danske bank a/s risk: problem loans/ gross loans capital: tangible common equity/risk-weighted...

FINANCIAL INSTITUTIONS

CREDIT OPINION9 February 2018

Update

RATINGS

Danske Bank A/SDomicile Denmark

Long Term Debt A1

Type Senior Unsecured - FgnCurr

Outlook Negative

Long Term Deposit A1

Type LT Bank Deposits - FgnCurr

Outlook Stable

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Louise Lundberg +46.8.5025.6568VP-Sr Credit [email protected]

Niclas Boheman [email protected]

Jean-FrancoisTremblay

+44.20.7772.5653

Associate [email protected]

Sean Marion [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

Danske Bank A/SUpdate following Q417 and rating action early February

SummaryDanske Bank AS's standalone Baseline Credit Assessment (BCA) is a3, its long-term deposit,long-term senior unsecured debt and issuer ratings are A1; the deposit rating is on a stableoutlook, while the senior unsecured and issuer rating carry negative outlooks (following therating action on February 2nd 2018).

Danske Bank's a3 BCA reflects the continuing strengthening of its asset quality, capitalisationand profitability, as the bank benefits from a balanced and well-diversified lending portfolio.These improvements follow a challenging period in the aftermath of the financial crisis,both domestically and abroad, and bring Danske’s credit profile in line with those of its largeNordic peers.

In addition to the BCA, Danske Bank's ratings reflect (i) the results of our Advanced LossGiven Failure (LGF) analysis, which provides one notch of rating uplift to its deposit andsenior unsecured debt ratings, and (ii) our assumption of a “moderate” probability ofgovernment support, resulting in one notch of rating uplift for the bank's deposit and seniorunsecured ratings.

Exhibit 1

Rating scorecard - Key financial ratios

2.3% 21.4%

0.6%

43.6% 31.7%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0%

5%

10%

15%

20%

25%

Asset Risk:Problem Loans/

Gross Loans

Capital:Tangible Common

Equity/Risk-WeightedAssets

Profitability:Net Income/

Tangible Assets

Funding Structure:Market Funds/

Tangible BankingAssets

Liquid Resources:Liquid Banking

Assets/TangibleBanking Assets

Solvency Factors (LHS) Liquidity Factors (RHS)

Danske Bank A/S (BCA: a3) Median a3-rated banks

So

lve

ncy F

acto

rs

Liq

uid

ity F

acto

rs

These represent our Banks methodology scorecard ratios, whereby asset risk and profitability reflect the weaker of either thethree-year average and the latest annual figure. Capital ratio is the latest reported figure. Funding structure and liquid resourceratios reflect the latest fiscal year-end figures.Source: : Moody's Investors Service

https://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBC_1110835

https://www.moodys.com/research/Moodys-downgrades-the-deposit-ratings-of-Danske-Bank-AS-affirms--PR_379005

https://www.moodys.com/research/Moodys-downgrades-the-deposit-ratings-of-Danske-Bank-AS-affirms--PR_379005

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Credit strengths

» Improving asset quality, albeit still below Nordic peers

» Solid and improving capitalisation

» Profitability is improving, and converging towards similarly rated Nordic peers

Credit challenges

» High dependence on market funding, mitigated by more stable covered bonds and adequate liquidity

» Exposure to problem segments, albeit gradually improving, in Danish agriculture, shipping, and oil & offshore

OutlookThe stable outlook on the long-term deposit rating is driven by a combination of expected steady financial performance and ourprojections that the debt cushion protecting this debt class will be sufficient to maintain the current LGF uplift.

The negative outlook on the senior unsecured debt rating is driven by our expectation of a gradual eroding debt cushion.

Factors that could lead to an upgrade

» The ratings could be upgraded following an improvement in the bank's fundamental profile, as indicated by its BCA, for instanceif: (1) problem loans decline further; (2) capital and leverage strengthen; and/or (3) profitability increase and earnings volatilitymoderate. Additionally, a change in outlook or rating upgrades could also occur if the bank’s funding plan changes and results ina material increase in the volume and subordination of debt, for instance in the context of upcoming Minimum Required EligibleLiabilities (MREL) requirements.

