DBRS Confirms Danske Bank A/S at ‘A’, Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed the ratings of Danske Bank A/S (Danske or the Bank), including the ‘A’ Senior Unsecured Debt & Deposits rating and the R-1 (low) Short-Term Debt & Deposits rating. The trend on all ratings is Stable. The support assessment remains SA3 and as a result, the final senior debt rating is positioned in line with the ‘A’ Intrinsic Assessment (IA).

The ratings reflect the Bank’s strong position in Denmark and diversification across the wider Nordic area, as well as stable earnings generation ability, good cost control and reduction in impairment charges. The ratings also incorporate Danske’s improving risk profile, including progress in reducing the size of the Non-Core unit, solid capitalisation levels and an improving and diversified funding profile, despite some reliance on wholesale funding, particularly covered bonds.

Danske has a very strong domestic franchise and this is a key factor underpinning the ratings. The Bank’s leading market position in Denmark is complemented with meaningful market shares in Sweden, Norway and Finland as well as a strong presence in Northern Ireland. In early 2016 the Bank reorganised its business segments by establishing a new Wealth Management unit, which encompasses private banking, pension savings and asset management, and by reporting the Northern Irish segment separately. These complement the well-established segments of Personal Banking, Business Banking and Corporates & Institutions while the winding-up of the Bank’s Non-Core, consisting primarily of Irish and Baltic exposures, remains on track, with this now down to DKK 21.6 billion at end-1H16.

Danske has been able to maintain stable income before provisions and taxes (IBPT) in recent years as net interest income has remained largely resilient while the Bank has managed to grow the contribution of net fee income to revenues, despite the negative interest rate environment. This stable earnings generation ability has been further supported by reduced expenses and lower impairment charges and, as a result, in 2015 the Bank reported net profit of DKK 9.1 billion while net profit in 1H16 reached DKK 9.4 billion. The Bank continues to work on its efficiency and for 1H16 the reported cost-income ratio stood at 48.3%, down from 50.9% excluding goodwill impairments in 2015. Impairment charges continue to trend downwards with the Bank reporting net reversals of DKK 188 million in 1H16 and DBRS expects the low levels of provisioning to continue, given that Danske is dealing successfully with its problem loans and the economic environment remains relatively stable.

Danske’s asset quality indicators continue to improve with gross non-performing loans (NPLs, both non-defaulted and defaulted) reducing to DKK 50.3 billion at end-June 2016 from DKK 72.0 billion at end-June 2015. As calculated by the Bank, NPLs in its core segments accounted for 1.7% of total gross exposure at end-June 2016, down from 2.0% at end-2015 and 2.5% at end-2014, and DBRS expects the improvement in the Bank’s asset quality to continue. DBRS also notes that the Bank’s loan portfolio shows good diversification, although the historically more volatile sectors of commercial property, agriculture and shipping accounted for a combined 17% of the total net credit exposure at end-June 2016. Positively, most of the Non-core Irish commercial property has been sold while the sale of the personal banking portfolios in Lithuania and Latvia was completed in June 2016.

Danske’s funding profile is diversified and has been improving in recent years, however, the Bank has a significant reliance on wholesale funding, and in particular, towards mortgage covered bonds, which are mandatory for financing housing loans in Denmark. At end-June 2016, wholesale funding represented 60% of total funding (DBRS calculation), with covered bonds accounting for half of this amount. This is, however, mitigated by the fact that the Danish mortgage market has proved to be a reliable and liquid source of funding for Danske to date. Positively, customer deposits, which totalled DKK 952.3 billion at end-June 2016, have been relatively stable in the last 5 years and DBRS views them as providing a solid foundation to the funding profile. Liquidity remains well-managed with the Bank reporting a liquidity coverage ratio (LCR) of 136% at end-1H16.

DBRS views Danske’s capital position as solid. At end-1H16 the Bank reported a Common Equity Tier 1 (CET1) ratio, under Danish transitional rules, of 15.8%, down from 16.1% at end-2015. DBRS notes, however, that the decrease was due to the DKK 9.0 billion share buy-back programme that was initiated in February 2016 and that on a pro-forma basis for the share buy-back the CET1 ratio was 15.0% at end-2015. In July 2016, the Bank advised that due to increased regulatory uncertainty it had revised its CET1 target to a range of 14%-15% in the short to medium term. DBRS views the Bank as well-placed to meet the ongoing challenges of the evolving regulatory requirements, given Danske’s improved internal capital generation. The CRD IV fully-loaded leverage ratio stood at 4.0% at end-1H16.

RATING DRIVERS
A continuation of the positive asset quality trends whilst maintaining good core profitability could lead to positive rating pressure over the medium term.

Negative pressure could arise if there is a reversal in the Bank’s asset quality indicators or profitability metrics, as well as if the use of wholesale funding increases.

Notes:
All figures are in DKK unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2016). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2016), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016) and Critical Obligations Rating Criteria (February 2016). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company reports, SNL Financial and the Danish FSA. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Ross Abercromby
Rating Committee Chair: William Schwartz
Initial Rating Date: January 18, 2010
Most Recent Rating Update: September 29, 2015

DBRS Ratings Limited
20 Fenchurch Street
31st Floor
London
EC3M 3BY
United Kingdom
Registered in England and Wales: No. 7139960

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.