Digital Shift And Rising Regulatory Costs Will Squeeze European Margins

Key Takeaways

• Disruptive digital competitors and new technologies threaten to erode Danske Bank's core revenues and diminish its long-term market position.
  
• Mounting regulatory, legal, and reputational challenges are likely to drive up costs and limit both profitability and growth prospects.
  
• Improved market share, digital advancements, robust credit quality, and strong capital position drive growth, diversification, and long-term stability for Danske Bank.

Catalysts

Provides various banking products and services to corporate, institutional, and international clients.

• The accelerating shift towards digital currencies and decentralized finance may increasingly disintermediate Danske Bank's traditional banking operations, putting material long-term pressure on its fee-based and lending revenues as customers migrate to more agile, technology-led alternatives.
  
• Persistently low or even negative interest rates across Europe, exacerbated by demographic stagnation and subdued economic growth, are likely to compress net interest margins, resulting in structurally lower earnings and an inability to generate above-peer returns.
  
• Heightened regulatory scrutiny and expanding ESG requirements are set to drive up compliance and operational costs, eroding net margins and potentially triggering new reputational setbacks if legacy issues re-emerge or if Danske Bank is unable to keep pace with evolving standards.
  
• Lingering reputational damage and unresolved legal overhang from prior money laundering scandals may continue to constrain customer trust and franchise value, stifling business expansion and leaving Danske Bank exposed to higher ongoing provision costs that undermine profitability.
  
• The intensifying competitive threat from non-bank digital challengers and Big Tech-companies able to capture payments, lending, and advisory relationships-will likely weaken Danske Bank's market share over time and result in declining revenues from its core banking and fee-generating activities.

Danske Bank Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Danske Bank compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Danske Bank's revenue will decrease by 1.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 41.4% today to 39.7% in 3 years time.
• The bearish analysts expect earnings to reach DKK 21.2 billion (and earnings per share of DKK 27.62) by about July 2028, down from DKK 23.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.4x on those 2028 earnings, down from 9.1x today. This future PE is lower than the current PE for the GB Banks industry at 8.9x.
• Analysts expect the number of shares outstanding to decline by 2.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.11%, as per the Simply Wall St company report.

Danske Bank Future Earnings Per Share Growth

Risks

• Danske Bank continues to achieve strong growth in lending volumes and deposits, particularly across its corporate and private banking segments, supporting revenue growth through increased market share in the Nordics and improved customer activity.
  
• The bank's ongoing investments in digital platforms and advisory capabilities are enabling cost reductions and productivity improvements, which are reflected in stable operating expenses and a cost/income ratio progressing toward its 2026 target, thereby supporting net margins.
  
• Credit quality remains robust with low impairment charges, aided by a favorable macroeconomic backdrop in Denmark and the Nordics, which helps to stabilize provisions and reduce earnings volatility over time.
  
• Resilience and upward momentum in assets under management, along with recovering investment activity and net inflows from both institutional and retail customers, provide potential for fee income recovery and growth contributing to a more diversified revenue stream.
  
• Strong capital generation, a rising CET1 ratio, and active share buyback programs give Danske Bank considerable flexibility for capital distribution and potential dividend increases, further supporting shareholder returns and underpinning long-term earnings stability.

Valuation

• The assumed bearish price target for Danske Bank is DKK192.41, which represents two standard deviations below the consensus price target of DKK266.8. This valuation is based on what can be assumed as the expectations of Danske Bank's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of DKK300.0, and the most bearish reporting a price target of just DKK145.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be DKK53.3 billion, earnings will come to DKK21.2 billion, and it would be trading on a PE ratio of 8.4x, assuming you use a discount rate of 6.1%.
  
• Given the current share price of DKK257.6, the bearish analyst price target of DKK192.41 is 33.9% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.