Danske’s Loan Losses in ‘Scary’ Ireland Likely Peaked

Danske Bank A/S, Denmark’s largest lender, said its Irish loan losses have likely peaked as the country said it would spend as much as 50 billion euros ($69 billion) bailing out the nation’s banks.

“Obviously, it is scary that the banking sector has cost the Irish government and taxpayers so much and the big question is, of course, what happens now -- will the property market fall even more?” Chief Executive Officer Peter Straarup said in a Copenhagen interview yesterday. “If it does, it will obviously result in more impairment charges in addition to what has already taken place. We do think, though, and still think, that impairment charges peaked in Ireland in the second quarter.”

Ireland is preparing to take majority control of Allied Irish Banks Plc and pump extra cash into Anglo Irish Bank Corp., it said yesterday. The cost of the bailout will push the budget deficit to about 32 percent of economic output in 2010. Danske Bank’s second-quarter loan losses in Ireland were 1.65 billion kroner ($304 million).

Once the banks are shored up, the Irish government will seek to narrow the budget deficit, which at 14 percent of gross domestic product was the highest in the euro region last year. Finance Minister Brian Lenihan will lay out his plan to narrow the deficit to 3 percent by the end of 2014 in November.

‘Right Medicine’

“If the Irish government tightens more, which could become necessary, then it would obviously also hit other sectors than the property sector, which could mean the economy would take some time longer to recover,” Straarup, 59, said. “I don’t have any doubt, though, that the Irish economy will recover one day, and I think the government and the country is putting the right medicine into the medicine cabinet.”

Danske Bank has expanded abroad in the past 15 years because of limited growth opportunities in its Danish home market. It acquired Sweden’s Oestgoeta Enskilda Bank in 1997, Norway’s Fokus Bank in 1999 and Northern Bank in Northern Ireland and National Irish Bank in the Republic of Ireland in 2005. Danske also acquired Sampo Bank in Finland in 2007.

Danske Bank suffered the largest loan losses of any Nordic bank last year because of the economic crisis in its Danish home market and Ireland. The lender’s Danish consumer business has been unprofitable since the fourth quarter of 2008 because of impairment charges and costs related to the Danish state guarantee program for banks, and in Ireland since early 2008 after the country’s property market slumped.

Danske Shares

Danske Bank, the Nordic region’s second-largest bank by market value before the global financial crisis began, has slipped in size and now ranks fourth after Nordea Bank AB, Norway’s DnB NOR ASA and Sweden’s Svenska Handelsbanken AB. The shares have gained 11 percent this year, compared with a 4 percent decline in the Bloomberg Europe Banks and Financial Services Index, which includes 54 European banks and insurers.

The stock was down 0.4 krone, or 0.3 percent, at 131.5 kroner as of 11:31 a.m. in Copenhagen trading after falling as much as 1.4 percent earlier today.

In the first half of this year, Danske Bank paid a 1.25 billion-krone fee to the Danish government guarantee program for banks and took 927 million kroner in impairment charges relating to the program, or Bank Package I, which expired Sept. 30. That contributed to the 1.5 billion-krone pretax loss it reported at its Danish retail unit in the period.

The Danish lender is likely to return to making money in its Danish retail operations this year after the expiration of the country’s government’s guarantee program, said Straarup, who has been CEO since 1998 and joined Danske Bank in 1968.

Impairment Charges

“Danske pays about 1.1 billion kroner per quarter in impairment charges or commission fees,” Straarup said in regards to the costs of Bank Package I, which have been taken by the lender’s Danish retail operations. “So, for that reason, I will expect them to get back to profits again now.”

The expiration of the Danish government guarantee program, coupled with new regulation and liquidity buffers for financial institutions, may prompt more mergers and acquisitions, Straarup said. Danske Bank isn’t interested in acquiring any Denmark lenders because it already has about a third of the nation’s market share, he said.

Danske Bank is closing branches in Ireland, Sweden, Norway and Denmark as part of a plan to consolidate its network, make smaller corporate customers use its telephone bank instead and lower costs, Straarup said. The bank is cutting its branch network in Ireland by 50 percent and as much as 20 percent in Sweden and Norway, he said.

Danske has 320 branches in Denmark, 49 Swedish outlets, 45 Norwegian branches and 44 Irish outlets.

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