Danske Bank A/S shares rose more than 13% in early afternoon trading Oct. 27 after the bank estimated it would face a penalty of 15.5 billion kroner, or $2.1 billion, from U.S. and Danish authorities over a high-profile Baltic money-laundering scandal.
Danske, Denmark's largest lender by assets, booked 14 billion kroner in provisions for the "Estonia matter" in the third quarter of 2022, having already taken 1.5 billion kroner in charges in 2018. It leaves the bank with a common equity Tier 1 ratio of 16.9%, which remains above its own management target of 16%.
"It could have been a lot worse," said Jyske Bank analyst Anders Vollesen. "It is at a level where the bank's capital situation does not become an issue."
"Overall, this is positive and helps to send the share price up significantly," said Sydbank equity analyst Mikkel Emil Jensen. "It puts an economic end to the matter."
Danske Bank was first named in relation to the Global Laundromat in 2017 and was subsequently at the center of media revelations about the scandal.
A 2018 probe by Danish law firm Bruun & Hjejle found that more than €200 billion of nonresident money flowed through the bank's Estonian branch from 2007 to 2015, of which a "significant" part was found to be suspicious. It also found that a whistleblower had notified Danske's management about shortcomings as far back as 2013.
The findings led to the resignation of Thomas Borgen as CEO and prompted authorities in Estonia, Denmark, France and the U.S. to open investigations into the Danish lender's Baltic activities.
"The discussions with U.S. and Danish authorities related to the Estonia matter are now at a stage where Danske Bank can reliably estimate the total financial impact of a potential coordinated resolution amounting to a total of 15.5 billion Danish kroner," Danske's CEO Carsten Egeriis said in a statement Oct. 27.
Egeriis said there was ongoing dialogue with authorities, including with the U.S. Department of Justice, the U.S. Securities and Exchange Commission and the Danish Special Crime Unit. The bank hopes there will be a resolution by the end of the year, the CEO said.
Investors have been particularly concerned about potential financial penalties from the U.S. DOJ, which has issued billions of dollars in fines to banks over money laundering and sanctions violations. Previous fine estimates made by analysts ranged from 4 billion kroner to 20 billion kroner.
Dividends may restart in 2023
The news removes the risk associated with the investigations and uncertainty around the share price, said Jensen. He said investors have also reacted positively to the fact that the bank can pay the fine "out of its own pocket" and otherwise good third-quarter results. The fact that Danske maintained its 2023 ambition of reaching a return on shareholders' equity of 8.5% to 9% is also positive, according to Jensen.
"Focus will now return to Danske Bank's commercial momentum," Vollesen said, adding that it should positively impact his future earnings estimates for Danske.
Danske revised its profit outlook for 2022 and now expects a net loss of less than 5.5 Danish billion kroner in light of the Estonian provision. It had previously estimated a full-year net profit of between 10 billion kroner and 12 billion kroner.
The bank has also canceled the remaining dividend tranches for 2021 and will propose to not pay out dividends for 2022.
Vollesen expects Danske to start accruing and paying dividends as normal from 2023, as the bank has the capacity to do so. Meanwhile, there is an acceptance among investors that 2021 and 2022 dividends will be withheld.
"I think the market is satisfied with that, and that is what we can read from the share price," Vollesen said.
Lower regulatory requirement
Danske is also facing a lower regulatory capital requirement. The Danish financial regulator in 2018 imposed a so-called Pillar II add-on of 10 billion kroner on Danske to cover heightened compliance and reputational risks in light of the scandal. Danske said 7.5 billion kroner of those have now been released on the basis of dialogue with the regulator.
The U.S. Office for Foreign Assets Control, a Treasury enforcement agency, in December 2020 closed its investigation into potential sanctions breaches by Danske.
The bank still faces a range of shareholder lawsuits by investors in the bank's ordinary shares, with more than $1 billion of claims having been filed in Denmark to recover losses from a significant share price drop. They accuse Danske Bank, and in some cases former bank executives, of misleading investors and inflating the bank's share price by failing to inform the market that it was facilitating illicit transactions through its Baltic operations.
Danske in its third-quarter report said the timing of completion of any such lawsuits, pending or threatening, and their outcome are uncertain and "could be material."
As of Oct. 26, US$1 was equivalent to 7.39 Danish kroner.