Strategic review in 2014 turned into execution

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1 DANSKE BANK - STRONG BUY Strategic review in 214 turned into execution In connection with the annual report for 214, we expect that management will present specific initiatives in order to achieve the medium-term ROE-target of 12%. Strategic review: Based on Danske Bank s strategic review in 214, we expect a continued focus on especially the profitability of the C&I business, where trading income has been under pressure for several quarters. Danske Bank has communicated an ROE-target of 15% for the C&I unit, which in our mind is ambitious - especially if the current market conditions with low volatility and interest rates continue. The restructuring process of the Personal Banking unit in Sweden will continue as a long-term case - we expect a new management will be presented soon Winding down non-core: During the first nine months of 214 we have seen Danske Bank continue winding down the activities in Non-core the process has most likely been accelerated in the fourth quarter, e.g. we have seen the liquidator of Anglo Irish Bank sell off 9% of a EUR 24bn loan portfolio (mainly properties) within just one year highlighting significantly better conditions for selling property assets Ireland. Well capitalised: Danske Bank is well capitalised with a CET1-ratio at 15%. Management has confirmed a CET1 comfort level at 14%. Attractive valuation: We continue to see Danske Bank as an interesting long-term investment case based on an attractive P/B at 1.7, which is low compared to other large Nordic banks, e.g. Svenska Handelsbanken with a P/B at 1.99 and SEB with a P/B at Accounting figures and key figures (DKKm) 213R 214E 215E 216E Net interest income Total income Pre-tax profit Total income (%) -13,% 1,5% 1,9% 2,4% Cost/income ratio 59,9% 71,3% 49,5% 48,9% NII/RWA 2,6% 2,7% 2,8% 2,9% ROE 5,% 4,4% 9,7% 9,9% EPS 6,5 6,5 14,8 15,6 P/E 19,1 24,3 1,7 1,2 P/BV,93 1,5 1,2 1, Div. per share 2, 6,6 9,6 1,9 Share buy-back Fundamental valuation Undervalued Risk Average News flow Neutral 12-month target price 25 Closing price 163 Shar e infor m ation High/low latest 12 m 171/124 Price trend (3/12 m) 3%/29% Relative to OMXC2 2%/14% Market value (DKKm) Free float 77% Avg daily vol (DKKm) 271, Reuters DANSKE.CO Bloomberg DANSKE DC Pr ice tr end Danske Bank 177 OMXC2 Cap j f m a m j j a s o n d j Source: Jyske Bank & Datastream Jyske Markets, Vestergade 8-16 DK-86 Silkeborg Senior Analyst, Equity Research, Thomas Eskildsen Thomas.eskildsen@jyskebank.dk This is an investment research report for retail clients. Important investor information: Please see the last pages of the report 1

2 Overview Danske Bank Company profile Danske Bank is the largest Danish bank. The Danske Bank group consists of Danske Bank, Realkredit Danmark, Danica Pension and the subsidiaries outside Denmark. The bank offers services within banking, insurance, mortgage lending, asset management and leasing. Danske Bank has approx. 5 million private customers in Denmark, Norway, Sweden, Finland and Ireland and the bank serves a significant number of customers in the corporate, public and institutional segments. Danske Bank has approx. 19, employees. Ownership structure Other 68% A. P. Moeller F. 23% Cevian Capital 9% Sales growth and profitability Break-down of sales 15% 1% 5% % -5% Corporates and Institutions 21% Business Banking 3% Danske Danica CapitalPension 5% 3% Personal Banking 41% Growth in net interest income Growth in result before tax Fundamental valuation Investment case We assess that the Danske Bank share trades below fair value. The Danske Bank share offers exposure to growth and the We assume that the economic trend in the Nordic countries will interest-rate level in Scandinavia, predominantly to the slowly improve but that Danske Bank will in this process Danish economy. improve its earnings much faster than its rivals. The losses in Ireland and Northern Ireland will fade away in 214 and 215 and earnings will improve. The bank's solid capital position ensures peace for this even with the implementation of new capital rules. Price triggers Risk factors Increasing interest margins that generate growth on the top as The company has natural exposure to the macro-economic well as the bottom line. environment in Scandinavia. Increases in the number of the Falling impairment charges in Ireland and Northern Ireland countries' unemployment rates will raise the loss and will lift earnings. provisions percentage and put the bottom line under pressure. Continuing volatility in the financial markets may give rise Because of Danske Bank's exposure in Ireland, the continued to high trading income. focus on the debt crisis in the European fringe countries will cause a negative sentiment. Total return of the share 28-72,7% ,9% 21 23,3% ,3% ,4% 213 3,1% 2

3 Date Recommendation Buy Strong Buy Price at recommendation 13,6 132,5 163,4 Yield until next change of recommendation or today 1,45% 23,32% Index at recommendation 72,18 714,64 81,54 Yield until next change of recommendation or today -,77% 13,42% Relative performance compared to index 2,24% 12,79% The tabled prices are the opening price of the day of the recommendation change. Index: OMXC2 CAP 3

