Danske Says ‘Full London’ Isn’t Goal in Capital Markets Overhaul

Danske Bank A/S is reorganizing its capital markets operations as part of a move to rely less on business that needs a lot of regulatory capital, such as traditional lending.

The shift reflects the monetary and regulatory environment, Jens Petter Olsen, head of capital markets for the Copenhagen-based bank, said in an interview. Stricter requirements have left the global financial industry wary of capital-intensive banking. But Danske doesn’t want to imitate a model playing out in London, where banks have started to rely on investment banking instead of old-fashioned lending, Olsen said.

“There is still a Nordic model. We are not going full London, so to speak,” he said. “We will continue to still use our capital selectively for our core clients. But the regulatory environment is changing.”

One stop

“Wholesale banking is changing and we need to adjust our business models in terms of how we provide lending,” Olsen said. “Our focus is now much more on the whole relationship.”

Denmark’s biggest bank is creating a one-stop shop for corporate customers, ending a division between equity and debt capital markets that has traditionally channeled clients down a particular financing path before they’ve discussed the options with their bank. Danske this month hired Michael Zeier from Goldman Sachs as part of the revamp, naming him global head of the bank’s corporate finance unit.

Danske’s adjustment helps the bank tap into the “reasonably hot” market created by private equity firms exiting their investments, Olsen said. “In this environment, with very low rates, so far very moderate volatility and with central banks quite supportive -- even though there are some noises -- it is a good environment for risk assets,” he said.

Capital Ideas

While Nordic banks are known for being better capitalized than most, the region’s financial industry is still fine-tuning its business model in anticipation of ever stricter rules. Nordea Bank AB, the region’s biggest, last month became the first Nordic lender to sell a capital relief instrument. The so-called synthetic securitization shifts some of the risk in its corporate loan portfolio over to investors, though the assets remain on Nordea’s books. In a low-yield environment, the double-digit returns that such a product offers are in demand, Olsen at Danske said.

“We’ll see capital relief trades across the board,” he said. “There is demand. With the low absolute yield level, the buy side will look to do yield enhancing strategies.” He declined to say whether Danske is considering similar transactions.

Denmark’s biggest banks face as much as $19 billion in additional capital requirements because of new rules being proposed by the Basel Committee on Banking Supervision. That’s an increase of about 55 percent. While European officials are trying to force a compromise with Basel, Denmark’s government says the industry needs to gird for tougher standards.

That will make it harder for banks to improve profitability. Danske’s return on equity is still below that of most of its Nordic peers. The bank has told investors it can reach a return of at least 12.5 percent by 2018. It delivered 11.8 percent at the end of June.

Danske challenged on return on equity
Danske challenged on return on equity

Danske is in the middle of a 9 billion-krone ($1.4 billion) share buyback program and can repeat it in 2017, according to Kristin Dahlberg, an equity analyst at Jefferies. Danske had a common equity Tier 1 capital ratio of 15.6 percent at the end of June, according to fully phased-in regulations. That’s 3.6 percentage points more than the bank anticipates it will be required to hold by 2019. 

A ban by European regulators on the decade-old practice of Nordic banks to give corporate debt a so-called shadow rating won’t affect debt issuance, Olsen said. “Given the way regulation is developing, more financing on the debt side will be done on the market place.”

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