CREDIT OPINION 9 February 28 Danske Bank A/S Update following Q47 and rating action early February Update Summary Danske Bank AS's standalone Baseline Credit Assessment (BCA) is a, its long-term deposit, long-term senior unsecured debt and issuer ratings are A; the deposit rating is on a stable outlook, while the senior unsecured and issuer rating carry negative outlooks (following the rating action on February 2nd 28). RATINGS Danske Bank A/S Domicile Denmark Long Term Debt A Type Senior Unsecured - Fgn Curr Negative Long Term Deposit A Type LT Bank Deposits - Fgn Curr Stable 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. Danske Bank's a BCA reflects the continuing strengthening of its asset quality, capitalisation and profitability, as the bank benefits from a balanced and well-diversified lending portfolio. These improvements follow a challenging period in the aftermath of the financial crisis, both domestically and abroad, and bring Danske s credit profile in line with those of its large Nordic peers. In addition to the BCA, Danske Bank's ratings reflect (i) the results of our Advanced Loss Given Failure (LGF) analysis, which provides one notch of rating uplift to its deposit and senior unsecured debt ratings, and (ii) our assumption of a moderate probability of government support, resulting in one notch of rating uplift for the bank's deposit and senior unsecured ratings. Exhibit Rating scorecard - Key financial ratios Danske Bank A/S (BCA: a) Contacts Median a-rated banks 5% 25% Jean-Francois +44.2.7772.565 Tremblay Associate Managing Director jean-francois.tremblay@moodys.com Sean Marion +44.2.7772.56 MD-Financial Institutions sean.marion@moodys.com CLIENT SERVICES Americas -22-5565 Asia Pacific 852-55-77 Japan 8--548-4 EMEA 44-2-7772-5454 Solvency Factors Niclas Boheman +44.2.7772.64 AVP-Analyst niclas.boheman@moodys.com 45% 4% 2% 5% % 5% 25% 2% % 5% Liquidity Factors Louise Lundberg +46.8.525.6568 VP-Sr Credit Officer louise.lundberg@moodys.com % 5% 2.% 2.4% % Asset Risk: Problem Loans/ Gross Loans Capital: Tangible Common Equity/Risk-Weighted Assets Solvency Factors (LHS).6% Profitability: Net Income/ Tangible Assets 4.6%.7% Funding Structure: Market Funds/ Tangible Banking Assets Liquid Resources: Liquid Banking Assets/Tangible Banking Assets 5% % Liquidity Factors (RHS) These represent our Banks methodology scorecard ratios, whereby asset risk and profitability reflect the weaker of either the three-year average and the latest annual figure. Capital ratio is the latest reported figure. Funding structure and liquid resource ratios reflect the latest fiscal year-end figures. Source: : Moody's Investors Service
Credit strengths» Improving asset quality, albeit still below Nordic peers» Solid and improving capitalisation» Profitability is improving, and converging towards similarly rated Nordic peers Credit challenges» High dependence on market funding, mitigated by more stable covered bonds and adequate liquidity» Exposure to problem segments, albeit gradually improving, in Danish agriculture, shipping, and oil & offshore The stable outlook on the long-term deposit rating is driven by a combination of expected steady financial performance and our projections that the debt cushion protecting this debt class will be sufficient to maintain the current LGF uplift. The negative outlook on the senior unsecured debt rating is driven by our expectation of a gradual eroding debt cushion. Factors that could lead to an upgrade» The ratings could be upgraded following an improvement in the bank's fundamental profile, as indicated by its BCA, for instance if: () problem loans decline further; (2) capital and leverage strengthen; and/or () profitability increase and earnings volatility moderate. Additionally, a change in outlook or rating upgrades could also occur if the bank s funding plan changes and results in a material increase in the volume and subordination of debt, for instance in the context of upcoming Minimum Required Eligible Liabilities (MREL) requirements. Factors that could lead to a downgrade» The ratings could be downgraded due to a deterioration in the bank s fundamental credit profile, for instance if we observe: () renewed pressure on asset quality; or (2) signs that the improvements achieved in recent years are not sustainable. Similarly, debt ratings could be downgraded if the cushion of loss absorption provided by its own volume and the amount of debt subordinated to it continues to gradually decline over the outlook period. Key indicators Exhibit 2 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) 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 (%) 272 262 252 242,57,457 45,942 54,49 6,949 2,67 25,958.7 2.4 8.7.9..6,242,7 46,24 459,897 59,68 2,47 22,645 2. 