Company Reports

Danske reported a good fourth-quarter 2023 and overall, a strong 2023. Profits before tax increased 12% in the fourth quarter on a sequential basis. Higher net fee income and significantly stronger net trading income more than offset slightly lower net interest income. Danske has seen pass-through rates increase, weighing on the deposit margin, while the lending margin continued to be under mild pressure since rates have started to increase in Denmark. Growing assets under management contributed to the positive quarterly development in investment fees. Net trading income benefited from a one-off release from a common equity Tier 1 foreign-exchange hedge.

Danske has been through a tumultuous decade, which saw it settle a USD 2 billion lawsuit with the U.S. Department of Justice, left the Baltic countries, refocused on the Nordics, and reduced its exposure to oil and gas borrowers. The bank, which emerged from the tumultuous decade, is finding its footing again supported by a clear strategic focus. As a result, profitability has increased, despite inflated costs due to higher expenses related to improved anti-money-laundering processes.

Narrow-moat Danske reported a good start to 2023 as the bank saw higher interest rates lift net interest income despite loans contracting slightly (down 2%). Deposit margins continued to widen across all segments, driving the bulk of 8% increase in net interest income. Although this dynamic is expected to slow as customers start shifting deposits into savings products, Danske still expects DKK 700 million per 25-basis-point rate changes for future interest-rate increases. Positive as well, lending margins have remained fairly stable, supporting the net interest income uplift. We maintain our DKK 170 per share fair value estimate.

Stress has returned to the European banking system less than a week after a solution for Credit Suisse had been announced. Shares in European banks have traded down through March 24 around midsingle digits, with Deutsche Bank taking the brunt of it, down 15% at its lowest point intraday. We maintain our fair value estimates and moat ratings across our European banking coverage. Allianz remains our Best Idea. Admiral is one of our top picks

With Credit Suisse shoring up liquidity, concerns around a banking crisis spreading in Europe have been firmly planted. While we expect that the next days and weeks will remain volatile, we do not currently see a liquidity crisis spreading through the European banking system. The issues at Credit Suisse are idiosyncratic in nature and we believe containable for now even in a worst-case scenario. With capital and liquidity levels high across the board, asset quality still good, and regulators much better equipped than 15 years ago to quell any sparks, we believe European banks are solid. The major caveat being that developments are currently happening at a rapid pace and views we form today may be stale tomorrow. We believe investors are best placed in European banks with a greater retail focus and a sound profitability outlook. We would highlight BBVA, Handelsbanken, ING, and Lloyds.

We do not believe investors should view the collapse of U.S.-based Silicon Valley Bank as a read-through of the health of European banks' balance sheets. Nevertheless, banks remain highly reliant on the confidence of depositors and other funders. It would be foolish to say there is no contagion risk for European banks, especially if other global banks run into trouble. The current uncertainty could also push up the cost of funding and increase the rate at which European banks pass on higher interest rates to depositors. But we believe it is vital for investors to take note of the contrasts between European banks' and SVB's balance sheets.

Narrow-moat Danske reported fourth-quarter profits before tax of DKK 4,880 million versus DKK 2,622 million a quarter ago if we exclude provisions for the Estonia case (DKK 14 billion) and goodwill impairments (DKK 1.6 billion) booked in third-quarter 2022. Net interest income grew 18% on a sequential basis benefiting from higher deposit margins, which are being pushed up by higher interest rates. Positively, net fee income increased 2% after a softer performance through 2022 overall, as capital markets saw a small rebound in activity levels in the fourth quarter. Expenses increased 2% as higher compensation and performance pay drove up the cost base. Loan losses increased to DKK 774 million in the quarter, or 16 basis points, albeit predominantly driven by updated macroeconomic assumptions used in Danske’s risk models and higher management overlays. For 2023, guidance for net profit is set between DKK 15 billion and DKK 17 billion, anticipating higher loan losses of 18 basis points versus just 8 basis points in 2022, highlighting greater uncertainty and a weaker economic outlook for this year. We maintain our DKK 170 per-share fair value estimate.

Narrow-moat Danske's third-quarter results were overshadowed by a DKK 14 billion provision taken related to the Estonia case. Excluding this large one-off, performance was decent. Income generation, up 12% to DKK 9,767 million, primarily own stronger net interest income (up 9%), more than offset 6% higher operating expenses. Loan impairment charges nearly doubled to DKK 368 million versus DKK 192 million a quarter ago, driven by another DKK 650 million one-off related to the legacy debt collection case. We maintain our DKK 170 per share fair value estimate.

Narrow-moat Danske Bank reported second-quarter profits before tax of DKK 2,164 million, substantially missing consensus estimates of DKK 3,600 million collected by the bank prior to the release. Losses in trading income as well as income from the insurance business were the culprits. Danske was caught out by higher levels of volatility and lower liquidity in fixed income markets hitting its trading operation. The declining market environment also drove negative value adjustments in Danske’s insurance business, which could not be offset by a DKK 415 million gain on the sale of Danica Norway. We maintain our DKK 170 per-share fair value estimate despite this performance. Outside the very volatile line items, which have caused the substantial miss relative to expectations this quarter, results looked decent. We anticipate the trading and insurance businesses to recover for the rest of the year.

