Danske Bank A/S
Key Rating Drivers
Leading Danish Bank: Danske Bank A/S's ratings reflect its strong universal banking franchise in Denmark and, to a growing extent, across the Nordic region, providing stable revenue generation across a wide range of products. The ratings also consider Danske's low risk appetite, stable funding and solid capital buffers built up in the expectation of possible fines related to anti-money-laundering (AML) control deficiencies and operational risk.
Potential AML Fine: At end-April 2022 Danske, began final discussions with the US and Danish authorities regarding the past AML control deficiencies in its Estonian branch, which is likely to result in a fine for the bank. Fitch Ratings expects Danske to maintain at least a EUR3 billion capital surplus until the settlement of the AML issue, which we view as a sufficient loss-absorption capacity to cushion a potentially large fine from the Danish and US authorities.
Solid Capitalisation: Risk-weighted capital ratios compare well with those of international peers. The bank's management has built buffers into its stated target for the common equity Tier 1 (CET1) ratio of at least 16%. In 4Q20, the US authorities cleared the bank of sanctions breaches relating to Estonia. In our opinion, this reduces the risk of a fine of a size that would erode Danske's capital ratios to a level no longer commensurate with its 'a' Viability Rating.
Sound Revenue Generation: Danske's operating revenue has been broadly resilient, despite the cyclical challenges of margin pressure in the highly competitive Nordic markets and the economic downturn. Higher funding costs, partly due to sustained issuance of senior non- preferred instruments, and high expenses related to investments in AML controls, has reduced the bank's cost-efficiency and profitability to levels below those of peers. We expect lower operating profit in 2022 due to normalised credit losses, lower asset-management fees and elevated costs. The net interest income uplift from rate increases will be gradual.
Stable Asset Quality: The bank's impaired loans ratio is weaker than at Nordic peers' but it has been stable since 2018 at about 2%, which is in line with similarly rated international peers. We expect the impaired loan ratio to modestly increase by end-2023 due to the economic slowdown. Danske's direct exposure to Russia, Ukraine and the Baltics is negligible.
Stable Diversified Funding: Danske is reliant on wholesale funding, like most Nordic banks. Its well-diversified funding base has proven resilient to the negative news from the AML investigations and pandemic, enabling the bank to execute its funding plan. The bank's refinancing risk is low and well-managed and the bank maintains ample liquidity surplus.
Rating Sensitivities
Stable Outlook: The bank has sufficient rating headroom to withstand a downward revision of our assessment of asset quality and profitability by one notch that could be triggered by severe delays to the economic recovery. A substantial and durable CET1 ratio erosion below 14% would lead to a downgrade. Such an erosion could be driven by an AML fine considerably larger than the bank's current loss-absorption capacity.
Weakened Capital Surplus: We could revise the Outlook to Negative if we believe the bank's capacity to absorb AML fines is insufficient. This could be triggered if we expect Danske's CET1 ratio surplus over its requirement to decrease materially below 250bp.
Strengthened Financial Profile: An upgrade of Danske would require the completion of AML investigations and clarification of potential fines; an expected CET1 ratio of at least 15% net of AML settlements; a sustainable reduction in impaired loans ratio below 2%; and a successful implementation of the bank's transformation plan. This would have to be demonstrated by a durable recovery in the operating profit/risk-weighted assets (RWAs) ratio to at least 2.5%.
Banks
Denmark
Ratings
Foreign Currency
Long-Term IDR | A |
Short-Term IDR | F1 |
Derivative Counterparty Rating | A+(dcr) |
Viability Rating | a |
Support Rating | 5 |
Support Rating Floor | NF |
Sovereign Risk | |
Long-Term Foreign- and Local- | AAA |
Currency IDRs | |
Country Ceiling | AAA |
Outlooks | |
Long-TermForeign-Currency | Stable |
IDR | |
Sovereign Long-Term Foreign- | Stable |
and Local-Currency IDRs |
Applicable Criteria
Bank Rating Criteria (November 2021)
Related Research
Large European Banks Quarterly Credit Tracker (June 2022)
Global Economic Outlook (June 2022)
Potential Material AML Fine for Danske Is Rating Neutral (April 2022)
Fitch Affirms Denmark at 'AAA'; Outlook
Stable (February 2022)
Analysts
Michal Bryks, FCCA +48 22 103 3024 michal.bryks@fitchratings.com
Christian Scarafia
+44 20 3530 1012 christian.scarafia@fitchratings.com
Rating Report │ 4 July 2022 | fitchratings.com | 1 |
Banks
Denmark
Debt Rating Classes
Rating Level | Rating |
Deposits | A+/F1 |
Senior preferred debt | A+/F1 |
Senior non-preferred debt | A |
Tier 2 subordinated debt | BBB+ |
Additional and legacy Tier 1 notes | BBB- |
Source: Fitch Ratings | |
Danske's long-term senior preferred debt and deposit ratings and Derivative Counterparty Rating (DCR) of 'A+(dcr)' are one notch above the bank's Long-Term IDR. This reflects the protection that could accrue to deposits and senior preferred debt from the bank's more junior bank resolution debt and equity buffers. At end-March 2022, this buffer was about 20% of RWAs, adjusted for Realkredit, which is excluded from Danske's resolution strategy.