9.6 24.5...6,55,864 49,489 444,826 54,726 2,7 22,52. 8.6.. 2.5.5,52,89 42,42 52,9 4,444 8,995 22,985.7 6.4 9.4. 2.2. 2 CAGR/Avg.4,5,84 48,98 56,492 25,578 6,8 2,95 4.8.5 5.9..4.2 2.45 2.55.5 6.45 6.55 2.95.6 9.7.6.6 2.77.56 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 www.moodys.com for the most updated credit rating action information and rating history. 2 9 February 28 Danske Bank A/S: Update following Q47 and rating action early February
Cost / Income Ratio (%) Market Funds / Tangible Banking Assets (%) Liquid Banking Assets / Tangible Banking Assets (%) Gross Loans / Due to Customers (%) 5.7 4.6.7 2. 5.4 44.6 29. 224. 5.4 4.6 27.5 225.7 56.4 48. 29. 244.2 6.7 4.9 28.9 97. 55.6 44.26 29.26 22.6 [] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - fully-loaded or transitional phase-in; IFRS [] Basel II; IFRS [4] May include rounding differences due to scale of reported amounts [5] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime [6] Simple average of periods presented for the latest accounting regime. [7] Simple average of Basel III periods presented Source: Moody's Financial Metrics Profile Danske Bank A/S is part of the Danske Bank Group, which also comprises Realkredit Denmark (a mortgage credit institution), Danica Pension (a life insurance company), Danske Hypotek AB (a covered bond issuer in Sweden) and Danske Mortgage Bank Plc (a covered bond issuer in Finland). As of year-end 27, the bank held domestic market shares of 27% in terms of loans and 28% in terms of deposits, and reported total consolidated assets of DKK.5 trillion ( 475.4 billion). Danske Bank is a universal bank and provides a broad range of products and services, including deposits, loans and other credit, insurance, pensions, leasing, asset management, and trading in fixed-income products, foreign exchange and equities. As of year-end 27, it distributed its products through domestic and 5 international branches in Sweden, Norway, Finland, Northern Ireland, and the Baltic States. Danske Bank was established in 87 as Den Danske Landmandsbank. In 976, it was renamed Den Danske Bank, and in 2, Danske Bank. Its shares are listed on the NASDAQ OMX Copenhagen Stock Exchange (Ticker: DANSKE). As of year-end 27, its largest shareholder was the A.P. Møller Holding Group, which held 2% of the bank s total share capital. Detailed credit considerations Improving asset quality, albeit still below peers Our assigned Asset Risk score reflects our assessment that recent positive trends in asset quality are sustainable. The bank's reported problem loan ratio improved to.7% at end-december 27 from 2.% in 26, mainly reflecting gradual improvements in the problematic segments of agriculture, shipping and oil and offshore. Danske Bank has continued to improve its asset quality, as reflected by the decline in problem loans. Danske Bank s elevated problem loan ratio post the 28 financial crisis 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 A2 stable) and to some extent in Northern Ireland (UK government bond rating A stable). Since then, the bank has gradually disposed of its non-core assets, which stood at a minor.% of the loan book at year-end 27. These were mainly performing residential mortgages in Estonia and Ireland. Exhibit Danske Bank's Problem Loans as % Gross Loans We expect Danske Bank's asset quality to continue to gradually improve 6.% 5.% 4.8% 4.6%.7% 4.%.%.% 2.%.7% 2.%.%.% 22 2 24 25 26 27 Source: Moody's Banking Financial Metrics 9 February 28 Danske Bank A/S: Update following Q47 and rating action early February
