Nordic Strength Fuels Growth Amidst Margin Squeeze And Revenue Pressures

Key Takeaways

• Strategic focus on corporate lending and investment activities aligns with macroeconomic improvements, potentially driving revenue growth through enhanced banking services.
  
• Emphasis on cost discipline, digitalization, and sustainability-linked finance strengthens profitability and positions the bank well in emerging markets.
  
• Subdued lending demand, pricing pressures, and high operating expenses challenge Danske Bank's revenue growth and earnings stability amid uncertain interest rates.

Catalysts

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

• Danske Bank's Forward '28 strategy aims to secure increased corporate lending demand and investment activities, which could drive revenue growth over the next few years as corporate activity and debt capital markets strengthen.
  
• The improvement of the macroeconomic environment in Denmark, with lower inflation and central bank rates, is expected to support growth, potentially impacting revenue positively by stimulating lending and banking activities.
  
• Cost discipline measures have led to stable operating expenses, with the bank focusing on digitalization and IT partnerships, which could enhance net margins through operational efficiencies.
  
• The share buyback program and strong capital position, along with the reduction in loan impairment charges, are likely to improve earnings per share (EPS) as capital is returned to shareholders.
  
• Danske Bank's continued focus on sustainability-linked finance and the strength of its Nordic franchise in debt capital markets position the bank for revenue growth in emerging high-demand market segments.

Danske Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Danske Bank's revenue will decrease by -3.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 39.3% today to 32.6% in 3 years time.
• Analysts expect earnings to reach DKK 17.5 billion (and earnings per share of DKK 23.75) by about November 2027, down from DKK 23.4 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as DKK 23.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.6x on those 2027 earnings, up from 7.5x today. This future PE is lower than the current PE for the GB Banks industry at 13.0x.
• Analysts expect the number of shares outstanding to decline by 4.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.63%, as per the Simply Wall St company report.

Danske Bank Future Earnings Per Share Growth

Risks

• Subdued lending demand in the Retail business due to low housing market activity could negatively impact Danske Bank's revenue growth in the consumer sector.
  
• Competitive pricing adjustments for home loans and lower deposit margins from central bank rate cuts may pressure net interest income, affecting overall earnings.
  
• Despite solid income from sustainability-linked finance, any prolonged stagnation in lending volume recovery, especially in mortgage lending, could affect future revenue streams.
  
• There is uncertainty around future net interest income, particularly in 2025, due to fluctuating central bank rate expectations, leading to potential volatility in earnings projections.
  
• High operating expenses, although managed well, could continue to strain net margins if wage inflation and nonrecurring costs persist, despite cost management strategies.

Valuation

• The analysts have a consensus price target of DKK 234.44 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 DKK 285.0, and the most bearish reporting a price target of just DKK 145.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be DKK 53.8 billion, earnings will come to DKK 17.5 billion, and it would be trading on a PE ratio of 11.6x, assuming you use a discount rate of 5.6%.
  
• Given the current share price of DKK 209.1, the analyst's price target of DKK 234.44 is 10.8% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.