Denmark’s latest regional bank failure shows that even lenders that had reported growing profits can conceal risks big enough to shut them down.
Toender Bank A/S (TNDR), based in southwest Denmark close to the German border, was forced to declare bankruptcy after markets closed on Nov. 2, following an inspection by the Financial Supervisory Authority that revealed bad loans big enough to wipe out the lender’s equity. Sydbank A/S (SYDB), Denmark’s third-largest listed lender, will take over Toender Bank’s 18,000 customers and a balance sheet of 2.3 billion kroner ($396 million). The acquisition won’t include hybrid or supplementary capital.
Denmark’s burst housing bubble has claimed more than a dozen regional lenders since 2008 as continued declines in property values and a struggling farming industry trigger deeper impairments. About 3.2 percent of the nation’s roughly 105 banks are under “intensified supervision due to potential solvency problems,” FSA Director Ulrik Noedgaard said last month. Until last week, Toender Bank had appeared profitable.
“Based on what the FSA had published, Toender Bank had until now looked fine and therefore it had not been subject to a lot of scrutiny,” Jesper Berg, senior vice president and head of regulatory affairs at Copenhagen-based Nykredit A/S, Europe’s biggest issuer of covered bonds backed by mortgages, said in an e-mailed reply to questions. “Reality turned out to be less benign.”
The FSA told Toender Bank to find 278 million kroner to cover its solvency requirement, after uncovering 319 million kroner in bad loans, the Copenhagen-based regulator said in a statement late on Nov. 2. In its six-month report, published Aug. 21, Toender Bank reported writedowns of 32.5 million kroner and a net income of 9.2 million kroner, more than three times the profit posted a year earlier. The bank, which has an ad on its website inviting prospective customers to a free dinner to entice them to open an account, claimed its solvency ratio was 17.3 percent at the end of June.
“The considerable increase in writedowns follows an overly optimistic view of customers,” the FSA wrote. “Credit management has revealed deep short comings.”
The bank’s sudden failure should prompt an investigation into the FSA’s oversight practices, Benny Engelbrecht, a business affairs spokesman in Prime Minister Helle Thorning- Schmidt’s Social Democrat party, told newspaper Borsen.
Given the information now available, it appears Toender Bank’s management demonstrated “severe negligence” in its handling of the bank’s affairs, the Danish Bankers Association said in a statement late yesterday. There had been no indications that the bank might be facing insolvency, the association said.
The bankers group also criticized Toender Bank’s decision to sell 30 million kroner in hybrid capital to 460 customers in September.
“Everything points toward a failure of management that is indefensible but that is hard to protect against,” Joergen A. Horwitz, the director of the bankers association, said in a statement.
Denmark’s government, which last year became the first in Europe to enforce bail-in legislation that led to senior bank creditor losses, has pushed through five bank rescue packages, including measures to encourage consolidation. Anders Dam, the chief executive officer of Jyske Bank A/S (JYSK), Denmark’s second- biggest listed lender, estimates about half the country’s banks will disappear through 2020, as they’re either bought up or wound down.
Three regional banks failed the central bank’s latest stress test, published Oct. 25. A fourth bank would be close to breaching capital rules, while the nation’s four biggest lenders, including Danske Bank A/S (DANSKE), all passed.
Nicholas Rohde of Niro Invest Aps., who correctly predicted the failure of Fjordbank Mors A/S, Amagerbanken A/S and Max Bank A/S in 2011, ranks Basisbank A/S, Andelskassen JAK and Sparekassen Lolland A/S as Denmark’s worst-capitalized banks, he said last month. Dam has said Jyske can mobilize about 18 billion kroner for acquisitions as the bank uses the crisis to win market share.
Shares in Sydbank slipped 0.5 percent to 106.70 kroner as of 10:05 a.m. in Copenhagen today. Jyske Bank fell 1.1 percent to 175.60 kroner while Danske Bank declined 0.3 percent to 94.25 kroner. A number of regional Danish lenders saw their share prices slump today. Totalbanken A/S sank 12 percent, Ostjydsk Bank A/S fell 8 percent, Nordfyns Bank A/S lost 7.1 percent and Nordjyske Bank A/S dropped 4.9 percent.
“I think Toender Bank is an outlier, but I wouldn’t rule out that a few other banks could face closure,” said Berg, who is also a former departmental head at the Danish central bank.
It’s important to remember that European Banking Authority stress tests show that overall bank health in Denmark remains better than in much of the rest of Europe, Berg said. Also, the country has learnt its lessons after bail-ins last year at Amagerbanken and Fjordbank Mors, and has since managed to orchestrate mergers to soften the blow of subsequent failures, he said.
A number of Denmark’s regional banks are still struggling. About a quarter of Danish banks don’t generate enough core earnings to cover average industry writedowns as the cost of holding deposits grows, the FSA estimates. The International Monetary Fund said today Denmark risks falling into another recession as house price declines undermine any recovery.
Eighteen Danish banks had core Tier 1 capital ratios below 9.5 in the second quarter, while five were below 7 percent and one didn’t meet a 4.5 percent threshold, according to the regulator. As lenders continue to struggle, the FSA is setting more rigorous rules. It estimates that half of Denmark’s banks now face higher solvency requirements under a new model.
“The Danish FSA has recently tightened its provision rules and also applies some of the toughest capital standards in Europe, in particular through its very aggressive Pillar II practice,” Berg said. “The upside of this policy is that it should be possible to find buyers, who are also willing to take over all non-subordinated liabilities. The downside is that it can be tough on shareholders and subordinated creditors. That is likely to be a general trend in Europe.”
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