Factors that could lead to a downgrade

» The ratings could be downgraded due to a deterioration in the bank’s fundamental credit profile, for instance if we observe: (1)renewed pressure on asset quality; or (2) signs that the improvements achieved in recent years are not sustainable. Similarly, debtratings could be downgraded if the cushion of loss absorption provided by its own volume and the amount of debt subordinated toit continues to gradually decline over the outlook period.

Key indicators

Exhibit 2

Danske Bank A/S (Consolidated Financials) [1]12-172 12-162 12-152 12-142 12-133 CAGR/Avg.4

Total Assets (DKK million) 3,357,457 3,242,070 3,055,864 3,152,809 3,050,804 2.45

Total Assets (EUR million) 450,942 436,024 409,489 423,402 408,938 2.55

Total Assets (USD million) 541,490 459,897 444,826 512,339 563,492 -1.05

Tangible Common Equity (DKK million) 160,949 159,638 154,726 141,444 125,578 6.45

Tangible Common Equity (EUR million) 21,617 21,470 20,733 18,995 16,833 6.55

Tangible Common Equity (USD million) 25,958 22,645 22,523 22,985 23,195 2.95

Problem Loans / Gross Loans (%) 1.7 2.3 3.0 3.7 4.8 3.16

Tangible Common Equity / Risk Weighted Assets (%) 21.4 19.6 18.6 16.4 11.5 19.07

Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 18.7 24.5 30.3 39.4 53.9 33.36

Net Interest Margin (%) 0.9 1.0 1.1 1.1 1.0 1.06

PPI / Average RWA (%) 3.1 3.0 2.5 2.2 1.4 2.77

Net Income / Tangible Assets (%) 0.6 0.6 0.5 0.3 0.2 0.56

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 9 February 2018 Danske Bank A/S: Update following Q417 and rating action early February


Cost / Income Ratio (%) 51.7 50.4 53.4 56.4 63.7 55.16

Market Funds / Tangible Banking Assets (%) 43.6 44.6 43.6 48.1 40.9 44.26

Liquid Banking Assets / Tangible Banking Assets (%) 31.7 29.0 27.5 29.0 28.9 29.26

Gross Loans / Due to Customers (%) 210.1 224.3 225.7 244.2 197.3 220.36

[1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - fully-loaded or transitional phase-in; IFRS [3] Basel II; IFRS [4] May include rounding differences dueto scale of reported amounts [5] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime [6] Simple average of periods presented for the latestaccounting regime. [7] Simple average of Basel III periods presentedSource: Moody's Financial Metrics

ProfileDanske Bank A/S is part of the Danske Bank Group, which also comprises Realkredit Denmark (a mortgage credit institution), DanicaPension (a life insurance company), Danske Hypotek AB (a covered bond issuer in Sweden) and Danske Mortgage Bank Plc (a coveredbond issuer in Finland). As of year-end 2017, the bank held domestic market shares of 27% in terms of loans and 28% in terms ofdeposits, and reported total consolidated assets of DKK3.5 trillion (€475.4 billion).

Danske Bank is a universal bank and provides a broad range of products and services, including deposits, loans and other credit,insurance, pensions, leasing, asset management, and trading in fixed-income products, foreign exchange and equities. As of year-end2017, it distributed its products through 100 domestic and 150 international branches in Sweden, Norway, Finland, Northern Ireland,and the Baltic States.

Danske Bank was established in 1871 as Den Danske Landmandsbank. In 1976, it was renamed Den Danske Bank, and in 2000, DanskeBank. Its shares are listed on the NASDAQ OMX Copenhagen Stock Exchange (Ticker: DANSKE). As of year-end 2017, its largestshareholder was the A.P. Møller Holding Group, which held 20% of the bank’s total share capital.