We expect further moderate improvements in the group s asset quality during 28, supported by the domestic economy, which we expect to grow by.8% in 28 and.7% in 29, following growth of 2.% in 27, and continued low interest rates. Solid and improving capitalisation Danske Bank s solid capital buffers is a relative strength for its credit profile. The bank's capital ratios improved in recent years, increasing the bank's ability to absorb potential future losses. At the year-end 27, the bank's Common Equity Tier (CET) was 7.6% (6.% in 26), which compares favorably with its short to medium term capital target of 4%5%. Our assigned a Capital Score reflects these strengths, but also take into account the bank's high leverage: tangible common equity stood at 4.8% of total assets at the end of December 27, which is in line with large Nordic peers (average of 5.5%) The Board of Directors proposed a dividend of DKK. per share (45% pay-out ratio) and the bank initiated a DKKbn new share buyback programme which will run until 4 February 29 in order to return the excess capital versus the bank s internal target to its shareholders. Exhibit 4 Danske Bank's CET Ratio We view capitalisation as a relative strength for Danske Bank 7.6% 8% 6% 4.7% 6.% 6.% 25 26 5.% 4% 2% % 8% 6% 4% 2% % 2 24 27 Source: Company reports Profitability is improving, and converging towards similarly rated Nordic peers Danske Bank's profitability remains supportive for the group, as reflected in our assigned ba Profitability Score. Net income in 27 was.6% of tangible assets (unchanged compared to 26). The firm s strategy currently focuses on enhancing its wealth management capabilities, reducing its operating costs and continuing to improve customer satisfaction in its core markets (Denmark, Sweden, Norway and Finland). The bank's primary source of revenues is net interest income (around half of total income in 27). Net interest income rose by 6% year-on-year in 27, mainly driven by volume growth and continued growth in Norway and Sweden, which offset margin pressure from low rates and competition. Trading income accounted for 6.2% of income in 27 and added volatility to earnings. In this environment, we see Danske Bank's ability to maintain tight cost control as important. The efficiency gap against peers has declined in recent years, with a cost-to-income (as per our definition) of 52% in 27, slightly above the average of its large Nordic peers (46%). Danske Bank continued recording low impairments in core activities driven by net reversals of DKK.9 billion reflecting better credit quality, supported by recovering asset values. In 27, Danske reported a return on equity (ROE) of.6%, above the bank s target of 2.5%. We expect that the improvement in the bank s asset risk will continue to support profitability going forward as strategic initiatives, including optimisation of price structures, improved cost efficiency and a moderate level of credit provisions mitigate margin pressure resulting from the ongoing low interest rate environment in Denmark. 4 9 February 28 Danske Bank A/S: Update following Q47 and rating action early February
High dependence 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 29% of total funding at year-end 27, partly due to private sector deleveraging, Danske Bank relies heavily on wholesale funding. Market funds accounted for 4.6% of tangible banking assets at year-end 27 (44.6% at YE26). Our assigned ba Funding Structure score reflects the proven stability, depth and breadth of the Danish covered bond market. The majority of the group's market funds are covered bonds (mainly taken up by Realkredit Danmark, the bank's mortgage subsidiary). The refinancing risk on this type of funding is reducing following the introduction of a new price structure incentivising longer reset periods. As a result, Danske Bank's exposure to up to 4 years adjustable rate mortgages (i.e. F-F4) has reduced to 8% of gross loans at year-end 27 (2% at YE2). 