A market abuse case and multiple reprimands from the Danish financial regulator could impede Danske Bank A/S' efforts to rebuild trust among its customers, but analysts expect an otherwise limited impact on Denmark's largest bank.
In what is now a case for Danish police, Finanstilsynet found during an inspection in 2019 that Danske had engaged in so-called wash trading by simultaneously selling and buying the same financial instruments between 2016 and 2019.
Wash trading can create misleading or artificial activity in a marketplace and could constitute market abuse. The regulator said June 10 that it had reported Danske to the police for violating market abuse regulation and for failing to have in place effective systems to detect and report such transactions.
"Market abuse is serious," said Mikkel Emil Jensen, an equity analyst at Sydbank. The case will be particularly unhelpful in Danske's efforts to rebuild its image following its involvement in a historic money-laundering scandal in the Baltics, he said.
Danske admitted in 2018 that up to €200 billion nonresident money, most of which was found to be suspicious, flowed through its Estonian branch between 2007 and 2015.
"It's no secret that Danske Bank currently has a tarnished image, and it's a priority for the bank to reestablish trust and credibility among its customers," Jensen said. "Obviously such cases are not helpful in this respect."
Danske is also dealing with an overcharging case related to its Flexinvest Fri portfolio management product, in which the Danish prosecutor in November 2019 charged the bank with violating investor protection rules by providing misleading information to thousands of new and existing customers.
Although not positive for Danske, the wash trade case is far less serious than the Baltic money-laundering scandal, said Mads Thinggaard, an equity analyst at ABG Sundal Collier. He emphasized Finanstilsynet's assessment that Danske is unlikely to have executed the "opposite trades" intentionally.
"The wash trade case strikes me as something that is more technical in nature," he said.
The bank itself has admitted it did not have adequate market monitoring in place at the time. Philippe Vollot, Danske's chief compliance officer, said the bank takes the matter "very seriously" and had in 2019 made "significant investments" to strengthen the systems in close dialogue with Finanstilsynet.
"The so-called opposite trades were due to insufficient procedures, and we have introduced new controls designed to prevent something similar from happening again," he said June 10, adding that there was no indication of intentional wrongdoing or any harm to customers or market participants.
Regardless of intention, being found guilty of having manipulated the market through wash trading could warrant a financial penalty for Danske. A fine is, however, likely to be relatively small compared to a potential money-laundering fine, Jensen and Thinggaard said.
Finanstilsynet further criticized the bank June 11 and June 12. It said Danske had failed to adopt impairment rules correctly on its corporate books, and also found shortcomings in the bank's credit policy guidelines, risk analysis and assessment of customers' debt servicing ability for property loans.
Notably, the regulator had in an August inspection found that "significant" additional write-downs were needed on a sample of 55 loans valued at 2 million Danish kroner to corporate customers in stages 2 and 3. Write-downs for the sample totaled 142 million kroner, when in fact this number should have been 323 million kroner, according to the watchdog.
Danske had not only implemented several parts of the impairment rules incorrectly, but also had errors in its data, Finanstilsynet found.
Jensen said the reprimand mainly focuses on accounting technicalities around how the bank categorizes its loans under the IFRS 9 accounting standard. IFRS 9 has only been in effect since 2018 and it is as such not surprising to see mistakes in its implementation, he said.
"In the wake of new accounting principles and stricter regulatory requirements, it's hard to avoid errors in the implementation and understanding of new rules," Jensen said, adding that other banks in Denmark are likely to face similar orders to align their IFRS 9 interpretation with the regulator's expectations.
Commenting on the reprimand, Brian Skopek, COO for risk management at Danske, said Finanstilsynet has taken a stricter approach to the adoption of IFRS 9 than most other supervisory authorities in the world.
This approach "has proved difficult to implement" while retaining the integrity of other standards such as IRB, he told S&P Global Market Intelligence. The internal ratings-based, or IRB, approach is a method banks use to assess credit risk and calculate regulatory capital.
Loan portfolio review
Danske is now reviewing its loan portfolio, according to Finanstilsynet. While this could result in additional second-quarter impairment charges, they will be far less significant than those resulting from the coronavirus pandemic and are unlikely to total much more than 100 million kroner, according to Thinggaard.
He noted that Danske had already booked 530 million kroner in additional impairment charges in its 2019 fourth-quarter earnings following the inspection.
In comparison, Danske has recorded loan impairment charges of 4.34 billion kroner in the first quarter of 2020 after updating its macroeconomic scenarios under IFRS 9 and provisioning for exposures to companies and sectors severely affected by the pandemic. As such the bank "front-loaded" the potential severe negative impact of the pandemic on asset quality, said Vitaline Yeterian, senior vice president for the global financial institutions group at DBRS Morningstar.
Skopek said he believed the bank had already absorbed the financial implications of Finanstilsynet's inspection. Furthermore, Danske is working to adapt its IT systems and processes to the specific requirements of the regulator, and some changes have already been implemented, he said.
As of June 23, US$1 was equivalent to 6.58 Danish kroner.