Danske Bank says Denmark’s negative interest rates have lasted longer than anyone could have expected, with the damage to the financial industry growing increasingly burdensome.
“This was seen as an emergency rate that would go away in 2015,” Claus Ingar Jensen, head of investor relations at the Copenhagen-based bank, said in a phone interview. “If pressure on margins is ongoing in 2016, that will mean something to bank earnings.”
Denmark’s central bank has left its benchmark deposit rate at minus 0.75 percent since February to defend the krone’s peg to the euro. A smaller-than-expected stimulus package from the European Central Bank last week removed some pressure from Denmark to continue easing policy. But Danish rates are unlikely to go positive any time soon, making life difficult for the country’s commercial lenders.
Negative rates are costing Danish banks “a lot more than 1 billion kroner ($146 million) this year,” Tonny Thierry Andersen, chairman of the Danish Bankers’ Association, said on Monday. That’s in large part because banks so far haven’t passed on the cost to retail deposits, said Andersen, who’s also head of personal banking at Danske Bank.
To be sure, lower rates have started to lead to smaller impairments. Danske wrote back 86 million kroner in bad loans last quarter, after writing back 219 million kroner in the previous period.
Danske’s economic research unit sees no rate increases over the next 12 months. That means Denmark faces years of negative rates, which, for the most part, have stayed below zero since mid-2012. The outlook is a punishing one for banks.
“Nobody could foresee even this three months ago,” Jensen said.
While Danske delivered profit growth in the third quarter, its revenue sank 10 percent. The lender is looking for other income streams to make up for the lost lending revenue. Last month, Danske announced it will create a new wealth management unit, joining other large Nordic banks that have taken a similar step.
Investors are also pointing to continued negative rates as a growing threat to returns. Norway’s sovereign wealth fund, the world’s biggest of its kind, is asking the government for permission to expand the group of assets it’s allowed to hold to help tackle the low-rate environment.
Negative interest rates “in many countries” are posing challenges to the fund’s investment strategy, Yngve Slyngstad, the wealth fund’s chief executive officer, said in an interview on Tuesday.
“It has become a new reality that all investors have to be thinking about in considering how to position themselves,” he said. “What we have been doing is reducing our bond holdings and increasing our holdings in equities and real estate, and that may well continue.”
Lars Rohde, the governor of Denmark’s central bank, said in an interview on Monday that the current rate level is far from “normal.” But he predicted that Danish rates will move much closer to those set by the ECB in the longer term.
How soon Denmark acts to narrow the spread “will largely depend” on what the ECB does, he said.