DBRS Morningstar Confirms Danske Bank’s Issuer Ratings at A (low)/R-1 (low), Trend Stable

DBRS Ratings GmbH (DBRS Morningstar) confirmed the ratings of Danske Bank A/S (Danske or the Bank), including the Long-Term Issuer Rating of A (low) and the Short-Term Issuer Rating of R-1 (low). The trend on the Long-Term Issuer Rating remains Stable. The Bank’s Intrinsic Assessment (IA) is A (low) and the Support Assessment remains SA3. See a full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS
The confirmation of the Long-Term Issuer Rating continues to incorporate the Group’s strong and well-entrenched retail and commercial banking franchise in Denmark, and takes into consideration Danske’s resilient revenue generation in a challenging operating environment. We also note that Danske's profitability remains under pressure due to the ultra-low interest rate environment.

The confirmation of the ratings also reflects Danske’s stable risk profile with overall limited exposure towards sectors vulnerable to the impact of the COVID-19 pandemic, and the strong capital position that incorporates a high capital cushion above the minimum requirements. In line with the Nordic peers, the Bank’s funding and liquidity profile incorporates higher reliance on wholesale funding, however, deposits increased by 28% at end-Q1 2021 vs. end-2019 and liquidity is ample.

DBRS Morningstar notes that the outcome of the investigations into the Bank’s conduct issues remain unclear. This includes anti-money laundering (AML) issues in its now closed Estonian branch, and the Danish FSA investigating additional issues in the Bank's risk management and internal reporting and controls. As a result, the ratings incorporate the still high litigation and conduct risk which could potentially lead to high financial penalties. However, DBRS Morningstar recognises that Danske has been proactive in improving its operational risk framework and strengthening its compliance, financial crime and AML capabilities, incurring significant costs.

RATING DRIVERS
An upgrade of the Long-Term Issuer Rating would require continued resilience in the Bank's underlying profitability, along with the risk management failures being fully addressed and limited impact from the settlement of the pending conduct issues.

A downgrade of the Long-Term Issuer Rating would be driven by a significantly larger than expected settlement of the pending investigations, failure to address the risk management issues, or a further sustained deterioration of profitability metrics.

RATING RATIONALE
Danske is the largest bank in Denmark by asset size and the second largest in the Nordic area. The Bank has a dominant market position in Denmark, with a market share of 25.2% in lending and 30.2% in deposits as of Q1 2021, as well as an important presence in Finland, Norway and Sweden. Danske also operates in Northern Ireland. The Group offers a wide range of products and services to private and business customers, including retail, wealth management, life insurance, leasing and capital markets products. DBRS Morningstar will continue to monitor the developments related to the investigations over anti-money laundering deficiencies at the Bank’s now closed Estonia branch and other internal control shortcomings, which led to significant negative media coverage. However, we note that the impact of these issues on the Bank’s franchise in terms of market shares has been very limited to date.

Danske's profitability has weakened in the current challenging operating environment mostly due to a significant increase of loan loss provisions (LLPs). Danske reported a net profit of DKK 4,589 million in 2020, materially lower than DKK 15,072 million in 2019, which led to a Return-on-Equity (ROE) of 2.6% in 2020 vs. 9.6% in 2019, well below its Nordic peers. In Q1 2021, net profit increased to DKK 3,139 million (vs. a net loss of DKK 1,289 million in Q1 2020) supported by significantly lower LLPs, and the ROE in Q1 2021 was 7.5%, closer to the management target of 9-10% by 2023. Danske's revenue generation has proved to be resilient but remains under pressure due to the persistently low interest rate levels. The Bank's operating efficiency continues to lag behind its Nordic peers, with the cost-income ratio increasing to 66% in 2020, from 60.5% in 2019. However, we note that Danske remains on track with its strategic transformation plan and is focusing on cost management initiatives, which are expected to drive operating expenses down to DKK 24.5 billion in 2021 (vs. DKK 28.1 billion in 2020). Danske reported DKK 7,001 million loan loss provisions (LLPs) in 2020, significantly higher than DKK 1,516 million in 2019. Nevertheless, the cost of risk of 37 basis points (bps) in 2020 (vs. 9 bps in 2019) remains below European peers' average and manageable for Danske. In Q1 2021, LLPs decreased significantly to DKK 497 million from DKK 4,251 million in Q1 2020, with the reduction mostly driven by the improved macroeconomic outlook in the Nordic area which is in line with our view. The Bank expects LLPs to total around DKK 3.5 billion in 2021.

Danske's credit risk profile is solid in DBRS Morningstar’s view, supported by sound asset quality metrics to date. DBRS Morningstar will continue to monitor any sign of credit deterioration especially linked to COVID-19 vulnerable sectors, albeit recognising that the Nordic economies have proven to be more resilient through the COVID-19 crisis compared to other European countries. At end-Q1 2021, Danske’s gross Stage 3 loans were 1.7% of total gross credit exposure, down from 1.8% at end-2020 and in line with end-2019. This is slightly above the Nordic peers' average but compares favourably against other European peers. DBRS Morningstar will also continue to monitor operational risk closely, as Danske is still in the process of addressing the shortcomings in its operational risk framework and strengthening its compliance, financial crime and AML controls. The Bank remains under investigation by various regulatory authorities in Denmark, Estonia, France and the US for AML issues in its now closed Estonian branch concerning activity carried out between 2007 and 2015 and the outcome of these investigations remains unclear.

DBRS Morningstar considers Danske's funding profile as sound and well-managed. Covered bonds represent a relatively high share of Danske’s funding. Therefore, in line with Nordic peers, reliance on wholesale funding is higher than European peers. Nevertheless, due to a significant increase of customer deposits, the loan-to-deposit ratio decreased to 149% at end-Q1 2021 from 154% at end-2020 and 189% at end-2019. We view Danske's liquidity profile as robust with a Liquidity Coverage Ratio of 151% at end-Q1 2021 compared to 154% at end-2020 and an LCR reserve of DKK 737 billion (vs DKK 710 billion at end-2020).

DBRS Morningstar views Danske’s capitalisation as solid. The fully-loaded CET1 ratio of 17.9% at end Q1 2021 (vs. 18% at end-2020) remains well above the management target of above 16%. The 470 bps capital cushion over the minimum requirements is sound but is expected to reduce due to increasing RWAs (both from credit deterioration and regulatory driven) and dividend payments. DBRS Morningstar also notes that the outcome of the investigations into the AML issues could result in fines, potentially impacting capital if they are substantial.

ESG CONSIDERATION
DBRS Morningstar views that the Business Ethics and Corporate Governance ESG subfactors are significant to Danske’s credit ratings. This is related to the high litigation and conduct risk that Danske is subject to, due to severe deficiencies in the Bank’s AML and internal risk controls. As a result, these risks are incorporated in the Bank’s ratings, reflected in the Bank’s franchise strength and risk profile grid grades.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

Notes:
All figures are in DKK unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (8 June 2020) https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations . Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

The sources of information used for this rating include Danske Bank’s Annual and Sustainability Report 2020 and Q1 2021 Interim Report, Danske Bank’s Debt Investor Presentation 2020 and Debt Investors Presentation Q1 2021, Danske Bank’s Fact Book 2020 and Q1 2021, Danske Bank’s Pillar 3 Report and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

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 12-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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/381219

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Mario De Cicco, Vice President, Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director, Global Financial Institutions and Sovereign Ratings
Initial Rating Date: January 18, 2010
Last Rating Date: July 8, 2020

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