Detailed credit considerationsImproving asset quality, albeit still below peersOur assigned a2 Asset Risk score reflects our assessment that recent positive trends in asset quality are sustainable. The bank's reportedproblem loan ratio improved to 1.7% at end-December 2017 from 2.3% in 2016, mainly reflecting gradual improvements in theproblematic segments of agriculture, shipping and oil and offshore.

Danske Bank has continued to improve its asset quality, as reflected by the decline in problem loans. Danske Bank’s elevated problemloan ratio post the 2008 financial crisis reflects the impact of the financial crisis in Denmark on its domestic portfolio, but also poorasset quality at its operations in the Republic of Ireland (government bond rating A2 stable) and to some extent in Northern Ireland(UK government bond rating Aa2 stable).

Since then, the bank has gradually disposed of its non-core assets, which stood at a minor 0.3% of the loan book at year-end 2017.These were mainly performing residential mortgages in Estonia and Ireland.

Exhibit 3

Danske Bank's Problem Loans as % Gross LoansWe expect Danske Bank's asset quality to continue to gradually improve

4.6%4.8%

3.7%

3.0%

2.3%

1.7%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2012 2013 2014 2015 2016 2017

Source: Moody's Banking Financial Metrics



We expect further moderate improvements in the group’s asset quality during 2018, supported by the domestic economy, which weexpect to grow by 1.8% in 2018 and 1.7% in 2019, following growth of 2.3% in 2017, and continued low interest rates.

Solid and improving capitalisationDanske Bank’s solid capital buffers is a relative strength for its credit profile. The bank's capital ratios improved in recent years,increasing the bank's ability to absorb potential future losses. At the year-end 2017, the bank's Common Equity Tier 1 (CET1) was 17.6%(16.3% in 2016), which compares favorably with its short to medium term capital target of 14%-15%.

Our assigned a1 Capital Score reflects these strengths, but also take into account the bank's high leverage: tangible common equitystood at 4.8% of total assets at the end of December 2017, which is in line with large Nordic peers (average of 5.5%)

The Board of Directors proposed a dividend of DKK 10.0 per share (45% pay-out ratio) and the bank initiated a DKK10bn new sharebuyback programme which will run until 4 February 2019 in order to return the excess capital versus the bank’s internal target to itsshareholders.

Exhibit 4

Danske Bank's CET1 RatioWe view capitalisation as a relative strength for Danske Bank

14.7%15.1%

16.1% 16.3%

17.6%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2013 2014 2015 2016 2017

Source: Company reports

Profitability is improving, and converging towards similarly rated Nordic peersDanske Bank's profitability remains supportive for the group, as reflected in our assigned baa2 Profitability Score. Net income in2017 was 0.6% of tangible assets (unchanged compared to 2016). The firm’s strategy currently focuses on enhancing its wealthmanagement capabilities, reducing its operating costs and continuing to improve customer satisfaction in its core markets (Denmark,Sweden, Norway and Finland).

The bank's primary source of revenues is net interest income (around half of total income in 2017). Net interest income rose by 6%year-on-year in 2017, mainly driven by volume growth and continued growth in Norway and Sweden, which offset margin pressurefrom low rates and competition. Trading income accounted for 16.2% of income in 2017 and added volatility to earnings. In thisenvironment, we see Danske Bank's ability to maintain tight cost control as important. The efficiency gap against peers has declined inrecent years, with a cost-to-income (as per our definition) of 52% in 2017, slightly above the average of its large Nordic peers (46%).

Danske Bank continued recording low impairments in core activities driven by net reversals of DKK 0.9 billion reflecting better creditquality, supported by recovering asset values. In 2017, Danske reported a return on equity (ROE) of 13.6%, above the bank’s target of12.5%.

We expect that the improvement in the bank’s asset risk will continue to support profitability going forward as strategic initiatives,including optimisation of price structures, improved cost efficiency and a moderate level of credit provisions mitigate margin pressureresulting from the ongoing low interest rate environment in Denmark.



