Danske Bank’s Buy-Back Strategy: A Risky Move or a Defensive Play?

Danske Bank (CPH:DANSKE) is taking bold steps to repurchase its undervalued shares, signaling a strategic move that investors should pay attention to. In the last five months, the bank has already bought back 0.93% of its total share capital, spending DKK 1.8 billion in the process. The intriguing part is the increasing volume-weighted average price (VWAP) of these acquisitions, hinting at something significant happening behind the scenes.

The latest buy-back progress is quite impressive. In a single week (week 26, June 23-28), Danske Bank acquired 517,152 shares, bringing the total repurchases to 7.77 million shares. What’s remarkable is that the average VWAP for this week rose to DKK 256.47, a notable increase from earlier levels. The overall program’s VWAP stands at DKK 232.31, representing a hefty 10% premium.

The rising VWAP goes beyond enhancing shareholder returns. It indicates a strong belief in the stock’s true value by the management. Purchasing shares at higher prices signifies their confidence in the market undervaluing the bank. At present, Danske Bank trades at a 15% discount to its DKK 270 target price, aligning its P/E ratio (16.3x) with that of similar Nordic companies. Closing this gap could lead to a substantial 20% upside, serving as an enticing prospect for investors.

The buy-back initiative is not merely defensive. Here’s why it matters:

1. EPS Accretion: A 1% decrease in shares boosts EPS by 1.2%, potentially driving EPS to DKK 15.30 by year-end.
2. Valuation Improvement: The DKK 270 target assumes a 17.6x P/E, indicating room for modest expansion from current levels.
3. Macro Factors: A weaker Norwegian krone versus the euro is enhancing cross-border lending margins, underscoring Danske Bank’s strong position in the Nordic market.

Nonetheless, the bank faces challenges, particularly with declining net interest income (NII) amid easing rates. The management is combating this through disciplined cost control (capped at DKK 26 billion) and buy-backs to offset NII pressure.

Critics might view Danske Bank’s strategy as overly ambitious, especially with a substantial portion of the buy-back budget remaining and potential macroeconomic risks looming. Nonetheless, the bank’s low loan impairment charges and robust fee income display resilience. The buy-back program’s MAR compliance and daily caps ensure a cautious, calculated approach.

Investors should view this as an opportunity. The upcoming Q2 earnings report, coupled with the buy-back’s acceleration trend, offers a catalyst for growth. Stock price fluctuations, particularly a dip due to rate-cut fears, could present a buying opportunity within the DKK 250-255 range.

To act accordingly:
– Consider buying if the stock falls below DKK 255, leveraging the rising VWAP from the buy-back.
– Hold for the DKK 270 target with a 1.4% dividend yield to mitigate risks.

Danske Bank’s strategic move to repurchase shares highlights a favorable outlook. The askesis not financial advice, so consulting a professional before making investment decisions is imperative.