Danske Too-Big-to-Fail Stamp Won’t Help Rating, S&P Says

Naming Danske Bank A/S a systemically important financial institution won’t be enough to trigger a ratings upgrade because the designation won’t change existing assumptions of state support, Standard & Poor’s said.

The same logic applies to Copenhagen-based Nykredit A/S, Europe’s biggest issuer of covered bonds backed by mortgages, according to Per Tornqvist, a Stockholm-based director at S&P. The institutions’ stand-alone ratings already get a two-level boost because S&P assumes they’re too big to fail, he said.

“A wider notching following a Sifi report is not likely,” Tornqvist said.

Denmark’s government-appointed Sifi committee is due to deliver its recommendations by March 1, including a list of banks and how much extra capital they must hold. It will also address the need for living wills that would work as roadmaps for orderly resolution. Whether Sifi-designation will make life easier or harder for the biggest banks remains a subject of debate.

Benny Engelbrecht, who heads parliament’s committee on bank laws, said this month that Sifis will need to meet higher capital standards to absorb losses, and rejected speculation they’ll enjoy greater government support. Danske Chief Executive Officer Eivind Kolding said in November the designation would imply government support as his bank targets a ratings upgrade to help lower funding costs.

‘Similar Language’

Denmark’s biggest bank is rated A- at S&P, A at Fitch Ratings and Baa1 at Moody’s Investors Service. Nordea Bank AB of Sweden enjoys a AA- rating at S&P, Aa3 at Moody’s and AA- at Fitch.

While Danske’s ratings aren’t likely to rise, S&P is also skeptical of the government’s claims it will refrain from bailing out an institution whose total assets are twice Denmark’s gross domestic product.

“We have a number of cases where similar language” to Engelbrecht’s “has been used -- the U.K., the U.S., Switzerland -- and where we continue to say, ‘We hear what you’re saying but we do not believe that this is the real policy quite yet,’” Tornqvist said.

Denmark’s banks are facing capital markets with lower ratings than their rivals in neighboring Sweden as the economy struggles to surface from a 2008 burst real estate bubble and regional banking crisis. The nation in 2011 became the first in Europe to enforce bail-in legislation, triggering senior creditor losses. Lawmakers have since passed a bank merger bill that is designed to support consolidation and prevent more outright bankruptcies.

Bank Takeovers

Jyske Bank A/S, Denmark’s second largest-listed lender, last week took over Sparekassen Lolland A/S after an inspection by the Financial Supervisory Authority uncovered writedowns big enough to wipe out its equity. Sydbank A/S in November acquired Toender Bank A/S after the regulator said its capital buffers were too small to cover bad loans.

Denmark’s banks suffer from lower profitability and weaker asset quality than their peers, the International Monetary Fund estimates. Non-performing loans are about three times levels outside Denmark, the IMF said in a report released this month by the central bank. The Washington-based fund included an analysis of banks in Finland, Sweden, Switzerland and Germany.

IMF Warning

The IMF also called into question Danish banks’ efforts to build up capital. While the industry on average holds more than 13 percent core Tier 1 capital of risk weighted assets, which is higher than banks elsewhere, the use of hybrid debt and internal ratings models for assessing risk weights “masks the actual capital position” which is “not as strong as indicated,” it said.

Danske Bank is due to report its fourth-quarter results on Feb. 7. Nordea said today its net income rose 7 percent to 840 million euros ($1.13 billion), while Swedbank AB reported a more-than fourfold surge in profit, allowing the lender to increase its dividend payout ratio to 75 percent from 50 percent.

Denmark’s FSA said last week banks will be allowed to issue new hybrid debt instruments to meet tougher capital demands only if the securities convert to equity early enough to avoid eating into regulatory buffers. The agency is broadening its definition of regulatory capital as it imposes tougher individual solvency requirements to avert another financial crisis.

‘Absorb Shocks’

Governments want banks to hold more capital, and that’s “positive for stability and for the ability to absorb shocks,” Tornqvist said. The European Union directive for bank crisis management is “equally strong in stating that governments are not going to commit taxpayer money,” he said.

“But we haven’t seen in any of the cases I mentioned --nor have we seen it in Denmark -- the tools necessary to make such policy statements effective,” he said. “So we continue to factor in expected, extraordinary government support in our bank ratings.”

Danish banks may see the gap between their credit scores and those of their peers shrink at Fitch Ratings.

Government support isn’t factored into Nordic bank ratings, but based on their financial strength alone, said Olivia Perney Guillot, senior director of financial institutions at Fitch. That’s not the case for other countries, including Germany. As those banks raise their capital levels, government support will probably decline, she said.

“So far we have maintained most of our support rating floors in Europe,” Guillot said.

“There is strong support for the biggest banks in each country,” she said. “But we are watching the developments, and we do expect at some point in the future that we will reduce the expected level of support for the banks.”

(Updates with Swedish bank earnings in 13th paragraph.)
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