Danish Bank Mergers to Reshape Industry by 2013, FSA Says

Denmark’s financial industry faces consolidation as small banks struggling to refinance debt before a state guarantee ends in 2013 get absorbed by bigger rivals, said Ulrik Noedgaard, head of the country’s financial regulator.

“Many banks will face challenges as they need to refinance the individually guaranteed bonds,” said 41-year-old Noedgaard, director general of the Financial Supervisory Authority, in a March 4 interview in Copenhagen. “One of the tools they can use is to strengthen by merging with other banks. It’s on the cards that we’ll have fewer banks.”

Since Amagerbanken A/S failed on Feb. 6, setting a European Union precedent by inflicting losses on depositors and senior bondholders, Denmark’s lenders have faced higher funding costs than rivals outside the Nordic country. Moody’s Investors Service 10 days later cut its ratings on five Danish banks, including Danske Bank A/S, the country’s biggest, as it factors out the likelihood of government support.

Some of the banks that don’t opt for mergers will be forced to “scale down the number of loans,” Noedgaard said. “Share sale is another tool; that will boost solvency, which is crucial if the banks want to raise funds in the bond market.”

Asked whether more Danish banks might fail, Noedgaard said “it’s too early to make that conclusion. There’s still some risk out there on the loan books and we’ll have to wait and see how things develop.”

‘Excessive Risks’

Financial stocks were the biggest losers on Copenhagen’s benchmark index, losing 0.6 percent, compared with a 0.2 percent decline for the OMXC30 Index at 9:27 a.m. in Copenhagen. Danske Bank dropped 0.6 percent to 126 kroner.

The failure of Amagerbanken, Denmark’s fifth-largest listed lender, was the first to fall under rules effective since October that opened the door to bondholder losses. Financial Stability, the state winding-down unit, estimates Amagerbanken creditors and depositors will lose about 41 percent of holdings not backed by guarantees. Guarantees on bank bonds issued during the state program that expired on Sept. 30 run out in 2013.

“We knew in advance that one of the consequences of Denmark no longer securing all debt holders could be that financing costs would rise -- it was even written in the law proposal,” Noedgaard said. “Investors know now that if a bank takes excessive risks then you may end up paying the bill. We’re currently a bit tougher than the rest of Europe, but the Danish regime is consistent with the recent proposal from the European Commission.”


Since Amagerbanken’s collapse, regional Danish lenders Sparekassen Faaborg A/S and Svendborg Sparekasse A/S agreed to a 15.5 billion-krone ($2.9 billion) merger on March 2, creating a new unit, Bank Fyn A/S, which will employ 319 people and be listed on the Copenhagen Stock Exchange.

Danske Bank Chief Executive Officer Peter Straarup said in a Feb. 10 interview Denmark’s 130 banks can’t escape consolidation. Danske Bank won’t buy up any smaller rivals to comply with competition laws, it said last month. Sydbank A/S and Spar Nord Bank A/S, the country’s third- and fourth-largest lenders, have said they may look for opportunities.

The rise in funding costs comes as smaller banks are more dependent on wholesale financing than they were two years ago. Denmark’s biggest lenders, with more than 50 billion kroner in working capital, raised 699 billion kroner through bond sales as of June, up 7 percent from a year earlier, according to the FSA. Banks with less than 50 billion kroner in working capital almost tripled bond sales in the period to 72.4 billion kroner, it estimates.


Banks stepped up borrowing to finance loans amid speculation Denmark’s property market would rise. House prices, which surged an annual 26 percent in the second quarter of 2006, subsequently slumped 28 percent through the second quarter of 2009. Since then, the number of commercial bankruptcies soared 41 percent through a November 2010 peak. Homeowner insolvencies are up 75 percent since the second quarter of 2009, according to the statistics office.

“There are still some banks out there that could be vulnerable,” Noedgaard said. “There are banks out there that have big exposure to real-estate and agriculture. Banks with real-estate exposure have been hit hard.”

Since Amagerbanken’s failure, Denmark’s financial stocks have suffered. Danske Bank shares have lost 12 percent, shares of Jyske Bank A/S, the country’s second-largest lender, are down 8.1 percent, while Sydbank stock has slumped 15 percent. That compares with a 3 percent decline in the 32-member MSCI European Financials Index.


“It’s worth noting there are also many small banks which are healthy and have been cautious during the crisis,” Noedgaard said. “They don’t need to seek consolidation.”

Danske Bank wrote down 13.8 billion kroner of bad loans last year, down from 2009’s record of 25.7 billion kroner, it said on Feb. 10. The bank also announced plans to raise about 20 billion kroner in a rights offering to boost capital and repay government loans. Proceeds will increase Danske’s core Tier 1 capital ratio, a measure of financial strength, to about 12.5 percent from 10.1 percent, it said.

“Writedowns are somewhat unevenly distributed among Denmark’s banks,” Noedgaard said. “There are some banks that are challenged; in general terms, the worst writedowns are behind us, especially for the big banks.”

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