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Rating Action:

Moody's downgrades the deposit ratings of Danske Bank A/S, affirms BCA, senior unsecured debt ratings and all other ratings, changes outlook on senior unsecured debt ratings to negative from positive

02 Feb 2018

London, 02 February 2018 -- Moody's Investors Service today downgraded the long-term deposit ratings assigned to Danske Bank A/S (Danske Bank), to A1 from Aa3, affirmed the long-term senior unsecured debt and issuer ratings of A1, while changing the outlook on the long-term senior unsecured debt and issuer ratings to negative from positive. The action reflects the correction of an error in the calculation of the cushion of debt that could be bailed in under the European Bank Recovery and Resolution Directive (BRRD), according to Moody's Advanced Loss Given Failure (LGF) analysis.

Concurrently, Moody's affirmed the bank's standalone baseline credit assessment (BCA) at a3 as well as all of Danske Bank's other debt and short-term deposit ratings.

The full list of the affected ratings can be found at the end of this press release

RATINGS RATIONALE

DOWNGRADES OF DEPOSIT RATINGS AND CHANGE IN OUTLOOK ON SENIOR UNSECURED DEBT DRIVEN BY CORRECTION OF ERROR

Today's downgrade of Danske Bank's deposit ratings and change in outlook on senior unsecured debt were driven by a correction of inputs into Moody's LGF analysis, a component of the rating agency's banking methodology that consists of assessing the extent to which the amount of debt a bank has outstanding could protect senior creditors in case of a failure of the bank under the BRRD framework.

The prior use of erroneous amounts of debt caused Moody's to overestimate the size of the protection afforded to depositors when upgrading the bank's deposit rating on October 12, 2016, and when assigning a positive outlook to the bank's senior unsecured debt and issuer ratings on August 16, 2017.

The error has now been corrected, and today's rating action reflects this change.

AFFIRMATION OF BCA UNDERPINNED BY CONTINUED SOLID PERFORMANCE AND ROBUST BUFFERS

The affirmation of the bank's BCA at a3 reflects the continued strengthening of the bank's asset quality, capitalisation and profitability on the back of a balanced and well-diversified lending portfolio.

Moody's expects the group's asset quality to remain robust in 2018, supported by the domestic economy. Moody's further views Danske Bank's capital position as sound: at the end of 2017, its Common Equity Tier 1 (CET1) ratio was 17.6%, (16.3% at end-2016) and above the bank's 14%-15% capital target in the short- to medium-term.

Danske Bank's profitability remains a relative strength for the group, with net income in the first nine months of 2017 at 0.6% of tangible assets (unchanged compared to 2016). The firm's strategy currently focuses on enhancing its wealth management capabilities, reducing operating costs and on continuing to improve customer satisfaction in its core markets of Denmark, Sweden, Norway and Finland. Management's focus on reducing expenses and a contained cost of credit should continue to support a positive profitability trend, while margin pressure resulting from the current low interest-rate environment in Denmark should ease towards the later part of 2018 when Moody's expects interest rates to rise gradually.

AFFIRMATION OF SENIOR UNSECURED DEBT AND OTHER RATINGS DRIVEN BY DEBT CUSHION AND SUPPORT ASSUMPTIONS

The affirmation of the senior unsecured and other debt ratings reflects the aforementioned affirmation of the bank's standalone profile as well as Moody's LGF analysis of the group's current consolidated balance sheet structure at end-2017 and its near-term funding plan.

Moody's LGF analysis indicates that Danske Bank A/S's depositors and senior creditors are likely to face low loss-given-failure, due to the loss absorption provided by subordinated debt and, potentially, by senior unsecured debt should deposits be treated preferentially in a resolution, as well as the volume of deposits and senior debt themselves. This results in one notch of uplift for senior unsecured debt.

Moody's assumption of a moderate probability of government support for Danske Bank A/S's senior unsecured debt and deposits results in a further one-notch uplift, leading to long-term deposit ratings of A1 and long-term senior unsecured and issuer ratings of A1.

