Regulator Orders Danske Bank to Increase Risk Weightings, Set Aside More Capital

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Danske Bank reported that it had received orders from the Danish Financial Supervisory Authority concerning its approach in capital adequacy and solvency need calculations. First, the orders outline specific elements to Danske’s method for calculating risk-weighted assets assigned to corporate clients in comparison with other financial institutions. The orders would increase 2013 riskweighted assets by DKK 100 million or 13% for Danske. This will reduce the likelihood of Danske paying dividends for this year and coming years.

The remaining orders are related to Danske’s solvency need. In terms of the total solvency need as determined by the Basel transitional rules, those are unaffected by the FSA orders. However, as a result of the increased risk-weighted assets, capital totaling DKK 8 billion will need to be added. After the FSA orders, the core Tier 1 ratio will be reduced to 13.3% from 15.1% as a result of the increased riskweighted assets. The fully loaded Basel III ratio will decline as a result of the higher risk-weighted asset level. The revised estimate will not be published until second-quarter results are released.

Danske Bank is considering its option to appeal the orders and will make that decision in the next couple of weeks. At this point, we are maintaining our moat rating and fair value estimate.

 

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