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 DKK68 billion or 2% of tangible banking assets at year-end 27, leading to a ba assigned liquidity score. At the same date, Danske Bank's Liquidity Coverage Ratio according to the new EU standards was 7%. Support and structural considerations Loss Given Failure analysis Danske Bank is subject to the EU's Bank Recovery and Resolution Directive (BRRD), which we consider to be an Operational Resolution Regime. We apply our advanced Loss Given Failure (LGF) analysis to Danske Bank's liabilities, considering the risks faced by the different deposit and debt classes across its liability structure at failure. We assume residual tangible common equity of % and losses post failure of 8% of tangible banking assets, a 25% run-off in junior wholesale deposits and a 5% run-off in preferred deposits. These are in line with our standard assumptions. Our advanced LGF analysis is applied to Danske Bank's consolidated banking group and includes a forward looking approach on the bank's near term bail-in-able debt issuance and indicates that a low loss given failure for junior depositors and senior unsecured creditors, resulting in a one-notch uplift in the relevant ratings, from the firm s a adjusted BCA. Government support considerations 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 deposit and senior unsecured debt ratings. This reflects the fact that Danske Bank is Denmark's largest financial institution, and the market leader in most financial products. Counterparty Risk Assessment Counterparty Risk Assessments (CRAs) 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 (2) apply to counterparty obligations and contractual commitments rather than debt or deposit instruments. The CRA 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 CRA is positioned at A(cr)/Prime(cr). The CRA is positioned four notches above the Adjusted BCA of a, based on the substantial cushion against default provided to the senior obligations represented by the CRA by subordinated instruments. The main difference with our Advanced LGF approach used to determine instrument ratings is that the CRA 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. 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. 5 9 February 28 Danske Bank A/S: Update following Q47 and rating action early February
Rating methodology and scorecard factors Exhibit 5 Danske Bank A/S Macro Factors Weighted Macro Profile Strong + Factor Historic Macro Ratio Adjusted Score Credit Trend Assigned Score Key driver # Key driver #2 Collateral and provisioning coverage Solvency Asset Risk Problem Loans / Gross Loans 2.% Expected trend Capital TCE / RWA 2.4% aa a Nominal leverage Profitability Net Income / Tangible Assets.6% ba ba Return on assets Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets 4.6% b ba Market funding quality Liquid Resources Liquid Banking Assets / Tangible Banking Assets.7% ba Quality of liquid assets a 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 in-scope (DKK million),788,689 9,777 676,95 27,582 29,9 2,742 88,24 2,94,48 Other liabilities Deposits Preferred deposits Junior Deposits Senior unsecured bank debt Dated subordinated bank debt Equity Total Tangible Banking Assets 6 % 9 February 28 ba a Aaa -baa a a % in-scope 6.8%.% 2.% 8.% 4.4%.7%.% % at-failure (DKK million),88,894 82,572 642,85 78,87 29,9 2,742 88,24 2,94,48 % at-failure 64.% 27.9% 2.8% 6.% 4.4%.7%.% % Danske Bank A/S: Update following Q47 and rating action early February
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 vs. subordination subordination Adjusted BCA Counterparty Risk Assessment 4.2% 4.2% 4.2% 4.2% aa (cr) Deposits 4.2%.7% 4.2% 8.% 2 Senior unsecured bank debt 4.2%.7% 8.%.7% Junior subordinated bank debt.%.%.%.% ba (hyb) Non-cumulative bank preference shares.%.%.%.% -2 baa (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 Assessment Notching -2 aa (cr) ba (hyb) baa (hyb) Government Support notching Local Currency Rating A (cr) A --Baa (hyb) Foreign Currency Rating -A A Ba (hyb) Baa (hyb) Source: Moody's Financial Metrics Ratings Exhibit 6 Category DANSKE BANK A/S 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 Stable(m) A/P a a A(cr)/P(cr) A A Ba (hyb) Baa (hyb) P (P)P DANSKE BANK A/S (LONDON BRANCH) Deposit Note/CD Program Stable (P)A/(P)P DANSKE CORPORATION Bkd Commercial Paper P Source: Moody's Investors Service 7 9 February 28 Danske Bank A/S: Update following Q47 and rating action early February
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9 Analyst Contacts CLIENT SERVICES Louise Lundberg +46.8.525.6568 VP-Sr Credit Officer louise.lundberg@moodys.com Americas -22-5565 Asia Pacific 852-55-77 9 February 28 Japan 8--548-4 EMEA 44-2-7772-5454 Danske Bank A/S: Update following Q47 and rating action early February