The valuation demonstrates that Danske Bank operates in a complex and challenging environment.
Recently Danske Bank underwent major transformations, as it founded its new wealth management
52 http://pages.stern.nyu.edu/~adamodar/New_Home_Page/lectures/ddm.html
93 unit, partially divested its Baltic business units and focused on the Nordic core market again. The Nordic market is characterized by a high acceptance of and adaptability to digital solutions that represent possibilities to attract more customers for Danske Bank. In certain areas such as mobile payment, Danske Bank offers the market standard. Thus the emphasis lies on the extension of Danske Banks digital banking solutions in the future.
In terms of capital requirements, it has been revealed that especially an increase in the leverage ratio above 5% would have implications for Danske Bank. However Danske Bank already complies with all other capital requirements for 2019 (Net Stable Funding Ratio is unknown), so that a leverage ratio of 3% will have no impact on Danske Banks current funding structure.
Valuing financial service firms requires certain consideration and the choice of appropriate valuation models, as the debt has another connotation for financial service firms compared to non-financial service firms. Thus models have been chosen that allowed for the discounting of the return on equity by the cost of equity.
The valuation resulted in a value of Danske Bank of DKK 179 and consequently it coincides with the stock price in the market. The second scenario considered the rise in the leverage ratio in 2018,so that Danske Bank’s stock price would be overstated.
94
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Appendix
Systematic risk
Systematic risk describes the probability that the financial system as a whole becomes adversely affect by an event instead of only a single market participant (Murphy, 2012). According to Murphy (2012) there are four categories that indicate a systematic risk exposure by a firm, financial institution, policy or government:
1. The failure of one entity causes the failure of other entities in a domino effect.
2. A contagion, i.e. that a company holding certain assets experiences distress when another company with similar assets is distressed.
3. It contributes to fire sales when prices fall
4. It has a critical function, meaning that the absence of the entity hinders other entities to make use of essential services.
A bank usually is connected to several other banks and companies, as they trade financial
instruments, lend loans and hold deposits. Thus a bank failure would result in a netting of position that may lead to tremendous deficits for customers such as other banks and companies. Consequently, systematic risk may expose a threat to a whole economy, as the failure of banks and several big companies affects the GDP.
To prevent systematic risk, there are several considerations. One consideration is the improvement of transparency in banks and companies that helps to prevent a panic reaction by investors and allows regulators better monitoring. Furthermore lenders of last resort such as the IWF or central banks shell prevent illiquidity of markets and credit cutoffs for healthy firms. Additionally Murphy (2012) suggest that deposit guarantors shell help to keep and attract customers and clients. However all policies and measures may create moral hazard, as companies that trust in the fact that they will be rescued anyways, take aggressive risk positions. (Murphy, 2012)
101
Table and Figures
Figure 1
Figure 2
102 Figure 3
Figure 4