September 14, 2018 / 11:21 AM / a year ago

Breakingviews - Markets bet against U.S. leniency over Danske

Danske Bank is seen in Copenhagen, Denmark in this undated Scanpix Denmark photo

LONDON (Reuters Breakingviews) - Nordic lenders rightly pride themselves on their best-in-class profitability and rock-solid dividends. The problem for Denmark’s Danske Bank is that it may have to add top-notch money-laundering services, if media reports citing between $30 billion and $150 billion of potentially suspicious transactions processed through its Baltic business are accurate. A report in the Financial Times newspaper that Danske’s boss downplayed earlier warnings will do little to mitigate potential reprisals from US authorities.

Trying to quantify a potential outcome is difficult, especially since the bank is not yet under formal investigation. But given the lender is projected to make a 13 percent return on tangible equity this year – excluding any fines – suppose a fair value for Danske shares is 1.3 times tangible book, assuming a 10 percent cost of equity. Shares currently trading at just over one times book would thus imply a potential fine of up to 35.7 billion Danish crowns ($5.5 billion), according to a Breakingviews calculation. That reflects fears of impending punishment from the United States, given many of the transactions under review were processed in dollars.

In such a scenario Danske’s common equity Tier 1 capital ratio would fall from a robust 15.9 percent to 11.2 percent, just above Danish regulators’ threshold and below the bank’s 14 percent target. The lender would have to end its 10 billion Danish crowns share buyback – 5.9 billion Danish crowns of which remain outstanding – and suspend the dividend. CEO Thomas Borgen would struggle to keep his job.

Many analysts think such a fine is too high – it would represent nine times what Deutsche Bank paid to U.S. regulators after processing $10 billion in suspicious transactions from Russia. Analysts at Berenberg reckon a $1 billion penalty is more likely – meaning Danske’s CET1 ratio would drop to 15 percent and the bank could continue paying out capital to shareholders. That suggests investors have a good measure of downside protection.

The bank will release the results of an internal probe on Sept. 19. Even if Danske is portrayed in a better light, Borgen may still have to go, like ING’s finance director Koos Timmermans did on Sept. 11 after accepting responsibility for money-laundering violations under his watch. Either way, until the long-arm of U.S. regulators is revealed investors will have to put up with increased uncertainty.


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