Danske’s cost burden keeps growing in an age of bank scandals

Bloomberg

At Danske Bank A/S, the cost of adapting to a world intensely focused on financial crime just keeps growing.
In an interview in Stockholm, the chief executive of Danske in Sweden, Johanna Norberg, said “the peak” level of investment to meet anti-money laundering requirements has “not yet been reached.”
The 48-year-old has been running Danske’s operations in the biggest Nordic nation since September, after years spent overseeing the bank’s markets units. Her headquarters overlook the Baltic Sea, beyond which lies region that dragged Danske into its worst existential crisis in living memory.
A month after Norberg took on the job of Swedish CEO, Danske announced an organization-wide hiring freeze to help cope with growing compliance costs. That’s as the European Union makes ever greater demands forcing banks to take adequate steps to ensure they don’t touch suspicious transactions.
Since admitting it failed to properly screen 200 billion euros ($222 billion) in non-resident flows through Estonia, Danske has become the target of multiple criminal investigations. Investors are now bracing for hefty fines. Norberg says there’s plenty of capital to deal with any challenge.
The bank can “manage whatever might happen,” she said. “We are one of the best capitalised banks in Northern Europe.”
Danske is being investigated in Denmark, Estonia and France, as well as by the US Department of Justice and the US Securities and Exchange Commission. It also faces a number of class-action lawsuits.
The bank’s market value has plunged by almost 40%, or over $9 billion, since late September 2018, when it revealed the scale of its Estonian scandal. The bank’s capital adequacy, however, remains better than most.
Philip Richards, a senior banks analyst at Bloomberg Intelligence in London, says Danske’s “strong” capital ratio provides a capital buffer of about $3.3 billion, compared with his estimate for a total fine of no more than $2.5 billion. Still, equity analysts at Citigroup recently advised clients to brace for a fine of about $3.2 billion.
“I don’t feel worried,” Norberg said.
What Bloomberg Intelligence Says:
The EU’s fifth anti-money laundering rule (AMLD5) went live on Jan. 10, “raising banks’ costs, as well as compliance and franchise risk. Stricter client checks will also see investment in compliance staff and systems upgrades mount, opening doors for regulatory-compliance software.”
—Sarah Jane Mahmud, Senior Analyst.
Danske is just one of a number of Nordic banks being investigated for potential money laundering. In Sweden, Swedbank AB and SEB AB — which dominate in the Baltic region — have also been tainted by scandals.
Earlier this month, analysts at JPMorgan Cazenove warned clients of the risk of “significant cost pressure given ongoing scrutiny of systems and controls.”
Norberg says that at Danske, a lot of the costs of protecting the bank from money laundering “are focused on getting automated processes and a new platform in place.” She says that “once that’s done the investment levels will decrease.”
Swedish Ambitions
Danske is trying to step up its presence in Sweden, where it’s faced tough competition in the mortgage market. The bank’s share of new business fell in the third quarter, and it has now decided to join a local price war by not raising mortgage rates.
“One reason is of course that our brand got affected due to Estonia and the money laundering events,” Norberg says. “It’s been a hard nut to crack. We got hit pretty hard being the first bank in the Nordics.”
Of her first few months as Swedish CEO, Norberg says, “It’s been a steep learning curve and great fun.” But she also acknowledges that “the honeymoon is over.”
So in Sweden, the plan is “to continue to grow quite substantially.”