Danish Banking Crisis Entices Buyers Seeking Cheap Targets

Denmark’s banking crisis has left in its wake a number of cheap acquisition targets that may entice buyers to take advantage of an industry brought to its knees by a sequence of insolvencies.

Jyske Bank A/S, Denmark’s second-largest listed lender, expects to acquire more regional rivals weakened by economic turmoil and Europe’s toughest bank resolution rules, Chief Executive Officer Anders Dam said. The bank, which purchased Fjordbank Mors A/S last month after it was declared insolvent, will wait for troubled lenders to approach it for help, he said.

Denmark’s banking industry, the Nordic region’s worst performing, “is poised for a restructuring in which we want to participate,” Dam said in an interview. “Jyske Bank is looking for growth even if the market is turning down.”

As many as 15 banks may fail in the next three years as commercial property and agricultural loans sour, Standard & Poor’s said in July. Max Bank A/S this month became the first insolvent lender to sidestep Denmark’s bail-in laws and test a consolidation bill that allowed it to avoid senior creditor losses.

There are about 120 banks in Denmark, most of which have been unable to tap funding markets after the February failure of Amagerbanken A/S triggered the European Union’s first senior creditor losses within a resolution framework. Consolidation since 2001 has already cut the number of banks by 34 percent, according to the website of the Danish Bankers Association.

Funding Costs

Sydbank A/S, the country’s third-largest listed lender, said today that plans made in May to issue senior debt are on hold as the wholesale funding market remains squeezed. The Aabenraa, Denmark-based bank, which today reported a break-even result for the third quarter, missing an average analyst estimate for a 135 million-krone ($25 million) profit, said market conditions have prevented it from issuing senior debt on “satisfactory terms.”

A surge in funding costs helped drive up Jyske Bank’s interest costs by 66 percent in the third quarter, to 621 million kroner, the bank said yesterday. Denmark’s financial industry won’t recover from its crisis until a number of lenders are restructured or taken over, Dam said. “It will take two or three years for that to happen,” he said.

Jyske yesterday reported a 47 percent drop in third-quarter net income to 81 million kroner as interest income slipped, costs rose and the value of its securities slumped.

Shares Decline

Shares in Jyske Bank slipped 1 percent to 151.8 kroner as of 1:56 p.m. in Copenhagen, underperforming a 0.4 percent gain in the 46-member Bloomberg index of European financials. Sydbank fell as much as 2.7 percent.

Jyske’s profit decline follows “the slowdown in economic growth in Denmark, which, although not a eurozone country, is definitely impacted by the area’s sizeable problems,” Prateek Datta, a credit strategist at Royal Bank of Scotland Plc in London, said in a note. Still, “the strength of Jyske remains its balance sheet, with a 12.5 percent core Tier 1 capital ratio, excluding hybrids.”

The bank has no plans to tap equity markets for extra capital, Dam said in the interview. It already has the capital it needs to continue expansion through acquisitions, he said.

Including hybrids, such as bonds that convert to equity, the capital ratio is 14.1 percent, Jyske said. Its purchase of Fjordbank Mors included a customer portfolio consisting of about 47,000 clients with loans and advances of about 2.7 billion kroner and deposits of about 3.7 billion kroner, according to a Sept. 30 statement.

Worst Performer

Denmark is Scandinavia’s worst performing economy as a local banking crisis and declining housing market undermine consumer confidence. The country’s lenders are struggling to stay profitable as international creditors balk at the European Union’s toughest bank resolution laws.

Fjordbank Mors, which collapsed in June, was the riskiest of 99 lenders ranked by researcher Niro Invest Aps in a June survey. Max Bank, which failed this month, was the third-riskiest, while Aarhus Lokalbank A/S ranked second riskiest. Shares in Aarhus Lokalbank have plunged 86 percent this year.

‘Optimistic’ Writedowns

Of the 10 riskiest banks on the list, two have failed, and six aren’t listed. Vestjysk Bank A/S, the eighth-riskiest, has seen its share-price slump 64 percent this year.

The Financial Supervisory Authority is investigating lenders deemed at risk of being declared insolvent to ensure their reported impairments and solvency ratios are accurate. FSA Director General Ulrik Noedgaard in an August interview characterized banks’ approach to calculating writedowns and capital buffers as “optimistic.”

The government in September passed a consolidation bill designed to help lenders side-step Denmark’s bail-in laws. S&P analyst Per Toernqvist said the consolidation bill, which lawmakers first presented on Aug. 25, may reduce the number of failures, in an interview the same day.

Still, it’s unlikely that Denmark will be able to avoid more bail-ins, meaning there’s no guarantee senior creditors won’t suffer further losses, said Henrik Bjerre-Nielsen, chief executive officer at the winding-up unit known as the Financial Stability Co., in an interview this month.

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