In concert with 69 other European banks, Danske Bank has participated in the 2023 EU-wide stress test conducted by the European Banking Authority (the EBA).
The purpose of the stress test is to assess the robustness of the European banking sector in the event of a very severe economic setback. According to the test, Danske Bank would have to use parts of its combined capital buffers in such a macroeconomic scenario.
“The stress test confirms that Danske Bank is robust under a very severe stress test. Despite the fact that we are facing a much more severe economic setback in the new stress-test, the result for Danske Bank is similar to the result from 2021. The 2023 EU-wide stress test uses a very severe macroeconomic scenario with a harshness observed not even during the financial crisis, while permitting no measures taken by management to mitigate the effect of the given scenario. Furthermore, it disregards that our profitability has improved considerably since the end of 2022. In this highly unlikely situation, we would have to use parts of our combined capital buffers, which is precisely the purpose of such buffers,” says Stephan Engels, Chief Financial Officer at Danske Bank. He continues:
“We continue to meet the requirements imposed by the Danish Financial Supervisory Authority and we remain one of the best capitalised banks in Europe. This stress test with the very severe scenario does not cause us to change our capital management or dividend policies.”
Very severe adverse scenario
The stress test is based on reported risks and financial figures from 31 December 2022, and it comprises two macroeconomic scenarios for the years 2023-2025 – a base scenario and an adverse scenario. The stress test was carried out applying a static balance sheet assumption and therefore does not consider possible actions to mitigate the effect of the scenarios.
The adverse scenario describes a very severe economic setback with negative GDP growth, sharp falls in residential and commercial property prices and increasing unemployment. The fall in residential and commercial property prices is much sharper in the Nordic countries under the adverse scenario than for the EU as a whole.
In addition, the stress test applies a common methodology that comes with some limitations. The method defines several restrictions on the development in, among other things, the bank’s earnings, risk exposure and balance sheet. The restrictions imply that institutions' earnings from net interest income in the adverse scenario must not exceed the level from 2022, and the results therefore do not take into account that Danske Bank’s profitability has increased and is considerably higher than in 2022, even when applied to the stress-scenario.
The result of the stress test is that the Danske Bank Group’s common equity tier 1 (CET1) capital ratio at the end of 2025 would be 10.9% and 18.5% on transitional figures, respectively, in the adverse and base scenarios. The Danske Bank Group’s total capital ratio at the end of 2025 would be 14.5% in the adverse scenario and 22.7% in the base scenario on transitional figures.
The highest impact of the stress scenario is observed by the end of 2024, where Danske Bank would have to use 0.7 and 1.7 percentage points of its combined capital buffers in the adverse scenario on CET1 and total capital, respectively, assuming that the countercyclical buffer is released.
The results of Danske Bank’s stress test are available at danskebank.com/stress-test.
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