DBRS Morningstar Confirms Danske Bank’s LT Issuer Rating at A (low), Stable Trend

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 ratings takes into account Danske’s leading retail and corporate franchise in Denmark and Northern Ireland, as well as its meaningful corporate franchise in Finland, Norway and Sweden. The ratings also reflect its good risk profile, underpinned by a well-diversified loan book with adequate and stable asset quality metrics, as well as its strong capital position with an ample and comfortable capital cushion above current minimum regulatory requirements.

The ratings also incorporate Danske’s high reliance on wholesale funding, partly driven by the fact that in Denmark mortgage loans have to be funded by covered bonds by law. Thus, long-term wholesale funding reliance is mainly through covered bonds issued in the Nordic covered bond markets, which DBRS Morningstar considers to be a resilient and stable source of funding. The ratings also consider the Bank’s adequate, albeit volatile, internal capital generation capacity, underpinned by a stable low cost of risk, but constrained by years of very high non-core expenses.

Finally, the confirmation of the ratings also includes Danske’s still elevated operational risk. DBRS Morningstar recognises the Bank’s significant effort to strengthen its internal risk control and compliance functions, as well as the fact that the main litigation items have been settled. However, this is an ongoing process and could still result in further fines, albeit to a lesser extent than in the past.

RATING DRIVERS

An upgrade of the Long-Term Issuer Rating would require a sustainable improvement in the Bank’s profitability and a further strengthening of internal risk control and compliance functions while maintaining the current risk profile and capital levels.

A downgrade of the Long-Term Issuer Rating would be driven by deterioration in the Bank’s profitability and/or its asset quality materially weakening its capital position. In addition, the appearance of additional weaknesses related to internal controls and compliance would also result in negative rating actions.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Strong
Danske is the largest bank in Denmark by asset size and the second largest in the Nordic area. At end-Q1 2023, the Bank’s total assets amounted to DKK 3,791 billion (c. EUR 547 billion). Danske has a leading market position in Denmark and Northern Ireland both for retail and corporate customers. The Group also has solid market presence in Finland, Norway and Sweden, with a focus on corporate customers. Danske offers a wide range of products and services ranging from retail, wealth management, life insurance, leasing and capital markets products. Danske announced in June 2023 its new 2026 Financial Targets, which include achieving a return on equity (ROE) of 13%, a CET1 ratio above 16%, a cost/income ratio of around 45% and a dividend pay-out ratio of 40-60% of net profits.

In December 2022, Danske reached a final resolution on the investigation, that has been ongoing since 2017 regarding the suspected money laundering issues in the Bank’s now closed Estonia Branch. As a result, the Bank agreed to pay a final fine of DKK 15.3 billion (c. EUR 2.06 billion) to the US and Danish authorities and accepted full responsibility for the charges filed. The fine had a meaningful negative financial impact on the Bank’s FY22 results, but the overall impact on Danske’s franchise strength and capitalisation was contained.

Earnings Combined Building Block (BB) Assessment: Moderate
DBRS Morningstar views Danske’s underlying earnings profile as well placed to significantly benefit from the current high interest rate environment and the digitalisation that Danske has undertaken. In 2022, the Bank reported a net loss of DKK 5,068 million, negatively affected by the provision for the Estonian penalty (net DKK 13.8 billion), the total impact from the debt collection case (DKK 1.8 billion) as well as a net impairment charge in Danica’s goodwill of DKK 1.2 billion. Excluding all one-offs, the Bank reported a net profit of DKK 13.6 billion at end-2022, down 21% Year on Year (YoY) as a result of lower operating income because of the repricing of almost all assets in the insurance and trading portfolios due to the significant increase in interest rates and market turmoil, as well as significantly higher loan loss provisions YoY in light of the challenging macroeconomic outlook. In Q1 2023, Danske reported a net profit of DKK 5,168 million, up 13% Quarter on Quarter (QoQ) as a result of stronger net interest income, net trading income and lower loan loss provisions. The Bank’s cost to income ratio (excluding one-offs) improved to 50% in Q1 2023, down from 72% at end-2022 and 63% at end-2021.

Risk Combined Building Block (BB) Assessment: Good
DBRS Morningstar views Danske's credit risk profile as good, underpinned by a well-diversified loan book exposure and adequate asset quality metrics that have steadily improved since 2014. Danske’s credit exposure towards commercial real estate (CRE) is the lowest among its Nordic peers and is geographically distributed between Denmark (48%), Sweden (26%), Norway (12%), Finland (7%) and other (7%). These exposures could become a potential concern in the current weaker macroeconomic environment with persistent inflation and rising interest rates, especially in Sweden where some real estate borrowers are facing difficulties to refinance their upcoming maturities of unsecured debt. However, the asset quality of the CRE book remained sound, with Stage 2 and 3 exposures declining QoQ and a Stage 3 ratio of 1.1% over the total CRE exposure. The Bank’s total Stage 3 exposures also declined 3.3% QoQ at end-Q1 2023 to DKK 31,027 million or 1.2% of total gross credit exposure, down from 1.3% at end-2022 and 1.7% at end-2021. Total Stage 2 exposures represented 6.2% of total gross exposures, down from 6.9% at end-2022 but up from 4.8% at end-2021, reflecting the challenging and uncertain macroeconomic outlook since the beginning of 2022.

