Moody’s upgrades Danske to A3, highlights improved profitability

Dec 4th, 2014

Moody’s upgraded Danske Bank from Baa1 to A3 last week, citing as the main driver continued improvement in the Danish bank’s profitability, with reduced refinancing risk in its mortgage credit operations another factor.

DanskeThe rating agency said on Thursday of last week (27 November) that the upgrade and stable outlook reflect the positive trend in the group’s profitability — which has been evident since mid-2013 on the back of a reduction in loan losses — and its view that this will continue due to cost efficiency measures and a positive margin trend.

Moody’s also cited as a factor in the upgrade reduced refinancing risk in Danske’s mortgage credit operations. It noted that the share of short term (one and two year) funded mortgages has fallen by around 50% since 2012.

The upgrade was also attributed to reduced credit risk relating to Danske’s non-core operations. The rating agency also cited a stabilisation of the operating environment in Denmark, and highlighted that the bank has a high level of capital, with a Tier 1 ratio of 16.6% as of 30 September.

Danske’s standalone baseline credit assessment (BCA) was also raised, from baa2 to baa1.

“The baa1 BCA mainly reflects the group’s market leading position in Denmark and Northern Ireland and strong operational presence in Finland, Sweden and Norway,” said Moody’s, “giving the group the benefit of a balanced and well diversified lending portfolio and a significant volume of relatively stable recurring earnings.”

Danske’s rating benefits from one notch of government support uplift from the baa1 standalone BCA.

“Following the adoption of the Bank Recovery & Resolution Directive (BRRD) and the Single Resolution Mechanism regulation in the EU, the balance of risk for many European banks’ senior unsecured creditors has shifted to the downside,” said Moody’s “Considering Danske Bank’s domestic importance, Moody’s assesses a moderate probability of systemic support, and does not currently expect this probability to decline to any material degree, even after full implementation of the BRRD.”

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