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Morningstar | Jyske Reports Fiscal-Year 2018 Results; We Lower Our Fair Value Estimate on Weaker Outlook. See Updated Analyst Note from 27 Feb 2019

Jyske reported pretax profits of DKK 3.1 billion for 2018, which is 22% lower than 2017 and resulted in a return on average equity of 7.6%, well below our cost of equity assumption of 9% and the result last year of 9.7%. The culprits were missing value adjustments benefiting results as they did last year, as well as higher loan impairment charges of DKK 468 million versus DKK 453 million in reversals the year prior. Net interest income and fee and commission income came in weaker, down 1% and 5%, respectively, although 9% lower operating expenses were enough to offset the softer top line. For next year, Jyske targets 6%-10% return on average equity for 2019 citing high competition in Denmark and a generally less favourable market environment. This is a downshift of 2% on both the top and bottom ends of the range management had set for the year just behind us. On this more subdued outlook, weaker-than-expected 2018 results and after rolling our model a year forward, we lower our fair value estimate to DKK 300 from DKK 395 per share. Our no-moat and stable trend rating are unchanged. We now expect a return on average capital of 8% next year, falling to about 7% toward the end of our explicit forecast period as we expect loan loss provisions, which have been a tailwind in the last couple years, to move closer to midcycle levels.

Despite the softer outlook and weaker performance relative to 2017, the dividend is expected to increase to DKK 6.12 from DKK 5.85 per share last year. Jyske’s common equity Tier 1 ratio stands at 16.4% compared with a solvency requirement of 11% and a self-imposed target of 14%.