Danske Says Bank Has Excess Capital to Reward Shareholders

(Bloomberg) -- Danske Bank A/S has built up enough extra capital to commit to dividends and, at the end of this year, will look into the option of resuming share buybacks.

Christian Baltzer, who started as chief financial officer at Denmark’s biggest bank in October, pointed to capital buffers that exceed both regulatory requirements and the bank’s own targets as evidence it can afford to return money to shareholders.

“We right now have a strong capital position of 16.7 percent, well above our own target and well suited for whatever might come our way,” Baltzer said in a phone interview on Tuesday.

Shares in Danske rose to the top of Bloomberg’s index of European financial stocks on Wednesday, gaining as much as 2.6 percent higher. Because of the May 1 holiday across much of Europe, many banks weren’t trading.

When it comes to dividends, Danske aims to return 40-60 percent of profits to shareholders each year, and “we can definitely maintain that,” Baltzer said. “Share buyback, it’s something that we discuss year-end with the board, so we’ll have a look at it at year-end.” He said that Danske also needs to discuss the option of share buybacks with the financial regulator.

The assurances on shareholder rewards follow a grim set of quarterly results that drove Danske’s share price down almost 10 percent on Tuesday. The bank said an Estonian money laundering scandal that erupted last year continues to weigh on its business, and pointed to higher funding and legal costs as part of the reason profits suffered.

Danske’s management was forced to cut its outlook for the full year, with net interest income set to decline in 2019 and profit at risk of stagnating. Against that backdrop, the bank’s capital position stood out as a bright spot, with its common equity Tier 1 buffer growing from a year earlier.

Danske’s laundering scandal last year prompted the Danish financial regulator to enforce an additional capital requirement of 10 billion kroner ($1.5 billion). That forced the bank to cut short its existing share buyback program and shelve plans for future repurchase plans.

Baltzer said Danske’s additional capital requirement hasn’t been earmarked for a particular purpose. It could be used to cover the cost of potential fines, but it might also go toward expanding lending or buying back shares, depending on what the regulator approves.

Danske has a common equity Tier 1 capital equivalent to 16.7 percent of its risk-weighted assets. Its regulatory requirement is 14 percent and the bank’s management has set a target of 16 percent. That leaves an excess capital layer of 0.7 percentage point, equivalent to 5.3 billion kroner, or around $800 million, according to Bloomberg calculations confirmed by Danske Bank.

It’s “a little bit of a buffer for us to work with,” Baltzer said.

Danske said in September that a large part of around $230 billion that flowed through an Estonian unit over nine years was suspicious. The bank is being investigated across Europe and in the U.S., and the roughly 50 percent it lost in market value last year reflects investor anxiety over potential laundering fines.

Danske also faces multiple shareholder lawsuits on both sides of the Atlantic. Last month, 169 cases were filed in Copenhagen courts seeking claims of 3.5 billion kroner, the bank said.

The case has cost Danske roughly 500 million kroner in legal, administrative and extra funding costs so far. That figure is set to rise, though Baltzer said he couldn’t provide an estimate to show how much.

“Guessing what the end number of that will be is not something that we have come out with,” he said. “When you to have go to a lawsuit in the U.S., unfortunately it’s not for free.”

The bank has pledged not to pass on to customers the higher funding costs related to the case, he said. Danske is keen to regain the trust of customers and investors and has decided that shielding them from its laundering costs is key to that goal.

Just under 20,000 Danish retail customers have closed their accounts since October. Baltzer says there are signs that the exodus is now slowing.

“We’ve had two quarters with significant outflow of customers,” he said. “We’re seeing more of a normalization coming in. But again, you could argue that it’s too early to call. There’s the notorious seeing light at the end of the tunnel: is it a train or is it the end of the tunnel?”

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;Christian Wienberg at cwienberg@bloomberg.net

©2019 Bloomberg L.P.