July 18 (Bloomberg) -- The outlook on Denmark’s banking industry remains negative as lenders face the risk of more bad loans before an economic recovery takes hold and property prices improve, Moody’s Investors Service said.
The outlook for larger banks is stable, while mortgage lenders and banks most reliant on market funding have negative prospects, Kim Bergoe, vice president and senior credit officer at Moody’s, said in a report published today. The outlook for the banking industry has been negative since November 2008.
Denmark’s $320 billion economy is lagging behind its Scandinavian neighbors as consumers struggle to emerge from a burst property bubble that drove more than a dozen banks into insolvency since 2008. Private spending, which makes up half of the Danish economy, grew 0.1 percent in the first quarter as gross domestic product stalled. Household debt reached a record 315 percent of disposable incomes last year, the International Monetary Fund estimates.
“Loan losses could start to rise again as economic growth remains slow,” Bergoe said in an interview. “The uncertainty around credit quality, and hence earnings, remains too big for us to move to a stable outlook.”
Denmark’s government, the central bank and the country’s biggest lender Danske Bank A/S have all cut growth forecasts for this year. The government and central bank expect 0.5 percent growth in 2013, while Danske Bank sees GDP expanding 0.1 percent. The forecasters kept their 2014 estimates unchanged in the 1.4 percent to 1.7 percent range.
Falling Loan Losses
Nordea Bank AB, the Nordic region’s biggest lender, yesterday said net loan losses at its Danish retail unit fell 10 percent to 77 million euros ($101 million) in the three months through June compared with the first quarter. It marked the third consecutive quarter of declines in loan losses.
Svenska Handelsbanken AB said operating profit at its Danish branch network more than doubled to 194 million kronor ($29.5 million) in the second quarter from a year earlier as loan losses slumped an annual 68 percent to 37 million kronor.
“We’re seeing a turnaround but a slow one” in Denmark, Nordea’s Chief Executive Officer Christian Clausen said in a phone interview from Stockholm on July 17. “We’re seeing consumer sentiment going up and that, combined with the housing market” recovery, “points toward an improvement,” he said.
While loan losses at Nordea’s Danish unit may fluctuate in coming quarters, they are likely to be lower in 2014 as a whole than this year, Clausen said.
“It would appear that markets disagree with Moody’s arguments to give a negative rating of the outlook for Danish banks,” Thomas Hovard, the head of credit research at Copenhagen-based Danske Bank, said in a note to clients. “Domestic and foreign investors alike rate Denmark and the Danish mortgage lending system among the safest in the world setting interest rates very low.”
The yield on Denmark’s benchmark 10-year government bond slid to 1.67 percent today, its lowest since June 17. The yield on the Nykredit Realkredit A/S 3.5 percent mortgage bond due October 2044 was little changed at 3.54 percent, according to generic price data compiled by Bloomberg.
Apartment prices in Denmark rose 7.3 percent in the 12 months through April while house prices gained 2.6 percent, the statistics office said on July 3. That will reduce the need for writedowns on loans and allow lenders to cancel earlier provisions for loan losses, Christian Hede, a senior equity analyst at Silkeborg, Denmark-based Jyske Bank A/S, said.
Bergoe said Moody’s was cautious on the Danish property market after a very long streak of falling prices and that it needs “to see if things develop in the right direction over time to be sure we’re seeing a trend, not just fluctuations.”
Moody’s said small and medium-sized companies will remain the main source of loan losses to banks. Local lenders are more vulnerable to losses than larger banks as they are exposed to local industries such as farming, Moody’s said.
“Danske Bank and others may report the same trends as Nordea and Handelsbanken, but pockets of weaknesses will remain and some banks will move in the other direction,” Jyske Bank’s Hede said. One such bank “could be Sydbank A/S, as the economy isn’t doing too well in southern Jutland and they have farm exposures.”
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