SWOT Analysis

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Chart 3 Chart 4

The ROA reveals how much income a company earns for every capital invested in assets. Thus it demonstrates the ability of management to utilize the financial recourses. The ROA is calculated by ROA = (Net income)/(Total assets). The chart 4 shows that all banks show an increase in the ROA from 2011 to 2015, i.e. Banks are able to generate more money out of their assets. However Danske Bank has the lowest ROA compared to its peers. This is highly relates to Danske Banks high operational cost.

76 Resource Based View (RBV) regards the resources of a company as its main source of comparative advantage (Grant 2010). The combination of resources and capabilities create the key success factors (KSFs). In the course of the analysis KSFs have been identified as strong focus on digitalization, performance in asset management, embeddedness and partnerships, reputation, economies of scale and scope. Danske Bank states its key success factors as expertise, integrity, value creation, agility and collaboration (Corporate Responsibility Report, 2015). These KFSs are in accordance with the preceding analyses.

Digitalization: Danske bank has a strong IT affinity and discerns the trends in digitalization in an early stage. Thus Danske Bank has one of the most advanced online platforms for customers in the Scandinavian region and developed payment systems such as MobilePay that it implemented through cooperation with diverse retail chains. In order to send payments with MobilePay, users have to use the mobile application by Danske Bank. This in turn creates additional brand awareness.

Asset management: Danske Bank’s workforce aggregate to approximately 19,000 employees composed of 65% with a higher education and of 19% who are studying. This makes for a high degree of knowledge concentration and connectivity to universities. Thus Danske Banks skilled workforce is a capability that leads to high performance in asset management and other areas. That is the reason why Danske Bank received recognition as best asset management in the Nordics. For instance, Morningstar announced Danske Bank best in equities in Denmark for the seventh year running, the Nordic Hedge Award ranked Danske Bank second for the Danske Invest Hedge Fixed Income Strategies and customers surveys ranked Danske Banks as “Best Regional Cash Manager” in the Nordic and Baltic regions. Thus Danske Bank’s human resources are a key success factor.

Reputation: As mentioned in the previous chapters, Danske Bank is ranked among the top banks in the Nordics in terms of performance, transparency and customer satisfaction, so that it enjoys a good reputation. A good reputation comes along with trust and confidence of customers. In turn it attracts more customers and may increase customer activities. The good reputation is also supported by high ratings by rating agencies due to the fulfillment of capital requirements.

Economies of scale and scope: Danske Bank is well diversified, operating in various market segments. On the one hand Danske Bank is capable to serve multinational corporation (MNC) such as Volvo and on the other hand it serves individual private customers. As Danske Bank portfolio is diversified it allows for synergies between business units and for economies of scope. An example is

77 the offering of insurances to commercial customers or the transfer of wealthy customers from commercial banking to the wealth management unit. In addition Danske Bank is able to make use of economy of scale for profit generation and cost minimization, in terms of sales, human resource planning, procurement, etc.

Embeddedness and Partnership: Another perspective is the Network theory that values a corporation’s external network as a unique resource for information, services and capital (Andersson, Forsgren & Holm, 2002). According to the Network theory Danske Bank’s strength lies in the embeddedness of branches and subsidiary in local markets. Danske Banks has a network of 353 branches, including 159 in Denmark, 53 in Northern Ireland, 45 in Finland, 39 in Sweden and 32 in Norway. This local embeddedness allows customer to easily find a personal contact person and it create awareness of the brand as well as of the strength of Danske Bank. In addition Danske Bank continuously seeks to increase its network and partnerships by cooperating with external companies such as REMA to increase the user rate of its payment applications MobilePay. Cooperation also includes company offers such as the one for Akademikerne or Saco, allowing employees of certain companies to enjoy benefits related to banking services. Another strategy to extend the network is the inorganic growth strategy of Danske Bank. Especially from 1995 to 2006 Danske Bank expanded its network through several M&As. This in turn increased Danske Bank’s local embeddedness in foreign countries and increased the network of customers as well as governmental authorities.

6.3.2 Weakness

Danske Bank encounters weaknesses in several areas of its business. One major weakness is the high cost-to-income ratio that is still high compared to peers despite recent improvements. The high cost-to-income ratio decreases the ROA and consequently the ROE. As salaries make for the largest position in operating expenses, Danske banks could consider to reduce its branch network and outsource IT related operations to countries with lower salary levels. Also trends of increasing digital channel usage, allows for a focus on online customer service solutions.

Another weakness is the limited diversification into foreign markets that comes along with Danske Banks expansion strategy. As the globalization is proceeding it becomes more important to be on the spot when the customer asks for services. Thus an absence in certain markets leaves space for the competition to gain key corporate customers. However Danske Bank’s recent effort to enter new markets did not pay off. In previous years the Baltics performed poorly and even resulted in negative

78 return in personal banking. Hence Danske Bank intends to leave the Baltic market in order to focus solely on the Nordic core market. This action will further decrease the international exposure.

