Scope’s review will focus on execution of Danske Bank’s current measured growth strategy, its digital offering, and its risk management. The review will also assess the bank’s response to criticisms from the Danish FSA concerning its governance.
Scope Ratings today placed on review for possible upgrade Danske Bank’s A+ Issuer Rating as well as the bank’s A senior unsecured debt ratings and the BBB- rating of its Additional Tier 1 (AT1) securities. The S-1+ short-term rating and its Stable Outlook are not being reviewed. Scope noted that its rating review will focus on the execution of Danske Bank’s current growth strategy, which has shifted away from acquisitions in recent years, its risk management framework, and development of digital offerings to customers. The review will also assess management’s response to the issues raised in the recent report published by the Danish FSA concerning alleged weaknesses in governance concerning anti money-laundering controls.
The agency pointed out that following its review, Danske Bank’s ratings could be upgraded by one notch. Alternatively, they could be confirmed at the current level, either with a Stable or Positive outlook.
Scope’s analysis underpinning Danske Bank’s ratings reflects the bank’s solid and well-diversified market position in Denmark, its international diversification, the solidity of its Danish wealth management businesses, and reassuring financial and prudential metrics, which compare well with those of other major Nordic banks and elsewhere in Europe. Like the other large Nordic banks, Danske Bank also relies to a large extent on market funding, although a large portion comprises covered bonds, which have proved to be an extremely stable funding source.
When initially assigned in 2014, Danske Bank’s ratings reflected ongoing issues the bank had been facing, in particular with regard to its 2005 acquisitions in the Republic of Ireland and Northern Ireland, which generated large losses in the wake of the financial crisis. During the same period the bank also experienced agricultural sector and corporate credit losses in its Danish operations and had to downsize the Baltic operations it acquired when it bought Sampo Bank in 2005. Goodwill impairments were booked in 2014 and 2015 relating to Finland, Northern Ireland and Estonia; subsequent periods have been clean. The ratings were upgraded by one notch in June 2017 based on progress made.
Following Danske Bank’s balance-sheet clean-up (the ‘non-core’ portfolio at the end of 2017 comprised just 0.1% of total assets) and steadier subsequent performance which brings it more in line with some higher-rated peers, Scope is more reassured that Danske Bank’s credit fundamentals are likely to remain strong, as it remains in a good position to weather well any normalization of its current favourable credit costs (in negative territory due to provision reversals). Possible pockets of concern appear limited; the shipping portfolio has required added provisions in the past two years, but exposure appears well controlled.