NEGATIVE OUTLOOK ON SENIOR UNSECURED DEBT DRIVEN BY EXPECTED GRADUAL EROSION IN SIZE OF DEBT CUSHION

Although Danske Bank A/S's senior unsecured debt is likely to face low loss-given-failure due to the loss absorption provided by its own volume and the amount of debt subordinated to it, the expected loss on this debt may rise due to the bank's decision to allow senior unsecured debt and some subordinated debt to mature, without fully offsetting it by expected issuance of "junior senior" debt.

STABLE OUTLOOK LONG-TERM DEPOSIT RATINGS DRIVEN BY STEADY FUNDAMENTALS AND LGF ANALYSIS

The stable outlook on the deposit ratings is driven by a combination of expected steady financial performance and projections that the debt cushion protecting this debt class will be sufficient to maintain the current LGF uplift.

Moody's expects the financial performance of Danske Bank to remain robust over the outlook period due to the supporting operating environment and the bank's strong and well-diversified position in the key markets where it operates. Furthermore, the agency's updated projections under its LGF analysis suggest that, during the outlook period, the amount of debt issued by the bank will be sufficient to maintain one notch of uplift on deposits while remaining below the threshold required for any upgrade.

WHAT COULD CAUSE RATINGS TO GO UP / DOWN

The ratings could be upgraded following an improvement in the bank's fundamental profile, as indicated by its BCA, for instance if: (1) problem loans declined further, supported by a decrease in agriculture and oil-related exposures; (2) capital and leverage strengthened; and/or (3) profitability increased and earnings volatility moderated. Additionally, a change to a stable outlook on the long-term debt ratings or rating upgrades could occur if the bank's funding plan changed and results in a material increase in the volume and subordination of debt, for instance in the context of upcoming Minimum Required Eligible Liabilities (MREL) requirements.

The ratings could be downgraded due to a deterioration in the bank's fundamental credit profile, for instance if there were: (1) renewed pressure on asset quality, particularly in one of the bank's core markets; (2) indications that the firm will not deliver the anticipated improvement in profitability; or (3) signs that the improvements achieved in recent years were not sustainable. Similarly, debt ratings could be downgraded if the cushion of loss absorption provided by its own volume and the amount of debt subordinated to it continued to gradually decline over the outlook period.

LIST OF AFFECTED RATINGS

Issuer: Danske Bank A/S

Downgrades:

....LT Bank Deposits, Downgraded to A1 from Aa3, Outlook remains Stable

....LT Deposit Note/CD Program, Downgraded to (P)A1 from (P)Aa3

Affirmations:

....LT Issuer Rating, Affirmed A1, Outlook changed to Negative from Positive

....ST Bank Deposits, Affirmed P-1

....Senior Unsecured Regular Bond/Debenture, Affirmed A1, Outlook changed to Negative from Positive

....Junior Subordinate, Affirmed Baa2 (hyb)

....Pref. Stock Non-cumulative, Affirmed Baa3 (hyb)

....Senior Unsecured MTN Program, Affirmed (P)A1

....Other Short Term Program, Affirmed (P)P-1

....ST Deposit Note/CD Program, Affirmed P-1

....ST Deposit Note/CD Program, Affirmed (P)P-1

....BACKED ST Deposit Note/CD Program, Affirmed P-1

....Commercial Paper, Affirmed P-1

....Adjusted Baseline Credit Assessment, Affirmed a3

....Baseline Credit Assessment, Affirmed a3

....LT Counterparty Risk Assessment, Affirmed Aa2(cr)

....ST Counterparty Risk Assessment, Affirmed P-1(cr)

Outlook Actions:

....Outlook, Remains Stable(m)

Issuer: Danske Bank A/S (London Branch)

Downgrades:

....LT Deposit Note/CD Program, Downgraded to (P)A1 from (P)Aa3

Affirmations:

....ST Deposit Note/CD Program, Affirmed (P)P-1

Outlook Actions:

....Outlook, Remains Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in September 2017. 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 - Sr 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:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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