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Morningstar | Placing Danske Under Review

We are placing Danske under review to assess the tangible impact that recent revelations in its money-laundering case and potential fines may have on the bank’s business, its risk profile, and its competitive advantages. We plan to publish an update shortly.

Although known by the public for a couple years already, recent revelations are painting an ever-grimmer picture of the extent of the wrongdoing involved. Up to EUR 200 billion of funds that flowed through the Estonian branch from 2007 to 2015 are under investigation, forcing Danske’s CEO Thomas Borgen to step down and calling into question the knowledge management had at the time. His replacement, Jesper Nielsen, previously head of Danish banking at Danske, has his work cut out for himself. In Nielsen's first week in the job, the Danish Financial Supervisory Authority required Danske to hold DKK 10 billion in additional capital, instead of the previously announced DKK 5 billion, for potential reputational damage and fines resulting from the scandal. Danske also revealed that the U.S. Department of Justice, or DoJ, is looking into a criminal investigation, and reports have surfaced that the bank was involved in mirror trades, a tactic that has previously led to fines for Deutsche Bank. We plan to fully digest the recent developments and analyse the potential impact on Danske’s business, as well as the likelihood and size of potential fines.

We believe markets are punishing Danske Bank for its poor crisis management up to this point. Attempts to get ahead of the news with its own investigative report and promises to clean ship have lost credibility after recent revelations called into question whether the problems were born in negligence or active pursuit by people at the helm of Danske. We also believe that the DoJ's involvement brings back memories of the forced liquidation of ABLV, the third-largest Latvian lender at the time, which saw liquidity drying up after the DoJ targeted the bank for its ongoing money-laundering activities. We assess it as unlikely that a similar scenario will befall Danske, however, as the Patriot Act (under which the DOJ can restrict U.S. financials from dealing with an entity) has historically been invoked in cases in which the entity poses an ongoing threat to the U.S. financial system. In Danske’s case, the nonresident Estonian unit was closed in 2015, together with the client relationships in question, and the bank has vowed to take the necessary steps to prevent future fraudulent activities. Thus, we view it as more likely that the DoJ will refrain from utilizing the Patriot Act. Substantial fines from both European regulators and U.S. regulators are a possibility, however.