Danske Bank A/S (DANSKE) and other Danish lenders are likely to find a more level Nordic playing field to push them out of their crisis as Sweden raises the amount of capital its banks must set aside for potential housing losses.
Sweden’s Financial Supervisory Authority proposed today to triple the risk-weights on mortgage loans to 15 percent from about 5 percent, on average, following calls by the finance minister and central bank governor for banks to set aside more cash amid growing debt burdens in the largest Nordic economy.
The changes, which would close some of the gap to levels in Europe, may help Danske Bank narrow the capital ratio gap and compete with Sweden’s Nordea Bank AB (NDA), SEB AB, Swedbank AB (SWEDA) and Svenska Handelsbanken AB. (SHBA) The regulator said today Sweden’s biggest lenders would need to set aside an extra 20 billion kronor ($3 billion) to comply with the higher risk weights.
“When the markets realizes this, it will probably help the funding costs of the large Danish banks to come even further down compared to the Swedish banks,” said Mads Thinggaard, a banking analyst at Nykredit Markets.
Credit default swaps, which indicate the potential for default, on Danske Bank stood at 143.24 on Nov. 23, compared with 118.4 for Swedbank, 116.31 for SEB and 87.5 for Nordea. Handelsbanken’s swaps were at 71.98. Danske Bank’s CDS have gained 32 percent this quarter, outperforming all the Swedish competitors.
Swedish banks have withstood the financial and sovereign debt crisis, raising senior debt throughout the turmoil. Part of the outperformance can be attributed to Sweden’s low risk weights, which compare with Danske Bank’s 17 percent. Sweden’s FSA had said it may raise risk-weights to between 15 and 20 percent.
In Denmark, even the country’s biggest lenders have been tainted by a regional banking crisis that’s left at least a dozen banks insolvent since a housing bubble burst in 2008. The government in 2011 enforced Europe’s first so-called bail-in laws, which saddle senior creditors with losses. Subsequent bank packages have sought to encourage mergers to help banks sidestep bail-in legislation.
Danske Bank has argued its role in Denmark’s economy is too systemically significant for the government ever to allow it to fail. The bank last month raised 7.15 billion kroner ($1.22 billion) from shareholders to increase its capital ratios and credit ratings in an effort to lower funding costs.
“Danish banks have higher funding costs than their Swedish peers due to a mix of low results, perceived lower common equity Tier 1 ratios and fear of the Danish Bank Package 3,” as the bail-in law is known, said Thinggaard.
That difference may ease as investors realize that the bank package doesn’t apply to the biggest banks and as stricter risk- weights in Sweden create a more level playing field, he said.
Under Basel III rules and assuming 17 percent risk weights on mortgage assets, Danske Bank and Jyske Bank A/S (JYSK), the two largest listed Danish lenders, would have core Tier 1 capital ratios of 12.8 percent said Thinggaard.
Swedish risk weights, which banks have calculated from probabilities based on past defaults, have helped the country’s lenders emerge as among the best-capitalized in Europe. Lenders in the largest Nordic economy also argue that Sweden’s generous welfare system makes it less likely for households to default as income lost through unemployment is largely made up in state benefits.
Handelsbanken was the European Union’s best-capitalized bank at the end of the third quarter, with a core Tier 1 ratio of 17.9 percent. Swedbank was second at 17.3 percent, according to data compiled by Bloomberg. SEB had a core Tier 1 ratio of 16.5 percent and Nordea 12.2 percent. In Denmark, Danske Bank’s ratio was 12.7 in that quarter, while Jyske’s was 13.8 percent.
The Swedish requirements proposed today would mean the largest banks would need to set aside an additional 20 billion kronor ($3 billion) in common equity Tier 1 capital, including 7.2 billion kronor for Swedbank and 5.5 billion kronor for Handelsbanken, the watchdog estimated. That would lower Swedbank’s core capital ratio by 1.5 percentage points and Handelsbanken’s by 1.1 percentage points, it said. Nordea would need to set aside 3.4 billion kronor and SEB 2.3 billion kronor, lowering their ratios by 0.2 percentage point and 0.4 percentage point, respectively.
Nykredit estimated that Swedbank and SEB would have core Tier 1 capital ratios of 13.9 and 12.9 percent, respectively, under Basel III rules, new pension accounting rules and mortgage risk weights of 15 percent. Handelsbanken would have a core Tier 1 ratio of 14.7 percent and Nordea 10.8 percent.
Sydbank A/S (SYDB), Denmark’s third-largest listed bank, would have a ratio of 12.6 percent under Basel III, Thinggaard estimated.
SEB’s capital buffer gives it cheaper funding and means clients “happily” place deposits, Chief Executive Officer Annika Falkengren said in an Oct. 25 interview. While high capital buffers ease funding costs, there “is a limit somewhere where that doesn’t matter anymore,” Ulf Riese, Handelsbanken’s chief financial officer, said on Oct. 26.
Danish banks also have lower credit ratings at Moody’s Investors Services and Standard & Poor’s, in part because the Swedish government is seen as more supportive in a crisis, the ratings companies have said. Danske is rated Baa1 at Moody’s, while Handelsbanken has an Aa3 rating, four levels higher.
“The credit rating agencies attach positive weight to the probability of systemic government support by up to two notches more for the Swedish groups compared with the current credit rating of Danske Bank,” the Danish central bank said in a June 6 report. “As a result of the higher credit rating, among other factors, the Swedish banks have generally had better funding access and lower funding costs compared with other European banks.”
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