Danske's $1.5 Billion Capital Penalty Forms Buffer for Fines

(Bloomberg) -- The head of the Financial Supervisory Authority in Denmark says Danske Bank A/S needs to hold more capital to be prepared for potential fines and protect it from any market fallout caused by damage to its reputation amid a money laundering scandal.

“Clearly there’s an issue in relation to fines from various authorities looking into Danske Bank and that’s one of the reasons we have increased the pillar 2 requirements,” Jesper Berg, director general of the FSA in Copenhagen, said in an interview with Bloomberg Television’s Nejra Cehic. “But not the sole reason.” The extra capital requirement is “so the bank is able to handle these things financially.”

The regulator on Thursday ordered Danske to add 5 billion kroner ($770 million) to its capital buffers, bringing to 10 billion kroner, or $1.5 billion, the additional requirements made since May in response to allegations that the bank had been used to launder money.

Danske revealed last month that much of about $235 billion that flowed through a tiny Estonian unit between 2007 and 2015 may need to be treated as suspicious transactions. The Financial Times reported that the transactions included so-called mirror trades for up to 8.5 billion euros ($9.8 billion), from which the bank allegedly earned 10 million euros in 2013. The newspaper cited a memo it had seen. Danske spokesman Kenni Leth declined to comment, beyond referring to the bank’s Sept. 19 report.

Danske said on Thursday it was also shelving a share buyback program that had targeted purchasing 10 billion kroner through February. It bought back about 6.8 billion kroner of the targeted amount.

Berg said the Danish FSA “will review the bank’s capital plan for 2019 and then we’ll have discussions in relation to share buybacks as a consequence of that review. But it’s premature to speculate in what the outcome will be.”

Danske is the target of criminal investigations in Denmark and Estonia, with Swiss and U.K. authorities also looking into the money laundering allegations. On Thursday, the bank said it is also cooperating with U.S. authorities after they started a separate investigation into the case. Denmark’s government has already said that Danske may face a $630 million fine in the country, without taking other jurisdictions into account.

Berg said that the Danish FSA “knew well in advance” of the announcement of the U.S. probe “that there were risks in relation to conduct fines.”

“But there were also other risks in relation to the bank’s standing in financial markets,” he said. “Therefore we have increased the pillar 2 requirements for all of these reasons in order for the bank to be rock solid.”

Berg says Danske is “very solid” and “exceptionally well managed in other areas than the one we’ve looked at here. So I wouldn’t see any likelihood of massive changes in relation to retail or wholesale customers. Obviously there will be some, but Danske is not the only bank around which has had issues with money laundering.”

Morten Mosegaard, the bank’s interim chief financial officer, said it’s difficult at this stage to know whether the bank will face fines and what size they may be. As a consequence, it’s “not really appropriate” to make provisions, he said. But he emphasized a cautious approach with capital planning.

Danske is increasing the amount of capital it holds, raising its target for its common equity Tier 1 capital ratio by 150 basis points, to around 16 percent, as it retreats from its share buyback program. Mosegaard says the bank will maintain its dividend policy.

Meanwhile, shares in the bank have dropped by about 34 percent this year, making Danske the worst performer in the Bloomberg index of European financial stocks after Deutsche Bank AB.

“We want to be very cautious on the capital distribution side,” Mosegaard said. That way, “we will have a larger buffer, if you like, and hence we will continue to be stable in terms of the dividend policy, etc.”

To contact the reporters on this story: Frances Schwartzkopff in Copenhagen at fschwartzko1@bloomberg.net;Christian Wienberg in Copenhagen at cwienberg@bloomberg.net

To contact the editor responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net

©2018 Bloomberg L.P.