High dependence on market funding, in particular covered bonds; liquidity is adequate and refinancing risk is reducingWhile the share of deposit funding has increased in recent years to around 29% of total funding at year-end 2017, partly due to privatesector deleveraging, Danske Bank relies heavily on wholesale funding. Market funds accounted for 43.6% of tangible banking assets atyear-end 2017 (44.6% at YE2016). Our assigned baa2 Funding Structure score reflects the proven stability, depth and breadth of theDanish covered bond market.

The majority of the group's market funds are covered bonds (mainly taken up by Realkredit Danmark, the bank's mortgage subsidiary).The refinancing risk on this type of funding is reducing following the introduction of a new price structure incentivising longer resetperiods. As a result, Danske Bank's exposure to up to 4 years adjustable rate mortgages (i.e. F1-F4) has reduced to 8% of gross loans atyear-end 2017 (12% at YE2013).

We take some comfort from Danske Bank's sizeable reported liquidity buffer - most of which can be used as collateral for central bankliquidity - amounting to DKK618 billion or 21% of tangible banking assets at year-end 2017, leading to a baa2 assigned liquidity score.At the same date, Danske Bank's Liquidity Coverage Ratio according to the new EU standards was 171%.

Support and structural considerationsLoss Given Failure analysisDanske Bank is subject to the EU's Bank Recovery and Resolution Directive (BRRD), which we consider to be an Operational ResolutionRegime. We apply our advanced Loss Given Failure (LGF) analysis to Danske Bank's liabilities, considering the risks faced by the differentdeposit and debt classes across its liability structure at failure. We assume residual tangible common equity of 3% and losses postfailure of 8% of tangible banking assets, a 25% run-off in “junior” wholesale deposits and a 5% run-off in preferred deposits. These arein line with our standard assumptions.

Our advanced LGF analysis is applied to Danske Bank's consolidated banking group and includes a forward looking approach on thebank's near term bail-in-able debt issuance and indicates that a low loss given failure for junior depositors and senior unsecuredcreditors, resulting in a one-notch uplift in the relevant ratings, from the firm’s a3 adjusted BCA.

Government support considerationsAlthough the implementation of the BRRD has prompted us to reconsider the potential for government support to benefit certaincreditors, we continue to consider a moderate probability of government support for Danske Bank, resulting in one notch ofgovernment support uplift in the bank's A1 long-term deposit and senior unsecured debt ratings. This reflects the fact that Danske Bankis Denmark's largest financial institution, and the market leader in most financial products.

Counterparty Risk AssessmentCounterparty Risk Assessments (CRAs) are opinions of how counterparty obligations are likely to be treated if a bank fails and aredistinct from debt and deposit ratings in that they (1) consider only the risk of default rather than both the likelihood of default andthe expected financial loss suffered in the event of default and (2) apply to counterparty obligations and contractual commitmentsrather than debt or deposit instruments. The CRA is an opinion of the counterparty risk related to a bank's covered bonds, contractualperformance obligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities.

Danske Bank's CRA is positioned at Aa2(cr)/Prime-1(cr).The CRA is positioned four notches above the Adjusted BCA of a3, based on the substantial cushion against default provided to thesenior obligations represented by the CRA by subordinated instruments. The main difference with our Advanced LGF approach usedto determine instrument ratings is that the CRA captures the probability of default on certain senior obligations, rather than expectedloss, therefore we focus purely on subordination and take no account of the volume of the instrument class.

About Moody's bank scorecardOur Scorecard is designed to capture, express and explain in summary form our rating committee's judgment. When read inconjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our Scorecardmay materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strongdivergence). The Scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down toreflect conditions specific to each rated entity.



