Danish Banks No Better Buy After Rescue Proposals, PFA Says

Denmark’s second-biggest pension fund is under-weighting its holding of Danish financial stocks as government efforts to ease the country’s banking crisis fail to win over investors.

“We would need to see both an improvement in the macro economy and a new government bank package before we would change our view,” Glenn Martin Vestergaard, senior portfolio manager at PFA, said in an interview. The Copenhagen-based fund has about 285 billion kroner ($55 billion) in investment assets.

Danish financial stocks have underperformed the country’s equity market this year after the economy contracted and two regional banks failed, triggering the European Union’s first senior creditor losses within a resolution framework. Policy makers have struggled to repair the damage as banks face a funding drought that’s likely to worsen when a state guarantee expires in 2013.

Shares of the country’s three biggest banks have lost more than a third of their value this year, compared with a 23 percent decline in the benchmark OMX Copenhagen 20 Index. (KFX) Financial stocks were the only losers in the index, with the sub-index dropping 0.9 percent compared with a 0.7 percent advance for the overall gauge as of 1:47 p.m. local time.

Share Losses

Shares in Danske Bank A/S, the country’s biggest lender, have lost 42 percent this year, setting it up for the second- worst worst annual performance since at least 1990. The bank sold 232.9 million new shares in April to bolster its capital base, raising net proceeds of 19.8 billion kroner. Jyske Bank A/S shares have lost 43 percent and Sydbank A/S stock is down 35 percent this year.

Jyske today reported a 47 percent drop in second-quarter net income to 88 million kroner, missing the average estimate of 260 million kroner in a Bloomberg survey. The shares of the Silkeborg, Denmark-based bank lost as much as 7 percent.

While the government is working on a new bill to help banks sidestep Europe’s toughest resolution laws, lenders still face liquidity shortages. The central bank responded last week by broadening its collateral terms indefinitely. The decision to accept a wider variety of collateral shows “just how bad it is” for some of the country’s banks, Vestergaard said in the Aug. 19 interview.

“A new bank package that winds up banks in a different way and extends state guarantees would be very, very positive for the sector,” he said. “But the poor macro-economic picture is even more important for the banks at the moment.”

Recession Impact

Denmark slid into a recession in the fourth quarter as the Nordic economy lags behind recoveries in Sweden and Norway. State budget cuts, declining house prices and lackluster consumer spending threaten to keep growth subdued.

The government’s proposal, announced Aug. 12, would allow the state winding-up unit Financial Stability to take over bad loans from ailing lenders if another bank wants to buy the healthy parts. Denmark’s lenders need to refinance about $35 billion in state-guaranteed debt in the next two years. The proposal would also allow a bank to have its guarantee extended in the event of a takeover.

The government has since also said it wants to jumpstart the country’s stalled housing market by allowing some buyers to sidestep select fees and taxes. The plan, which Prime Minister Lars Loekke Rasmussen revealed to newspaper Jyllands-Posten over the weekend, are a “welcome initiative” to help bring Denmark’s housing market back to pre-crisis levels, EDC-Gruppen A/S, the country’s biggest realtor chain, said yesterday. The government will provide further details of its proposal when it presents its economic and budget outlook this week.

Not Enough

Measures to spur consolidation may not be enough to prevent a liquidity squeeze as Denmark’s banks struggle to refinance state-backed debt coming due in the next two years.

“There are a lot of state-guaranteed bonds out there and it will be very difficult for many banks to refinance,” said Vestergaard.

PFA returned 37.1 percent on its 4 billion-krone Danish share portfolio last year, compared with a 32.7 percent gain for all of the country’s stocks, including dividend payments. PFA owns shares in Denmark’s largest lenders, including Danske. Vestergaard declined to disclose specific holdings.

Since Denmark’s bank resolution bill took effect in October, senior creditors have suffered losses on two occasions. Amagerbanken A/S, formerly Denmark’s fifth-biggest listed lender, collapsed on Feb. 6, while Fjordbank Mors A/S declared itself insolvent on June 24.

‘Steer Clear’

Regional lenders such as Spar Nord Bank A/S has said it needs to sell off assets to generate cash because it can’t access international funding markets.

“Foreign investors feel they might as well steer clear of Danish banks after Amagerbanken’s collapse caused creditor losses,” said Vestergaard. “That’s affecting banks’ profit margins as they have to go out and pay more for their funding -- if they can get funding at all.”

Standard & Poor’s said July 28 a further 15 banks in the Nordic country “could default,” costing as much as 12 billion kroner in the next three years.

Denmark’s Financial Services Union, which represents 55,300 employees, today urged politicians to disregard election politics and pass a new banking law as the industry faces “an acute situation.” Denmark must hold an election no later than Nov. 12.

Five of Denmark’s 10 worst performing stocks this year are regional lenders as Aarhus Lokalbank A/S, Sparekassen Lolland (SPALOL) A/S, Max Bank (MAX) A/S, Totalbanken A/S and Sparekassen Faaborg A/S all lost more than half their market value.

Denmark’s biggest lenders should be able to withstand the fallout of more regional bank failures, Ulrik Noedgaard, director general of the Danish Financial Supervisory Authority, said in a June 29 interview.

The country’s four biggest banks, Danske, Jyske, Nykredit Realkredit A/S and Sydbank all passed the EU’s stress tests last month. Their capital ratios ranged from 9.4 percent to 13.6 percent, exceeding the test’s 5 percent minimum, the European Banking Authority said July 15.

To contact the reporter on this story: Christian Wienberg in Copenhagen at cwienberg@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net

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