Operational risk remains elevated, albeit DBRS Morningstar recognises the Bank’s efforts to substantially strengthen its operational capabilities, including compliance, internal audit and risk management areas.

Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate
DBRS Morningstar views Danske's funding and liquidity profile as good and well-managed underpinned by ample liquidity buffers and access to stable covered bond markets. Customer deposits, which represented 54% of total non-equity funding, grew by 0.8% QoQ in Q1 2023 to DKK 1,272 billion. According to Danske, 33% of total deposits are fully insured and an additional 28% are considered stable deposits in nature by the Bank. The net loan to deposit ratio, excluding repos, stood at 158% at end-Q1 2023. The Bank’s reliance on wholesale funding, as for the rest of its Nordic peers, is very high compared to most European banks, and is mostly accessed through covered mortgage bonds, largely due to the fact that in Denmark mortgage loans have to be funded by covered bonds by law. Nonetheless, DBRS Morningstar views the Nordic covered bond markets as very stable and resilient. At end-Q1 2023, the Bank’s liquidity positioned remained ample with total high-quality liquid assets of DKK 611 billion, 1.5x of total less stable customer deposits. Danske reported a Liquidity Coverage Ratio of 169% at end-Q1 2023 and a Net Stable Funding Ratio of 126%.

Capitalisation Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar views Danske's capitalisation as robust supported by adequate internal capital generation capacity and a large capital cushion against minimum requirements. At end-Q1 2023, Danske's CET1 ratio was 18.0%, up from 17.8% at end-2022 and 17.7% at end-2021. The significant fine paid by Danske in regards to the Estonian matter had an impact of c. 170 bps on the Bank’s CET1 ratio in 2022 and Danske’s board of directors decided to not pay any dividend for 2022 in order to ensure prudent capital management in connection to this. The Bank targets a dividend pay-out ratio between 40-60% of net profit once the dividend restriction has been lifted. Danske’s minimum capital regulatory requirement stood at 13.5% at end-Q1 2023, and is expected to increase by 20bps in Q2 2023 due to an increase in the Swedish countercyclical buffer, thus leaving a still comfortable capital buffer of 430 bps. Danske’s minimum requirements for eligible liabilities (MREL) was set at 26.7% at end-Q1 2023, already fully covered by existing securities.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/416666

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Social (S) Factors
The S factor has changed from the prior credit rating disclosure. The subfactor ‘product governance’ was previously considered relevant to reflect product legacy issues such as the wrongful charging of interest on reminder fees and the overcollection of approximately 245,000 debt customers which led to investigations by the Danish FSA. Danske is in the process of compensating the affected customers, with the completion expected by the end of 2023. Nevertheless, the financial impact of these issues on the Bank’s profitability has been limited so far.

Governance (G) Factors
The G factor has changed from the prior rating disclosure. The subfactor ‘corporate governance’ was previously considered significant to the rating of Danske Bank, mainly due to Danske’s role in money laundering activities in its former Estonia branch between 2007 and 2015. The subfactor is now considered relevant to the rating and this is reflected in the Bank’s risk grid grade. In December 2022, Danske Bank reached a final resolution with the US Department of Justice (DoJ), the US Securities and Exchange Commission (SEC) and the Danish Special Crime Unit (SCU) in regards to the Estonia matter. As part of the resolution, Danske Bank paid a fine of USD 2.06 billion (DKK 15.3 billion) to US and Danish Authorities and accepted full responsibilities for its failings. Additionally, as part of the settlement with the DoJ, Danske Bank remains under corporate probation for the next three years until 13 December 2025. We note that Danske Bank is still under investigation by the French authorities and currently has some pending civil claims in relation to the Estonia matter with the timing and outcome of these claims still uncertain and they could be material. Nevertheless, the Bank is working on strengthening its AML capabilities and while the investigations related to the Estonia matter led to significant media coverage, the impact on the Bank’s franchise has been limited so far.

There were no Environmental or Social factors that had a significant or relevant effect on the credit analysis.

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 (17 May 2022) https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:

All figures are in DKK unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations (22 June 2023). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies

The sources of information used for this rating include Morningstar Inc. and Company Documents, Danske Bank Annual Report 2022, Danske Bank Interim Report Q1 2023, Danske Bank Fact Book Q4 2022-Q1 2023, Danske Bank Investor Presentation Q4 2022 – Q1 2023, Danske Bank Pillar 3 Report 2022, Danske Bank Sustainability Report 2022. 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/416665

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

Lead Analyst: Maria Jesus Parra, Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of Global FIG
Initial Rating Date: 18 January 2010
Last Rating Date: 1 July 2022

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