DBRS Confirms Danske Bank A/S at A, Trend Revised to Positive

DBRS Ratings Limited (DBRS) has today confirmed the ratings of Danske Bank A/S (Danske or the Bank), at A for the Long-Term Issuer Rating, and Long-Term Debt and Deposit Rating, and R-1 (low) for the Short-Term Issuer Rating and Short-Term Debt and Deposits rating. The Intrinsic Assessment (IA) for the Bank is A, resulting in the Bank’s final ratings being positioned in line with its IA, while the trend has been revised from Stable to Positive. Please see the table at the end of the press release for full list of ratings.

The change in the trend to Positive on the long-term ratings reflects Danske’s consistent progress over a number of years in improving fundamentals, with enhanced profitability, improving asset quality reflecting the continuous winding-up of the Non-Core unit as well as good macroeconomic conditions, a well managed funding profile and strong capital levels.

In confirming the ratings, DBRS recognises Danske’s very strong domestic franchise, and this remains a key factor underpinning the ratings. The 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. Positively, the winding-up of the Bank’s Non-Core, consisting primarily of Irish and Baltic exposures, remains on track.

DBRS views Danske’s capacity to generate earnings as strong and resilient. Despite the pressure from the negative interest rate environment, Danske’s net interest income has remained largely resilient while the Bank has managed to grow the contribution of net fee income to its revenues in recent years. In 2016, excluding one-off items in each year, Danske’s income before provisions and taxes (IBPT) was DKK 23.8 billion up 8.7% from 2015 in DBRS estimates, whilst this trend continued in 1H17. One-off items in 2016 mainly reflected non-operating items including the divestment of properties (DKK 1.1 billion), while in 2015 it mainly reflected large impairments on goodwill (DKK 4.6 billion). Also, the earnings generation ability has been further supported by strong level of efficiencies with a cost-to-income ratio now below 50% (1H17: 47.1%; 2016: 47.2%; 2015: 50.9%). Impairment charges continued to trend downwards with the Bank reporting net reversals of DKK 474 million in 1H17 compared to reversals of DKK 168 million in 2016. As a result the Bank reported net profit of DKK 19.9 billion in 2016 while net profit in 1H17 reached DKK 10.3 billion, with the pressure on margins offset by increased lending volumes and an overall absence of impairments. DBRS expects the low levels of provisioning to continue, given that Danske is dealing successfully with its problem loans and the economic environment remains stable.

Danske’s asset quality indicators continue to improve. At end-June 2017, the Bank’s largest exposure was towards personal customers and it accounted for DKK 899.7 billion, or 34% of the total net credit exposure, with the majority of it being mortgage loans granted through Realkredit Danmark, Danske’s domestic mortgage subsidiary. The remainder of the portfolio has relatively good diversification with the historically more volatile segments of commercial property, agriculture and shipping accounting for a combined 15% of the total net credit exposure from lending at end-June 2017. Gross non-performing loans (NPLs, both non-defaulted and defaulted) continue to trend downwards and totalled DKK 38.7 bilion at end-June 2017 down from DKK 50.3 billion at end-June 2016. Excluding Non-core, NPLs stood at DKK 35.9 billion at end-June 2017, down from DKK 42.6 billion at end-June 2016. As calculated by the Bank, NPLs in core segments accounted for 1.3% at end-June 2017 down from 1.7% of total gross exposure at end-June 2016, and 2.5% at end-2014. DBRS expects the improvement in NPL ratios to continue.

In DBRS’s view, Danske’s funding is sound and well-managed, and liquidity is ample. As per Danish regulation, mortgage lending is exclusively financed by covered bonds. As a result, Danske relies to a higher degree than other European banks to capital market funding due to its significant usage of covered bonds. As a result, wholesale funding represented approximately 58% of total funding at end June 2017 (DBRS calculation), with covered bonds accounting for half of this amount. Given the balance principle that is applied in Denmark, which is in substance match funding, DBRS views the covered bonds as well aligned with mortgage loans. And, customer deposits, which represented 39% of total funding at end-June 2017, have been relatively stable in the last 5 years. DBRS views deposits as providing a solid foundation to the funding profile. Liquidity remains ample with the Bank reporting a liquidity coverage ratio (LCR) of 163% at end June 2017.

DBRS views the Bank as well-placed to meet the ongoing challenges of the evolving regulatory requirements, given current buffers over regulatory minimums, the Bank’s track record for solid internal capital generation, and flexibility to access markets. At June 2017, the Bank reported a Common Equity Tier 1 (CET1) ratio, under Danish transitional rules, of 16.2%, a similar level to that of end-2016 in spite of additional share buy-backs. This represents a significant buffer of 420 basis points over 12% CET1 minimum requirements including 1.4% of Pillar 2 CET1. With regards to the leverage ratio, the CRD IV fully-loaded figure stood at 4.1% at end June 2017. DBRS notes that mortgage banks are not subject to bail-in tools under the Danish version of EU’s BRRD (Bank Recovery and Resolution Directive). However, the Danish authorities have required mortgage banks to maintain a buffer of 2% of unweighted assets in addition to their capital requirements, and DBRS understands that Realkredit is already able to meet the requirement using excess shareholders’ equity - not requiring any additional funding.

The Grid Summary Grades for Danske Bank A/S are as follows: Franchise Strength – Strong; Earnings – Strong; Risk Profile – Strong/Good; Funding & Liquidity – Strong/Good; Capitalisation – Strong.

RATING DRIVERS

Continued strong operating performance including a continuation of positive asset quality trends, whilst maintaining solid core profitability, a well-managed funding profile and strong capital levels could have positive rating implications.

Negative pressure could arise if there is a reversal in the Bank’s asset quality indicators or profitability metrics, as well as if there is further encumbrance of the balance-sheet. A significant deterioration in capital levels would also lead to negative pressure.

Notes:
All figures are in DKK unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017). This can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial and Company Documents. 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 and US regulations only.

Lead Analyst: Vitaline Yeterian, Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, MD – Head of EU FIG, Global FIG
Initial Rating Date: November 28, 2006
Last Rating Date: July 14, 2017

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