Denmark’s Banks Endure Writedown Shock Delaying Recovery

Denmark’s banks face larger writedowns this year than those endured in 2011 as rules enforced since April take a bigger toll on lenders than the industry predicted.

“We anticipate that loan losses won’t decline in 2012,” Per Tornqvist, an analyst at Standard & Poor’s based in Stockholm, said in an interview. “There’s no doubt that the provisions need to be done, and the sooner the better, in terms of working it out of the economy.”
S&P estimates total loan losses at Danish banks swelled to 155 billion kroner ($27 billion) in the four years through 2011, with another 30 billion kroner in writedowns yet to be taken. Danske Bank A/S (DANSKE), the country’s largest lender, accounted for almost half the industry’s bad loans, according to S&P.

Denmark’s Financial Supervisory Authority told banks in February to comply with stricter writedown standards, a requirement it said would have limited impact on loan losses as it estimated most banks already followed the revised rules. Since then, Jyske Bank A/S (JYSK) and Sydbank A/S (SYDB), the country’s second- and third-largest listed lenders, respectively, raised their forecasts for impairments this year, citing the new regulatory standards.

“All of us have been quite surprised by the magnitude of the writedowns, given what the FSA said in February,” Thomas Hovard, head of credit research at Danske Bank in Copenhagen, said in an interview. “Most people had expected that loan losses would come down in 2012.”
Shares Drop

Shares of Danske Bank fell as much as 2.8 percent to trade at 89.85 kroner as of 12:14 p.m. in Copenhagen. Sydbank lost as much as 2.3 percent and Jyske fell as much as 2.2 percent. The losses exceeded a 1.2 percent decline in the 43-member Bloomberg index of European banks.

The writedowns threaten to stall a recovery that had been aided by legislation aimed at sidestepping Denmark’s 2010 bail- in law. The failures of Amagerbanken A/S and Fjordbank Mors A/S last year triggered the European Union’s first senior credit losses within a government resolution framework, locking most of Denmark’s 120 banks out of funding markets.

Since those insolvencies, parliament has passed legislation to aid bank mergers in the hope of avoiding further creditor losses. Three insolvent regional banks have used the new framework to stay afloat. Lawmakers are also trying to create a fund to rescue the country’s troubled farming industry. Moody’s Investors Service said yesterday distressed agricultural portfolios are putting pressure on Danish bank ratings.
‘Elevated Risks’

“Elevated risks in agricultural lending are contributing to downward pressure on the credit profiles of Danish lenders and covered bonds,” Moody’s said, as part of its review of 114 European lenders, including eight Danish banks.

Denmark is still struggling to emerge from the fallout of its property market collapse. House prices fell an annual 9 percent in February, the country’s statistics agency said last month, and by next year real estate values will have dropped 25 percent from their peak in 2007, the government-backed Economic Council said in November.

Given the frailty of bank balance sheets amid continued house price declines, lenders face an uphill battle convincing investors that Denmark won’t be the scene of further creditor losses, according to Mads Thinggaard, senior equity analyst at Copenhagen-based Nykredit Markets. He says tightening writedown rules before the crisis is over is likely to hurt the industry.

“A lot is about convincing funding markets there’s not going to be another bail-in and this won’t help,” Thinggaard said in an interview.
Accounting Loopholes

The FSA argues insolvencies to date followed lax impairment practices and on Feb. 6 told banks to build up bigger buffers against property losses. The stricter standards are needed after a series of audits found lenders were abusing accounting loopholes to understate deteriorating books, the FSA said.

“There will be less of a gap between what the banks have done and what we expect when we visit them,” Anders Balling, a director at the FSA’s bank analysis division, said in an interview. “It’s to everyone’s benefit that they know what we want.” He reiterated the regulator’s February assumption that a small part of Denmark’s bank industry will be affected.

“We can only say that a large number of institutions already use this approach for the majority of their loans, so it will have only a minor impact, if any, on these,” he said. “For a smaller group of institutions, it will have a larger impact.”
Danske Writedowns

Copenhagen-based Danske Bank reports its first-quarter results tomorrow, and “there is a risk that writedowns for the full year will be a little higher than expected,” Bjoern Schwarz, an analyst at Sydbank, said by phone. Still, the bank “started earlier with writedowns than other banks, so it has very large loan-loss reserves,” he said, adding that most of Danske’s first-quarter losses will probably stem from its Irish business.

Tornqvist said banks should take the pain as quickly as possible to get the bad debt out of the system and aid the recovery.

“It is very time consuming for banks to manage bad debts,” he said. “It’s better if the banking industry can focus on the challenge of channeling savings into the economy, making sure their role as an intermediary is upheld.”
Damp Growth

Denmark’s economy will grow 1.2 percent this year, the central bank said March 21. Governor Nils Bernstein said then Denmark’s financial industry is “in broad terms solid,” adding low interest rates are supporting a recovery. The bank, which uses policy to peg the krone to the euro, lowered the benchmark lending rate to 0.7 percent in December.

Still, stricter writedown rules mean banks will contribute less to any rebound, according to Hovard.

“The regulations may make it difficult for the banks to underpin the economic recovery,” he said. “The tougher the regulations are, the faster they have to be implemented, the more they will put a damp on economic growth.”