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Morningstar | Danske's First-Quarter Profits Fall 35%, Forcing Management to Revisit Full-Year Guidance

Danske reported first-quarter results of DKK 3 billion, down 35% compared with the same period last year, prompting management to lower net profit guidance downward for the full year. The target of DKK 14 billion-DKK 16 billion in net profits for 2019 remains unchanged; it now includes DKK 1.3 billion in expected gains from the sale of Danica Pension Sweden, however. Our full-year profit expectation sits even below the now revised guidance at DKK 12 billion, as such we are not surprised with the development in the beginning of the year. We maintain our fair value estimate of DKK 210 and narrow moat rating.

Danske’s operation was facing headwinds front, left, and center this quarter, not least owed to the Estonian money laundering case. Higher funding costs and thinner margins were a drag on net interest income that declined 9% to DKK 6.9 billion, while higher expenses largely related to investments in anti money laundering compliance drove costs up by 10%. The adverse development in funding costs was a direct result of increased credit spreads on non-preferred senior bonds offers in the U.S. and Europe driven by the Estonian anti money laundering case. Additionally, signs of a maturing economic cycle start to appear in Denmark, which materialised in Danske’s profit and loss in the form of higher credit impairments of DKK 618 million compared with virtually no impairments last year.