Oct. 28 (Bloomberg) -- Danske Bank A/S, Denmark's largest lender, cut its full-year outlook after reporting a 70 percent drop in third-quarter profit on higher provisions for bad loans and because of costs related to the government's bank guarantee plan.

Net income fell to 1.1 billion kroner ($185 million) from 3.64 billion kroner a year earlier, the Copenhagen-based bank said in a statement today. That missed the average 1.74 billion- krone estimate of seven analysts surveyed by Bloomberg.

Danske's profit has dropped for five straight quarters amid slower economic growth and a slump in property and stock markets. Denmark, the first European economy to enter a recession since the credit crisis started last year, has bailed out two lenders and introduced a 35 billion-krone program paid for by the Danish banks to guarantee deposits, including interbank loans.

``Danske has a good capital position and is stable but it's facing a lot of headwinds at the moment,'' said Matti Ahokas, an analyst at Svenska Handelsbanken AB in Helsinki, which has a ``reduce'' rating on the Danish lender.

Danske fell 1.5 kroner, or 1.9 percent, to 78 kroner in Copenhagen trading, extending the decline in the past 6 days to 29 percent. The stock has dropped 61 percent this year.

``The financial unrest and weak economic growth make the group's income estimates more uncertain than usual,'' Danske Bank said. The cost of the state guarantee plan also contributed to the lower earnings forecast, the bank said. The program will reduce net fee income by about 2.5 billion kroner in each of the two years of the accord, the bank said earlier this month.

Slower Growth

Banking income will rise between 3 percent and 5 percent, compared with an earlier estimate of 4 percent to 7 percent, the bank said. Profit before loan-loss charges, excluding net trading income and earnings from insurance, may increase as much as 5 percent from a year earlier, compared with a previous estimate of a 10 percent to 20 percent increase.

Loan-loss provisions rose almost sevenfold to 1.78 billion kroner because of higher charges relating to commercial properties in Ireland, companies as well as Lehman Brothers Holding Inc. The net trading loss was 2.57 billion kroner, compared with a profit of 1.44 billion kroner a year earlier, and was driven by losses on Danish mortgages and covered bonds.

The second reduction of Danske's outlook in just three months may force the lender to revise its targets for 2012. Danske targets annual revenue of about 55 billion kroner and a cost-to-income ratio of 45 percent by 2012. That compares with revenue of 45 billion kroner in 2007 and a cost-to-income ratio of 56 percent.

Danske Bank is in the middle of a plan to double earnings outside Denmark by 2010. It acquired Northern Bank in Northern Ireland and National Irish Bank in the Republic of Ireland in 2005, and bought Helsinki-based Sampo Bank last year. Danske Bank also operates in Sweden and Norway as well as in Estonia, Latvia and Lithuania and Russia through Sampo Bank.

The Danish central bank bailed out regional lenders Roskilde Bank A/S and Ebh Bank A/S because of bad loans linked to a slumping property market.

To contact the reporter on this story: Niklas Magnusson in Stockholm at nmagnusson1@bloomberg.net

Last Updated: October 28, 2008 12:39 EDT