Danske ROE Target in Jeopardy as Crisis Rates Prove Sticky

Danske Bank A/S Chief Executive Officer Eivind Kolding said he may review a goal to more than double shareholder returns as central banks keep interest rates at record lows.

Denmark’s biggest lender said in October it would raise return on equity to more than 12 percent by 2015, based on a prediction that short-term interest rates would rise to 2 percent by then. Yet central banks from Frankfurt to Washington are signaling they’ll continue policies needed to support growth as their economies struggle to emerge from the worst financial crisis since the Great Depression. That’s casting doubt over Danske’s interest rate assumptions.

“It’s not likely that it will be 2 percent in 2015, but we have not adjusted that assumption and thus our 2015 target,” Kolding, who’s headed Danske Bank since February last year, said yesterday in an interview. “We might revisit that toward the end of the year.”

Danske set its ROE targets as Europe’s debt crisis showed signs of easing at the end of 2012. The Copenhagen-based lender, which yesterday posted its biggest profit in five years, is trying to woo back investors after diluting their holdings with two share sales in as many years, and no dividends since 2007.

Danske reported an increase in return on equity to 5.2 percent last quarter. That’s still less than half the average at its Swedish competitors including Nordea Bank AB, according to data compiled by Bloomberg.

Shares Slip

Danske shares slipped 0.8 percent to 112 kroner as of 12:54 p.m. in Copenhagen, after gaining as much as 3.5 percent earlier in the day.

What’s worrying is Danske’s difficulty raising revenue, said Christian Hede, vice president of equity research at Jyske Markets. While loan losses declined last quarter more than most analysts predicted, the bank faces an uphill battle generating income as demand for credit stalls and interest rates stay low, he said.

“If you look at it over the long term -- 15 to 17 quarters -- the earnings were a bit negative,” Hede said. “It was expected that writedowns would normalize -- which they did, just faster -- while net interest income keeps falling.”

Danske reported yesterday a 3.7 percent decline in net interest income from the second quarter a year earlier, to 5.5 billion kroner.

‘Definitely Not’

Chief Financial Officer Henrik Ramlau-Hansen said yesterday the bank won’t sell shares to meet stricter capital requirements as the bank works toward boosting shareholder returns.

“Definitely not,” Ramlau-Hansen said in an interview. “We feel we have the equity we need and the major issue for the bank is generating a good return on equity. We have no plans at all to issue shares, not at all.”

Danske, which sold new shares in 2011 and 2012, has seen its capital goals come under pressure after the financial regulator ordered it to add $18 billion to its risk-weighted assets and as a rule change at Standard & Poor’s wiped out the equity content of a hybrid issue. The bank reported a core tier 1 capital ratio of 15.6 percent for the end of June, meaning it already meets regulatory requirements.

Stricter capital demands are coming from several fronts. Denmark’s six biggest banks need to hold as much as 5 percent in additional capital of risk-weighted assets, a government-appointed committee said in March. Though the proposals opened the door to using convertible debt to help meet requirements, analysts including Thomas Hovard, head of credit research at Danske Markets, argue pricing may force banks to rely on equity to build capital.

Repay Debt

Danske plans to repay 24 billion kroner ($4.3 billion) in state-owned hybrid debt next year, Ramlau-Hansen said.

“In that connection, given our capital ratios, we are considering what other capital exercises we need to do in order to keep healthy capital ratios,” he said. “When the state hybrid is repaid, that will reduce our total capital ratio by 3 percentage points. We are looking into whether we should do Tier 1s, Tier 2s, combinations. But again, no decision has been made. It will probably be some transactions, not just one.”

The bank is awaiting the result of its appeal of an order from the Financial Supervisory Authority to add 100 billion kroner to its risk-weighted assets after the regulator said Danske had underestimated the likelihood of losses on small business loans. Danske is also considering its options on how to treat a 2037 hybrid note after S&P’s rule change, Ramlau-Hansen said.

Considering Options

“We have an option, or at least we can change the documentation so that we have an option, to redeem it at par but of course we are considering what to do,” he said. “We assume that the investor community is a professional community that knows what the conditions are, so we have to find the right balance between something that is fair for the bank and something that is fair for the investor community.”

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