Danske Firing of CEO Follows Failure to Improve Ratings

Within months of becoming Danske Bank A/S chief executive officer last year, Eivind Kolding was telling investors they could look forward to higher credit ratings to enhance their returns.

The upgrades never came. Instead, owners absorbed $1.3 billion in new shares in October to help Denmark’s biggest bank meet stricter capital rules. Danske then became embroiled in a battle with the Financial Supervisory Authority over an order to add as much as $18 billion to risk-weighted assets as it awaits national laws dictating extra reserve requirements for too-big-to-fail banks. Chairman Ole Andersen, who yesterday fired Kolding, said Danske needs a ratings upgrade to help lower funding costs.

“It is a very high priority to get our credit rating back to where it should be,” Andersen said yesterday in an interview from Copenhagen. “If we somehow can accelerate our strategy implementation to secure a ratings upgrade happens sooner rather than later, then that’s what we should do.”

Andersen said Danske now needs an executive more versed in banking. Kolding, 53, who started as Danske CEO in February last year after heading the container shipping unit of A.P. Moeller Maersk A/S, will be replaced by 49-year-old Thomas F. Borgen. Borgen has worked at Danske since 1997 and is a member of its executive board with responsibility for corporate and institutional banking. Danske didn’t make Kolding available for comment.

‘Slow Process’

“Kolding inherited a lot of the problems but it was a slow process solving them,” Nick Davey, an analyst at UBS AG in London, said by phone. “You need someone well-connected with the FSA and capable of managing that relationship effectively while being able to manage equity holders’ interests; nothing kills an equity story quicker than a CEO doing everything he can to make the FSA happy.”

Danske is rated Baa1 at Moody’s Investors Service, A- at Standard & Poor’s and A at Fitch Ratings. The bank, together with five others, was identified by a government committee in March as systemically important to Denmark’s $340 billion economy, adding as much as 5 percentage points to capital requirements.

Danske’s too-big-to-fail designation didn’t bring the assurances of state backing Kolding told investors it would. The government of Prime Minister Helle Thorning-Schmidt has publicly rejected Kolding’s claim in a Nov. 8 interview that Danske’s status as systemically important would make it exempt from Denmark’s bail-in legislation.

Danske’s Risk

Credit derivative traders see Danske as a riskier investment than its competitors in neighboring Sweden. Investors pay about 47 basis points more to insure against a default on Danske’s senior unsecured debt, using five-year credit default swaps, than they do on similar contracts on Nordea Bank AB, Sweden’s biggest bank by market capitalization.

Nordea is rated Aa3 at Moody’s, four steps above Danske. Its AA- rating at S&P is three steps higher than Danske’s.

“Danske Bank’s biggest problem is to raise their rating,” Andreas Hakansson, an analyst at Exane BNP Paribas, said in a phone interview. “They need to improve it to be competitive with their peers, and particularly so on corporate lending.”

Housing Bubbles

Danske has said it wants to compete with the bond market to offer companies affordable financing, a proposition that’s only feasible if the bank reduces its funding costs, Hakansson said.

Since being dragged through housing bubbles in Ireland and Denmark, Danske has met rising capital requirements and record-low interest rates with cost cuts. A government-appointed committee will present its findings tomorrow on the causes of Denmark’s financial crisis, including the role of the country’s banks and mortgage lenders.

Under Kolding, Danske introduced a pricing model to reward customers with the most business there. The plan, and an advertising campaign to promote it, was slammed by local media and Danske in June fired its head of communications, Eva Hald.

A February survey showed Danske dropped one level to third place in a Prospera customer satisfaction ranking on Danish corporate banking, published by Borsen. The bank was beaten by Swedish lenders SEB AB and Nordea.

“No one at Danske could live with a situation where the bank ranked lower than SEB and Nordea,” Christian Hede, an analyst at Jyske Bank A/S, said by phone. “The bank simply isn’t where it’s supposed to be in any of its business areas, and they need Borgen to take them there.”

Customer Volume

Danske’s customer base slipped over the past year with 27.5 percent of Danes identifying it as their main bank, compared with 29.4 percent a year ago, according to a Voxmeter poll commissioned by Jyllands-Posten and published today.

Danske spokesman Kenni Leth declined to comment on the poll and referred instead to the bank’s own calculations in its second-quarter report, published Aug. 1. Kolding said then the bank had lost 40,000 customers since introducing its new pricing program in January. The shift didn’t affect Danske’s market share because “we were compensated by the existing customers bringing in more volume,” he said.

Since Kolding took the helm at Danske 19 months ago, shares in the bank have returned 27 percent, compared with 37 percent for Nordea, Scandinavia’s biggest bank, and 53 percent at SEB. The figures include reinvested dividends, which Danske last paid in 2007.

Though Kolding served as vice chairman on Danske’s board from 2005 until 2011, the year he became chairman, he lacked the experience inside banking to make decisions on his own, according to Andersen.

“If you’re on the bridge of a sailing yacht, we’re now assuming it’s better you know yourself how to steer the boat instead of having 10 people advising you on how to do it,” he said.

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