DBRS Confirms Danske Bank A/S at A, Trend Revised to Negative

DBRS Ratings Limited (DBRS) has confirmed Danske Bank A/S (Danske or the Bank) at ‘A’ for the Long-Term Issuer Rating, and R-1 (low) for the Short-Term Issuer Rating. The Intrinsic Assessment (IA) for the Bank is ‘A’, resulting in the Bank’s final ratings being positioned in line with its IA. The trend on the Bank’s long-term ratings has been revised to Negative from Stable. Please see the table at the end of the press release for a full list of ratings.

KEY RATING CONSIDERATIONS
In revising the trend on the long-term ratings to Negative, DBRS has taken into account the extended scope of the regulatory investigations into Danske, and its Estonian branch. Initial investigations had been led by the Estonian and Danish regulators, however the US Department of Justice (DoJ) is now involved, along with several other non-domestic authorities. The Danish FSA has recently announced capital add-ons for the Bank, and it remains unclear to what extent the Bank’s franchise, earnings, funding, and ultimately capital, may be negatively impacted by possible fines and damage to the Bank’s reputation.

RATING DRIVERS
Any upside pressure is unlikely in the short term. However, the ratings could return to stable if the Bank is able to demonstrate limited franchise and financial impact as a result of the regulatory investigations from the Estonian case.
Additional negative pressure on the ratings would likely be driven by (i) a material damage to the customer franchise, or (ii) a significant deterioration in profitability or capital levels, or (iii) a weakening in investor confidence that would affect access to wholesale funding.

RATING RATIONALE
Operational risk challenges have become evident at Danske, since the Danish FSA memorandum published in May 2018. This revealed serious shortcomings in governance in Estonia over money laundering issues during the 2007-2015 period, as well as weaknesses in risk management. Investigations into the Estonian case are still ongoing with the final outcome remaining uncertain. However, the publication of Danske’s internal investigation in September 2018 uncovered an unprecedented level of suspicious money transferred through its Estonian branch. While the investigations revealed weaknesses in risk management in the Estonia branch in all three lines of defence (the business, the risk management and compliance function, and the internal audit department) and although Danske is cooperating with the relevant authorities, further clarification remains needed regarding the full extent of the breakdown in risk controls and how this will impact the bank.

DBRS considers Danske’s capacity to generate earnings as strong and resilient. However, any significant negative impact on the franchise as a result of significant risk and control issues may impair the Bank’s capacity to generate solid earnings.

DBRS views Danske as having a well-managed funding profile, however, at the same time, access to international wholesale funding could be challenged, depending on the outcome of the DoJ investigations. DBRS notes that senior debt instruments funded in US dollars represented around a third of Danske’s total senior debt at end-June 2018 (DKK 47 billion or 35% of DKK 135 billion, representing about USD 7 billion) while US commercial paper accounted for approximately USD 4 billion. At end-June 2018, Danske maintained a Liquidity Coverage Ratio above 100% in EUR and USD (224% and 156%), and the Bank’s total liquidity buffer amounted to DKK 548 billion.

Danske’s capitalisation levels have been supported to date by good internal capital generation, large cushions over regulatory minimum, and continued access to markets. Nonetheless, any fines in connection with the Estonian branch activities have the potential to reduce the Bank’s large capital cushions. On October 4, 2018, the Danish FSA announced additional regulatory penalties with capital add-ons, and Danske is now required to increase the Pillar II add-on to DKK 10 billion, or 1.3% of its total REA (RWA equivalent) at the end of 2Q18. This would increase the Group’s solvency requirement to 11.9% from 11.2% at end-June 2018. DBRS notes the combined buffer introduced by CRD IV that applies in addition to the solvency need is phased in from 2015 to 2019. Including the combined buffer, the Group’s regulatory minimum Common Equity Tier 1 (CET1) ratio requirement is increasing to 13.2% from 12.6% further to the additional capital add-on. Under fully phased-in rules, Danske’s CET 1 ratio at end-June 2018 was 15.7% (with REA of 20.3% of total assets) and its leverage ratio was 4.2%. Given these pressures, DBRS views positively Danske’s decision to end its current share buy back programme of DKK 10 billion.

The Grid Summary Grades for Danske Bank A/S are as follows: Franchise Strength – Strong; Earnings – Strong; Risk Profile – Good; Funding & Liquidity – Strong/Good; Capitalisation – Strong/Good.

Notes:
All figures are in DKK unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2018). This can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial, Finanstilsynet (Danish FSA) and Company Documents. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

DBRS 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.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Vitaline Yeterian, Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, MD – Head of EU FIG, Global FIG
Initial Rating Date: January 18, 2010
Last Rating Date: July 31, 2018

DBRS Ratings Limited
20 Fenchurch Street
31st Floor
London
EC3M 3BY
United Kingdom
Registered in England and Wales: No. 7139960

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.

DBRS rating definitions and the terms of use of such ratings are available at www.dbrs.com

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.