Danske downgrades profitability forecast as image, compliance issues persist

Danske Bank A/S's share price dropped more than 5% in early trading Oct. 29 after the Danish bank downgraded its 2023 profitability forecast and admitted that compliance and image issues were hampering its growth more than expected.

Denmark's largest lender by assets now anticipates a return on equity of between 8.5% and 9% in 2023, down from a previous ambition of 9% to 10%. The figure stood at 7.7% in the third quarter.

Presenting Danske's third-quarter earnings, CEO Carsten Egeriis said the bank's Danish retail business had struggled to capture its "fair share of the growing market." He highlighted extensive remediation and compliance work and the negative brand impact of its money-laundering scandal as headwinds that prompted the adjustment to growth assumptions.

"Although we continue to have a strong value proposition for all customer segments, our brand is particularly impacted in the personal customer segment in Denmark," the CEO said.

Danske in 2018 admitted to having been involved in a money-laundering scandal in which up to €200 billion worth of suspicious transactions flowed through the bank's Estonian branch from 2007 to 2015. The lender has also been dealing with the fallout of a debt collection scandal in which it admitted to overcharging financially distressed customers.

Despite the profitability downgrade for 2023, Egeriis said he was confident the bank's business model could reach an ROE of between 9% and 10% in a "normalized state."

As of 12:30 p.m. Copenhagen time, the bank's share price was down 5.3% at 109.25 Danish kroner.

Green transition growth potential

Danske's decision to downgrade its expectations did not come as a surprise to analysts, who have long questioned the lender's ability to reach its previous target. Yet Danske's new goal is still higher than consensus, which ahead of the earnings predicted the bank would achieve an ROE of just 7.6% in 2023, based on an average of 13 estimates provided to S&P Global Market Intelligence.

Presenting a plan for how Danske would reach its new 2023 ROE target, Egeriis said the bank sees "tremendous growth potential" within the large corporates and institutions and business customer segments, particularly in supporting clients in their green transition. To capture this growth, the bank will implement an improved service model that will cater to the growing demand for more complex solutions and expand its digital offerings, he said.

Danske estimates that income will increase to 43.5 billion kroner in 2023, from above 42 billion kroner this year, with two-thirds of the uplift coming from large corporates and institutions and business customers.

Costs will land at about 23.5 billion kroner in 2023, from about 25 billion kroner in 2021, according to the bank. The extended scope of its financial crime compliance remediation will cause an elevated need for resources until 2023, Egeriis said, but the compliance cost level is expected to improve in the 18 to 24 months after that.

Estonia case resolved by 2023

Danske's new target is based on the "prudent" assumption that regulatory investigations into its Estonian money-laundering case would be resolved by the end of 2023, and that the bank as such would reach a normalized equity level, Egeriis said. However, he emphasized that Danske is "not in control of timing on the resolution."

Danske is currently being investigated by authorities in Estonia, Denmark, France and the U.S., which could lead to hefty fines. The fact that a settlement has not been reached means the bank still needs to carry additional capital buffers, Egeriis said.

Danske recorded a common equity Tier 1 ratio of 18.1% at the end of the third quarter, significantly above its own management target of 16%.

As of Oct. 28, US$1 was equivalent to 6.38 Danish kroner.