This action follows the announcement that Danske Bank is the subject of criminal investigations by the US Department of Justice
London, 12 October 2018 -- Moody's Investors Service (Moody's) has downgraded all long-term
ratings of Danske Bank A/S (Danske), including the long-term
deposit and senior unsecured debt ratings to A2 from A1, junior
senior unsecured debt ratings to Baa2 from Baa1, and baseline credit
assessment (BCA) to baa1 from a3. The long-term deposits
and senior unsecured ratings continue to carry a negative outlook.
The rating action follows the announcement that the bank is the subject
of criminal investigations by the US Department of Justice (DoJ) linked
to money laundering through its Estonian branch between 2007-2015.
The downgrade reflects Moody's opinion that this development,
in conjunction with the ongoing investigations of European authorities
regarding money laundering, 1) has increased the probability that
Danske will receive substantial financial fines, and 2) will consume
a significant amount of resources and managerial focus, owing to
the expected length and complexity of the US investigation and the potential
for additional remediation requirements.
Danske's baa1 BCA also reflects the strengthening of its asset quality,
capitalization and profitability in the aftermath of the financial crisis,
which brought its credit profile broadly in line with those of its large
Nordic peers. The negative outlook captures further related operational
and reputational risks stemming from ongoing investigations, which
could affect negatively Danske's franchise.
The full list of the affected ratings can be found at the end of this
press release.
RATINGS RATIONALE
RISKS RELATED TO MONEY LAUNDERING INVESTIGATIONS DRIVE DOWNGRADE
The key driver for today's ratings downgrade of Danske's BCA
to baa1 from a3 is the recent news of money laundering investigations
by US authorities, which 1) heighten the risk of material monetary
penalties; and 2) will exert pressure on both financial and human
resources and managerial time, given the complexity and scope of
the investigations and related remedial actions.
In addition to the investigation launched by US authorities, Danske
is also the subject of parallel investigations in Denmark and Estonia,
including for potential criminal activities, linked to money laundering
of a significant scale through the bank's Estonian branch between
2007-2015. Even though Moody's acknowledges the high
degree of uncertainty surrounding the magnitude of any potential fines
resulting from the investigations, an analysis of past money laundering
cases involving US authorities suggests financial penalties alone (i.e.
excluding internal operational and remediation costs) could represent
a sizable figure relative to the bank's annual net income.
Furthermore, as indicated by similar cases in the past and considering
the reported number of regulators involved in investigations, Moody's
considers that the prolonged and complex nature of the investigation and
remediation procedures will consume a significant amount of bank resources
and managerial focus.
Moody's recognises that, in the context of earlier investigations
by the Danish regulators, the bank has already taken a number of
steps to address its Board and Executive level governance and control
and specifically its money laundering process controls deficiencies.
These actions underpins the baa1 BCA assigned to the bank along with its
strengthened capital, solid asset quality and diversified funding
profile. Danske closed down its non-resident customer portfolio
in 2015, strengthened governance and oversight in the Baltics along
with nominated new Baltic management. Additionally, Danske
has boosted its capital buffer in order to comply with its home regulator's
order to set aside a minimum of DKK 10 billion (approximately USD 1.7
billion) in Pillar II capital (in the form of CET1) to cover for what
the Danish regulatory authority characterized as "heightened compliance
and reputational risks". The bank cancelled its share buy-back
program in response.
SENIOR UNSECURED, DEPOSIT AND JUNIOR DEBT RATINGS
The downgrade of the deposit and senior unsecured debt ratings follows
the downgrade of the bank's adjusted BCA. Moody's Advanced
Loss Given Failure (LGF) analysis is based on the group's current balance
sheet structure and its capital and funding plans up to the beginning
of January 2022, when the subordination requirement for Minimum
Requirements for own funds and Eligible Liabilities (MREL) is applicable.
This analysis indicates that Danske's depositors and senior creditors
are likely to face low loss-given-failure, due to
the loss absorption provided by the non-preferred senior issuance.
This results in one notch of uplift for deposits and senior unsecured
debt ratings, which are further supported by our view of "moderate"
probability of government support, which results in an additional
uplift for these two rating classes, leading to long-term
deposit and senior unsecured ratings of A2. Moody's does not incorporate
government support in the Baa2 junior senior ratings, as this debt
class has been introduced by the authorities to absorb losses.
