Danske Bank A/S. Update Following Upgrade of Long-Term Deposit ratings and Outlook Change to Positive from Stable. CREDIT OPINION 17 October 2016

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1 CREDIT OPINION 7 October 6 Danske Bank A/S Update Following Upgrade of Long-Term Deposit ratings and Outlook Change to Positive from Stable Update Summary Rating Rationale RATINGS Danske Bank A/S Domicile Denmark Long Term Debt A Type Senior Unsecured - Fgn Curr Outlook Positive Long Term Deposit A Type LT Bank Deposits - Fgn Curr Outlook Positive Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. On October 6, we upgraded Danske Bank A/S (Danske Bank)'s long-term deposit rating to A from A, its long-term deposit note/ CD program rating to (P) A from (P) A and affirmed all other ratings. The rating agency also changed the outlook to positive from stable on Danske Bank A/S's long-term deposit, long-term issuer rating and senior debt ratings. At the same time, we affirmed the bank's standalone baseline credit assessment (BCA) at baa. The affirmation of Danske Bank A/S s baa BCA reflects the progressive strengthening of the bank's performance in recent years following its challenges during the financial crisis, both domestically and abroad. The continued improvements include a strengthening of its asset quality, capitalisation and profitability, as the bank benefits from a balanced and welldiversified lending portfolio. Danske Bank's A long-term senior unsecured debt and A deposit ratings take into account the bank's baa BCA, in conjunction with our view of a low loss-given-failure based on the protection provided to creditors by the group's deposits, senior and subordinated debt, and a moderate likelihood of government support. Exhibit Contacts Alessandro Roccati Senior Vice President alessandro.roccati@moodys.com Danske Bank versus Large Nordic Peers Improving asset quality, capitalisation and profitability, as the bank benefits from a balanced and welldiversified lending portfolio Maria Asensio Associate Analyst maria.asensio@moodys.com Sean Marion Managing Director Financial Institutions sean.marion@moodys.com Source: Moody's Banking Financial Metrics

2 Credit Strengths and Challenges Danske Bank's BCA is supported by its Strong+ macro profile Improving asset quality, albeit still below Nordic peers Solid and improving capitalisation Profitability is improving, but remains below similarly rated peers High reliance on market funding, in particular covered bonds; liquidity is adequate and refinancing risk is reducing Our advanced LGF analysis indicates a low loss-given-failure, resulting in a two-notch uplift to the long term deposits and a onenotch uplift to the senior unsecured debt ratings from the BCA The long term deposit and senior unsecured debt ratings incorporate one notch of government support uplift Rating Outlook The positive outlook on Danske Bank A/S s senior ratings reflects the bank's improvements in financial metrics to date and the expectation of a continuation of the positive trend. Moody s considers the recent positive trends in asset quality, capital and profitability to be sustainable. In addition, the bank has shown improving recurring earnings in the first half of 6, supported by its balanced and well-diversified business mix. Factors that Could Lead to an Upgrade Upward rating pressure could develop from a continuation of the positive trends in the bank s financial performance, including: () an improvement in Moody s asset risk assessment, especially with regards to more volatile segments, such as agriculture and commercial real estate; and () an increase in profitability and reduced earnings volatility, supported by revenues, without a material increase in risk provisioning; () an improvement in the capital leverage position, currently constrained by the large nominal size of the bank s balance sheet. An upward change in the bank s long-term debt and deposit ratings would require upward pressure on its BCA and/or additional loss-absorbing liabilities at group level providing additional notching uplift from our advanced LGF analysis (see also Notching Considerations). Factors that Could Lead to a Downgrade Downward rating pressure could arise from: () any renewed pressure on asset quality, particularly in one of the bank's core markets; () any indication that the firm will not deliver the anticipated improvement in profitability; or () any sign that the improvements achieved in recent years are not sustainable. Key Indicators Exhibit Danske Bank A/S (Consolidated Financials) [] Total Assets (DKK million) Total Assets (EUR million) Total Assets (USD million) Tangible Common Equity (DKK million) Tangible Common Equity (EUR million) Tangible Common Equity (USD million) Avg.,6,88 4, ,794 4, 8,84.,9.7,55,864 49, , ,586,74.7,5.,5,89 4,4.5 5,9.5 4,68 8,984.8,97.7,5,84 48, ,49.4 5,578 6,8.8,94.6,79,944 46,4 56,96.9 8,69.7 5,897.5, This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 7 October 6

