Danish $80 Billion Fund Bets Bank Losses Won’t Impact Tests

Danish $80 Billion Fund Bets Bank Failures Wont Impact Test
Credit default swaps on senior five-year debt at Danske Bank, Denmarks biggest lender, touched 150 basis points on July 11, versus 144.5 on July 8. Photographer: Chris Ratcliffe/Bloomberg

Denmark’s banks, which are grappling with the fallout of Europe’s toughest resolution laws, will probably pass European stress tests even after failures sent the industry’s funding costs higher, the $80 billion ATP fund said.

“I don’t expect any of the Danish banks being stress tested to cause any problems,” Torben Sand, who oversees 25 billion kroner ($4.7 billion) at the equity unit of the Hilleroed, Denmark-based pension fund, said in a phone interview yesterday.

The European Banking Authority is due to publish stress test results for 91 of the region’s biggest lenders on July 15. In Denmark, the tests will include Danske Bank A/S, Jyske Bank A/S, Sydbank A/S and Nykredit A/S. The country’s financial industry is struggling to overcome a jump in funding costs that Moody’s Investors Service warns will be “long-term,” after the failure of two regional lenders triggered senior creditor losses.

ATP, which holds shares in Danske, Jyske and Sydbank, doesn’t expect the collapse of Amagerbanken A/S in February and Fjordbank Mors A/S last month to affect the value of its investment in the country’s biggest lenders, Sand said.

“It is not a risk,” he said. “It might cost them something, but I don’t see it as a risk.”

Shares Rise

Shares of Danske Bank rose 3.4 percent, or 3.2 kroner, to 97.45 kroner in Copenhagen, the most since July 1. Sydbank’s stock gained 2.7 percent and Jyske Bank shares closed 1.5 percent higher. The Bloomberg Europe Banks and Financial Services Index, which includes 46 stocks, rose 0.4 percent at 5:15 p.m. local time.

The difference between the Copenhagen interbank offered rate and its euro-area equivalent, Euribor, yesterday reached 6.6 basis points, the widest since April 28. Credit default swaps on senior five-year debt at Danske Bank, Denmark’s biggest lender, touched 150 basis points on July 11, versus 144.5 on July 8. That compares with 90 basis points on debt sold by Stockholm-based Nordea Bank AB, the biggest lender in the Nordic region.

Still, investor skepticism about the state of Denmark’s regional banks shouldn’t spread to its biggest lenders, according to Niels Storm Stenbaek, chief economist at the Danish Bankers Association in Copenhagen.

“The Danish financial system is very healthy, but we have some issues with some small- and medium-sized banks, which is causing a bad reputation throughout Europe,” he said. “We are very concerned about that.”

Funding Wall

Spar Nord Bank A/S, Denmark’s fourth-largest listed lender, isn’t approaching investors outside the Nordic country as it waits for the fallout of the June 24 collapse of Fjordbank Mors to recede, Ole Madsen, Spar Nord’s head of communications, said in a June 28 interview.

Central Bank Governor Nils Bernstein has urged banks at risk of failing to reduce their lending or look for buyers instead of using the state’s resolution facility. Economy Minister Brian Mikkelsen said this month the government’s “one target” for the industry is “consolidation, consolidation, consolidation.”

According to Storm Stenbaek at the Bankers Association, Danish lenders’ exposure to fixed-income securities sold by the euro area’s most indebted countries is 0.5 percent of all bonds and loans on the banking and trading books.

Tougher Tests

“Of course the stress tests are tougher than last year, but the banks are very well-capitalized,” Storm Stenbaek said. “They have a lot of core equity and they’re not very exposed to sovereign debt from the Mediterranean countries, so that shouldn’t be a problem.”

This year’s exams will include a review of how lenders would handle a 0.5 percent economic contraction in the euro area in 2011, a 15 percent drop in European equity markets as well as possible trading losses on sovereign debt. The banks will be expected to maintain a Core Tier 1 capital ratio of at least 5 percent under the stress-test scenarios, the EBA has said.

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