We expect Danske's resolution debt buffer to remain comfortably above 10% of RWAs in the long term. This also drives the equalisation of Danske's long-term senior non-preferred debt with the bank's Long-Term IDR.
Danske's short-term senior preferred debt and deposit ratings are mapped to their respective long-term ratings and also reflect our assessment of the bank's funding and liquidity at 'a+'.
Danske's Tier 2 debt is rated two notches below its VR to reflect the poor recovery prospects of this type of debt. Additional and legacy Tier 1 securities are rated four notches below Danske's Viability Rating to reflect the poor recovery prospects of these securities (two notches) as well as the high risk of non-performance (an additional two notches). Our assessment is based on the bank operating with a CET1 ratio comfortably above maximum distributable amount thresholds and our expectation that this will continue.
Danske Bank A/S | ||
Rating Report │ 4 July 2022 | fitchratings.com | 2 |
Banks
Denmark
Ratings Navigator
Danske Bank A/S
ESG Relevance:
Banks
Ratings Navigator
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aaa | aaa | AAA | AAA | Stable | |||||||||||||||||||||||||
aa+ | aa+ | AA+ | AA+ | Stable | |||||||||||||||||||||||||
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a+ | a+ | A+ | A+ | Stable | |||||||||||||||||||||||||
a | a | A | A | Stable | |||||||||||||||||||||||||
a- | a- | A- | A- | Stable | |||||||||||||||||||||||||
bbb+ | bbb+ | BBB+ | BBB+ | Stable | |||||||||||||||||||||||||
bbb | bbb | BBB | BBB | Stable | |||||||||||||||||||||||||
bbb- | bbb- | BBB- | BBB- | Stable | |||||||||||||||||||||||||
bb+ | bb+ | BB+ | BB+ | Stable | |||||||||||||||||||||||||
bb | bb | BB | BB | Stable | |||||||||||||||||||||||||
bb- | bb- | BB- | BB- | Stable | |||||||||||||||||||||||||
b+ | b+ | B+ | B+ | Stable | |||||||||||||||||||||||||
b | b | B | B | Stable | |||||||||||||||||||||||||
b- | b- | B- | B- | Stable | |||||||||||||||||||||||||
ccc+ | ccc+ | CCC+ | CCC+ | Stable | |||||||||||||||||||||||||
ccc | ccc | CCC | CCC | Stable | |||||||||||||||||||||||||
ccc- | ccc- | CCC- | CCC- | Stable | |||||||||||||||||||||||||
cc | cc | CC | CC | Stable | |||||||||||||||||||||||||
c | c | C | C | Stable | |||||||||||||||||||||||||
f | f | NF | D or RD | Stable | |||||||||||||||||||||||||
Significant Changes
Operating Environment Resilient to the Economic Slowdown
Danske's operations are mainly concentrated in Denmark, but it has also a diversified presence across the remaining three largest Nordic countries. The economic environments and sovereign credit profiles are also strong and structural weaknesses are very limited, which presents very good opportunities for banks to be consistently profitable. Strong levels of employment, savings buffers accumulated through the pandemic, and sufficient fiscal space by Nordic sovereigns mitigates the risk of a sharp economic downturn.
Household debt in the Nordic region is high in an international context, due to high house ownership financed by mortgage loans. The high inflation, rise in long-term interest rates and the projected monetary tightening (started in Norway in late 2021 and in Sweden in April 2022) will dampen real spending power, but should be manageable for Nordic households, which have accumulated sizeable savings.
We expect a moderate rise in bankruptcies in the region largely coming from financially weaker SMEs in the sectors worst-hit by the pandemic, as well as vulnerable to higher commodity and energy prices and the interest rate hike cycle. This should also increase appetite for bank credit, which has been dampened during the pandemic by government liquidity measures and loan schemes. Nordic banks have sufficient liquidity to meet higher corporate loan demand.
Danske, like its Nordic peers, is materially exposed to the real estate market through mortgage loans and lending to property-management companies. We expect a moderate fall in residential property prices from 2H22, which should be viewed as a healthy cool-off after a pandemic- driven surge in prices in 2020-2021 (this was less strong in Finland). This correction should still result in home prices higher than pre-pandemic levels.