3 Problem Loans / Gross Loans (%) Tangible Common Equity / Risk Weighted Assets (%) Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) Net Interest Margin (%) PPI / Average RWA (%) Net Income / Tangible Assets (%) Cost / Income Ratio (%) Market Funds / Tangible Banking Assets (%) Liquid Banking Assets / Tangible Banking Assets (%) Gross loans / Due to customers (%) [] All figures and ratios are adjusted using Moody's standard adjustments [] Basel III - fully-loaded or transitional phase-in; IFRS [] Basel II; IFRS [4] Compound Annual Growth Rate based on IFRS reporting periods [5] IFRS reporting periods have been used for average calculation [6] Basel III - fully-loaded or transitional phase-in & IFRS reporting periods have been used for average calculation Source: Moody's Financial Metrics Detailed Rating Considerations Danske Bank's BCA is supported by its Strong+ macro profile Danske Bank's Macro Profile is Strong+ and aligned with that of Denmark, on the basis of the weighted average of the bank's credit exposures. The bank s largest credit exposures relate to Denmark (6%, Macro Profile Strong+ ) Sweden (%, Macro Profile Very strong- ), Norway (%, Very strong- ), and Finland (%, Strong+ ). Danish banks benefit from an improving operating environment and a strong institutional and legal framework. Our assessment also factors in the banking system's large stock of problem loans that date back to the financial crisis, and high household debt. The financial sector has considerable wholesale funding needs, which - although reducing - create some susceptibility to adverse events, while the relatively fragmented structure of the banking industry and strong competition constrain profitability. Improving asset quality, albeit still below peers Our assigned a Asset Risk score reflects our assessment that recent positive trends in asset quality are sustainable. Danske Bank has continued to improve its asset quality, as reflected by a decreasing NPL trend. At end-june 6 group problem loans, as calculated by the bank, declined to.6% from.% at end-5 and.7% at end-4. Exhibit Danske Bank Problem Loans % Gross Loans Evolution We expect Danske bank's asset quality to record moderate improvements in the coming months Source: Moody's Banking Financial Metrics 7 October 6

