Morningstar | Danske Company Report
We believe Danske 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 15 billion on hand. Fines by U.S. regulators are potentially more severe, but also less likely.We expect the underlying business to be little affected by any reputational damages. Danske has built strong and sticky customer relationships that can withstand the negative headlines over the coming couple of years, as we think the general perception is this issue is related to a small branch and does not reflect Danske’s general business practices. The most recent headlines over the involvement of more European banks in suspicious money flows have strengthened our confidence it is an issue of weak "know-your-customer" processes throughout the European banking system rather than active money laundering facilitation by the banks, or in this case Danske. Despite taking a more bullish view on reputational damages as well as the severity of fines, we believe the stellar returns of above 11% of the recent past are not sustainable in the long run. This is largely owed to our assumption that loan impairments will revert closer to midcycle levels from impairment reversal booked currently. Net interest margins are expected to remain under pressure from higher funding costs in the short term and lower-for-longer interest rates. As a result, returns on equity fall to 10% on average in our explicit forecast period.Danske Bank is a diversified financial services firm. Through its subsidiaries, Co.'s activities include the provision of banking, mortgage finance, insurance, real estate brokerage, asset masnagement and trading in fixed income products, foreign exchange and equities. Co. operates international retail bank operations in 15 countries, with an emphasis in the Nordic region. Co. divides its operations into five segments: Banking Activities, Danske Markets, Danske Capital, Danica Pension and Other Activities. As of Dec 31 2011, Co. had total assets of DKK3,424,403,000,000 and total deposits of DKK848,994,000,000.
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