Strategic Valuation of Danske Bank

Lasse Andreas Gerbola

Student thesis: Master thesis


The objective of this paper is to determine the fair value of the Danske Bank share per December 31 December 2018. Throughout 2018, Danske Bank has caught much media attention from its Estonian money-laundering incident, which has led to increased funding costs and the possibility of incurring a large fine. Furthermore, future growth prospects are likely to be hampered, at least in the short-term. This paper begins with presenting the most common valuation models and the unique characteristics of financial service firms, followed by an analysis of how these characteristics affect different valuation models. It explores the regulatory overlay, including capital requirements, and how the introduction of internally developed risk-scoring models serve as an advantage to large banks such as Danske Bank. In order to support the valuation model a strategic analysis using the PEST and Porter’s Five Forces model is constructed, which reveal that while the financial service industry as a whole are experiencing many new entrants, the banking sector is undergoing a significant consolidation, driven by increased regulation. As economies of scale become a necessity for continued operations, the largest firms are likely to persevere, which will be to the benefit of Danske Bank. Interest rates in the Scandinavian region is at unprecedented levels, which is likely to be because of the QE program introduced by the ECB in 2015. Deposit rates with national banks are negative in Denmark, Sweden and Finland, and interest margins have shrunk, which has negatively influenced the interest earnings of Danske Bank. In the computation of cost of equity, the paper explore that the current risk-free rate in Denmark is at an unnaturally low level, both related to historical as well as Fisher’s equation levels. The paper argues for why it is likely to reverse to natural levels, which will better the interest margins of Danske Bank. The paper assesses key figures and growth prospects and establishes three distinct scenarios upon which valuations of each business segment within Danske Bank is undertaken. A valuation of MobilePay, a fullyowned subsidiary of Danske Bank without reliable historical accounting data, is also composed. The paper finds that Danske Bank is significantly undervalued and recommends a strong buy.

EducationsMSc in Accounting, Strategy and Control, (Graduate Programme) Final Thesis
Publication date2019
Number of pages129
SupervisorsSvend Peter Malmkjær