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TEXT-Fitch affirms Danske Bank at 'A';negative outlook
November 30, 2012 / 11:01 AM / 5 years ago

TEXT-Fitch affirms Danske Bank at 'A';negative outlook

Nov 30 - Fitch Ratings has affirmed Denmark-based Danske Bank’s (Danske) Long-term Issuer Default Rating (IDR) at ‘A’, Viability Rating at ‘a’ and Short-term IDR at ‘F1’. The Outlook on the Long-term IDR is Negative. A full list of rating actions is at the end of this rating action commentary.


The affirmation reflects Danske’s strong Danish franchise, solid capitalisation and relatively diversified earnings. It also factors in ongoing asset quality challenges in Ireland and Denmark resulting in high loan impairment charges (LICs), moderate cost efficiency, and wholesale funding reliance, although the latter is mitigated by a large and liquid domestic funding market.


The Negative Outlook continues to reflect the profitability challenges Danske is facing resulting from LICs in Ireland and Denmark, which are limiting its ability to absorb higher than expected shocks. However, in Fitch’s view, the downside risk is reducing, particularly in Danske’s Irish portfolio. A revision of the Outlook to Stable would require clear signs of an improving risk profile combined with a sustainable level of profitability. Management has introduced a number of measures during 2012 aimed at addressing both profitability and risk.

A downgrade of the Long-Term IDR would be limited to a single notch to ‘A-', provided that the Support Rating Floor remains at ‘A-'. In this case, the bank’s Short-Term IDR would remain at the current level of ‘F1’.

Fitch expects profitability will improve in 2013, although for it to remain significantly below pre-crisis levels. LICs have been significant since 2008 and have accounted for over 60% of pre-impairment operating profits. Management has taken actions focusing on boosting profitability via margin increases and containing costs, although Fitch does not expect this to translate to a marked improvement until 2014. In its base case, Fitch expects lower LICs to be the key driver for improved bottom line profit in 2013 and 2014.

Asset quality has been affected by the global economic downturn, in particular its Danish business, and the real estate crisis in Ireland. Non-performing loans remain high as a proportion of gross loans, although Fitch expects the level to stabilise in 2013. The net impaired exposure accounted for around half of reported equity at end-September 2012, leaving Danske vulnerable to potential further deterioration in collateral values. However, Fitch believes the downside risks are reducing, given the substantial impairment charges already taken in its Irish book and stabilising asset quality indicators in its Danish operations.

Danske funds just under half of its loan book by customer deposits, making it reliant on wholesale funding markets for its structural funding, like most Nordic banks. Its domestic mortgage business is mainly funded by Danish mortgage bonds issued by its subsidiary Realkredit Danmark (‘A’/Stable/‘F1’). Danske has maintained access to domestic and international funding markets, although it would be affected by a prolonged dislocation in funding markets. Fitch believes that Danske will retain a significant liquidity portfolio to mitigate this risk.

Danske’s capital adequacy ratios compare well to international peers, but lag some of its Nordic peers. Solid capitalisation mitigates the currently weak profitability and asset quality challenges. Leverage is relatively high with a tangible common equity/tangible assets ratio of just above 3% at end-September 2012.


Danske’s Support Rating and Support Rating Floor reflect Fitch’s expectation that there is an extremely high probability that support would be forthcoming from the Danish authorities if required. This is driven by Danske’s importance within the Danish financial sector, with around one-third of deposits at end-September 2012.

The Support Rating and Support Rating Floor are sensitive to any potential change in Fitch’s assumptions about the propensity or ability of the Danish authorities to provide timely support to the bank.


Subordinated debt and other hybrid capital issued by Danske are all notched down from Danske’s VR. The ratings are in accordance with Fitch’s assessment of each instrument’s respective non-performance and relative loss severity risk profiles, which vary considerably. Their ratings are primarily sensitive to any change in Danske’s VR.

This rating action has no impact on the ratings of the covered bonds issued by Danske secured over the International, Domestic and Combined mortgages cover pools (cover pools I, D and C).

The rating actions are as follows:


Long-term IDR: affirmed at ‘A’, Negative Outlook

Short-term IDR: affirmed at ‘F1’

Viability Rating: affirmed at ‘a’

Support Rating: affirmed at ‘1’

Support Rating Floor: affirmed at ‘A-’

Commercial Paper Programme: affirmed at ‘F1’

Long-term senior debt: affirmed at ‘A’

Short-term senior debt: affirmed at ‘F1’

Guaranteed senior debt: affirmed at ‘AAA’

Subordinated notes: affirmed at ‘BBB’

Tier 1 instruments: affirmed at ‘BBB-’

Danske Corporation

Commercial Paper Programme: affirmed at ‘A’/‘F1’

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