DBRS Morningstar Confirms Danske Bank A/S at A, Trend Remains Negative

DBRS Ratings Limited (DBRS Morningstar) confirmed the ratings of Danske Bank A/S (Danske or the Bank), including the Long-Term Issuer Rating at ‘A’, and the Short-Term Issuer Rating at R-1 (low). The trend on the Bank’s long-term ratings remains Negative. The Bank’s Intrinsic Assessment (IA) is ‘A’. See a full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS
The confirmation of the ratings takes into account Danske’s resilient franchise along with its strong capacity to generate solid earnings, when compared to European peers. It also incorporates the sound credit profile, supported by the good macroeconomic conditions in the main countries of operation, as well as the sound capital cushions over regulatory minimum requirements.

The continuation of the Negative Trend reflects the downside risks about the extent to which potential fines relating to the Estonia case could further damage the Bank’s reputation, and/or negatively impact profitability, funding or capital levels in the context of persistent negative interest rates and uncertainties around regulatory capital developments.

RATING DRIVERS
Any upside pressure is unlikely in the short term. However, the ratings could return to stable if the Bank were able to demonstrate limited franchise and financial impact from the regulatory investigations relating to the Estonian case.

Additional negative pressure would likely be driven by (i) a significant deterioration in the Bank’s profitability, and capital levels, or (ii) a weakening in investor confidence that would affect access to wholesale funding.

RATING RATIONALE
Danske continues to maintain a very strong franchise in its domestic Danish market. However, on the regulatory front, the Bank remains under a series of investigation, including by the Danish FSA, and there has been a number of changes in Danske’s senior management as a result of the regulatory problems faced by the Bank. However, the impact of this on the Bank’s customer base appears limited to date. The Bank’s leading market position in Denmark is complemented by meaningful market shares in Sweden, Norway and Finland.

DBRS Morningstar views Danske’ ability to generate earnings as having been hampered in recent quarters but still strong compared to peers. On the revenue side, negative interest rates continue to pressure the Bank’s net interest income (NII), while the contribution of net fee income to total income remains relatively stable. Additionally, over recent quarters, the adverse conditions in financial markets have resulted in lower trading income. At the same time, operating expenses have increased due to anti-money laundering investments, costs associated with compliance-related activities, and costs for regulatory requirements. As a result, Danske’s net income was DKK 15.0 billion in FY18, down 28% vs. FY17, and of DKK 7.0 billion in 1H19, down 24% vs. 1H18.

Asset quality remained strong, benefiting from the solid Nordic macroeconomic environment. Overall, as calculated by the Bank, Non-Performing Loans (NPLs) in core segments accounted for just 1.2% at end-June 2019, stable from end-2018 and below 2.5% at end-2014. However, Danske remains in the process of addressing shortcomings in its operational risk framework and strengthening its compliance, financial crime and Anti-Money Laundering (AML) activities. With regards to credit risk, DBRS notes the Bank’s largest exposure remains towards personal customers (39% of the total net credit exposure), with the majority being mortgage loans granted through Realkredit Danmark, Danske’s domestic mortgage subsidiary.

DBRS Morningstar views Danske as having a sound and well-managed funding profile, even though wholesale funding accounts for a higher proportion of total funding than most European peers. 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 on capital market funding due to its significant usage of covered bonds. Covered bonds accounted for approximately 40% of total funding. Given the balance principle that is applied in Denmark, which is in substance match funding, DBRS Morningstar views the covered bonds as well-aligned with mortgage loans. Liquidity remains solid with the Bank reporting a liquidity coverage ratio (LCR) of 129% at end-June 2019. DBRS also notes that despite the reputational issues around the Estonia case and the subsequent loss of some customers, Danske has been able to maintain a stable deposit base of approximately DKK 930 billion from its banking and wealth management customers.

Danske’s capitalisation levels have been supported to date by good internal capital generation, large cushions over regulatory minimum, and continued access to markets. Nonetheless, any fines in connection with the Estonian branch activities or any additional capital requirements have the potential to reduce the Bank’s large capital cushions. DBRS Morningstar notes Danske’s CET 1 ratio at end-June 2019 was 16.5% on a fully loaded basis, implying a capital cushion of 220 bps over the regulatory minimum [16.5%-14.3%]. In addition, with REA (RWA equivalent) only totaling 20.2% of total assets, the implementation of the so-called Basel IV, although to be phased over a long period (2022-2027), could impact the amount of capital required for Danske. The leverage ratio was up to 4.4% at end-June 2019.

Concurrently, DBRS Morningstar has discontinued the rating on Danske’s Hybrid Tier 1 Capital Notes to reflect that these instruments have been repaid. The upgrade of the rating on Danske’s Dated Subordinated Debt to BBB (high) from BBB reflects the fact that the instruments currently issued in this debt class have the terms of standard subordinated debt and thus are now rated two notches below the Long-Term Issuer rating of the Bank in line with the notching for subordinated debt under DBRS Morningstar Global Methodology for Rating Banks and Banking Organisations.

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

DBRS Morningstar notes that this press release was amended on October 22, 2019, to correct the trend on the Dated Subordinated Debt rating in the Rating Table below.

Notes:
All figures are in DKK unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2019). This can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include Company Documents, Finanstilsynet (Danish FSA) and S&P Global Market Intelligence. 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 Morningstar had no access to relevant internal documents for the rated entity or a related third party.

DBRS Morningstar 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 Morningstar's outlooks and ratings are under regular surveillance

For further information on DBRS Morningstar 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
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG - Global FIG
Initial Rating Date: January 10, 2010
Last Rating Date: October 9, 2018

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