EUR 850.00 For Business Accounts Only

Morningstar | Danske's 1H Results as Expected After Profit Warning; Fair Value Maintained

After its profit warning on 8 July, first-half 2019 results at Danske were no surprise. Net profit fell 21% to DKK 7 billion, corresponding to a 9% return on equity in the first half of the year, although this includes a DKK 1.3 billion gain from the sale of Danica Pension Sweden. According to our calculations, the net profit excluding the sale was about DKK 6 billion, or a return on equity of about 7.7%. We maintain our DKK 200 per share fair value estimate and narrow-moat rating despite this negative development, because we have adjusted our model already following the profit warning.

The stock trades on the edge of five-star territory and the significant discount to our fair value looks exciting. However, we point investors to our very high uncertainty rating for Danske. In the short- to medium term, higher anti-money-laundering expenses and margin pressure because of higher funding costs as well as a bearish outlook on the global economy are likely to weigh on operating results. Danske’s new management promised to offer investors a new strategy later in 2019 to address these issues. Additionally, our very high uncertainty rating reflects the wide range of possible outcomes of Danske’s Estonia case, related to anti-money-laundering.

Net interest margins remain under pressure. At a group level, higher funding costs as a result of the Estonia case negatively affected margins. More worryingly however, Danske also experienced margin compression at a segment level across the board. Margins reported on a segment basis exclude group-wide funding costs. Danske said competition in Sweden and a shift toward lower-margin mortgage products in Denmark were the main reasons. We already model for a material decline in net interest margins during 2019, which we think adequately reflects the current development. However, this is an area we will watch closely.

Danske holds 16.5% in common equity Tier-1 capital versus a minimum requirement of 14.3%. This translates into about DKK 16.8 billion in excess Common Equity Tier-1 capital. Additionally, the minimum requirement includes DKK 10 billion in common equity Tier-1 capital set aside for potential fines related to the Estonia case. Tallied up, this gives Danske headroom of DKK 26.8 billion or about 30% of its total market capitalization.