4 Danske Bank's still elevated problem loan ratio reflects the impact of the financial crisis in Denmark on its domestic portfolio, but also poor asset quality at its operations in the Republic of Ireland (government bond rating A positive ) and to some extent in Northern Ireland (UK government bond rating Aa negative), which, however now represent only around % of the bank loan book. Danske Bank non-core assets stood at DKK.6 billion (net) at end-june 6, or.% of the bank loan book. The winding-up of Danske Bank's Irish non-core portfolio continues and most of the commercial property portfolio has now been sold. In the first quarter of 6, Danske Bank finalised the disposal of its non-core personal customer business in the Baltics to Swedbank (deposit / senior unsecured rating Aa / Aa stable, BCA a ), reducing non-core assets by 4% since the end of 5. Of these non-core assets, 8% were non-performing, mitigated by non-performing loan provision coverage of %. We expect further moderate improvements in the group s asset quality during 6, supported by the domestic economy, which we expect to grow by.% in 6 and.6% in 7, following growth of.% in 5. In addition, the low interest rate environment has improved debt affordability and clients repayment capacity; consumer confidence is up and house prices are growing. That said, asset quality remains weaker than that of its large Nordic peers (average problem loans.% for large Nordic peers, at end-june 6). Solid and improving capitalisation Our assigned a Capital Score reflects our view that capitalisation is a relative strength for Danske Bank's standalone credit profile. Danske Bank's capital ratios improved in recent years, increasing the bank's ability to absorb potential future losses: at end-june 6, its Common Equity Tier (CET) ratio was 5.8%, a moderate decrease versus 6.% at end-5, due to the February 6 DKK9 billion share buy-back. Despite the decrease, we continue to view Danske Bank s capital position as sound. On a nominal leverage basis, tangible common equity at 4.4% of total assets at end- June 6 was short of some Nordic peers. We adjust our capital score to account for the bank s high leverage. Exhibit 4 Danske Bank's CET Ratio Evolution We view capitalisation as a relative strength for Danske Bank's standalone credit profile Source: Moody's Banking Financial Metrics Profitability is improving, but remains below similarly rated peers Danske Bank's profitability remains a relative weakness for the group, which is reflected in our assigned baa Profitability Score. Net income in the first half of 6 was.6% of tangible assets, and we expect Danske Bank's earnings capacity to remains below that of its peers, reflecting Denmark's modest, albeit improving, growth environment, and margin pressure in the low interest-rate environment. The firm s strategy currently focuses on enhancing its wealth management capabilities, reducing operating cost and on continuing to improve customer satisfaction in its core markets (Denmark, Sweden, Norway and Finland). Danske Bank's primary source of earnings is net interest income (around half of total income in 5), which has been under pressure owing to the lack of volume growth, the low interest-rate environment, and high funding costs. Trading income and income from the insurance business (Danica Pension) add volatility to earnings; in 5 these business lines together accounted for % of income. 4 7 October 6

5 In this environment, we see Danske Bank's ability to maintain tight cost control as crucial. The efficiency gap against peers closed significantly in recent years, as the cost-to-income ratio was 5.% in the first half of 6, in line with the average of its large Nordic peers (5.%). We expect profitability trends to moderately improve going forward as strategic initiatives, including optimisation of price structures and improved cost efficiency and a moderate level of credit provisions will mitigate margin pressure resulting from the current low interest-rate environment in Denmark. Danske Bank recorded DKK 9.4 billion net income in the first half of 6, unchanged year on year. While net fee and commission income decreased by % year-on-year due to continued pressure on deposit margins in the current negative short-interest rate environment, the bank was able to reduce operating expenses by DKK. billion (-% year on year) and recorded low impairments in core activities driven by net reversals of DKK. billion. High reliance on market funding, in particular covered bonds; liquidity is adequate and refinancing risk is reducing While the share of deposit funding has increased in recent years to around % of total funding at end-june 6 owing to the deleveraging trend in the Danish economy, Danske Bank relies heavily on capital markets funding. Market funds accounted for 4.7% of tangible banking assets at end-5. Our assigned baa Funding Structure score reflects the historical stability and strength of the Danish covered bond market. The majority of the group's market funds are raised from covered bond markets (largely via Realkredit Danmark, Danske Bank's mortgage subsidiary). The refinancing risk on this funding source is reducing: in the current low interest rate environment, and following the introduction of a new price structure incentivising longer reset periods, Danske Bank's exposure to one- and two-year adjustable rate mortgages has reduced to 4% of gross loans at end-june 6 from 7% at end-. In addition, the March 4 bill on mortgage credit loans and mortgage-credit bonds mitigates the refinancing risk arising from short-term market disruption because it provides a framework for failed covered bond auctions from Danish mortgage lenders. We take some comfort from Danske Bank's sizeable reported liquidity buffer - most of which can be used as collateral for central bank liquidity - amounting to DKK55 billion or 5% of total assets at end- June 6. At end-5 our wider definition of liquid banking assets, including cash and deposits with the Danish central bank, as well as held-to maturity and liquidity investments designated at fair value through profit or loss (which mainly consist of Danish covered bonds) accounted for around 7.5% of tangible banking assets and our assigned Liquidity Resources score is a. At end-june 6, Danske Bank's Liquidity Coverage Ratio according to the new EU standards was 6%. Notching Considerations Loss Given Failure and Additional Notching Denmark enacted the EU Bank Resolution and Recovery Directive (BRRD), which we consider to be an Operational Resolution Regime, in March 5. In our loss-given-failure analysis of the bank's balance sheet, we assume residual tangible common equity of % and losses post-failure of 8% of tangible banking assets, a 5% run-off in junior wholesale deposits, a 5% run-off in preferred deposits, and assign a 5% probability to deposits being preferred to senior unsecured debt. These are in line with our standard assumptions. We apply a standard assumption for large European banks that 6% of deposits are junior. The upgrade of Danske Bank A/S s long-term deposit rating to A from A reflects an increase in the volume of deposits since end-5 and the planned issuance of unsecured debt, which we believe offers further loss absorption for deposit liabilities issued by the bank. Taking account of the group's consolidated balance sheet structure at end-june 6 and its near-term funding plan, Moody's Advanced Loss Given Failure (LGF) analysis indicates that Danske Bank A/S s deposits are likely to face very low loss-given-failure, due to the loss absorption provided by subordinated debt and, potentially, by senior unsecured debt should deposits be treated preferentially in a resolution, as well as the substantial volume of deposits and senior debt themselves. This results in a Preliminary Rating Assessment (PRA) of a for deposits, two notches above the BCA, and one notch higher than under the previous analysis, which was based on end-5 data. 5 7 October 6

