Danske Bank DANSKE reported net profit of DKK 1.5 billion for first quarter 2013 (DKK 1.5 per share), higher than year ago profit of DKK 783 million (DKK 0.8 per share). Return on equity for first quarter 2013 equaled 4.3% compared with 2.5% a year ago. With much lower impairment charges in its non-core Ireland segment, overall profitability improved despite lower net interest income. With lower interest rates pressuring assets, we expect net interest income to approximate 2012 levels. However, with lower expenses, impairment charges, and corporate tax rates, we still expect Danske to be more profitable than last year. At this point, we do not expect any changes to our moat rating. With lower expected net interest margin, we will be lowering our fair value estimate slightly to DKK 116 from DKK 117.

Net interest income decreased to DKK 5.5 billion for first quarter 2013 compared with DKK 5.7 billion a year ago and fourth quarter 2012. While Danske has implemented initiatives to increase net interest income for 2013, lower interest rates and lending volumes are expected to negate the impact of those initiatives. With declining central bank rates in the face of a still-struggling European economy, it is difficult to anticipate rising interest rates, which would help net interest margins, in the near future. Therefore, we have slightly lowered our net interest margin assumption during our projected period from 1.1% to 1.05%.

We continue to see improvement in loan impairment charges, especially in the non-core Ireland bank (that is, the “bad” Irish bank). Total loan impairment charges equaled DKK 2.0 billion for first quarter 2013 compared to DKK 3.9 billion last year. While overall loan impairment charges were down, loan losses represented 0.41% of total loans, lower from year-end 2011 level of 0.99%. Loan impairments from non-core Ireland have been significantly reduced to DKK 0.6 billion for first quarter 2013 compared to DKK 1.2 billion a year ago. We still expected non-core Irish bank loan impairment charges to approximate DKK 2.5 billion for 2013 compared DKK 4.8 billion for 2012. Overall, we are encouraged by the improvement in asset quality at the Irish banks.

Danske remains on track to reduce its expenses through staff and branch reductions. It plans to eliminate 2,000 positions over 2012-13 with total expected cost savings to equal DKK 2 billion. After reducing approximately 1,000 positions saving about DKK 1 billion in costs during 2012, Danske has severance agreements with 650 employees as of March 31. So far, we are pleased with Danske’s efforts to reduce costs and improve returns.

Capital remains strong with its core tier 1 ratio equaling 15.1%, an increase from 12.0% as of year ago. Danske raised approximately DKK 7 billion in capital through a rights offering during 2012. Overall, we are encouraged by all of Danske’s efforts to strengthen and improve bank operating performance.