Analyst Note, 2. februar, Stephen Ellis
As a result of its activities in Finland, Northern Ireland, and Estonia, Danske Bank incurred goodwill impairment write-downs of DKK 9.1 billion during the fourth quarter. Danske continues to emphasize expense control and has targeted total expenses of DKK 22 billion for 2015 compared with DKK 23 billion of operating expenses realized in 2014. Furthermore, after reviewing its operations in the Baltics, Danske has decided to focus on business banking by investing DKK 100 million, but has also concluded that the personal banking operations in the Baltics do not possess sufficient scale to generate an acceptable return. As a result of this decision, Danske will exit retail banking in the Baltics and report the operations as noncore commencing in 2015.
With the significant goodwill impairment charge, the bank produced a loss in fourth quarter of DKK 6.3 billion or DKK 6.40 per diluted share. For full-year 2014 without the goodwill impairment, Danske earned net income DKK 12.9 billion compared with DKK 7.1 billion in 2013. At this point, we will maintain our narrow-moat rating and fair value estimate of DKK 164. Return on equity for 2014 equaled 8.5% excluding the goodwill impairment compared with 5.0% last year. Net interest income decreased in the fourth quarter primarily due to currency effects.
Balance sheet growth remained slow as total lending during 2014 increased only 2% compared with year-end 2013 as most of Danske's markets experienced weak growth and low demand for credit. We continue to see lower loan impairment charges contributing to Danske's stronger operating results. Total loan impairment charges totaled DKK 2.8 billion for 2014 which was 32% lower than 2013. As a result, loan losses represented 0.20% of total loans, lower from year ago level of 0.27%. Overall, we continue to be encouraged by the improvement in asset quality across Danske’s various country operations.
Bulls and bears say
Bulls say
- 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.
Bears say
- 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.
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