6 Danske Bank A/S s senior unsecured debt, issued at the bank level, is likely to face low loss-given-failure due to the loss absorption provided by its own volume and the amount of debt subordinated to it. This results in a PRA of a, one notch above the BCA, unchanged versus the previous analysis. Danske Bank's A long-term senior unsecured debt and deposit ratings take into account the bank's baa BCA, our view of a low loss given- failure on these instruments resulting in one notch of Loss Given Failure (LGF) uplift. We apply our Advanced LGF analysis on the consolidated total banking group including the Finnish operations, and thereby assume an SPE resolution across the group's Nordic operations. We consider that the bank's highly interconnected group structure and cooperation between national regulators make a cross-border resolution probable, implying the equal treatment of creditors of Danske Bank A/S and those of its Finnish subsidiary Danske Bank plc (see also our Credit Opinion on Danske Bank plc). Government Support Although the implementation of the BRRD has prompted us to reconsider the potential for government support to benefit certain creditors, we continue to consider a moderate probability of government support for Danske Bank, resulting in one notch of government support uplift in the bank's A long-term senior unsecured debt and A deposits. This reflects that Danske Bank is Denmark's largest financial institution, and is the market leader in most financial products, commanding an approximate % market share. Counterparty Risk Assessment CR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails and are distinct from debt and deposit ratings in that they () consider only the risk of default rather than both the likelihood of default and the expected financial loss suffered in the event of default; and () apply to counterparty obligations and contractual commitments rather than debt or deposit instruments. The CR assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities. Danske Bank's CR Assessment is positioned at Aa(cr)/Prime(cr). The CR Assessment, prior to government support, is positioned three notches above the Adjusted BCA of baa, based on the substantial cushion against default provided to the senior obligations represented by the CR Assessment by subordinated instruments. The main difference with our Advanced LGF approach used to determine instrument ratings is that the CR Assessment captures the probability of default on certain senior obligations, rather than expected loss, therefore we focus purely on subordination and take no account of the volume of the instrument class. The CR Assessment also benefits from one notch of systemic support, in line with our support assumptions on deposits and senior unsecured debt. This reflects our view that any support provided by governmental authorities to a bank which benefits senior unsecured debt or deposits is very likely to benefit operating activities and obligations reflected by the CR Assessment as well, consistent with our belief that governments are likely to maintain such operations as a going concern in order to reduce contagion and preserve a bank's critical functions. About Moody's Bank Scorecard Our Scorecard is designed to capture, express and explain in summary form our rating committee's judgment. When read in conjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our Scorecard may materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strong divergence). The Scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down to reflect conditions specific to each rated entity. 6 7 October 6

