Denmark’s tougher loan impairment standard is credit positive for the country’s banks even as it risks reducing capital, Moody’s Investors Service said.
More stringent rules force the industry to build reserves against loan losses and to improve asset transparency, the ratings company said in a Credit Outlook published today. In cases where the provisions exceed income, “bank capitalization might decline,” Moody’s said.
“However, improved transparency and reserve increases that shield against further portfolio deterioration are more important than higher capital achieved with inadequate reserves,” Oscar Heemskerk and Blake Foster, analysts at Moody’s, said in the report.
The Danish Financial Supervisory Authority tightened rules starting in the second quarter after two bank bail-ins and inspections last year led it to conclude that lenders took “too optimistic” a view on their loans. Banks must now value properties at prices that independent buyers would be expected to pay within six months, Moody’s said.
Jyske Bank A/S (JYSK), Denmark’s second-largest listed lender, last week unexpectedly reported second-quarter impairments of 900 million kroner ($146 million), including 540 million kroner from loans and guarantees.
Real estate lending made up 22 percent of total loan-by- loan determined impairments at banks amid a drop in property prices, Moody’s said. Prices of business property fell an annual 23 percent in the first quarter, the ratings company said.
“We do not expect this decline to reverse in the near future, as office vacancies reached 9.2 percent in April, the highest level since the Danish Association of Chartered Estate Agents began publishing such data in 1988,” Moody’s said.
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