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 retail and commercial banking franchise in Denmark as well as its important presence in the other Nordic countries. In addition, the ratings take into consideration Danske’s good earnings and stable credit risk profile. Danske has maintained sound asset quality metrics to date, however, uncertainty has increased, mostly driven by the deterioration in the macroeconomic outlook after Russia’s invasion of Ukraine. The Bank’s capital position is currently supported by high capital cushions above minimum requirements, while Danske’s funding and liquidity profile incorporates higher reliance on wholesale funding. In line with the Nordic peers, wholesale funding is mostly accessed through stable access to the covered bonds market and mitigated by ample liquidity available.
Danske announced it has entered into initial discussions with U.S. and Danish authorities for the resolution of a material anti-money laundering (AML) issue in Estonia. However, the outcome of the negotiations is still pending. DBRS Morningstar also notes that Danske is in the process of remediating additional weaknesses in its risk management and internal reporting and controls. As a result, the ratings continue to incorporate the Bank’s high operational risk which could potentially lead to material fines. However, DBRS Morningstar recognises that Danske has been proactive in improving its operational risk framework and strengthening its compliance, financial crime and AML capabilities, which has entailed significant remediation costs.
An upgrade of the Long-Term Issuer Rating would require the remediation of the internal control failures with limited financial impact from the settlement of the pending conduct issues, as well as further improvement in the Bank's profitability and maintenance of the current risk profile.
A downgrade of the Long-Term Issuer Rating would be driven by a significantly larger than expected settlement of the AML issues, failure to address the risk management shortcomings or a further sustained deterioration of profitability metrics.
Franchise Combined Building Block (BB) Assessment: Strong/Good
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 its domestic market, where it benefited from a market share of around 25% in lending and 29% in deposits as of February 2022. Danske also has an important presence in Finland, Norway and Sweden as well as Northern Ireland. The Bank offers a wide range of products and services to private and business customers, including retail, wealth management, life insurance, leasing and capital markets products. In April 2022, Danske announced that it is in initial discussions with U.S. and Danish authorities for the resolution of the anti-money laundering (AML) failure in its now closed Estonia branch, however, the outcome of the negotiations is still pending. DBRS Morningstar will continue to monitor the developments related to AML and other internal control shortcomings, which led to significant negative media coverage. However, DBRS Morningstar views the impact of these issues on the Bank’s franchise in terms of market shares as limited thus far.
Earnings Combined Building Block (BB) Assessment: Good/Moderate
Danske's profitability improved significantly in 2021, on the back of much lower loan impairment charges compared to 2020. In 2021, Danske reported a net profit of DKK 12,920 million, significantly higher than 4,589 million in 2020. This led to a return-on-equity (ROE) of 7.6% in 2021 which, albeit increasing from 2.6% in 2020, still compares unfavorably against the major Nordic peers. The ROE in Q1 2022 was 6.4% vs. 7.5% in Q1 2021, and the Bank has the ambition to reach an ROE of 8.5-9% by 2023. Danske’s revenue generation remained resilient with operating income from core banking activities expected to increase further in 2022 as the Bank is well positioned to benefit from increasing interest rates. Danske's operating efficiency continues to lag behind its Nordic peers, although the cost-income ratio decreased to 60% in 2021, from 65% in 2020 (62% Q1 2022 vs. 58% Q1 2021). Notwithstanding the still elevated remediation costs, we note that Danske remains on track with its strategic transformation and is implementing cost management initiatives, which would bring expected total operating expenses down to DKK 25 billion in 2022 (vs. DKK 25.6 billion in 2021). Danske reported very low loan loss provisions (LLPs) of DKK 348 million in 2021, down from DKK 7,001 million in 2020. LLPs are expected to remain below the normalised level in 2022.
Risk Combined Building Block (BB) Assessment: Good
DBRS Morningstar considers Danske's credit risk profile as good, supported by sound asset quality metrics to date. At end-Q1 2022, Danske's Stage 3 loans amounted to 1.3% of total gross credit exposure, down from 1.7% at end-2021. Stage 3 loans decreased significantly at end-Q1 2022 (-22% vs. end-2021) with the reduction spread across different sectors and mostly reflecting the lower than expected impact of the COVID-19 pandemic, as well as improved macroeconomic environment and write-offs. The Bank also implemented a new definition of default which aligns the current definition with the EBA guidelines. DBRS Morningstar will also continue to monitor operational risk closely, as Danske is still in the process of addressing its operational risk framework shortcomings and strengthening its compliance, financial crime and AML controls. The Bank remains under investigation by various regulatory authorities in Denmark, Estonia, France and the U.S. 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.
Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate
DBRS Morningstar considers Danske's funding profile as sound and well-managed. In line with Nordic peers, reliance on wholesale funding is higher than European peers. Wholesale funding is mostly accessed through covered bonds which are commonly used in Nordic countries and specifically in Denmark where mortgage loans have to be funded by covered bonds by law. Covered bonds stood at DKK 928 billion at end-2021, of which 83% was issued by the subsidiary Realkredit Danmark. Due to the significant increase of customer deposits during the pandemic, the loan-to-deposit ratio decreased to 157% at end-Q2 2022 from 189% at end-2019. Danske's liquidity profile is robust with a Liquidity Coverage Ratio of 164% at end-Q1 2022 compared to 164% at end-2021 and an LCR reserve of DKK 627 billion at end-Q1 2022 (vs DKK 687 billion at end-2021).
Capitalisation Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar views Danske’s capitalisation as solid. The fully-loaded CET1 ratio of 17.6% at end-Q1 2022 (vs. 17.7% at end-2021) remains well above the management target of above 16%. The CET1 minimum requirement was 12.6% at end-Q1 2022 which incorporates a countercyclical buffer (CCyB) requirement of 0.1%, reduced as part of the capital relaxation measures implemented by regulators in different jurisdictions after the COVID-19 outbreak. Taking into account that national supervisors in Denmark, Norway and Sweden have already announced gradual increases in the CCyB requirements, Danske estimated that the fully-loaded requirement would increase to 14.2%. As a result, the current capital cushion of 500 basis points (calculated using the fully-loaded CET1 ratio and the current CET1 minimum requirement) is expected to decrease. We also note that Danske’s capitalisation remains vulnerable to the outcome of the investigations into the AML issues which could result in substantial financial penalties potentially impacting the capital ratios.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/399183
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Social (S) Factors
DBRS Morningstar considers the ‘product governance’ subfactor as a relevant, but does not affect the rating or trend assigned to Danske. This is this reflected in the franchise grid grade and largely relates to product legacy issues such as the wrongful charging of interest rate on reminder fees and overcollection of debt customers which led to investigations by the Danish FSA. While Danske is in the process of compensating the affected customers, we note that the Bank is still working on addressing its operational risk shortcomings and we will keep monitoring the progress made by the Bank on improving its product and operational governance frameworks. Nevertheless, the financial impact of these issues on the Bank’s profitability have been limited so far.
Governance (G) Factors
One of the governance factors is significant to the rating of Danske and this is reflected in the Bank’s franchise and risk grid grades. We consider the subfactor ‘corporate governance’ to be significant due to Danske’s role in money-laundering activity in its now closed Estonia branch between 2007 and 2015. Danske Bank is still under investigation by several regulatory authorities for its deficiencies in corporate governance related to this case. In April 2022, Danske Bank announced that the bank is currently in initial discussions with the Danish and US authorities regarding the resolution of the case. Currently, there is no estimate to when the resolution will be finalized and the size of the settlement or fine, but Danske notes that it will be material. We also note that Danske Bank received an injunction from the Swedish FSA in October 2021, stating that the Swedish branch needs to rectify its deficiencies in its anti-money laundering (AML) and terrorist financing frameworks no later than June 30, 2022 which is ahead of Danske’s announced timeline of early 2023. Nonetheless, we note that the Bank is working on strengthening its AML capabilities and while the investigations led to significant media coverage, the impact on the Bank’s franchise has been limited so far.
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
All figures are in DKK unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (23 June 2022) - https://www.dbrsmorningstar.com/research/398692/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 (17 May 2022) https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings
The sources of information used for this rating include Morningstar Inc. and Company Documents, Danske Bank Annual Report 2021, Danske Bank Debt Investor Presentation Q4 2021 and Q1 2022, Danske Bank Interim Report Q4 2021 and Q1 2022, Danske Bank Press Releases, Danske Bank Factbook Q4 2021 and Q1 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. 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/399182
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: Elisabeth Rudman, Managing Director, Head of European FIG – Global FIG
Initial Rating Date: 01/18/2010
Last Rating Date: 07/06/2021
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