Danske Bank Has Half Its Value Wiped Away, But Will 2019 Be Better?

(Bloomberg) -- Shareholders in Danske Bank A/S started 2018 pretty secure in the belief that they owned one of Europe’s best-run financial firms.

Since the end of 2008, the value of their investment had soared five-fold (European banks, on average, added less than 20 percent over the same period). Not only was Danske delivering higher returns than its peers, but it did so during the world’s longest phase of negative interest rates, somehow managing to generate record profits through it all. Its chief executive officer, Thomas Borgen, was seen as the hero who’d made it all happen.

But then, the narrative around one of the best-run Nordic banks took a dramatic turn and the one thing Danske investors want to know now is: how much more pain is ahead?

Just before Christmas, shareholders in the bank were forced to digest yet another profit warning. That came days after police said they’d detained 10 former Danske employees for their suspected role in the bank’s $230 billion dirty money scandal. Meanwhile, multiple criminal investigations are continuing and estimates for potential fines range from less than $1 billion to over $8 billion. The stock has plunged almost 50 percent in 2018, equivalent to more than $15 billion.

Otto Friedrichsen, who’s head of equities at $11 billion asset manager Formuepleje, says investors desperately want the money laundering case to be resolved “so the bank can move ahead with a new agenda.” But he also says that the chances of that happening in the new year are slim.

“There are now several authorities conducting investigations so this will probably drag on, probably also beyond 2019,” Friedrichsen said by phone. At investment manager Alfred Berg, equities head Leif Eriksrod simply refers to Danske as a “big black box.”

A bank that started the year close to the top of the pack has been dragged down by what one Brussels-based commissioner has called Europe’s biggest scandal, with criminals from the former Soviet Union allegedly relying on Danske to launder their dirty money until as recently as 2015.

The case started in 2007, when Danske bought the banking assets of Sampo Oyj of Finland. Part of that fateful deal included a tiny branch in Estonia, which came with a sizable non-resident portfolio. Those accounts, which grew considerably in number after Danske took over the operations, appear to have become a European hub through which embezzlers and fraudsters from Russia, Georgia, Azerbaijan and elsewhere shoveled their wealth into the West.

Some of the money is suspected of having been used for bribes that have led to allegations being brought against European lawmakers. Bill Browder, the Hermitage Capital founder who’s behind numerous criminal filings against Danske, says some of the money can even be traced back to payments for contract killers, as well as much more mundane purchases such as luxury yachts, furs and diamonds.

Danske, whose home country Denmark has tended to top Transparency International rankings as one of the world’s least corrupt places, has apologized for its failings and says it is cooperating with all the relevant authorities to get to the bottom of the case. The scandal has ended the careers of CEO Borgen and the chairman, Ole Andersen, as well as many other top-level executives. Acting CEO, Jesper Nielsen, says 2018 was even worse for Danske than the global financial crisis of 2008. The bank’s new chairman, Karsten Dybvad, says Danske faces “years” of damage control.

Very Well Capitalized

It’s worth noting that Danske is viewed as a fundamentally strong business. The head of the Danish Financial Supervisory Authority, Jesper Berg, said in an interview this month that he considers it to be “a very well capitalized bank.” He also said the steps the bank has taken to purge its upper ranks have been impressive.

Friedrichsen at Formuepleje says a key consideration for investors is “that the core business of Danske Bank looks healthy.” The profit warning, which shaved about 10 percent off the bank’s net income outlook for 2018, was tied to the market selloff in the fourth quarter and is therefore something that Danske will have in common with other banks, according to Bloomberg Intelligence analyst Philip Richards.

But Danske’s investors will still need nerves of steel in 2019. At the beginning of 2018, analysts set price targets for the bank of around 276 kroner a share. It’s now trading at less than half that.

As with all risk, those who bet on Danske while it’s down may suddenly find themselves doing very well. In its Danish market predictions for 2019, ABG Sundal Collier lists Danske as one of the stocks to sell on a short-term horizon, which it defines as three months. But ABG also says the bank could rise as much as 30 percent in 2019 if it’s fined less than investors fear for its money laundering breaches.

However, “based on estimated risk and earnings,” ABG’s head of markets, Tue Ostergaard, says it’s “most likely” that Danske will fall again in 2019, and possibly even as much as 30 percent.

--With assistance from Ott Ummelas and Frances Schwartzkopff.

To contact the reporter on this story: 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.