(Updates with shares in eighth paragraph.)
Oct. 10 (Bloomberg) -- Max Bank A/S became Denmark’s first insolvent lender to test a bank package designed to sidestep the country’s bail-in laws after the state was able to find a buyer and avert senior creditor losses.
Sparekassen Sjaelland A/S will take over the healthy parts of Max Bank after it was declared insolvent by the Financial Supervisory Authority, the government said late yesterday. The state will assume the bank’s bad loans. Under the consolidation bill, the transaction will be subsidized by Denmark’s guarantee fund. Senior creditors will be spared, while shareholders will lose their investments.
“I’m pleased that the new consolidation initiatives, which are backed by a broad majority in parliament, have proven workable,” Economy and Growth Minister Ole Sohn said in a statement on the ministry’s website. “This solution means that no depositors or other simple creditors in Max Bank will lose money.”
The maneuver allows Max Bank to avoid Europe’s toughest bank resolution laws, which had led to senior bondholder losses twice since February. Those credit events had left international funding markets closed to most of Denmark’s roughly 120 banks. Lawmakers last month passed the consolidation bill in an effort to avoid triggering more senior creditor losses and to help banks return to bond markets and generate funds needed to avoid a credit crunch.
Max Bank’s resolution will hit bank industry profits as lenders are forced to cover losses through the Deposit Guarantee Fund, Simon Christensen, a senior analyst at Nordea Markets, said in a note.
“We estimate the loss that the Danish banking sector should cover through the Depositor Guarantee Fund to range between 3 percent and 5 percent of consensus profit before tax in 2011,” Christensen said in the note.
There’s no guarantee that the consolidation bill can be deployed successfully again in future, Joergen A. Horwitz, the director of the Danish Bankers Association, said in a note.
Bank shares were the worst performers amongst Danish equities today. The sub-index for the country’s financials declined 0.3 percent as of 3.25 p.m. in Copenhagen, compared with a 0.8 percent increase in the all-share KAX index.
Max Bank was declared insolvent after the FSA told it to raise writedowns and said its solvency ratio didn’t meet the new requirement, it said in a statement over the weekend. Neither Max Bank nor the regulator published details of the demands.
“Max Bank had fallen into a regrettable situation,” Sohn said. “The FSA’s inspection showed that the bank no longer lived up to its solvency requirements primarily because of its engagements within real estate.”
Sparekassen Sjaelland will take over all private and corporate clients at Max Bank with engagements of less than 5 million kroner ($900,000) a piece, the government said. The remaining commitments will be transferred to a unit of The Financial Stability Company, the state’s winding-down arm, it said.
Max Bank wrote down 79.2 million kroner of bad loans in the first six months of the year in addition to 218 million kroner combined for the years 2009 and 2010. In its annual report published Feb. 28, Max Bank said 34 percent of its loans were related to the building and real estate industries, identified by the FSA as among Denmark’s riskiest.
The bank had a solvency ratio of 13.8 percent at the end of June, exceeding its own calculated requirement of 11.3 percent, it said in August.
Max Bank Bonds
Max Bank has bonds out worth 3 billion kroner, according to Bloomberg data. The bank’s stock market value was 59.5 million kroner as of the Oct. 7 closing price, after the shares lost 72 percent this year.
The bank had assets of 9.39 billion kroner at the end of June, according to its first-half earnings report. It was the third-riskiest of 99 Danish banks graded by researcher Niro Invest ApS in a June survey.
Max Bank said Oct. 8 the OMX Copenhagen stock exchange had agreed to suspend trading of its shares and bonds.
Henrik Bjerre-Nielsen, chief executive officer of Financial Stability, didn’t answer calls seeking details. Max Bank CEO Henrik Lund didn’t respond to a message left on his voice mail.
--Editors: Tasneem Brogger, Jonas Bergman.
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