Furthermore Danske Bank has recently high impairment cost due to M&As that lower the financial results significantly. Whereas the impairment costs do affect neither the income generation nor the cost structure, they still have an impact on the profit sharing and annual financial result. Consequently the ROE is affected negatively.

6.3.3 Opportunities

Danske Bank has the opportunity to become the market lead in terms of digital banking in Scandinavia. Especially the sociocultural factors such as mobile and internet usage in Scandinavia support the digital transformation, so that Danske Bank is likely to extend its customer base.

According to Eurostat figures, the prevalence of online banking in Denmark is among the highest in the EU (Horwitz, 2014).

Additionally the upturn of the economy and GDP will raise income opportunities for Danske Bank in all its markets in the next years. According to Bloomberg interest rates will rise from 2018, so that Danske Bank faces higher profit potentials from net interest income⁴¹. Especially, as Danske Bank will not have to pay for cash deposits with the central bank anymore.

Also the new concept of Danske In-house Bank is an opportunity to expand the business activities that will drive profits in a new market segment. So far Danske Bank offers this service only to pilot clients. However a successful trial period may lead to a launch in all Nordic markets.

In respect to the sociocultural factors, Denmark is characterize by high mortgage financing activities, so that a successful integration of the platform Sunday.dk in the Danish market is likely to attract new mortgage holder. Thus Sunday.dk is a strategic responds to Nykredit’s predominant market position in mortgage financing.

Moreover the new wealth management unit may generate more profit due to following reasons. First, the unit is easily recognizable as a wealth management unit because it bears a more informative name compared to Danske Capital. Secondly there will be a closer cooperation between business units, so that synergies are likely to generate more profit. Also the collaboration with Danica Pension

41 http://www.bloomberg.com/news/articles/2016-01-07/denmark-s-central-bank-raises-key-interest-rate-to-minus-0-65-

79 allows for capital funding and a direct investment in managed pension funds by the wealth management unit.

Furthermore expected political agreements on the transatlantic trade and investment partnership with the USA may increase the money inflow into Scandinavia in the future⁴².

6.3.4 Threats

Danske bank faces several threads that may impact the future profits and operations. In the following the threads are listed without any chronological order.

SWIPP: Swipp is the answer of Nordea and other banks to Danske Bank’s MobilePay. Investigations show that MobilePay is likely to be driven out of the market, as its operation process is outdated. The way MobilePay works is that it sends money from one credit card to another. That means that money has to be booked from the bank account to the credit card of the sending party and from the receiving party’s credit cart to the receiving party’s bank account. That process is cumbersome and requires more time for the completion of the money transfers. Swipp, however, uses bank accounts to make instant payments that take seconds. Additionally Swipp is a project between nearly all Danish banks, except Danske Bank⁴³. Hence Danske Bank faces strong competition in respect to MobilePay.

Already now more than 800.000 customers use Swipp in Denmark⁴⁴

Nykredit: Another thread is the initial public offering (IPO) of Nykredit at the Copenhagen stock exchange in 2016⁴⁵. Due to the reason that Nykredit has troubles to fulfill the upcoming capital requirements, it plans to raise equity by listing shares. The listing offer Nykredit new potentials to increase its balance sheet and raise more capital for future investments. As a consequence, Nykredit may become a threatening competitor of Danske Bank.

Large competitor: Danske Bank’s competitor Nordea is the largest bank in the Nordics. In fact Nordea possess more assets and has more disposable income to invest in future developments. This gives Nordea an advantage, as they are able to invest relatively more money in order to react to market movements. This is especially important when it comes to investments in digitalization. As mentioned before Nordea launches its new online banking platform in 2016 that is supposed to be the best in the

42 https://ustr.gov/ttip

43 http://mjolner.dk/mobile-services/simple-money-transfers-with-swipp/

44 https://swipp.dk/

45 Nykredit Association approves plans to list Nykredit on the stock exchange https://www.nykredit.com/

80 Nordics. This represents a significant thread for Danske Bank, as customers can easily switch the bank and enjoy the best online solution for free.

Interest rates: Interest rates are currently very low in Scandinavia. This affected the customer activity in terms of rewritings of mortgage loans, since customer refinanced old loans by new loans with lower interest rates. However the activity level is expected to fall already in 2016 so that fee income will decrease. Thus Danske Bank is likely to yield a lower profit within the next years, until the interest income will increase due to an increase in interest rates in 2018⁴⁶.

Capital requirements: The leverage ratio imposes a thread to Danske Bank’s expansion and compliance, if it will be raised up to 6% in conformity with the US rate for SIFI banks⁴⁷. Assuming that the leverage ratio will be raised already by 2018, Danske Bank will only have two years left to comply with the requirement. As mentioned in chapter 1, there are three strategies to increase equity capital.

Issuing new share may have a diluting effect on old shares, so that Danske Bank is most likely to retain earnings in the next years. In turn, stock prices will fall as investors will not receive dividends.