Danske Bank Is Looking for Ways to Boost Returns

(Bloomberg) -- With a massive money laundering scandal pushing up costs, and negative rates squeezing income and stalling trading, what can Danske Bank A/S do to improve returns?

That’s the question market participants are asking after the troubled Danish lender tried to sweeten its third profit warning in less than a year with a vague pledge to come up with ways to improve profitability.

“It’s really quite a challenging situation,” said Richard Smith, an analyst at Keefe, Bruyette & Woods. “I’d assume they’re pulling most of the cost levers already, given the increased compliance costs and the group still needs to ensure strong capital generation to meet any regulator fines.”

Danske late on Monday cut its full-year net profit forecast to a range of 13 billion kroner ($2 billion) to 15 billion kroner, citing higher costs, margin pressure and lower trading revenue. The announcement followed a decision last month to return 400 million kroner to customers who were overcharged when they invested in Danske’s Flexinvest Fri product.

The bank also pledged to come back with a plan “later this year” on how to “improve longer-term performance.”

The Flexinvest fiasco was the latest to hit the Copenhagen-based bank. It’s already under investigation in the U.S. and elsewhere after revealing in September that a large part of $230 billion in transactions that flowed through its Estonian unit were suspicious.

With an internal investigation ongoing, shares have sunk as the prospect of fines in the billions of dollars scared off investors. After sliding 2.6% on Tuesday, the shares partly rebounded on Wednesday. The stock was up 1.2% as of 3:20 p.m. in Copenhagen.

Danske reports second-quarter earning on July 18, and with Monday’s release of preliminary numbers, the focus will be on what CEO Chris Vogelzang will do next.

Danske’s new chief executive officer started work last month and within weeks fired his predecessor, interim CEO Jesper Nielsen, in the aftermath of the overcharging scandal. (His predecessor, Thomas Borgen, was ousted amid the laundering revelations.)

“The obvious option is to reduce staff, supplemented by other initiatives to curb cost inflation, especially as regards the ongoing escalation of the cost base for AML,” Simon Hagbart Madsen, an analyst at Jyske Bank, said. “There are some manual processes that Danske should be able to automate over time.”

Danske said second-quarter income from trading was around 800 million kroner, while profit was roughly 4 billion kroner, falling short of the 4.6 billion kroner estimated by analysts before the announcement. Danske raised its 2019 outlook for costs to 25.5 billion kroner to 26 billion kroner from about 25 billion kroner, citing “higher costs for compliance and anti-money laundering activities.”

“Danske is not unique in seeing cost pressures. They are unique in the scope of the AML actual case,” Paulina Sokolova, an analyst at Barclays, said. “So in some ways perhaps there is more pressure for them to spend more than others.”

Sokolova says she’s estimating a fine of $2 billion from U.S. authorities, based on penalties that other banks have faced.

Danske’s pledge to squeeze out more profit comes after a push in recent years to close branches and turn to digitalization. Investments in technology now allow commercial customers to get new loans “within seconds,” according to the bank. But the money laundering scandal has forced Danske to invest heavily in people to staff its compliance and anti-money laundering units.

Employee numbers rose last quarter to almost 21,000, the highest in at least two years. Meanwhile, data compiled by Bloomberg indicates the bank is the least efficient of the big six Nordic banks.

Chief Financial Officer Christian Baltzer may be a part of the solution, Madsen said. Before starting as CFO last year, he held the same position at the Danish insurer Tryg A/S, where he gained a reputation for improving digitalization, the Jyske analyst said.

“Going long-term, we may see something like Nordea’s and Handelsbanken’s multi-year strategic initiatives to improve digitalization and reduce headcount,” Madsen said.

So far, Danske hasn’t signaled to its Danish employees that it plans to cut staff, according to union representative Kirsten Ebbe Brich.

“It’s just speculation,” Brich said. “From the union’s point of view, there really isn’t room to downsize staff when we talk with employees about how much work they have to do and how many tasks they have. It would be a very short-sighted solution and wouldn’t do anything to bring Danske toward becoming a profitable and sustainable bank over the long term.”

To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at fschwartzko1@bloomberg.net

To contact the editors responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net, Jonas Bergman

©2019 Bloomberg L.P.