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Danske Bank opts for cautious capital approach amid Basel IV uncertainty

CFO JacobAarup-Andersen told analysts July 21 that the lender opted to boost itstargeted capital backstop in the light of the uncertainty surrounding rulesthat have been dubbed "Basel IV."

DanskeBank the same day said it boosted its targeted common equity Tier 1 ratio — thestrictest measure of capital — to between 14% and 15% in the short to mediumterm, with a total capital ratio target of around 19%. The bank in its 2015annual report said it was targeting a 13% CET1 ratio and a 17% total capitalratio; it bumped the CET1 target to an "ambition" of 14% in itsfirst-quarter results.

Respondingto questions from analysts about the bank's motivation for the revision,Aarup-Andersen said the debate around Basel IV "has led to a need for abit more prudency."

"Oncewe have more clarity on the main regulatory unknowns out there, we willreassess our target levels again," he said. "There is not onespecific trigger event; as I said, we've been assessing our capital levels andit's only prudent that we do that as a major player here."

BaselIV has been used as a shorthand for a package of measures by the BaselCommittee on Banking Supervision aimed at tightening the standards banks use tocalculate the risk on their balance sheets, in effect raising the denominatorof the ratio and imposing additional capital requirements. It follows theformal set of standards known as Basel III, which were implemented after thefinancial crisis to reduce the risk of taxpayer-funded bank bailouts, and whichfocused primarily on the quality and quantity of capital.

"Thisis not something that has been driven by a single event,"Aarup-Andersen added. "We have obviously discussed this with the FSA, asyou would expect us to do. We have a very good dialogue with the FSA, and theDanish FSA acknowledges our new targets and the solid capital position of thebank."

Danske Bank reported a CET1 ratio of 15.8% at the end of thefirst half, up from 15.0% at the end of the first quarter, when it was adjustedto account for the full effect of a 9 billion Danish kroner share buyback. Theratio stood at 16.1% at year-end 2015, prompting the bank to launch the sharerepurchase.

Expensesrose in the second quarter to 5.81 billion kroner, compared to 5.31 billionkroner in the prior quarter and 5.65 billion kroner in the year-ago period. Butthe uptick will not set a tone for the near future, according toAarup-Andersen, who said in response to analyst questions that some of the increasewas down to one-off costs such as external consultants that will "fallaway" in the coming quarters.

CEOThomas Borgen said, meanwhile, that it is still too early to determine theimpact of Britain's decision to leave the EU on economic growth, adding thatthe Nordics were likely to be less affected than other continental Europeaneconomies. Northern Ireland accounts for about 3% of the bank's lending, andslower growth in the U.K. will have only a muted impact on the bank'sperformance, he said.  

First-halfnet profit attributable to shareholders fell year over year to 9.36 billionkroner from 9.42 billion kroner, with second-quarter attributable profitdeclining to 4.42 billion kroner from 4.47 billion kroner. Aarup-Andersen saida broadly flat performance in net interest income — which dipped to 10.75billion kroner from 10.80 billion kroner under the bank's preferred approachbefore reconciliation to IFRS — was attributable to 4% growth in lending andreduced funding costs offsetting margin pressure.

DanskeBank also adjusted its guidance for net interest income, saying it now expectsan increase in 2016, having previously forecast that the figure would be eitherflat or up.

As of July 21, US$1 wasequivalent to 6.76 Danish kroner.