High Payout Ratios Will Limit Capital For Reinvestment

Key Takeaways

• Muted lending demand in corporate and retail segments may limit revenue growth and dampen earnings momentum.
  
• Focus on high payout ratios could limit capital for strategic reinvestment, affecting long-term earnings growth.
  
• Danske Bank's robust financial performance and strategic advancements in technology, coupled with strong capital management, underpin stable earnings and support for shareholder value.

Catalysts

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

• The expectation for net interest income (NII) to slightly decline in 2025 due to lower market rates and timing of rate cuts could lead to reduced revenue growth potential.
  
• A muted lending demand in both corporate and retail segments may limit revenue growth and dampen earnings momentum.
  
• Cost projections remain stable, but continued investments in technology and IT could pressure net margins if revenue growth doesn't keep pace.
  
• The focus on maintaining a high payout ratio, including dividends and share buybacks, may limit capital available for strategic reinvestment, affecting long-term earnings growth.
  
• External macroeconomic uncertainties, such as potential trade conflicts impacting sector-specific growth, could introduce volatility in loan impairments and affect net profit margins adversely.

Danske Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Danske Bank's revenue will decrease by 0.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 41.5% today to 37.6% in 3 years time.
• Analysts expect earnings to reach DKK 21.6 billion (and earnings per share of DKK 27.78) by about March 2028, down from DKK 23.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting DKK25.7 billion in earnings, and the most bearish expecting DKK16.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.5x on those 2028 earnings, up from 8.2x today. This future PE is greater than the current PE for the GB Banks industry at 7.3x.
• Analysts expect the number of shares outstanding to decline by 2.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.98%, as per the Simply Wall St company report.

Danske Bank Future Earnings Per Share Growth

Risks

• Danske Bank's strong financial performance in 2024, with a net profit of DKK 23.6 billion and a return on equity of 13.4%, indicates potential for continued stable earnings, challenging the belief in a share price decrease.
  
• The bank's strategy execution, including technology advancements like cloud migration and investments in Gen AI, could enhance operational efficiency and support revenue growth.
  
• Robust fee income from investment activities and a strong capital markets franchise, with record performance fees in asset management, point to sustained revenue strength.
  
• Continued loan demand from corporates and improved credit quality leading to net reversals in loan impairments suggest resilient loan performance and stable net margins.
  
• A new share buyback program and maintaining a strong capital position with a CET1 ratio of 17.8% can support share value and investor returns through enhanced earnings per share.

Valuation

• The analysts have a consensus price target of DKK247.188 for Danske Bank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of DKK310.0, and the most bearish reporting a price target of just DKK145.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be DKK57.4 billion, earnings will come to DKK21.6 billion, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 6.0%.
  
• Given the current share price of DKK233.6, the analyst price target of DKK247.19 is 5.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.