Danske Bank A/S Chief Executive Officer Peter Straarup said Denmark’s biggest lender faces an inhospitable earnings climate for years to come as Europe’s toughest resolution laws and a lack of demand hurt its markets.
“Our earnings generation ability will be under pressure in the coming years, but that’s also why we’ve increased our rates,” Straarup said in an interview in Copenhagen yesterday.
Danske yesterday posted a 27 percent surge in net income for the second quarter to 1.19 billion kroner ($227 million) after loan losses declined and income grew. Still, the bank is suffering the fallout of two regional lender insolvencies since February, triggering the European Union’s first senior creditor losses within a resolution framework and forcing up funding costs for the whole industry.
Denmark’s resolution laws “affect Denmark in general and therefore also Danske Bank,” Straarup said. “Danske has been hurt by the failures” of Amagerbanken A/S and Fjordbank Mors A/S. “It has become more expensive to borrow money abroad and markets are negative towards Denmark.”
Credit-default swaps on Danske Bank’s senior debt touched a 2 1/2-year high last week of 205 basis points and trade about 65 percent above similar contracts on Nordea Bank AB, Sweden’s biggest lender. Shares of Danske have lost 35 percent this year, compared with Nordea’s 23 percent decline and a 25 percent drop in the 46-member Bloomberg Financials Index.
Any recovery in Danske Bank’s European markets will be “slow and fragile,” the lender’s Chief Financial Officer Henrik Ramlau-Hansen said at a press conference yesterday. Denmark’s economy has been in a technical recession since the fourth quarter as a weak housing market stalls a recovery.
Danske is trying to offset the harsh earnings environment by raising fees at its mortgage business and lifting borrowing costs at its banking unit.
“We haven’t given a specific number for what that will mean for net profits but we expect the steps we’ve taken along with the rate hikes central banks have provided will increase our result by about 2.5 billion kroner on an annual basis,” Straarup said.
Danske rose as much as 7.1 percent in Copenhagen trading. The shares advanced 4.55 kroner, or 5.4 percent, to 88.95 kroner at 9:31 a.m. The Bloomberg Europe Banks and Financial Services Index gained 1.9 percent.
Danske’s markets unit won’t profit as much from volatility in global markets as it did in 2009 because the bank’s business is more geared toward debt markets than stocks, Straarup said.
“One should not expect the bank to produce the same result from volatile markets as last time,” he said. “Back then it wasn’t equities being volatile but debt markets, which made for good profit opportunities. We don’t own a lot of shares so we won’t suffer major losses on our stock portfolio from the current volatility.”
The Chicago Board Options Exchange Volatility Index, which reflects the market’s estimate of future volatility, soared Aug. 8 to the highest since March 2009, jumping 50 percent to reach 48.
In the first quarter of 2009, when the volatility index averaged 45, Danske Bank posted a record-high 7.49 billion-krone trading income.
In the second quarter of this year, Danske Markets derived 7 percent of its income from equities, 21 percent from foreign currency and money markets, 55 percent from repos and derivatives and 18 percent from bonds.
The global stock-market slump that started last month and spilled into August after the U.S. was downgraded by Standard & Poor’s will end up hurting the bank industry as recovery prospects fade and demand dwindles, Straarup said.
“There’s no doubt that if the economic activity is affected, it will eventually travel into the banks’ performance,” he said. “Back in 2008, the financial crisis started out on the stock market and then travelled into the real economy, which became very costly to the entire banking industry.”