Danske Bank is a stable and conservatively run bank that follows a sound expansion strategy in the Nordics. However, uncertainties about fines related to the EUR 200 billion of potentially fraudulent transactions that flowed through its Estonian branch from 2007 to 2015 put significant pressure on its share price. We think the market largely overacts as there is little information to go on, which is typically not liked by investors. We expect fines by European regulators to be about DKK 3 billion, which Danske can absorb with excess capital of about DKK 9.5 billion on hand. Fines by U.S. regulators are potentially more severe, but also less likely.

For the first quarter, narrow-moat Danske reported profits before tax of DKK 3,707 million, down 9% versus the same period a year ago. Performance was decent, however, as the decline in profits came primarily from the volatile trading income line as well as negative investment results in the insurance business. Both tend to fluctuate and as such do not cause great concern to us. We maintain our fair value estimate of DKK 170 per share.

Danske reported fourth-quarter profits before tax of DKK 4.5 billion, largely in line with the DKK 4.4 billion consensus estimate collected by the bank itself. A strong showing in both net fee income and net trading income in tandem with another set of loan loss provision reversals helped the bank to lift its return on equity to 8.4% in the quarter. We maintain our DKK 170 per share fair value estimate and narrow moat rating.

Narrow-moat Danske Bank reported third-quarter profit before tax of DKK 4.27 billion, 12% ahead of consensus estimates polled by Danske before the earnings release. The beat was driven primarily by a better-than-expected loan-loss provision line with a reversal of DKK 151 million in the third quarter versus consensus expectations for a loan impairment of DKK 238 million on average. We have seen more positive loan-loss results across European banks broadly speaking this earnings season but would highlight that the current mix of loan-loss provisions taken last year not materializing to the extent feared together with a continuing benign credit default environment should not be extrapolated into the future. Danske’s guidance of below DKK 0.75 billion in loan losses for the full year suggests much the same for the fourth quarter, but we expect credit defaults and provision reversals to normalize throughout next year. We maintain our fair value estimate of DKK 170 per share.

Danske Bank is a stable and conservatively run bank that follows a sound expansion strategy in the Nordics. However, uncertainties about fines related to the EUR 200 billion of potentially fraudulent transactions that flowed through its Estonian branch from 2007 to 2015 put significant pressure on its share price. We think the market largely overacts as there is little information to go on, which is typically not liked by investors. We expect fines by European regulators to be about DKK 3 billion, which Danske can absorb with excess capital of about DKK 37.5 billion on hand. Fines by U.S. regulators are potentially more severe, but also less likely.

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.

We maintain our DKK 170 fair value estimate for Danske after an OK set of results. Profit before tax declined 7% to DKK 3.8 billion on lower income and higher expenses in the second quarter compared with the first. Income was down 3% primarily on lower net fee and net trading income, which declined 6% and 19%, respectively. Fee income remains elevated, however, despite the decline quarter over quarter, supported by high capital markets activity. Trading income tends to be volatile, and the first quarter was also positively affected by a DKK 227 million gain on the sale of Danske’s Visa stake. Taking this into account, we view performance as better than a first glance would suggest.

We maintain our DKK 170 per share fair value estimate for Danske after it reported decent first-quarter results. Comparing performance with the last quarter of 2020, which we believe paints a clearer picture, Danske did well. Total income increased 2% to DKK 10.6 billion carried by higher trading income and income from its insurance business. Net interest income was flat as deposit repricing tailwinds were offset by product mix effects and margin effects in the large corporates segment. More importantly, however, operating expenses have declined materially after the group has been investing and spending heavily over the last couple of years to restructure its business and clean its closet. Operating expenses came in at DKK 6.3 billion and are expected to fall below DKK 24.5 billion for the full year versus DKK 28.1 billion in 2020. Loan loss impairments of DKK 497 or 10 basis points were a positive as well compared with last quarter, but we would highlight that Danske’s current guidance of below DKK 3.5 billion implies higher impairments for the remainder of the year. Net income for the quarter came in at DKK 3.1 billion, which corresponds to a decent 7.5% return on equity.

We believe Danske Bank is a stable and conservatively run bank that follows a sound expansion strategy in the Nordics. However, uncertainties about fines related to the EUR 200 billion of potentially fraudulent transactions that flowed through its Estonian branch from 2007 to 2015 put significant pressure on its share price. We think the market largely overacts as there is little information to go on, which is typically not liked by investors. We expect fines by European regulators to be about DKK 3 billion, which Danske can absorb with excess capital of about DKK 37.5 billion on hand. Fines by U.S. regulators are potentially more severe, but also less likely.

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.

We believe Danske Bank is a stable and conservatively run bank that follows a sound expansion strategy in the Nordics. However, uncertainties about fines related to the EUR 200 billion of potentially fraudulent transactions that flowed through its Estonian branch from 2007 to 2015 put significant pressure on its share price. We think the market largely overacts as there is little information to go on, which is typically not liked by investors. We expect fines by European regulators to be about DKK 3 billion, which Danske can absorb with excess capital of about DKK 35.2 billion on hand. Fines by U.S. regulators are potentially more severe, but also less likely.