Rating methodology and scorecard factors

Exhibit 5

Danske Bank A/SMacro FactorsWeighted Macro Profile Strong + 100%

Factor HistoricRatio

MacroAdjusted

Score

CreditTrend

Assigned Score Key driver #1 Key driver #2

SolvencyAsset RiskProblem Loans / Gross Loans 2.3% a2 ↓ a2 Expected trend Collateral and

provisioning coverageCapitalTCE / RWA 21.4% aa1 ← → a1 Nominal leverage

ProfitabilityNet Income / Tangible Assets 0.6% baa2 ← → baa2 Return on assets

Combined Solvency Score a1 a2LiquidityFunding StructureMarket Funds / Tangible Banking Assets 43.6% b1 ↑ baa2 Market

funding qualityLiquid ResourcesLiquid Banking Assets / Tangible Banking Assets 31.7% a2 ← → baa2 Quality of

liquid assetsCombined Liquidity Score ba1 baa2Financial Profile a3

Business Diversification 0Opacity and Complexity 0Corporate Behavior 0

Total Qualitative Adjustments 0Sovereign or Affiliate constraint: AaaScorecard Calculated BCA range a2-baa1Assigned BCA a3Affiliate Support notching 0Adjusted BCA a3

Balance Sheet in-scope(DKK million)

% in-scope at-failure(DKK million)

% at-failure

Other liabilities 1,788,689 60.8% 1,881,894 64.0%Deposits 913,777 31.1% 820,572 27.9%

Preferred deposits 676,195 23.0% 642,385 21.8%Junior Deposits 237,582 8.1% 178,187 6.1%

Senior unsecured bank debt 129,900 4.4% 129,900 4.4%Dated subordinated bank debt 20,742 0.7% 20,742 0.7%Equity 88,240 3.0% 88,240 3.0%Total Tangible Banking Assets 2,941,348 100% 2,941,348 100%



De Jure waterfall De Facto waterfall NotchingDebt classInstrumentvolume +

subordination

Sub-ordination

Instrumentvolume +

subordination

Sub-ordination

De Jure De FactoLGF

NotchingGuidance

vs.Adjusted

BCA

AssignedLGF

notching

Additionalnotching

PreliminaryRating

Assessment

Counterparty Risk Assessment 14.2% 14.2% 14.2% 14.2% 3 3 3 3 0 aa3 (cr)Deposits 14.2% 3.7% 14.2% 8.1% 1 2 1 1 0 a2Senior unsecured bank debt 14.2% 3.7% 8.1% 3.7% 1 0 1 1 0 a2Junior subordinated bank debt 3.0% 3.0% 3.0% 3.0% -1 -1 -1 -1 -1 baa2 (hyb)Non-cumulative bank preference shares 3.0% 3.0% 3.0% 3.0% -1 -1 -1 -1 -2 baa3 (hyb)

Instrument class Loss GivenFailure notching

AdditionalNotching

Preliminary RatingAssessment

GovernmentSupport notching

Local CurrencyRating

ForeignCurrency

RatingCounterparty Risk Assessment 3 0 aa3 (cr) 1 Aa2 (cr) --Deposits 1 0 a2 1 A1 A1Senior unsecured bank debt 1 0 a2 1 -- A1Junior subordinated bank debt -1 -1 baa2 (hyb) 0 -- Baa2 (hyb)Non-cumulative bank preference shares -1 -2 baa3 (hyb) 0 Baa3 (hyb) Baa3 (hyb)Source: Moody's Financial Metrics

Ratings

Exhibit 6Category Moody's RatingDANSKE BANK A/S

Outlook Stable(m)Bank Deposits A1/P-1Baseline Credit Assessment a3Adjusted Baseline Credit Assessment a3Counterparty Risk Assessment Aa2(cr)/P-1(cr)Issuer Rating A1Senior Unsecured A1Jr Subordinate Baa2 (hyb)Pref. Stock Non-cumulative Baa3 (hyb)Commercial Paper P-1Other Short Term (P)P-1

DANSKE BANK A/S (LONDON BRANCH)

Outlook StableDeposit Note/CD Program (P)A1/(P)P-1

DANSKE CORPORATION

Bkd Commercial Paper P-1Source: Moody's Investors Service



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Analyst Contacts

Louise Lundberg +46.8.5025.6568VP-Sr Credit [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454


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