Morningstar DBRS Changes Trend on Danske Bank's Credit Ratings to Positive from Stable, Confirms LT Issuer Rating at A (low)

DBRS Ratings GmbH (Morningstar DBRS) confirmed its credit ratings on 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 was changed to Positive from Stable. The Bank's Intrinsic Assessment (IA) remains A (low) and the Support Assessment remains SA3. See a full list of credit ratings at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS
The change in trend to Positive from Stable reflects the significant progress Danske has made in implementing rigorous anti-financial crime (AFC) processes and in resolving outstanding issues. In December 2022, Danske reached a settlement regarding the money laundering issues at the Bank's now closed Estonia Branch between 2007 and 2015 and paid a DKK 15.3 billion fine (c. EUR 2.06 billion) to the US Department of Justice (DoJ), the US Securities and Exchange Commission, and the Danish Special Crime Unit. In 2023, Danske completed the implementation of a financial crime control framework that meets the regulatory requirements. The Group has also resolved almost all outstanding regulatory orders and has been subject to two in-depth inspections by the Danish FSA. The trend change also takes into account the Bank's improved earnings profile as litigation risk has been reduced significantly and the Bank is benefitting from higher interest rates.

The confirmation of the credit ratings considers 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 credit ratings also reflect its good credit risk profile, supported by a well-diversified loan book in stable economies. However, some operational risk related to outstanding civil lawsuits remains. Danske is under corporate probation by the US DoJ until 13 December 2025, and Morningstar DBRS is closely monitoring Danske's relationship with regulators. The Bank is also subject to civil law suits related to the Estonian case. Morningstar DBRS notes the Bank's strong capital cushion above regulatory minimum requirements. Danske's liquidity and funding profile is resilient, consisting of deposits, covered bonds, and wholesale funding. Moreover, Danish mortgages are entirely funded by corresponding bonds.

CREDIT RATING DRIVERS
An upgrade of the Long-Term Issuer Rating would require the Bank to demonstrate more consistent earnings, while maintaining its current risk profile and capital levels.

The trend on the long-term credit ratings would revert to Stable in case of a material deterioration in the Bank's core profitability level or its asset quality metrics. In addition, new shortcomings related to internal controls and compliance would also result in negative credit rating actions.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Very Strong/Strong
Danske is the largest bank in Denmark by asset size and the second largest in the Nordic area. Total assets amounted to DKK 3,710 billion at end-Q1 2024 (c. EUR 497 billion). Danske offers a wide range of products and services to private and business customers, including retail, wealth management, life insurance, leasing, and capital markets products. Danske has a leading market position in Denmark and Ireland. The Bank also has strong market presence in Finland, while Sweden and Norway are considered challenger markets. As part of its Forward 2028 Strategy the Bank has decided to exit the Norwegian Retail and private banking market. The Bank plans to further enhance it relationships with business and institutional customers in the entire Nordic region.

Earnings Combined Building Block (BB) Assessment: Good/Moderate
Morningstar DBRS views Danske's earnings generation capacity as good, albeit somewhat inconsistent in the past because of significant fines related to conduct issues. As the Bank has put most of those issues behind it, results improved significantly in 2023, further supported by the high interest rate environment. The Bank achieved its financial targets for 2023 and has set out targets for 2026, which include a return on equity (ROE) of 13%, a cost-income ratio of about 45%, and a CET1 ratio above 16%. Morningstar DBRS sees Danske as well positioned to maintain higher levels of earnings, given still high interest rates and the Bank's growth and efficiency initiatives.

In 2023, Danske reported a profit of DKK 21,262 million, compared with a profit of DKK 10,848 million (excluding the Estonian penalty and the goodwill impairment at Danica of DKK 15.4 million) in 2022. The increase was driven by strong growth in net interest income (NII), better market-related revenues, lower loan loss provisions, and the 2022 negative impact from the debt collection case (DKK 1.8 billion). The ROE was 13% in 2023, compared with a recurring ROE (excluding one-offs) of 6.5% in 2022, and up from 7.9% in 2021. In Q1 2024, Danske reported a net profit of DKK 5.63 million, up 4% year-on-year and 1% quarter-on-quarter largely as a result of net trading income and lower loan loss provisions. The Bank's guidance for 2024 net income is in the DKK 21 to 23 billion range.

Risk Combined Building Block (BB) Assessment: Good
Morningstar DBRS views Danske's credit risk profile as good. Credit losses were contained during the financial crisis and have since shown substantial further improvement, underpinned by a well-diversified loan book and conservative risk appetite. Operational risk still persists, although Morningstar DBRS recognises the Bank's progress as underscored by the Financial Crime Plan completed in 2023 and the resolution of all outstanding regulatory orders, except one. However, Danske is under corporate probation by the US DoJ until 13 December 2025, and civil law suits related to the Estonia case are still outstanding and could lead to further legal costs.

Funding and Liquidity Combined Building Block (BB) Assessment: Good
Morningstar DBRS views Danske's funding and liquidity profile as good and well-managed. The Bank's reliance on wholesale funding is very high compared to other European peers, and is also higher than some of its Nordic peers, largely as a consequence of the fact that in Denmark mortgage loans have to be funded by covered bonds (CBs) by law. As a result, the Bank's largest source of long-term wholesale funding is in the form of CBs, mainly accessed through the Danish CB market, and to a lesser extent the Norwegian, Finnish, and Swedish markets, all of them considered by Morningstar DBRS as very stable.

Capitalisation Combined Building Block (BB) Assessment: Strong/Good
Morningstar DBRS views Danske's capitalisation as robust, supported by an improving internal capital generation capacity and a large capital cushion over minimum requirements. At end-Q1 2024, Danske's CET1 ratio was 18.5%, slightly down from 18.8% at end-2023 as a result of share-buybacks during the quarter, partly offset by a decrease in risk-weighted assets (RWAs) for credit and market risk. This compares to Danske's minimum capital regulatory requirement of 14.4% at end-Q1 2024 and includes 2.0% related to the countercyclical risk buffer and 0.5% related to the Norwegian systematic risk buffer. This leaves the Bank with a comfortable cushion over minimum requirements of 410 bps as requirements will increase further at the end of H1 2024.

Further details on the Scorecard Indicators and Building Block Assessments can be found at: https://dbrs.morningstar.com/research/435223.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030.

Notes:
All figures are in Danish Krone unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (4 June 2024) https://dbrs.morningstar.com/research/433881. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030 in its consideration of ESG factors.

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

The sources of information used for these credit ratings include Morningstar Inc. and company documents, Danske Bank Annual Report 2023, Danske Bank Interim Report Q1 2024, Danske Bank Fact Book Q4 2023-Q1 2024, Danske Bank Investor Presentation Q4 2023 - Q1 2024. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, these are unsolicited credit ratings. These credit ratings were 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

Morningstar DBRS does not audit the information it receives in connection with the credit 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. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS 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 credit rating assumptions can be found at: https://dbrs.morningstar.com/research/435222.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Sonja Forster, Vice President
Rating Committee Chair: William Schwartz, Senior Vice President, Credit Practices Group
Initial Rating Date: January 18, 2010
Last Rating Date: June 30, 2023

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