Danish Banks Get No Mercy as Nordea Sees Sub-Zero Into 2014

The Danish central bank’s negative deposit rate, which banks and rating companies say is crippling the financial industry, will probably continue into 2014, according to Nordea Bank AB.

That will put pressure on an industry still struggling to surface from Denmark’s burst housing bubble, which has claimed more than a dozen banks since 2008. The central bank, which has left its deposit rate at minus 0.2 percent since July, says bank industry woes won’t distract it from using rates to defend the krone’s peg to the euro.

“Banks may have to live with negative rates for another two years,” Jacob Skinhoj, who heads fixed-income research at Nordea Markets in Copenhagen, a unit of Scandinavia’s biggest bank, said in an interview. “That could very easily be the case.”

Banks had about 150 billion kroner ($26 billion) in the central bank’s deposit facility last week, costing them some 300 million kroner annually, the Danish Bankers Association estimates. Meanwhile, the industry is still paying its customers to hold their deposits in an effort to attract stable funding and reduce reliance on wholesale financing. That’s turned deposit banking in Denmark into a losing business.

Net interest income at Nordea’s Danish unit fell 3 percent in the third quarter from the second, to 297 million euros ($384 million), the bank said on Oct. 24. For household deposits, net interest income was negative, the bank said.

‘Very Expensive’

“It’s very expensive not to be able to earn money on deposits,” Michael Rasmussen, head of Nordea’s retail banking and Danish operations, said in response to questions last week. “I have 125 billion kroner in deposits I can’t earn money on.”

While there’s a chance the central bank may raise its deposit rate by 0.1 of a percentage point sometime in the next three months to fine tune the exchange rate, Nordea estimates that after that, Denmark will probably leave rates unchanged into 2014 as policy makers in Copenhagen track the European Central Bank. Europe’s debt crisis means President Mario Draghi is unlikely to raise rates at all next year, Skinhoj said.

Denmark, where property prices have plunged about 25 percent since their 2007 peak, is probably in the grip of its second recession in less than a year, the Confederation of Danish Industry said today. The economy will remain under pressure well into 2013, the group estimates.

Own Risk

The Danish central bank’s only policy mandate is to defend the krone’s peg, and it targets a rate of 7.46038 per euro. Denmark’s status as a haven from Europe’s debt crisis -- thanks to a government debt load that’s less than half the euro-zone average and a current account surplus -- has attracted investors fleeing crisis-tainted euro-zone assets.

The central bank only takes the exchange rate into account when setting rates, said Governor Nils Bernstein’s spokesman, Karsten Biltoft. The bank made its policy focus clear after lenders in 1996 introduced adjustable-rate mortgages with regular refinancing auctions for homeowners, he said. Borrowers took the loans at their own risk, he said.

“We made it clear that, irrespective of what happened with short-term mortgage financing, we would adjust interest rates according to the needs of the fixed exchange-rate policy,” Biltoft said in an interview.

Bank Aid

The central bank has taken some measures to support banks, expanding its collateral base and extending loan maturities available at the benchmark lending rate -- 0.2 percent since July -- to six months and three years. Since July, the bank has twice raised the ceiling on its current account facility, which carries a rate of zero. Biltoft declined to comment on whether it may raise the ceiling again.

While some banks in the U.S., Canada and Sweden have started charging clients for their krone-denominated deposits, lenders in Denmark have hesitated for fear of losing business. The government, which has passed five bank rescue packages since 2008, has also warned any decision by the financial industry to charge for deposits would repel customers and hurt banks.

With both the government and the central bank signaling lenders are unlikely to get more policy-driven concessions, Denmark’s financial industry faces consolidation. Anders Dam, the chief executive officer of Jyske Bank A/S, Denmark’s second-biggest listed lender, estimates about half the country’s 106 banks will disappear through 2020, as they’re either bought up or wound down.

Bank Failures

Three regional banks failed the central bank’s latest stress test, published Oct. 25. A fourth bank would be close to breaching capital rules, while the nation’s four biggest lenders, including Danske Bank A/S, all passed.

Proposals to tighten Denmark’s capital rules further are credit positive for banks, Moody’s Investors Service said in an e-mailed note today. A plan to enforce individual buffers above a minimum 8 percent capital requirement will also equip the FSA “with additional tools to address banks that fail to meet” the standards, the rating company said.

Nicholas Rohde of Niro Invest Aps., who correctly predicted the failure of Fjordbank Mors A/S, Amagerbanken A/S and Max Bank A/S in 2011, currently ranks Basisbank A/S, Andelskassen JAK and Sparekassen Lolland A/S as Denmark’s worst-capitalized banks. Dam says Jyske can mobilize about 18 billion kroner for acquisitions as the bank uses the crisis to win market share.

“The biggest challenge to Danish lenders is that they’re not making very good returns,” said Rohde, who compiles the annual Danish Financial Institutions rankings at Niro Invest. “They need good returns to attract more capital” and “capital is really what it comes down to for survival.”

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