Analysts raise Danske Bank dividend, EPS forecasts after money-laundering charge

Danske Bank A/S is expected to pay dividends at the higher end of its target range from next year, according to S&P Capital IQ consensus estimates, after the bank canceled distributions for 2021 and 2022 to cover a money-laundering settlement.

The Danish lender booked a 14 billion kroner provision in its third-quarter earnings Oct. 27 for the resolution of regulatory investigations into a high-profile money-laundering case in Estonia. While this will be a short-term drag on earnings, analysts welcomed the news as it removes uncertainty around a penalty.

The financial results and provision have prompted analysts to raise their estimates for Danske's dividends and earnings in 2023 and 2024, and lift the price target for Danske shares.

While Danske canceled dividends for 2022 and the remaining tranches for 2021, the Danish lender is expected to pay a dividend of 9.2 kroner per share in 2023 and 9.9 kroner in 2024, according to consensus. This represents a payout ratio of 56% and 57%, respectively, and falls at the higher end of Danske's policy to pay dividends of between 40% to 60% of net profit.

Danske's average dividend payout ratio was roughly 50% between 2015 and 2020, excluding 2019 when the bank canceled dividends due to the coronavirus pandemic.

"While shareholder capital return is impacted short term, this clears the way for higher payouts in the future," UBS analysts said in a note. The analysts added that Danske could pay above the 60% upper end of its payout range in the medium term.

The Danish bank remains well capitalized after its Estonia provision, with a common equity Tier 1 ratio of 16.9% at the end of the third quarter. This is above its own target of 16% and a regulatory requirement of 13.6%.

Deutsche Bank analyst Kazim Andac expects Danske to resume share buybacks from next year, which would bring total payout to 73% in 2023 and 90% in 2024, while keeping its CET1 ratio at 16.8% in 2024, he said in a note.

Danske's capital distribution beyond 2022 is subject to an ongoing assessment and decision by the board under the bank's dividend policy, said Stefan Singh Kailay, head of press relations. It currently has no share buyback plans, he said via email.

The bank's third-quarter results prompted analysts to lower earnings estimates to a loss of 6.4 kroner per share for 2022. However, expectations were revised upward for 2023 and 2024, where EPS is forecast to reach 16.4 kroner and 17.3 kroner, respectively.

Rising interest rates and higher business volumes will boost core income, while reductions in expenses will support earnings, said Sydbank analyst Mikkel Emil Jensen in a note.

Danske's transformation work and growing commercial momentum has put it in a strong position to deliver on its 2023 ambition of reaching a return on shareholders' equity of 8.5% to 9%, said Kailay. The Estonia provision has provided significant clarity for employees, customers and investors, Kailay said.

The money-laundering charge should make Danske shares attractive to a much larger investor base over time, according to UBS analysts.

Danske shares were valued at 127.40 kroner at market close Nov. 25, more than 24% higher than Oct. 26, the day before Danske released its third-quarter results and provision news. Consensus target price was raised to 144.94 kroner as of Nov. 25, up from 127.11 kroner on Oct. 26.

As of Nov. 25, US$1 was equivalent to 7.15 Danish kroner.