Danske Bank releases rate sensitivity forecast following ECB, Danish rate hikes

Danske Bank A/S expects a net interest income boost of around 800 million Danish kroner annually after the Eurozone and Danish central banks raised rates by 50 basis points this week.

Denmark's largest lender by assets will then reap an annual benefit of between 800 million kroner and 900 million kroner for each of the next four 25 bps interest rate hikes, CEO Carsten Egeriis said on an earnings call July 22.

This comes after the European Central Bank raised its benchmark deposit rate by 50 bps to 0%, double the initial 25 bps guidance. The Danish central bank followed by increasing its key interest rate by the same amount, to minus 0.1%.

Denmark's fixed exchange rate policy means the central bank's sole mandate is to keep the krone stable against the euro.

Strong lending volumes and higher deposit margins already helped to drive Danske Bank's net interest income to 5.81 billion kroner in the second quarter, a 5.3% increase from the same period last year. The bank's deposit margins benefited from recent repricing actions and higher short-term rates, said CFO Stephan Engels.

"We see good traction for our income from core banking activities. And on this basis, we continue to expect this income to be higher for the full year," Engels said.

The ECB and Danish central bank rate moves this week will boost Danske's 2022 NII by between 330 million kroner and 340 million kroner, according to Egeriis.

Danske's rate sensitivity estimate includes assumptions that some of the interest rate increases will be passed on to deposit customers based on historical pass-through rates, Engels said.

The Danish lender said July 21 it would raise the variable interest rate on personal and business customer deposits by 50 bps to negative 0.20% in light of the Danish central bank rate hike. Other large banks in Denmark, including Nordea Bank Abp and Jyske Bank A/S, have made similar moves.

Danske's improving net interest income trend is encouraging, UBS analysts said in a note July 22. "With the ECB yesterday having raised rates more than expected, we see scope for consensus net interest income upgrades as we are now likely to see positive rates in Denmark already by the end of the third quarter," the note said.

Tough trading

Despite improved NII, negative net trading and net insurance income drove Danske's net profit down to 1.71 billion kroner in the second quarter, from 2.79 billion kroner a year earlier.

Net trading income amounted to a negative 390 million kroner due to extraordinarily high volatility and lower liquidity in the Nordic fixed income markets, while net income from insurance business came in at a negative 122 million kroner due to negative valuation adjustments, the bank said.

Danske already announced July 10 that second-quarter net profit would be around 1.7 billion kroner. At the same time, the bank downgraded its 2022 full-year net-profit guidance to between 10 billion kroner and 12 billion kroner, from a previous estimate of 13 billion kroner to 15 billion kroner.

The Danish lender also decided to withhold dividends for the second quarter in a row as it is still in discussions with U.S. and Danish authorities over its involvement in a money-laundering scandal in Estonia and faces a potentially material fine.

Shares of Danske Bank were down 2.5% in early afternoon trading.

As of July 21, US$1 was equivalent to 7.30 Danish kroner.