European Stress Test Results Not Pretty for Danske

Danske showed a poor performance during the 2021 European Central Bank stress test. Its common equity Tier 1 ratio dropped 2 percentage points below its minimum requirement set by regulators of 13.2%. Moreover, across the 18 banks under our coverage that participated in this edition of the stress test, Danske saw the largest decline in its capital ratio (down 6.7 percentage points). Throughout the three years of stress in the adverse scenario, Danske would be loss-making through all of them, hypothetically. Income generation was surprisingly stable throughout this exercise; however, Danske’s income statement could not weather the resulting materially higher credit losses. Over the stress test horizon of three years, Danske booked the equivalent amount in loan losses of nearly seven pandemic-ridden years of 2020’s proportion. We maintain our DKK 170 per share.