We expect the Nordic property management companies to perform well. A large share of this segment is concentrated in residential real estate, which should remain resilient to the economic slowdown. Office and retail spaces remain the most vulnerable segments due to heightened risk of prices falling, but most lending is at low loan/value ratios (LTVs). Refinancing risk at commercial real estate companies is manageable, despite notable widening of funding spreads. Nordic banks are able to temporarily replace short-term borrowing needs.
Bar Chart Legend
Vertical bars - VR range of Rating Factor Bar Colors - Influence on final VR
Higher influence Moderate influence Lower influence
Bar Arrows - Rating Factor Outlook
| Positive | | Negative |
| Evolving | | Stable |
Danske Bank A/S | ||
Rating Report │ 4 July 2022 | fitchratings.com | 3 |
Brief Company Summary
Leading Domestic Universal Bank
Danske is Denmark's largest universal bank, with a growing presence in the remaining three largest Nordic countries and a small franchise in Northern Ireland. Danske's franchise has been resilient to negative AML news, despite some customer outflows.
Domestic mortgage financing is mainly carried out through Danske's largest subsidiary, Realkredit Danmark A/S (A/Stable/a), which represents about 40% of group loans. Danske also provides investment banking and capital markets, asset management, private banking, real- estate brokerage, and leasing services. It has a significant Nordic fixed income and currency business, in particular in interest-rate swaps, cash management and trade finance. Danske also owns Denmark's second-largest life insurer/pension company.
In October 2021, Danske lowered its 2023 ROE target to 8.5%-9% from 9%-10%, which remains ambitious, as it depends on a sizeable number of structural income and cost initiatives. Reaching the ROE target of its 2020-2023 plan was hamstrung by higher compliance and anti- money-laundering(AML)-remediation expenses, subdued loan growth, competition, margin compression and inflated equity (due to additional AML-related Pillar 2 buffer). Danske maintained its CET1 ratio target above 16%, net of a potential AML settlement.
Diversified Income Streams
Danske's revenue has been broadly stable over time, with the business model focused on traditional, commercial banking, and capturing a larger share of its customers' spending by also offering wealth and life insurance products. The Danish operations generate about a third of revenue, followed by the Nordic personal and business customers and large corporates and institutions. Income for Nordic personal and business customers was particularly resilient during the pandemic due to solid contribution from Sweden and Norway, in line with the bank's strategy to expand into mid-corporate and retail segments across the other Nordic countries.
Conservative Risk Appetite
Danske's underwriting standards focus on cash-flow generation and client selection. The bank has been proactively capturing emerging risks through a more holistic risk management framework, in particular making use of portfolio analysis, stress tests and concentration limits on selected industries. We believe the bank's conservative risk management framework over time will strengthen loan portfolio resilience to a stress scenario. Customer lending is about half of total assets. The rest consists of debt securities (mainly held for liquidity purposes), insurance assets and well-collateralised repo lending and derivatives.
Danske's credit exposure is dominated by the safe retail segment (37% share of credit exposure at end-March 2022) of which about 90% are mortgage loans. Retail lending outside Denmark is mainly via partnerships with labour organisations, targeting mostly well-educated professionals with salaries above the market average rates, which translates into low credit losses.
Commercial property lending is material (12% of credit exposure), but only about a third is in the more vulnerable office and retail segment, for which the bank tightened its underwriting standards in 2020. Office and retail space exposure is concentrated in the largest Nordic cities and so far has performed well.
Danske has a limited exposure to risky sectors, such as agriculture, shipping, or oil and gas - which materially shrank in 2020. The rest of the corporate loan portfolio is well diversified by industry, and Fitch views obligor concentration as satisfactory. Danske also has good and improving geographical loan diversification.
We expect small retail loan growth due to higher rates and lower property prices, but we expect the demand in the non-retail segment, particularly among SMEs, to pick up. Danske's recent loan growth was driven by expansion in the Nordic countries (mainly in low-risk retail and business lending in Sweden and Norway), while the domestic portfolio growth was negatively affected by reputational issues and high competition.
