The man who correctly predicted the failures that triggered Denmark’s banking crisis two years ago is now warning that a surge in bad loans will drag down more regional lenders too far gone to attract buyers.
Aggregate impairments will continue to rise this year, with fatal consequences for the country’s weakest banks, according to Nicholas Rohde, founder of Copenhagen-based Niro Invest Aps.
It was Rohde’s financial model that identified the noxious cocktail of bad assets lurking on the balance sheet of Amagerbanken A/S well before its 2011 failure. The event triggered Europe’s first senior bondholder losses in a state-backed resolution, and Rohde says more bail-ins can’t be ruled out. Legislation designed to spur mergers and avoid creditor losses will probably fall short as potential buyers balk at the prospect of absorbing toxic debt, he said.
“There are some banks that are unattractive, either because they’re small or in a remote part of Denmark,” Rohde said in a telephone interview. “Or because it’s not clear how many skeletons remain in the closet.”
One lender fighting for life is Vestjysk Bank A/S, Denmark’s ninth-largest. The Financial Supervisory Authority’s most recent visit uncovered additional writedowns that left the Lemvig, Denmark-based lender only 350 million kroner ($62 million) shy of being shut down, the bank said in a Feb. 1 statement to the stock exchange.
“That’s not much, given the size of the bank, but it’s enough so that we can go forward,” Vestjysk Chief Executive Officer Vagn Thorsager said by phone.
The bank’s shares sank as low as 7.7 kroner this month. In 2007, one year before Denmark’s property market tanked, the stock traded as high as 272 kroner.
A Bloomberg index of Denmark’s 23 listed commercial banks with market capitalizations of 1 billion kroner or less hit its lowest Feb. 4 since the financial crisis began, falling to about one-seventh of its 2007 peak.
The FSA in April began requiring banks to value collateral at prices they could expect to get within six months, driving up industry-wide writedowns by 50 percent in the six months through June. The Copenhagen-based regulator imposed the new rule, dubbed “extreme” by Nordea Bank AB Chief Executive Officer Christian Clausen, after inspections showed banks failed to adequately account for real estate declines.
The financial watchdog has defended its approach as the best way to spur consolidation in an industry frozen by fears of hidden bad loans.
“The rules are set up to make sure you don’t take into consideration that things might get better,” Kristian Vie Madsen, deputy director at the FSA in Copenhagen, said in a phone interview. “There have been some banks where the effects have been larger. If you go to another bank and try to sell your assets, they would not accept a more positive, forward-looking evaluation.”
House prices have slumped more than 20 percent since their 2007 peak, plunging the economy into a recession. Vestjysk Bank says asset valuations that don’t take the possibility of a recovery into account are toughest in regions where signs of a rebound are most remote.
“In practice it can be difficult, especially in areas of the country where the property market is frozen,” Thorsager said. “It’s hard to say the financial crisis is over.”
Since 2008, 12 banks have been taken over by Denmark’s state resolution agency, Financial Stability. Another dozen troubled lenders have been absorbed by bigger rivals.
“I don’t think we’ve seen the last of banks that will be swallowed up, possibly against their will,” Rohde said.
Sparekassen Faaborg A/S said Feb. 14 it no longer has enough capital to meet an internal solvency target set in 2011 of 16 percent, after an 81 percent surge in writedowns last year ate through almost half its equity. The bank, whose shares hit a record-low in Copenhagen a day later, said it’s working on a plan to rebuild capital as it continues to face “significant” risks from real estate loans.
Sydbank A/S, Denmark’s third-largest listed lender, took over Toender Bank A/S in November after the FSA uncovered bad loans big enough to wipe out its equity. The failure followed what FSA Director General Ulrik Noedgaard called “massive non-compliance.”
Jyske Bank A/S, Denmark’s second-largest listed bank, bought Sparekassen Lolland A/S in January after writedowns ate through its regulatory capital. Oestjydsk Bank A/S the same month said 2012 writedowns will erase five years of profits.
Investors and the government hold at least 140 billion kroner in senior bank industry debt due this year and next, central bank data show. That includes at least 55 billion kroner in state-backed debt remaining from the 194 billion kroner issued by the end of 2010.
“The smaller banks now will be looked at with a magnifying glass,” Per Hoeg Jensen, head of financial origination at Danske Bank A/S, said in a phone interview. “What would upset things is if there were another Toender Bank.That was a big surprise.”
At the same time, Denmark’s banking crisis is widening the divide between the country’s biggest lenders, which are building up capital and winding down bad loans, and regional lenders too small to attract investors.
Danske Bank saw a fivefold surge in net income to 1.15 billion kroner last quarter as impairments dropped. Denmark’s biggest bank is eliminating 3,000 jobs to stay competitive, as it closes branches and cuts back on corporate lending.
Jyske Bank is taking advantage of the crisis to buy up rivals. Dam says his bank can mobilize 18 billion kroner for acquisitions. He estimates about half Denmark’s regional lenders will have been wiped out by 2020.
“The majority of Danish banks have sufficient capital and they shouldn’t have problems if the high writedowns continue,” Rohde said. “But some are still on shaky ground.”