Denmark’s banking crisis is getting worse, threatening to trigger more failures, as loans to farms and small businesses sour and the property market fails to recover, the head of the Financial Supervisory Authority said.
“We have a small group of institutions where we think there might be a risk that within the next 12 to 18 months they will run into solvency problems,” Ulrik Noedgaard, director general of the Copenhagen-based FSA, said in an interview yesterday. “Any notion that the group of troubled banks might get smaller than we thought has probably been taken off the table for a while.”
Denmark has yet to recover from a property bubble that burst in 2007, hurting businesses as consumers cut spending and leaving farmers struggling to repay loans after the economy fell into a recession. House prices plunged an annual 8.5 percent in November as the gap between bid and ask prices widened, official data showed today. Bad real estate loans led to three bank failures last year, two of which pushed losses on to senior creditors and exacerbated a funding squeeze.
Banks at risk of being declared insolvent represent about 3 percent of Denmark’s financial industry, Noedgaard said.
An index of Danish financial stocks reversed gains to slip as much as 0.2 percent, after having traded 1 percent higher earlier in the day. The 43-member Bloomberg index of European financials rose 1 percent.
Regional lenders Amagerbanken A/S and Fjordbank Mors A/S failed last year after loans to farming and real estate went bad. Vestjysk Bank A/S, which the FSA told to double its writedowns in December, merged with Aarhus Lokalbank A/S last week, allowing the two to extend state guarantees on their debt.
Denmark’s biggest lender, Danske Bank A/S, probably returned to profit in the fourth quarter after reporting its first loss since 2009 in the previous period, according to analyst estimates compiled by Bloomberg.
Banks in the worst-performing Nordic economy face more losses on farming loans as that industry struggles to pay down its obligations, Noedgaard said. Agricultural debt swelled 2.6 percent to 359 billion kroner ($63 billion) in 2010, the Danish Agriculture and Food Council estimates. Commercial farms have lost as much as half their value in some parts of Denmark, leaving 6 percent of the industry technically insolvent, according to the council.
“We have an agricultural sector that is somewhat challenged by very high levels of debt and a poor performance currently,” Noedgaard said.
‘Not Looking Good’
Loans to farming, construction and real estate made up 26 percent of total lending at the end of 2010 at banks with less than 50 billion kroner in working capital, according to a May report by the central bank. For the biggest banks, the corresponding figure was 16 percent.
At the end of 2011, loans to farms made up 11 percent of banks’ corporate lending and 23 percent of commercial mortgage lending, the Danish Bankers Association estimates.
Danish banks also face growing losses on loans to small-and medium-sized enterprises, which are struggling to survive the fallout of a faltering domestic economy, Noedgaard said.
“The domestically oriented small firms, retail businesses, different kinds of construction-related services, are struggling and the figures coming out of the annual accounts are not looking good,” Noedgaard said.
The $300 billion economy contracted 0.5 percent in the third quarter led by a decline in household spending, the statistics office said on Dec. 22. Output probably stagnated in the final three months of the year, said Klaus Rasmussen, chief economist at the Confederation of Danish Industries.
“There will be no growth,” Rasmussen said by phone. “It’s hitting firms of all sizes. The smaller firms may be a little harder hit because you have at the same time something of a credit crunch, which is stronger for the smaller firms than for the bigger ones.”
The government has tried to prop up the banks through four rescue packages since 2008. Lawmakers are in talks to broaden the latest bill, which targets consolidation in the industry, according to Brian Mikkelsen, a member of the parliament business committee that oversees banks.
“It will take some time before banks are able to do without some kind of public presence,” Noedgaard said. “It will take at least five years.”
The number of banks in Denmark fell to 121 in the middle of last year from 147 at the beginning of 2008, the Organization for Economic Cooperation and development estimates. The Paris-based group warned Jan. 26 that Denmark needs to do more to fix “financial sector vulnerabilities” if the country is to avoid another housing bubble.
Standard & Poor’s on Nov. 9 lowered Denmark to group 3 from group 2 under its banking industry country risk assessment, or BICRA, ranking the country lower than its Scandinavian peers Norway, Finland and Sweden. Denmark shares its BICRA grade with Italy, which is also ranked 3.
House prices will have plunged 25 percent by next year since the beginning of the crisis in 2007, the government-backed Economic Council said in November. At the same time, survey unemployment will rise to 7.4 percent this year, versus 3.2 percent in 2008, according to OECD calculations.
Today’s housing data show the market “remains in a crisis,” said Steen Bocian, chief economist at Danske Bank. “There’s not much to suggest that things will improve any time soon.”
According to Noedgaard, “with the current economic outlook, we have to prepare ourselves for further writedowns in the coming year.”