Danske Bank A/S, Denmark’s biggest lender, was told by the country’s financial watchdog it had underestimated risky assets as global regulators increase scrutiny of banks’ internal models.
Danske fell as much as 8 percent in Copenhagen trading after the Financial Supervisory Authority ordered the bank to adjust its models in a step that will force it to add about 100 billion kroner ($18 billion), or 13 percent, to risk-weighted assets “over time,” according to a statement late yesterday.
The regulator said it first informed the bank of the need to boost risk weightings last year and the company didn’t respond. Danske said it may appeal the decision, which relates in part to loss assessments on corporate loans, and left its full-year outlook and financial targets for 2015 intact. The FSA’s action comes as the Basel Committee on Banking Supervision reviews the way lenders model risk and assign capital.
The FSA’s decision “will reduce our solvency level from a very high level but it may not be that we’ll need to go back to the very high level we’re coming from,” Henrik Ramlau-Hansen, Danske’s chief financial officer, said in an interview. “We’ve made individual evaluations on the likelihood of these corporate clients missing payments and how much we would lose. That’s why we’re considering appealing the FSA’s ruling.”
The order will make lending to Danish businesses more costly, said Ramlau-Hansen. Denmark’s small and medium-sized enterprises employ about two-thirds of the workforce and the government is struggling to find ways to increase the flow of credit to businesses to help restore economic growth.
Danske Bank, based in Copenhagen, will need to hold an additional 15 billion kroner in equity by 2022 to sustain its capital ratio following the FSA’s new risk-weight requirement, Ramlau-Hansen said. He said the bank won’t need to sell shares to reach that target.
The bank closed down 6.1 percent at 104.90 kroner in Copenhagen, trimming the gain this year to 9.7 percent.
Nordea Markets, a unit of Nordea Bank AB, cut its recommendation on Danske shares, advising clients to hold the stock instead of buying it. Nordea targets a share price of 115 kroner, compared with 130 kroner previously, it said. The FSA’s ruling “means that Danske will need to build its buffers further, which can result in a reduced dividend potential in the coming years,” Nordea said in a note to clients.
Global regulators are forcing financial institutions to hold more capital to avoid a repeat of the taxpayer-funded bailouts of the financial crisis. Stefan Ingves, who heads Sweden’s central bank and the Basel committee, told reporters last week that regulators are reviewing the risk-weights banks apply after finding variations across markets. Such weightings determine how much capital lenders must set aside to cover the risk of losses on those assets.
The Basel committee brings together regulators from 27 nations, including the U.K., U.S. and China, to set capital rules for banks. The latest round, known as Basel III, states that banks should have core reserves equivalent to 7 percent of their RWAs, with the largest banks holding a buffer above that amount.
Ramlau-Hansen said the FSA’s order “will have no impact on our strategy or equity in the short term.”
The FSA said it has “for some time held the opinion that the bank had credit risks that were not adequately covered by Pillar I,” according to a separate statement. “The FSA’s opinion is based, among other things, on the FSA’s review of specific exposures in connection with credit inspections and on reviews of the bank’s internal ratings-based models.”
Danske said it has asked for a third-party assessment.
The bank is one of six identified in March as systemically important to Denmark’s $325 billion economy. Danish central bank Governor Lars Rohde said in an interview published today that too-big-to-fail banks can expect to be exempt from the nation’s bail-in legislation, albeit only to the extent such a step would aid the economy.
“Concerning systemic institutions, one would do everything possible to protect the systemically important parts, which would include considerations to the well-being of the general public,” Rohde said.
European Union resolution laws will ultimately determine how much freedom national authorities have to bail out or bail in their lenders, Rohde said.
Aside from adding to Danske’s risk-weighted assets, the FSA’s measures will cut Pillar II add-ons by about 2 billion kroner, Danske said, referring to additional individual requirements. The bank’s Pillar I capital requirements will grow to 72 billion kroner from 64 billion kroner, it said.