Hvad kan vi hjælpe med i dag?
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For the whole year 2015, Danske's cost of risk should be below 10 bps, among the lowest in the European banking sector. The program began on 31 March, 2015, and will run to year end. Related to the , Danske's total income increased by 6% and cost were down by 2% leading to positive jaws.
Despite cutting branches by 70% and costs by 22% since the peak in 2009, Danske still seems to have room to do more business on flat costs. Internationally, Danske has put renewed focus on its Sweden and Norway franchises from the beginning of 2014.
Hvad kan vi hjælpe med i dag? - In 2014, its cost of risk was only 20 bps a level that is more similar to other Nordic banks showing its superior credit quality.
Summary Danske Bank is Denmark's largest bank and has benefitted greatly from the economic and housing recovery of the past two years. Its profitability has increased considerably due to much lower loan losses and during the past quarter it was able to report provision releases, an impressive achievement. Its discount to Nordic peers does not seem to be justified and a re-rating may occur if management increases more aggressively the dividend payout ratio. Company Overview is Denmark's biggest bank and a leading player in the northern European financial markets. It was founded in 1871 and has grown organically as well by acquisitions throughout its history. Danske Bank provides financial services including banking, insurance, mortgage and lease financing and asset management services. Personal banking accounts for about half of its loan book, business banking has a weight of 38%, while large corporate and institutional clients represent 11% of Danske's loan book. The bank operates branches throughout Denmark, as well as international subsidiary banks. It operates in serving approximately 3. Its core markets are Denmark, Norway, Sweden and Finland but also operate in Ireland and the Baltic countries. Its primary listing is in Copenhagen, but also trades in the U. Its biggest market is Denmark, where it has a 27% market share. Its main competitor is Nordea , but also faces competition from local players, including Sydbank and Jyske Bank. The market is quite concentrated with the top 4 banks having about 70-80% of loan and deposit market share. For large banks this means higher profitability is sustainable over the long term, while efficiency was boosted by cost optimization and branch closures over the past few years. Danish banks were hard hit by the global financial crisis with increasing substantially after 2008. However, the economic recovery in Denmark has started in 2013 and should be supportive of continued normalization of loan losses. Danske is the largest bank domestically and was among the first to benefit from Danish economic recovery. Internationally, Danske has put renewed focus on its Sweden and Norway franchises from the beginning of 2014. Danske has only about 5% market share of private sector loans in these two countries and is building on its private banking franchise and expanding its offering in the corporate and institutional space, providing therefore a universal banking service to its clients. Financial Overview Regarding its , even though Danske reports relatively stable earnings throughout the business cycle, it was naturally affected by the European and Danish economic crisis of the past few years. However, with Danish macroeconomic environment improving rapidly since 2013 and the housing recovery becoming more broad-based, its results rebounded quite fast driven by much improved credit quality. The recovery in had been mainly related to the Great Copenhagen area since 2013, but more recently this has expanded through other regions in Denmark where Danske had more issues with credit quality. Indeed, Danske achieved in the past year the best results since 2007 and during the first six months of 2015 the trajectory has remained positive and rising collateral values has played a decisive role, allowing the bank to decrease sharply its loan loss provisions. Danske's credit quality is very good within the European banking sector, but a little bit worse than its Nordic peers due to its exposure to Ireland and the economic recession experienced in Denmark during 2012-13. The Irish woes appear to be over and unemployment in Denmark is declining, leading to much lower credit risk quality than a few years ago. In 2014, its cost of risk was only 20 bps a level that is more similar to other Nordic banks showing its superior credit quality. Indeed, Danske's credit quality has improved so fast that its loan loss provisions dropped to net reversals in the second quarter of this year, an impressive achievement and clearly shows by how much credit quality has improved in its loan book. For the whole year 2015, Danske's cost of risk should be below 10 bps, among the lowest in the European banking sector. Another factor that is supporting earnings growth is the bank's program. Despite cutting branches by 70% and costs by 22% since the peak in 2009, Danske still seems to have room to do more business on flat costs. Its efficiency is below its closest peers, with a cost to income ratio of more than 46% in the second quarter of the present year, while most Nordic banks are targeting a cost-to-income ratio within a range of 40-45%. This is below the level reported by its closest Nordic peers, but much better than most European banks and moving forward it aims to increase its profitability, with a target of 9. Related to the , Danske's total income increased by 6% and cost were down by 2% leading to positive jaws. This is justified by a better economic environment and a recovering housing sector. This result is quite impressive given that Danske's goal was to achieve this profitability only by 2018. Capital and Dividends Another positive factor for the bank is its strong capitalization, above the European sector's average. Even though the bank had to receive state aid during the financial crisis, this was fully repaid in 2014. Moreover, after the capital in 2014, the bank started a new phase focusing on capital distribution through higher dividends and share buybacks. It started a share buyback program announced with 2014 results, giving a strong message that Danske was more than comfortable with its capital position. Danske's dividend payout ratio target is between 40-50% of net profit without considering extraordinary items. If the bank decides to target a payout closer to its Swedish peers, this can easily move to more than 70% of profits. This would lead to strong dividend growth and Danske would deliver one of the highest yields within the sector. Its shareholder remuneration policy is also boosted by its current share buyback program. Danske is one of the only two banks in Europe that are currently buying back its own stock, showing how confident is management regarding the bank's capitalization. Not surprisingly, the other bank that has a share buyback program ongoing is its Danish peer Sydbank, being a very positive signal about the health of the Danish banking system. The program began on 31 March, 2015, and will run to year end. Together with its dividend, this leads to a total shareholder remuneration of close to 5%. Main Risks Regarding risks, despite Danske's quality profile it still faces some issues that may create some headwinds going forward. Although the discussions are in preliminary stages, this is becoming an increasing focus and would be a negative hit on Danske's capital. The impact is estimated to be below 100 bps on capital, so it seems to be manageable for Danske given its excess capital position. Moreover, the experience in Sweden shows that banks were able to increase lending margins to compensate the effect of higher capital requirements. Another potential risk is related to the Danish kroner peg against the euro and its sustainability over the long-term. After Switzerland un-pegged the Swiss Franc cap at the begging of 2015, was seen by speculator as the next target. The Central Bank of Denmark protected the Danish kroner peg, lowering interest rates a few times to -0. However, one of Danske's mitigating actions is to charge corporate depositors' negative deposit rates. Additionally, Danske has a few small pockets of risk due to its exposure to riskier industries. However, the industry is recovering and Danske's exposure only represents 2% of its loan book. Another area of concern is Danske's agricultural portfolio that faces some challenges since the imposition of economic sanctions to Russia. The bank has reacted proactively and the riskier businesses within agriculture are very well provisioned, with Dairy and Pig breeding coverage ratios of 96% and 79%, respectively. Conclusion Danske is quality bank within the European banking sector that is under-followed by U. The bank continues its transformation from a credit quality recovery story to a dividend investment. Further profitability increases should ultimately lead to an increasing dividend payout ratio, reducing the gap to its Swedish peers. Danske is currently trading at lower multiples than its closest peers, a discount that does not seem to be justified given the bank's strong fundamentals. Danske's dividend yield is lower than average and this may partially justify its valuation discount, but the bank seems very well positioned to increase its dividend payout towards the Swedish levels reducing its yield gap to peers. This catalyst may come at the beginning of 2016 when the bank reports its 2015 earnings, possibly leading to a re-rate of its shares. This is something that was already seen with Nordea, which increased its dividend payout ratio from slightly above 50% to 70% in the , so Danske would be only following its closest competitor footsteps. If Danske would trade at 1.