(Updates with comment from Aarhus Lokalbank in 14th and Jyske Bank in 16th paragraphs.)
July 5 (Bloomberg) -- Denmark’s banks face a decline in earnings as the fallout from Europe’s toughest resolution laws sends funding costs higher in the Nordic country, Moody’s Investors Service Senior Vice President Janne Thomsen said.
“We are worried about the loans to farmers, still worried about commercial real estate and we are also worried about the earnings of the banks because funding is going to be, and has shown to be, much more costly than it was in the past,” Thomsen said in a telephone interview yesterday.
The June 24 failure of Fjordbank Mors A/S, a regional lender with about $1.4 billion in deposits, underlined the state’s commitment to resolution laws that force senior creditors to share losses, Moody’s said yesterday in a note. The government’s goal of avoiding more insolvencies by encouraging consolidation is so far proving “elusive,” the company said.
“The government proposed law changes to enable sector solutions,” Thomsen said in the interview. “But we did not see this happen in relation to Fjordbank.”
The difference between the Copenhagen interbank offered rate and Euribor held at the widest in two months last week, at 5.8 basis points. It was 5.7 percent yesterday. Credit default swaps on senior debt issued by Danske Bank A/S, Denmark’s biggest lender, last week touched the highest in two years.
Danske Bank shares declined as much as 1.7 percent today and were down 1.3 percent at 100.7 kroner at 4:34 p.m. in Copenhagen. Jyske Bank A/S, the second-biggest Danish lender, fell as much as 0.6 percent, while No. 3 lender Sydbank A/S was down as much as 1.6 percent. The 49-company Bloomberg Europe Banks and Financial Services Index climbed 0.1 percent.
Denmark isn’t planning further measures to support troubled lenders which involve taxpayer funds, Jacob Jensen, a spokesman for the ruling Liberal Party, said in an interview last week. Doing so would send the wrong signal, given that it’s only “a few small banks” that are in trouble, he said.
Denmark’s biggest banks have enough capital to withstand the fallout from a spate of failures amongst regional lenders, Financial Supervisory Authority Director General Ulrik Noedgaard said in an interview on June 29.
The government’s “one target” for the country’s roughly 130 banks is “consolidation, consolidation, consolidation,” Economy Minister Brian Mikkelsen told broadcaster TV2 on July 1.
A bill passed last month that seeks to encourage industry mergers and prevent troubled lenders from triggering Denmark’s resolution laws has so far failed to prevent insolvencies. The government is trying to encourage healthy lenders to take over smaller peers in danger of failing by allowing them to tap the Depositor Guarantee Scheme for funds.
Denmark may need to consider a more “flexible” approach in how this bill is applied, Mikkelsen said, financial news service FinansWatch reported yesterday.
The country’s healthy lenders, which were forced to provide as much as 35 billion kroner ($6.8 billion) in 2008 to get a state industry guarantee, don’t want a repeat of that bill and will only buy troubled peers if such a move makes financial sense, said Karen Froesig, chief executive officer at Sydbank.
“My plea would simply be that we don’t make it a general package which requires commitments from all banks,” Froesig said in an interview last week. “I don’t think bank rescues should be funded by the taxpayer, but I also think it’s a problem that there’s an expectation that the rest of the sector steps in to rescue the weaker links.”
Vagn Thorsager, chief executive at lender Aarhus Lokalbank A/S, said his bank would consider taking part in a consolidation in 2013. He said the government will need to do more to support the industry to avoid more bank failures and allow for mergers.
“There are a number of us, we are weaker banks, who are fighting in order to survive and follow our action plans,” he said by phone today. “I’m fairly sure we will be able to meet our action plan and survive, then we can think about taking part in a merger in 2013.”
Jens Borum, a spokesman at Jyske Bank, said the lender will not be an active in a consolidation of the industry.
In the end, Denmark’s financial industry can’t avoid consolidation, Thomsen said. Troubled lenders will need to consider looking for buyers as they face refinancing deadlines that collide with the withdrawal of the state guarantee in 2013, she said.
“There is a large number of banks that have to refinance government guaranteed loans and they may have some problems getting this in place,” Thomsen said. “We think that consolidation will happen.”
The state winding-up unit Financial Stability said July 1 it was accepting offers to buy part, or all, of Fjordbank Mors.
Fjordbank had the worst risk ranking of 99 banks graded by researcher Niro Invest ApS, Copenhagen-based newspaper Borsen said on June 23. It was followed by Aarhus Lokalbank A/S. Denmark’s smallest banks have struggled with bad debts to the construction and farming industries.
Shares in Aarhus Lokalbank slumped as much as 6.1 percent today. Max Bank A/S, the third-worst bank in Niro’s risk rankings, lost as much as 3.7 percent, and traded up 1.9 percent higher at 10.90 kroner at 4:07 p.m.
The country’s lenders may face “large” loan losses this year with most of the risk coming from the real-estate and agriculture, the FSA said on May 5. Denmark’s banks wrote down 36 billion kroner of bad loans last year, compared with a record 58 billion kroner a year earlier, the regulator estimates.
“We have a negative outlook on the Danish banking system due to the asset quality,” Thomsen said. “The earnings of the banks will come under further pressure.”
--Editors: Tasneem Brogger, Jonas Bergman.
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