7 Rating Methodology and Scorecard Factors Exhibit 5 Danske Bank A/S Macro Factors Weighted Macro Profile Strong + Financial Profile Factor 7 % Historic Macro Ratio Adjusted Score Credit Trend Assigned Score Key driver # Key driver # Collateral and provisioning coverage Solvency Asset Risk Problem Loans / Gross Loans.4% a a Expected trend Capital TCE / RWA 7.5% aa a Nominal leverage Profitability Net Income / Tangible Assets.4% ba baa Expected trend Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets a 4.7% Liquid Resources Liquid Banking Assets / Tangible Banking Assets 7.5% a b a baa Market funding quality a Stock of liquid assets Term structure Combined Liquidity Score Financial Profile Business Diversification Opacity and Complexity Corporate Behavior Total Qualitative Adjustments Sovereign or Affiliate constraint: Scorecard Calculated BCA range Assigned BCA Affiliate Support notching Adjusted BCA ba Balance Sheet Other liabilities Deposits Preferred deposits Junior Deposits Senior unsecured bank debt Dated subordinated bank debt Junior subordinated bank debt Preference shares (bank) Senior unsecured holding company debt Dated subordinated holding company debt Junior subordinated holding company debt Preference shares (holding company) Equity Total Tangible Banking Assets in-scope (DKK),59,88 95,86 74,766 47,6 4, 8,76, 9,7 % in-scope 56.6%.8% 5.% 8.8% 4.4%.4%.%.7% at-failure (DKK),689,7 855,4 669,57 85,75 4, 8,76, 9,7 % at-failure 6.%.4%.8% 6.6% 4.4%.4%.%.7% 84,4,8,655.% % 84,4,8,655.% % 7 October 6 baa a Aaa a-baa baa baa

8 Debt class De jure waterfall De facto waterfall Notching LGF Assigned Additional Preliminary LGF notching Rating Instrument Sub- Instrument SubDe jure De facto notching guidance notching Assessment volume + ordination volume + ordination versus subordination subordination BCA Counterparty Risk Assessment 6.% 6.% 6.% 6.% a (cr) Deposits 6.% 5.% 6.% 9.6% a Senior unsecured bank debt 6.% 5.% 9.6% 5.% a Junior subordinated bank debt.8%.7%.8%.7% baa (hyb) Non-cumulative bank preference shares.7%.%.7%.% - ba (hyb) Instrument Class Counterparty Risk Assessment Deposits Senior unsecured bank debt Junior subordinated bank debt Non-cumulative bank preference shares Loss Given Failure notching Additional Preliminary Rating notching Assessment - a (cr) a a baa (hyb) ba (hyb) Government Local Currency rating Foreign Support notching Currency rating Aa (cr) A A -A -Baa (hyb) -Ba (hyb) Source: Moody's Financial Metrics Ratings Exhibit 6 Category DANSKE BANK A/S Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Issuer Rating Senior Unsecured Jr Subordinate Pref. Stock Non-cumulative Commercial Paper Other Short Term Moody's Rating Positive A/P baa baa Aa(cr)/P(cr) A A Baa (hyb) Ba (hyb) P (P)P DANSKE BANK A/S (LONDON BRANCH) Outlook Deposit Note/CD Program Positive (P)A/(P)P DANSKE BANK PLC Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Issuer Rating Senior Unsecured MTN Subordinate MTN -Dom Curr Pref. Stock Non-cumulative -Dom Curr Positive A/P baa baa Aa(cr)/P(cr) A (P)A (P)Baa Ba (hyb) DANSKE CORPORATION Bkd Commercial Paper P Source: Moody's Investors Service 8 7 October 6

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10 Contacts Maria Asensio Associate Analyst 7 October 6 CLIENT SERVICES Alessandro Roccati Senior Vice President alessandro.roccati@moodys.com Americas Asia Pacific Japan EMEA