The downgrade of the high-trigger Additional Tier 1 (AT1) ratings
to Ba1(hyb) from Baa3(hyb) also follows from the downgrade of the bank's
adjusted BCA, as per Moody's notching guidelines for junior
securities.
NEGATIVE OUTLOOK
The negative outlook reflects the balance of forward-looking operational
and reputational risks stemming from the ongoing investigations,
which could further negatively affect Danske's financial profile
and franchise.
In addition to the direct financial and potentially criminal impact that
could result from penalties, Danske faces reputational and operational
risks, as the money laundering findings, could dampen the
confidence of some customers, investors and counterparties.
WHAT COULD CAUSE RATINGS TO GO DOWN
The ratings could be downgraded if Moody's observes relapses in terms
of governance, control functions or compliance, along with
any indications of a renewed aggressive strategy resulting in heightened
credit or operational risks. The rating would also come under pressure
if the rating agency observes: (i) a sustained loss in clients or
business, exerting pressure on the bank's financial profile,
(ii) firmer evidence of monetary penalties that would not only put the
bank's earnings, but also capital under pressure; or (iii)
signs that funding becomes significantly more costly or that access to
certain markets or instruments becomes more limited.
WHAT COULD CHANGE THE OUTLOOK TO STABLE
The outlook could revert back to stable if the company demonstrates it
has fully addressed compliance shortcomings and that the repercussions
of the historical issues in Estonia will not have a material negative
impact on Danske's financial profile or its franchise compared to the
current positioning of the BCA. The bank would also need to demonstrate
satisfactory levels of profitability without any significant deterioration
in its funding profile, along with a reduction of the potential
risk of further material financial penalties.
LIST OF AFFECTED RATINGS
Issuer: Danske Bank A/S
..Downgrades:
....Long-term Counterparty Risk Ratings,
downgraded to Aa3 from Aa2
....Long-term Bank Deposits Rating,
downgraded to A2 Negative from A1 Negative
....Long-term Deposit Note/CD Program,
downgraded to (P)A2 from (P)A1
....Long-term Counterparty Risk Assessment,
downgraded to Aa3(cr) from Aa2(cr)
....Long-term Issuer Rating,
downgraded to A2 Negative from A1 Negative
....Baseline Credit Assessment, downgraded
to baa1 from a3
....Adjusted Baseline Credit Assessment,
downgraded to baa1 from a3
....Senior Unsecured Regular Bond/Debenture,
downgraded to A2 Negative from A1 Negative
....Senior Unsecured Medium-Term Note
Program, downgraded to (P)A2 from (P)A1
....Junior Senior Unsecured Regular Bond/Debenture,
downgraded to Baa2 from Baa1
....Junior Senior Unsecured Medium-Term
Note Program, downgraded to (P)Baa2 from (P)Baa1
....Preferred Stock Non-cumulative,
downgraded to Ba1(hyb) from Baa3(hyb)
..Affirmations:
....Short-term Counterparty Risk Ratings,
affirmed P-1
....Short-term Bank Deposits,
affirmed P-1
....Short-term Deposit Note/CD Program,
affirmed P-1
....Short-term Deposit Note/CD Program,
affirmed (P)P-1
....Backed Short-term Deposit Note/CD
Program, affirmed P-1
....Short-term Counterparty Risk Assessment,
affirmed P-1(cr)
....Commercial Paper, affirmed P-1
....Other Short Term, affirmed (P)P-1
..Outlook Action:
....Outlook remains Negative
Issuer: Danske Bank A/S (London Branch)
..Downgrade:
....Long-term Deposit Note/CD Program,
downgraded to (P)A2 from (P)A1
..Affirmation:
....Short-term Deposit Note/CD Program,
affirmed (P)P-1
..Outlook Action:
....Outlook remains Negative
Issuer: Danske Corporation
..Affirmation:
....Backed Commercial Paper, affirmed
P-1
..No Outlook assigned
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks published in
August 2018. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Louise Lundberg
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Limited, Stockholm Branch
Krejaren 2
Ostermalmstorg 1
Stockholm 114 42
Sweden
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Sean Marion
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
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JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
