COPENHAGEN (Reuters) - Continuing high impairment charges for Danske Bank's (>> Danske Bank A/S) Irish operations moved Standard & Poor's to cut its rating on Denmark's biggest financial institution, and analysts said a downgrade by Moody's was now imminent.

S&P cut Danske Bank Group to A-/A-2 from A/A-1, and said it expected the bank will continue to see high impairment charges in the Irish banking business, as well as ongoing challenges for some sectors in Denmark.

The cut was not expected by some analysts after the bank moved earlier this month to address the Irish banking issues, but they now expect the other top ratings agency to act accordingly.

"It comes bit as a surprise but it makes sense and you can expect Moody's to follow soon with at least a notch to A3 or maybe lower," said Keefe, Bruyette & Woods analyst Ronny Rehn.

Reporting its first quarter results three weeks ago, Danske Bank said it would hive off 35 billion Danish crowns ($5.90 billion) in commercial and investment property loans at its National Irish Bank (NIB) into a separate unit and then wind that unit up.

The action was part of a reorganization aimed at drawing a line under the fallout from the 2008 financial crisis and generating cost savings to help revive earnings.

Danske Bank owns National Irish Bank in the Republic of Ireland and Northern Bank in Northern Ireland and has been stung by high impairment charges as the Irish economy suffered during the financial crisis.

"We are aware that Moody's is in the process of downgrading European banks broadly," said Alm Brand analyst Stig Nymann.

"They (Moody's) have warned they could take action on Danske Bank and it could be pretty dramatic, but this (S&P) comes a little out of the blue," Nymann said.

He added the downgrade would lead to higher funding costs for the bank.

Moody's said in February it had placed the ratings of eight Danish banks under review for a possible downgrade, including Danske Bank. The agency currently has an "A2" long-term credit rating on the bank and its outlook under review.

Last week, Moody's cut the credit ratings of three of the Nordic region's biggest banks, Nordea (>> Nordea Bank AB) (>> Nordea Bank), Handelsbanken (>> Svenska Handelsbanken AB), DNB (>> DNB ASA), citing the euro zone crisis

The default insurance on Danske Bank's five-year debt traded on Wednesday at 322.0 basis points at 0915 GMT, more than double the 160 basis points for Nordic Bank rival Nordea and Sweden's Handelsbanken credit default swap which traded at 129 basis points.

CDS are used by investors to help protect fixed-income investments from defaults or restructurings.

TWO MORE YEARS

Danske Chief Executive Eivind Kolding has warned the bank's writedowns are set to continue and earnings will remain unsatisfactory for another two years.

In its home market, the bank has faced writedowns first from troubled property investors and then from agricultural clients.

The bank said in a statement it took note of S&P's downgrades but also of the fact that S&P considered its business position to be strong and viewed its liquidity as adequate.

"S&P's decision to downgrade the bank was unexpected in light of the decline in loan impairment charges in Ireland and Denmark from Q4 2011 to Q1 2012," said CFO Henrik Ramlau-Hansen in the statement.

"At the same time, we have announced a new business model for Ireland and expect impairment charges to decline over the coming years," Ramlau-Hansen said.

He said the bank was among the best-capitalised banks in Europe with a capital base of 159 billion Danish crowns ($26.82 billion) and a solvency need of 91 billion.

Banks across Europe have been battling to rebuild confidence after the 2008 crisis, property market crashes in countries like Ireland and Spain and, more recently, euro zone debt concerns raised doubts about the quality of their assets.

The troubles have made it more difficult and increasingly expensive for banks to get funding in international markets.

Danske Bank has already written down over 60 billion crowns ($10 billion) on its loan portfolio since 2008.

Danske Bank shares were down 1.8 percent at 79.90 crowns at 0933 GMT, against a 1.3 percent fall in the Nordic banking sector index <.TBNKF> and 0.9 percent fall in Denmark's benchmark index <.OMXC20>.

($1 = 5.9280 Danish crowns)

(Reporting by Mette Fraende, additional reporting by Shida Chayesteh and Ole Mikkelsen; Editing by Helen Massy-Beresford and Hans-Juergen Peters)

By Mette Fraende