Danske targets one notch minimum ratings boost after rights issue

Nov 1st, 2012

Danske Bank launched a Dkr7.15bn (Eu958m) rights issue on Tuesday as part of a strategy that includes an ambition to achieve upgrades of at least one notch to its credit ratings as soon as possible.

The Danish bank said that it is targeting a minimum capital ratio of 17%, with a core Tier 1 capital ratio of at least 13% on a reported basis. According to Moody’s, the equity sale increased the core Tier 1 ratio by approximately 0.8% from a level of 12.7% at the end of September.

Moody’s said that the rights issue is credit positive and because of this it expects the availability and pricing of unsecured funding for Danske Bank to improve.

“We expect that improving the bank’s capital cushion will further improve Danske Bank’s access to senior unsecured creditors following intermittently poor access to such funding by Danish banks during the financial crisis,” said Moody’s senior credit officer Oscar Heemskerk.

DanskeDanske said on Tuesday that it intends to improve its credit ratings by a minimum of one notch as soon as possible.

“An improved rating is expected to enhance short term market access, lower term funding costs and improve institutional business, including deposit inflow,” it said. “These benefits are expected to have a positive impact on earnings for the group.

“Positioning the group as among the market leaders on capital with the associated anticipated ratings uplift is expected to also augment our competitive market position and have significant reputational benefits.”

Danske is rated Baa1/A-/A by Moody’s, Standard & Poor’s and Fitch, with the latter’s rating on negative outlook and the others stable. Moody’s does not rate Danske Bank’s covered bonds, which are rated triple-A by S&P and Fitch.

The bank said that stronger capital ratios and improved ratings will better align it with its Nordic peers, announcing what it dubbed its “New Standards” strategy on Tuesday.

“New Standards aims to lift Danske Bank Group into the top half of its Nordic peer group by the end of 2015,” it said, “with a return on equity above 12% after tax, assuming more normalised market conditions.”

Moody’s said that the capital increase is particularly relevant given several challenges that the bank faces, for example increasing its buffer against asset quality deterioration and enabling Danske to meet increased regulatory requirements, namely CRD IV.

The rating agency also noted that Danish law requires banks to boost covered bond collateral when house prices decline, which can be funded through capital, and said that the requirement for supplementary capital for Danske Bank subsidiary Realkredit Danmark increased from Dkr34.5bn at the end of 2011 to Dkr40.8bn at the end of September. Moody’s said that further house price declines could lead to further increases in collateral requirements.

“Alternatively, Danske Bank could fund such over-collateralisations through junior covered bonds and bank guarantees, as it has done in the past,” it said.

Realkredit Danmark terminated its relations with Moody’s in June 2011 and has since solicited ratings from Fitch for its covered bond.

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