adequate capital buffers are maintained, and that revenues will be increased if the Bank's profitability falls short of the [7-11] % RoE target. Therefore, the Commission considers that the Bank's most recent restructuring plan provides sufficient grounds to ensure the viability of the Bank and addresses the doubts expressed in the Opening Decision.