The outlook for Denmark’s banks continues to be negative as the industry struggles to survive the fallout of a sluggish economy, stagnant credit growth and declining housing prices, Moody’s Investors Service said.
“Given the current economic conditions, our main concern is how asset quality will evolve over the outlook horizon,” Moody’s said in a statement published late yesterday. “The outlook expresses Moody’s expectations for the fundamental credit conditions in this sector over the next 12-18 months.”
Most of Denmark’s roughly 120 banks have been shut out of funding markets since the February collapse of Amagerbanken A/S triggered the European Union’s first senior creditor losses within a resolution framework. Lenders are now under pressure to refinance about 160 billion kroner ($30 billion) in state-backed debt through 2013, as they grapple with the stresses of a housing slump and faltering economy.
Denmark is Scandinavia’s worst-performing economy. Gross domestic product will grow just 1.4 percent this year, a third of the rate in neighboring Sweden, the two countries’ central banks estimate. Danske Bank A/S, Denmark’s biggest lender, this week reported its first net loss since the height of the financial crisis in 2009 and said it will cut 2,000 jobs in an effort to adapt to a tougher business climate.
The $325 billion economy will slow for a second year in 2012, as the budget deficit swells and unemployment rises, the government-backed economic council said today. Gross domestic product will slow to 1.1 percent in 2012 from 1.3 percent this year, while there’s a risk that failure to galvanize demand may result in economic contraction, the council said.
Danish bank stocks have lost 33 percent this year, compared with a 31 percent decline in the 46-member Bloomberg index of European financials.
“The weak operating environment is exacerbated by the fact that Danish financial institutions are subject to funding pressures, principally because the banks will need to refinance their government-guaranteed debt,” Moody’s said. The refinancing need “may lead to overcrowding in the funding market,” the rating company said. “As a result, unsecured funding may, even for healthy institutions, only be available at increased rates.”
To ease the funding crisis, the central bank last month opened a 400 billion-krone liquidity lifeline, the biggest in Denmark’s history. Still, banks may shun the support to avoid the risk of stigma associated with needing aid, lenders said.
“Nobody would give you a senior, unsecured loan if you use the liquidity line,” Karen Froesig, the chief executive officer of Denmark’s third-biggest listed lender, Sydbank A/S, said in an interview. “The loans are based on the activities of the company, but if the company has given the assets away, there’s nothing left.”
At the same time, banks face dwindling asset quality, especially from loans to construction, commercial property, farming and small- and medium-sized enterprises, Moody’s said.
“Aggregate bank and mortgage credit growth turned negative in 2011, putting negative pressure on banks’ profitability, whilst gross household indebtedness at more than 300 percent of disposable income remains high,” the rating company said.
The number of houses repossessed by mortgage banks rose this year to its highest since 1995, peaking at 661 in the second quarter, before easing to 601 in the following three months, the Association of Danish Mortgage Banks said on Oct. 31. The number of homeowners in arrears in the third quarter was unchanged at 0.4 percent.
The situation may yet deteriorate, according to Christian Heinig, chief economist at Realkredit Danmark A/S, the mortgage unit of Danske Bank.
“The financial unrest and weak economic figures from the last several months mean growth prospects have worsened and unemployment probably hasn’t peaked yet,” Heinig said this week.
Still, Danish lenders enjoy high capital buffers compared with their European rivals, mitigating the risks posed by other factors, Moody’s said. The extra padding “is largely a function of hybrid capital injections provided by Denmark’s government during the financial crisis,” it said.
As many as 15 Danish banks may fail before the country’s crisis is over, Standard & Poor’s warned in July. Henning Kruse Petersen, chairman of the state-backed bank resolution unit, Financial Stability Company, has said Denmark has about 75 too many regional banks.
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