Analyst Note, Dan Werner, 30/10/2014
With lower expenses and loan-impairment charges, Danske Bank produced a solid third quarter. At this point, we will maintain our narrow moat rating and fair value estimate of DKK 164. As a result of the lower costs, Danske reported net profit of DKK 3.3 billion for the third quarter (DKK 3.2 per share), much higher than the year-ago profit of DKK 1.5 billion (DKK 1.5 per share). Return on equity equaled 8.9% compared with 4.3% last year and 10.8% last quarter. Net interest income increased due to the repayment of hybrid capital raised from the Danish state and higher yields from the bond portfolio. Lastly, lower impairment charges and continued expense control led to Danske's improved results.
Part of Danske's improved results is due to the cost-reduction program introduced at the beginning of the year. Expenses in the third quarter declined to DKK 5.5 billion from DKK 6.0 billion a year ago. For 2014, the goal remains to keep costs below DKK 23 billion for the year.
We continue to see lower loan-impairment charges, which has contributed to Danske's stronger results in recent quarters. Total loan-impairment charges equaled DKK 668 million for the quarter compared with DKK 924 billion last year. While overall loan-impairment charges were down, loan losses represented 0.17% of total loans, lower from the year-ago level of 0.32%. Overall, we continue to be encouraged by the improvement in asset quality across Danske's various country operations.
Capital remains strong, with the core Tier 1 ratio equaling 15.0% and a total capital ratio of 19.3%. Overall, we are pleased with Danske's capital position as of the end of the third quarter.
Bull og Bear scenarier for Danske bank
Bull
- Capital is strong with the core Tier 1 capital ratio at more than 14%, giving the bank sufficient cushion against loan losses.
- Most of the banking assets remain in its home country of Denmark, where unemployment has stabilized and positive GDP growth is expected over the year.
- Expense reduction efforts should help maintain positive earnings during this difficult economic environment.
Bear
- Danske is expected to continue incurring larger loan losses, primarily from Irish housing, which will weigh upon the bank's capital generation.
- The agricultural and shipping sectors in Denmark have experienced difficult times, which has resulted in high loan impairment levels to Danske.
- Danske is very dependent on wholesale funding markets and gets only about 33% of its funding from deposits.
Læs den fulde analyse af Danske Bank her.
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