Failed Property Bets Show Danish Bank Woes Far From Over

Denmark’s latest bank failure was caused by bad bets on commercial property, a model for insolvency that continues to dominate the nation’s financial woes, Jyske Bank A/S Chief Executive Officer Anders Dam said.

Dam, who agreed on Jan. 25 to take over Sparekassen Lolland A/S after it failed to meet regulatory solvency requirements, won’t cover losses incurred by shareholders or subordinated creditors. Jyske has yet to calculate the final cost of the deal, he said in an interview.

Denmark’s state resolution agency has closed down 12 banks since the nation’s housing bubble burst in 2008, with a further dozen absorbed by stronger rivals. The crisis has wiped out community lenders where management speculated on property prices and boards failed to stop reckless bets. The Financial Supervisory Authority is now reviewing governance standards across the country to ensure boards meet minimum professional requirements.

“It’s commercial loans that are causing the troubles,” Dam, who runs Denmark’s second-biggest listed lender after Danske Bank A/S, said in the Jan. 25 interview. “It’s loans used to speculate in property outside Sparekassen Lolland’s geography that caused the extra writedowns. It’s the same story again.”

Wiped Out

Equity in Sparekassen Lolland, based on an island in Denmark’s southeast, was wiped out after the FSA found impairments that exceeded those reported for the third quarter by at least 289 million kroner ($52 million).

The bank’s management and board stepped down today after the lender was officially declared bankrupt, according to a statement to the stock exchange. All trading in its shares and bonds has been suspended. The collapse fueled speculation that more Danish lenders may yet be declared insolvent.

“Have we seen the last bank failure in Denmark? I hardly think so,” Simon Christensen, an analyst at Nordea Bank AB in Copenhagen, said by phone. “Thinly capitalized banks tend to delay booking writedowns until they’re forced to do so or until they can raise capital, which was also the case here.”

Jyske didn’t disclose a purchase price and Dam declined to say how much his bank put into the deal. Shares in the Silkeborg-based lender gained 0.8 percent to 180.1 kroner in Copenhagen. The stock has added 15 percent this year.

Real Estate

Sparekassen Lolland, whose total assets were 13.3 billion kroner at the end of September, had made 25.4 percent of its loans to real estate projects, the regulator said. Before the Jan. 25 announcement, which came after markets closed in Copenhagen, the bank’ shares had slipped 0.7 percent this year. In the four years through 2012, the stock lost 94 percent.

House prices in Denmark, home to the world’s most indebted consumers relative to disposable incomes, have plunged at least 20 percent since their 2007 peak, with the losses pushing the economy into a recession. Gross domestic product probably contracted 0.4 percent last year, matching a decline in the 17-member euro area, the government estimates.

Danish banks have seen their funding costs rise after Amagerbanken A/S’s 2011 collapse became the first in Europe to trigger senior creditor losses within a resolution framework. The government followed up with a bill designed to encourage bank mergers in an effort to prevent more outright failures.

Senior Claims

“Since Amagerbanken, the sector has done everything to ensure that senior claims against defaulted Danish credit institutions don’t see losses,” Christensen at Nordea said. “Jyske will be honoring senior commitments, so should there have been any lingering doubts among market participants as to whether one should buy senior debt, place deposits or have interbank relations with Danish banks, those doubts ought to be smaller after the weekend’s events.”

The FSA’s inspections have continued to reveal lenders with buffers too small to cover their bad loans. Toender Bank A/S, which declared bankruptcy on Nov. 2, had misled shareholders about the risks lurking beneath its reported figures, FSA Director General Ulrik Noedgaard said in an interview the same month. He repeated the regulator’s estimate that banks representing about 3 percent of Danish financial industry assets continue to be at risk of failure.

Oestjydsk Bank A/S saw its shares slump the most in 19 years on Jan. 25 after the regional lender said writedowns wiped out five years of profit. The bank blamed the FSA’s stricter impairment rules, introduced in the second quarter of last year.

Taxpayer Interests

The Danish government has repeatedly underlined its determination to protect taxpayers from bank industry losses, and said this month that even lenders deemed too big to fail shouldn’t expect bailouts. Estimated profits from the state’s bank packages are 11.2 billion kroner, the Business Ministry said on Jan. 25.

Dam said Jyske Bank’s first priority is to wind down Sparekassen Lolland’s toxic loans.

“We’ll split the loan book into a green bank, a yellow bank and a red one, and for the latter we’ll have to write them off and shut them down as soon as we can,” he said. “What we’re sure this deal will mean is that we’ll have to commit solvency, hard work and patience. I can’t say how much this will impact our capital.”

Dam said in October his bank can mobilize as much as 18 billion kroner to buy rivals as he predicted Denmark’s financial industry will lose about 50 banks by 2020. Jyske announced today it will seek permission from shareholders to issue 100 million new shares in a move that will allow it to reach that target by 2018.

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