Danske FY 2020: Compliance Costs and Loan-Loss Provisions Bite, but We See Inflection Point

Narrow-moat Danske reported a full year net profit of DKK 4.6 billion, down 70% compared with last year, although slightly ahead of the DKK 4.3 billion we had in our models. We maintain our fair value estimate of DKK 170 per share. Danske’s performance did not come as a massive surprise to us as higher expenses and loan-loss provisions were expected to be a significant headwind this year. Expenses to transform the group as well as rectify shortcomings in anti-money-laundering systems and processes have bloated the cost/income ratio from below 50% in 2017 to an average of around 60% over the past three years. In 2020, expenses increased 3% to DKK 28.1 billion from DKK 27.2 billion the year prior. Looking forward, however, we think Danske has reached an inflection point now and compliance costs should start trending downward, supporting earnings growth, despite our assumption that roughly half of the current annual compliance cost of DKK 4.1 billion will be recurring. Both net interest income and net fee income came in flat year over year as volume growth offset margin pressure on the net interest line, while buoying capital markets and investment fees balanced out weaker remortgaging activity. In total, income was down 6% year over year, however, driven by volatile trading income and the one-off gain from selling Danica Pension Sweden last year. Finally, loan loss provisions came in at DKK 7 billion, slightly below our DKK 7.2 billion estimate, versus just DKK 1.2 billion a year ago. DKK 3.3 billion of provisions was taken against Danske’s oil-related exposures which are in run-off while another DKK 2.7 billion forms a management overlay. Net profit guidance for next year of between DKK 9 to 11 billion as impairments are guided to half and expenses normalize suggests a material step up in EPS. Danske trades at 0.6 times our fair value estimate of DKK 170 per share.