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Danske's laundering scandal drags down smaller Danish banks

The money laundering scandal at Danske Bank A/S is having stock market repercussions that go beyond Denmark's biggest lender.

[COPENHAGEN] The money laundering scandal at Danske Bank A/S is having stock market repercussions that go beyond Denmark's biggest lender.

The country's other banks, which weren't involved in Danske's dubious activities in Estonia, have underperformed their European peers in recent months, a development that can in part be blamed on their local rival.

"There is a risk that the smaller banks could be facing somewhat higher funding costs as a spill-over effect from the Danske Bank case, and that's obviously a negative," Mads Thinggaard, an analyst at ABG Sundal Collier, said by phone.

The Systemic Risk Council on Tuesday urged the government to raise so-called counter-cyclical buffers for the country's banks, noting that the country's financial system is "highly affected by developments and risk perception in international markets," and "that is why the Danske Bank money laundering case poses a risk to the entire sector and to Denmark's international reputation."

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Danske Bank has suffered the most, losing about a third of its market value this year amid revelations that more than US$200 billion flowed through its small Estonian branch in the period 2007-2015. Much of that is "suspicious," the bank said in a report last week that triggered a further sell-off. The stock has lost more than 10 per cent since the start of September alone and is now heading for its worst monthly performance since June 2013.

In a parliament hearing on Tuesday, Danish Business Minister Rasmus Jarlov said the country's other banks "don't deserve" to be dragged down by Danske. Jyske Bank A/S, Sydbank A/S and Spar Nord Bank A/S (Denmark's No 2, 3 and 4 listed lenders) have all suffered on the stock market.

According to Mr Thingaard, some of those losses aren't linked to Danske but can be attributed to a general international trend that sees investors move out of the smaller bank stocks and into the bigger ones.

"Seen in isolation, if there hadn't been a money laundering case, Danske Bank shares would probably have gained while the smaller Danish banks stocks would still have fallen over the summer," the analyst said.

According to Per Hansen, an investment economist at Nordnet, foreign investors have been the main sellers of Danish bank shares recently. "A very rough estimate" suggests "a bit less than half" of their stocks' losses can be blamed on Danske and the rest on other factors, he said.

"It makes sense for some investors to sell their Sydbank or Jyske Bank shares when they already are dropping Danske Bank, just to avoid any remote risk of the case ending up hurting the Danish bank industry or the entire country," Mr Hansen said.

"But it's worth remembering that a fair number of private and corporate customers will most likely leave Danske Bank in protest and they will inevitably end up elsewhere, including at the smaller Danish banks. So there's some upside waiting for them."