Danske CEO Vows Rating Upgrade Predecessor Failed to Deliver

The Chief Executive Officer of Danske Bank A/S, Thomas Borgen, is promising investors he will deliver the ratings upgrade his predecessor failed to get as he steps up cost cuts in an effort to boost returns.

“We are comfortable our upgrade will come and we are working hard to achieve that,” Borgen said yesterday in a phone interview from Copenhagen. “It is something we are working continuously on.”

Denmark’s biggest bank, which sacked Borgen’s predecessor Eivind Kolding in September in part after he failed to boost Danske’s ratings, carries a Baa1 grade at Moody’s Investors Service. That’s four steps below the Aa3 Moody’s gives Nordea Bank AB of Sweden. At the same time, investors in the Danish bank get less than half the returns delivered by Nordea, Svenska Handelsbanken AB, SEB AB and Swedbank AB.

Danske Bank cut its profit outlook yesterday and told investors they’ll only get a 9 percent return on equity by 2015, compared with the bank’s previous goal of more than 12 percent, which has now be changed into a “longer term” target. Sweden’s four biggest banks all returned more than 10 percent in the third quarter. Danske’s owners got 4.3 percent.

Housing Busts

The bank is still struggling to surface from a 2008 housing bust in Denmark as it winds down its retail business in Ireland eight years after expanding into the euro nation’s property bubble. Its Danish business is struggling to grow in an economy hobbled by the world’s highest private debt burden. Denmark’s bail-in package, a law passed in 2010 requiring bondholders to share losses in the event of insolvency, has also pummelled the nation’s banks, driving up their funding costs.

It costs 43 percent more to insure against losses on senior unsecured bonds issued by Danske than it does on similar contracts on Nordea, according to credit-default swap data compiled by Bloomberg. Five-year swaps on Danske traded at 89 basis points this week, compared with 62 basis points on Nordea. Swaps on Handelsbanken, Europe’s best-capitalized bank, traded at 60 basis points.

Danske is also graded lower than Sweden’s biggest banks at Fitch Ratings and Standard & Poor’s. Per Tornqvist, a Stockholm-based analyst at S&P, said in a September interview “the main driver for better ratings is that Danske is able to demonstrate it’s able to improve its profitability and thus that it can support its capital.”

Kolding’s Promise

Danske said yesterday net income rose to 1.54 billion kroner ($280 million) in the three months through September, from 1.3 billion kroner a year earlier. That trailed the 2.14 billion kroner seen in a Bloomberg survey of analysts. Borgen yesterday added 1 billion kroner to the bank’s cost cutting measures.

Danske’s core Tier 1 capital ratio rose to 14.2 percent of risk-weighted assets at the end of September, from 12.7 percent a year earlier. The bank needs to hold core Tier 1 capital of 10 percent, under its too-big-to-fail requirements.

Borgen said yesterday he still plans to pay investors a dividend this year, as the bank works toward a target of paying out 40 percent of profit by 2015. Danske’s long-run target of returning 12 percent on equity will probably require the bank to “get rid of low-return activities,” according to Jesper Christensen, an analyst at Alm. Brand Markets.

Share Performance

Shares in Danske rose 1.5 percent as of 10:19 a.m. in Copenhagen to 130.20 kroner, bringing this year’s gains to 36 percent. Shares in Nordea have risen 34 percent over the same period. SEB has jumped most in the period, rising 41 percent. The 44-member Bloomberg index of European banks has added 18 percent.

S&P rates Danske A-, three steps below the AA- grade it gives Nordea. Danske is rated A at Fitch, which grades Nordea AA-.

Borgen isn’t the first CEO at Danske to promise a ratings upgrade. Kolding, who was sacked by Chairman Ole Andersen after only 19 months on the job, told investors in November 2012 they could expect a ratings upgrade as soon as Danske received its too-big-to-fail designation.

Treasurer Fired

The upgrades never came. Instead, owners absorbed $1.3 billion in new shares in October 2012 to help Danske meet stricter capital rules. The bank was identified as systemically important to the Danish economy in March and lawmakers agreed on additional capital requirements in September.

Danske has also recently fired its Group Treasurer Steen Blaafalk, who left the bank in October after working there for more than three decades.

Borgen, who was head of corporate and institutional banking before becoming CEO, said yesterday that arranging senior funding at competitive prices is not “a big issue for the time being.”

Credit-default swap spreads have been “narrowing tremendously during the last couple of months or quarters,” Borgen said.

The difference in five-year default swaps on Danske and Nordea narrowed to 27 basis points this week from a high of 75 in October last year. Back in 2010, default swaps on the two banks traded at the same level, according to data compiled by Bloomberg.

Losing Customers

Danske still needs to cut costs to support shareholder returns, Borgen said. Though he declined to say how many people the bank is letting go, he said reductions “will protect as much as possible the front line” so that customers have a “good experience” when they do business with the bank.

Danske cut its outlook for 2013 yesterday and now sees profit after tax of 6 billion kroner to 8 billion kroner, compared with a previous goal of 6.5 billion kroner to 9 billion kroner. Borgen has said he wants to repair the damage done to Danske’s image and try to win back customers in an effort to raise shareholder returns. Danske Bank lost 94,000 customers in the first nine months of 2013, spokesman Kenni Leth said by phone.

“We need to have more customer attention, we need to simplify the bank and we need to be more efficient,” Borgen said.

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