Banks
Denmark
Market Shares
End-March 2022
(%) | Loans | Deposits | |||
35 | |||||
30
25
20
15
10
5
0
Denmark Finland Sweden Norway Source: Fitch Ratings, Danske
Results Through-The-Cycle
Operating profit/RWAs (RHS)
CET1 ratio (LHS)
(%) | Impaired loans ratio (RHS) | (%) | |||||||
20 | 5 | ||||||||
15 | 4 | ||||||||
10 | 3 | ||||||||
2 | |||||||||
5 | 1 | ||||||||
0 | FY15 | FY20 | FY21 | 0 | |||||
FY13 | FY14 | FY16 | FY17 | FY18 | FY19 | 3M22 | |||
Source: Fitch Ratings, Danske |
Loans by Segments (%)
End-March 2022
Business customers | 35 |
- Denmark & Nordic | |
Personal customers
- Denmark27
Personal customers
- Nordic19
Large corporates &
institutions16
Northern Ireland | 3 |
Source: Fitch Ratings, Danske
Risky Exposures (%)
End-March 2022
Agriculture2.4
Oil-related1.3
Retailing 1.2
Transportation | 0.6 |
Hotels, restaurants | 0.6 |
and leisure | |
Source: Fitch Ratings, Danske
Danske Bank A/S | ||
Rating Report │ 4 July 2022 | fitchratings.com | 4 |
Banks
Denmark
Summary Financials and Key Ratios
31 Mar 22 | 31 Dec 21 | 31 Dec 20 | 31 Dec 19 | |||
3 months - 1st | 3 months - 1st | |||||
quarter | quarter | Year end | Year end | Year end | ||
(USDm) | (DKKm) | (DKKm) | (DKKm) | (DKKm) | ||
Audited - | Audited - | Audited - | ||||
Unaudited | Unaudited | unqualified | unqualified | unqualified | ||
Summary income statement | ||||||
Net interest and dividend income | 871 | 5,835 | 26,774 | 28,118 | 27,892 | |
Net fees and commissions | 461 | 3,092 | 12,117 | 10,786 | 10,469 | |
Other operating income | 334 | 2,240 | 8,463 | 7,466 | 7,875 | |
Total operating income | 1,667 | 11,167 | 47,354 | 46,370 | 46,236 | |
Operating costs | 1,141 | 7,645 | 30,822 | 32,821 | 30,960 | |
Pre-impairment operating profit | 526 | 3,522 | 16,532 | 13,549 | 15,276 | |
Loan and other impairment charges | 35 | 236 | 141 | 7,090 | 1,730 | |
Operating profit | 490 | 3,286 | 16,391 | 6,459 | 13,546 | |
Other non-operating items (net) | 63 | 421 | 180 | -155 | 276 | |
Tax | 129 | 862 | 3,651 | 1,715 | -1,250 | |
Net income | 425 | 2,845 | 12,920 | 4,589 | 15,072 | |
Other comprehensive income | -37 | -245 | 326 | -230 | 639 | |
Fitch comprehensive income | 388 | 2,600 | 13,246 | 4,359 | 15,711 | |
Summary balance sheet | ||||||
Assets | ||||||
Gross loans | 271,582 | 1,819,656 | 1,856,064 | 1,860,621 | 1,846,233 | |
- Of which impaired | 5,494 | 36,808 | 43,071 | 45,523 | 38,382 | |
Loan loss allowances | 3,080 | 20,637 | 20,381 | 20,599 | 19,248 | |
Net loans | 268,502 | 1,799,019 | 1,835,683 | 1,840,022 | 1,826,985 | |
Interbank | 11,320 | 75,843 | 33,422 | 31,453 | 82,040 | |
Derivatives | 48,919 | 327,767 | 260,224 | 379,566 | 293,980 | |
Other securities and earning assets | 226,941 | 1,520,553 | 1,434,026 | 1,489,002 | 1,410,811 | |
Total earning assets | 555,682 | 3,723,182 | 3,563,355 | 3,740,043 | 3,613,816 | |
Cash and due from banks | 38,769 | 259,759 | 293,386 | 320,702 | 99,035 | |
Other assets | 10,449 | 70,013 | 79,093 | 48,486 | 48,199 | |
Total assets | 604,900 | 4,052,954 | 3,935,834 | 4,109,231 | 3,761,050 | |
Liabilities | ||||||
Customer deposits | 164,431 | 1,101,721 | 1,169,829 | 1,195,319 | 964,533 | |
Interbank and other short-term funding | 63,606 | 426,174 | 320,913 | 372,010 | 494,769 | |
Other long-term funding | 162,305 | 1,087,477 | 1,125,248 | 1,136,861 | 1,211,058 | |
Trading liabilities and derivatives | 71,193 | 477,007 | 374,959 | 499,335 | 299,695 | |
Total funding and derivatives | 461,535 | 3,092,379 | 2,990,949 | 3,203,525 | 2,970,055 | |
Other liabilities | 116,039 | 777,484 | 753,427 | 727,948 | 610,473 | |
Preference shares and hybrid capital | 1,689 | 11,315 | 20,251 | 17,587 | 24,251 | |
Total equity | 25,637 | 171,776 | 171,207 | 160,171 | 156,271 | |
Total liabilities and equity | 604,900 | 4,052,954 | 3,935,834 | 4,109,231 | 3,761,050 | |
Exchange rate | USD1 = DKK6.7002 | USD1 = DKK6.5749 | USD1 = DKK6.1138 | USD1 = DKK6.6759 | ||
Source: Fitch Ratings, Fitch Solutions, Danske
Danske Bank A/S | ||
Rating Report │ 4 July 2022 | fitchratings.com | 5 |
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Danske Bank A/S published this content on 11 July 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 11 July 2022 12:43:08 UTC.