By Anna Molin
Danske Bank A/S plans to raise 20 billion Danish kroner ($3.68 billion) in a rights issue to return hybrid loans to the Danish state and reinforce its capitalization ahead of new European banking regulations, the bank said as its fourth-quarter net profit more than doubled but failed to meet expectations.
The bank also said that its fourth-quarter net profit more than doubled but failed to meet expectations, and that its chairman had announced his resignation.
Danske said it won't pay a dividend for 2010 despite the expiry last year of a government aid package that restricted shareholder payouts.
Instead, it will use the funds, including those raised from the share issue, to reimburse the government 26 billion kroner in subordinated hybrid capital that it borrowed in 2009 as its core markets at home and abroad, including Ireland and the Baltic countries, headed into recession.
By replacing state hybrid capital with high-quality shareholders' equity, Danske's core Tier 1 capital ratio—a measure of a bank's capital relative to its assets—will strengthen to about 12.5% from 10.1% currently and give the bank an "appropriate" equity level ahead of banking rules, the bank said.
The new capital rules, called Basel III, will force banks worldwide to hold bigger capital cushions and deeper pools of liquidity to guard against potential losses and crippling bank runs.
Danish politicians earlier this week pressured Danske to beef up its buffers in the event of another banking crisis. As Denmark's biggest lender with total assets worth 3.213 trillion kroner at the end of 2010, Danske is systemically important and a failure could trigger a financial meltdown.
"Banks like Danske Bank pose a potential risk to the entire financial system and therefore they must have a larger capital base," Morten Bodskov of the center-left Social Democratic Party told Danish newspaper Politiken Wednesday.
Smaller Danish banks were among the worst hit by the financial crisis due to excessive loans to commercial property developers, the fallout of which forced Denmark to seize its 11th bank, Amagerbanken A/S, on Feb. 6.
The country set up three banking rescue schemes in response to the crisis and had at end-2009 injected a total of 46 billion kroner of convertible hybrid capital into 43 institutions. In contrast to seeking hybrid aid, Nordic rivals, including Nordea Bank AB, DnB NOR ASA, Skandinaviska Enskilda Banken /zigman2/quotes/201173722/delayed SE:SEB.A +3.06% AB and Swedbank /zigman2/quotes/203208387/delayed SE:SWED.A +2.45% AB, all tapped shareholders for funds in 2008 and 2009, leaving Danske shy on equity capital in relation to peers.
Danske's share issue will be launched in April at the latest and the return of state capital will take place in May 2012. Details on offer terms and timeline will be announced after the board agrees to proceed, it said.
The bank's two largest shareholders—A.P Moller Maersk and the A.P. Moller and Chastine Mc-Kinney Moller Foundation, and Realdania—have agreed to subscribed for their proportionate shares of 22.76% and 10.07%, respectively. Danske Bank will act as global coordinator and book-runner, with Bank of America Merrill Lynch serving as joint book-runner and underwriter.
Chief Executive Peter Staarup said the measures "will make Danske Bank one of the best capitalized banks in the EU."
Meanwhile, the bank's chairman of seven years, Alf Duch-Pedersen , said he won't run for re-election since the bank is "moving into a new era" after the financial crisis. He will pass the baton to Vice Chairman Eivind Kolding , who will be up for board election this spring.
The share issue, the lack of dividend and weaker-than-expected fourth-quarter results weighed on Danish banking shares Thursday.
Danske shares were down 9.5% at 127.30 recently, underperforming a 1.4% drop in the broader Copenhagen market and giving the company a market capitalization of around 98 billion kroner.
Pan-Nordic bank Nordea, which has a 20% market share in Denmark, was down 2.3% to 61.15 kroner; Jyske Bank A/S and Sydbank A/S, Denmark's third- and fourth-largest banks by market capitalization, were down 2.4% to 242 kroner and 1.6% to 156.90 kroner, respectively.
"It was a disappointing result...but what is bringing the shares down even more is the capital increase. There is no rush to buy into the stock with a capital increase in coming months," said Ole Jensen , Sydbank's head of equities in Scandinavia.
The bank Thursday reported a rise in net profit to 1.07 billion kroner from 405 million kroner, but missed analysts' expectations for 1.96 billion kroner as trading income was off the mark and provisions for loan losses narrowed less than expected.
Loan-impairment charges shrank to 2.98 billion kroner, while trading income amounted to 795 million kroner.
The bank said earnings are expected to gradually improve in 2011 with lower loan-impairment charges than in 2010. In Ireland, loan impairments are likely to remain high as the country's property-market bust continues to weigh on borrowers, the bank said.
Mr. Jensen said he expects Danske's shares to remain under pressure until the capital increase is complete. "After that, I think it will be a great story. Danske will earn lots of money and they will get rid of the high interest rate to the state. Going into 2012, people will look at it as a very good bank opportunity."