Danske to Cut Fixed Income, Currency Jobs as Profits Falter

(Bloomberg) --

Danske Bank A/S will target its fixed-income and currencies unit for job cuts as part of a sweeping plan to revive profits amid rising compliance costs and entrenched negative interest rates.

Denmark’s biggest bank, which is being investigated for money laundering across Europe and in the U.S., missed analysts’ profit estimates, third-quarter results showed on Friday. It acknowledged its result this year will probably only reach the lower end of a previously targeted range of 13 billion kroner ($1.9 billion) to 15 billion kroner. Danske’s shares fell as much as 5.8% in Copenhagen.

To rein in costs, acting Chief Financial Officer Jacob Aarup-Andersen signaled that more corners of the bank than just FI&C will need to endure cuts. “There is no doubt that when we get to 2023, we expect to be fewer staff than we are today,” he said in a phone interview.

Danske is still dealing with the fallout of its $220 billion dirty-money scandal, and investors are bracing for fines potentially in the billions of dollars. Its market value has slumped almost 30% this year, after being halved in 2018. On Friday, the bank said costs related to dealing with compliance will peak next year.

Details of the measures targeting Danske’s FI&C unit, contained in a slide that accompanied third-quarter results on Friday, show the bank is planning “short-term cost reductions of up to 15% of direct staff costs.” Danske says it hopes most of the cuts will take place through “voluntary resignations” after it imposed a hiring freeze.

Challenging Times

“The first nine months of 2019 were characterized by challenging interest rate levels and margins as well as higher impairment levels and an increase in costs, related especially to compliance,” Chief Executive Officer Chris Vogelzang said. “We saw a good underlying business with high customer activity and lending growth, but overall, our performance is under pressure.”

The bank’s guidance “is very low” and will disappoint shareholders, Per Hansen, an investment economist at Nordnet, said in a note. “Danske Bank is in a transition phase,” he said. “2019 won’t be great, 2020 will be worse and no one knows what will come in terms of U.S. financial penalties.”

Danske said measures it’s taking to be more efficient “will have a significant effect on the result for 2020, for which we expect a return on shareholders’ equity in the range of 5-6%.” That’s considerably lower than previous goals.

Money Laundering

Danske’s costs for improving its anti-money laundering defenses and other compliance-related measures will rise next year to as much as 3.5 billion kroner. Costs will then drop, to around half that in 2023, it said. Danske’s compliance department currently has around 2,500 full-time employees.

The money-laundering case, which started in Danske’s now defunct Estonian unit, and compliance measures will lop off around 0.5 percentage points from the return on equity in 2020. Danske’s returns next year will be the lowest in seven years.

FI&C Jobs

In its slide on fixed-income and currencies, Danske said the unit faces a variety of headwinds including a risk that monetary easing will reduce market volatility. Net trading income fell by two-thirds from a year earlier, depressing income in Danske’s corporates and institutions division, it said.

Read More: Danske Is Using Improved Tool to Screen for Sanctions Violations

Danske is operating under an extreme monetary environment in its home market, where interest rates have been negative for more than seven years. The central bank’s benchmark rate is now minus 0.75%, a record low that Denmark shares with Switzerland. A number of Danske’s competitors have responded by passing negative rates on to retail depositors. But most have acknowledged the climate is making it increasingly difficult to run a traditional bank.

Danske set new targets for 2023. It wants to deliver a return on shareholders’ equity of 9-10%, and a cost-to-income ratio in the low 50s, “by continuously improving the profitability level.” It kept a dividend policy that targets a payout of 40-60% of profits.

What Bloomberg Intelligence Says:

“Danske Bank’s new guidance cut is disappointing, yet 2020 should be the low point, with new 2023 targets (9-10% ROE, low-50% cost-to-income ratio) offering a return to normality. Extra anti-money-laundering costs are expected to lower 2020 ROE to 5-6% vs. consensus’ 8%, with those charges fading thereafter. Danske Bank will remain embroiled in its Estonian money-laundering scandal until clarity emerges regarding likely U.S. and domestic fines the lender faces, which we don’t expect until late 2020. Nevertheless, Danske’s $9-$10 billion of lost market capitalization -- which we attribute to the affair -- dwarfs the $2-$2.5 billion fine we ultimately expect, while its capital buffer (16.3% CET1) of about $4 billion cushions that risk. Elevated compliance costs and revenue headwinds wiped about 40% off current-year EPS consensus, but both are likely to return to improving trends after 2020.”
----Philip Richards, Senior Banks Analyst at Bloomberg Intelligence

Read More: Danske Bank Raises Short-Term CET1 Capital Target

Danske’s lowered guidance comes not long after the bank appointed Vogelzang as CEO. Since starting in June, he has made rebuilding trust in the bank a top priority. His predecessor, Thomas Borgen, was fired last year and has since had preliminary criminal charges brought against him, along with a number of other former executives at the bank.

This is the second time Vogelzang has lowered the bank’s 2019 outlook since becoming CEO. Danske last issued a profit warning in early July, citing low margins and a weak trading income.

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

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