Any disobedient child knows that owning up to a mistake likely results in a lesser punishment. Danske Bank, which is on the naughty step for laundering up to $8.3 billion in its Estonian subsidiary, is hoping for similar leniency. The Copenhagen lender has promised to donate all gross profit it made from malfeasance to the fight against financial crime. The move may help to draw the sting of punishment from Danish authorities – but the bigger financial threat comes from the United States.
Danske’s munificence did little to reassure shareholders who sent the shares down 9 percent on Wednesday morning. True, second-quarter pre-tax profit undershot analysts’ forecasts because volatile trading revenue was lower than expected. But the giveaway also weighed on the stock. Danske reckons gross profit from its non-resident portfolio in Estonia – the business under investigation – was 1.5 billion Danish crowns ($234 million) between 2007 and 2015. That’s equivalent to 8 percent of estimated 2018 earnings, according to Eikon.
Unless the entire amount was derived from banking Russian gangsters then Danske’s contribution will be somewhat smaller. However, shareholders will only know for sure when the bank releases the results of its internal investigation in September.
Denmark’s largest lender says the distribution would be on top of potential fines. Judging by past record, there is little to fear from domestic authorities. Back in December the country’s public prosecutor fined the lender a mere 12.5 million Danish crowns ($1.9 million) for anti-money laundering violations. American investigators are more fearsome.
However, much pain appears to have been priced in. Assume Danske is fined $630 million, the same amount as Deutsche Bank paid to U.S. authorities for processing sham Russian trades worth $10 billion. Throw in the full $234 million giveaway, and Danske would still earn around 18.20 Danish crowns per share, using analysts’ consensus forecasts for 2019 revenue and costs. That equates to a 10 percent return on tangible equity – reasonable for a stock now trading at expected tangible book value for next year.
Of course, a substantially higher fine could explode those assumptions. But shareholders at least have a margin of comfort that Danske’s money-laundering wound has been cauterized.