4 Important Investor Information Jyske Bank is supervised by the Danish Financial Supervisory Authority. The research report is based on information which Jyske Bank finds reliable, but Jyske Bank does not assume any responsibility for the correctness of the material nor any liability for transactions made on the basis of the information or the estimates of the report. The estimates and recommendations of the research report may be changed without notice. The research report is for the personal use of Jyske Bank's clients and may not be copied. This report is an investment research report. Conflicts of interest Jyske Bank has prepared procedures to prevent and preclude conflicts of interest thus ensuring that research reports are being prepared in an objective manner. These procedures have been incorporated in the business procedures covering the research activities of Jyske Markets, a business unit of Jyske Bank. Jyske Bank's analysts may not hold positions in the instruments for which they prepare research reports. If an analyst takes over for the responsible analyst in connection with illness, business activities, etc., this analyst cannot trade in the relevant instrument on the day of publication of the research report and the following day. Jyske Bank may, however, hold positions, have interests in or business relations with the instruments/companies for which such reports are prepared. Analysts receive no payment from persons interested in individual research reports. Company research reports have not been presented to the company prior to their release. Read more about Jyske Bank s policy on conflicts of interest at Jyske Bank s share recommendations current allocation Allocation of recommendations, Danish shares (number) Allocation of recommendations, all shares (number) Strong Buy Buy Reduce Sell Strong Buy Buy Reduce Sell Source: Jyske Bank Update of research report The planned update of the report will be prepared immediately upon the release of the company s financial statements. In addition, research reports may be prepared on special themes specifically for the company or research reports where the company is part of the special theme. These research reports are published on an ad-hoc basis. See the front page for the initial date of publication of the report. All prices stated are the latest closing prices before the release of the report, unless otherwise stated. Financial models Jyske Bank employs one or more of the following models: Discounted cash flow (free cash flow), Economic Value Added and the dividend model to determine the fundamental value of a company. The fundamental value is compared with a relative valuation based on multiples such as P/E and EV/EBITA. The recommendation and the price target are moreover adjusted for the expected news flow and the market sentiment based on knowledge of the industry and company-specific circumstances. Jyske Bank s recommendations take into account the expected development in the equity market, the various sectors and company-specific circumstances. 4

5 Risk Investment in this share is associated with risk. Movements in the equity market, the sector and/or news flows, etc. regarding the company may affect the price of the share. See the front page of the research report for our view of the risk associated with the share. The risk factors stated and/or calculations of sensitivities in the research report are not to be considered all-encompassing. If the share is traded in a currency other than the investor s base currency, the investor accepts an FX risk. In connection with an ADR or similar papers, the FX risk exists relative to the currency in which the underlying share trades. Risk-adjusted Recommendation return Strong buy >2% Buy 1-2% Reduce -1% Sell <% Source: Jyske Bank Recommendation concepts Our recommendations are relative to the market development and are based on an evaluation of the forecast return within the next twelve months. The forecast return is the difference between the current price and our 12-month price target (the price target includes the expected dividend). The equity market has historically yielded a return of around 1% (the US equity market, for instance, yielded a return of 1% during the period ). When we determine the recommendation for a share, we use the 1% as an estimate of the return in the equity market. Since our recommendations are relative and risk-adjusted, it is possible to compare our recommendations across sectors and risk categories. In addition, the potential is stated in absolute terms via our price target. It should be borne in mind, however, that the recommendation is the anchor. A BUY recommendation will remain a BUY recommendation until changed, even if price increases have taken the price too close to the price target. For clarification of the recommendation structure we refer to: The future and historical returns estimated in the research report are stated as returns before costs and tax-related circumstances since returns after costs and tax-related circumstances depend on a number of factors relating to individual client relations, custodian charges, volume of trade as well as market-, currency- and product-specific factors. It is not certain that the instrument will yield the stated expected future return/s. The stated expected future returns exclusively express our best assessment. Risk classification Risk categorization Green: An investment product type is in green category if the risk of losing all the invested amount is regarded as insignificant, and if the product type is simple to grasp. Amber: An investment product type is in amber category if there is a risk of losing the invested amount partially or fully, and if the product type is simple to grasp. Red: An investment product type is in red category if there is a risk of losing more than the invested amount, or if the product type is difficult to grasp. Complexity For a product to be characterized as non-complex : it must be possible to sell, redeem or in any other way realize the product at a publicly accessible price; it must not involve actual or potential obligations for the client exceeding the expenses of acquisition; pricing must be determined without reference to the prices of other securities as well as other indices and targets; easily comprehensible, publicly accessible information about the characteristics of the product must be available; the product must not be a derivative instrument. 5

6 Contacts Private Banking Nord Toldbod Plads 1 9 Aalborg Tlf: Private Banking Midtvest St. Torv 1 75 Holstebro Tlf: Private Banking Sydvest Torvet Esbjerg Tlf: Private Banking Østjylland Østergade 4 8 Århus C Tlf: Private Banking Trekantsområdet Hjulmagervej 8 F 71 Vejle Tlf: Jyske Bank (Schweiz) AG Tlf: Berben s Effectenkantoor B.V. Tlf: +31 () PBC Hamburg Tlf: Private Banking København Vesterbrogade København V Tlf: Private Banking Sjælland Nørregade 6 41 Ringsted Tlf: Private Banking Fyn Mageløs 8 51 Odense C Tlf: Private Banking Silkeborg Vestergade Silkeborg Tlf: Private Banking Exclusive Vestergade Silkeborg Tlf: Jyske Bank (France) Tlf : Jyske Bank (Gibraltar) Ltd Private Banking Copenhagen (PBC) Tlf: