Vestjysk Bank Plunges as Auditors Warn Capital Plan Must Work

Vestjysk Bank A/S, which is $39 million away from insolvency, plunged in Copenhagen trading as its internal auditors warned the bank’s plans to raise capital contain no room for error.

If they fail, “there is a significant risk that the bank will not be able to continue operating,” the auditors said yesterday in the bank’s earnings report. The Nasdaq OMX stock exchange placed Vestjysk shares and bonds on the observation list today, citing the auditors’ report. The stock fell as much as 16 percent, the most since Feb. 4.

Denmark’s sixth-largest listed lender increased writedowns by 54 percent last year, plagued by agricultural and property loans, some inherited when the bank took over Aarhus Lokalbank A/S last year in a merger ushered by the government. The Lemvig, Denmark-based bank yesterday reported a more than three-fold increase in 2012 net losses to 1.45 billion kroner ($253 million).

Vestjysk’s results are “hardly a shock” and reflect the growing chasm between Denmark’s stronger institutions and those still struggling after a burst property bubble, said Torben Jensen, chief dealer at debt capital markets at Copenhagen-based Nykredit A/S.

“The results that are coming out from the smaller banks now are generally very good or they are very bad,” Jensen said. “The accountants are taking a tougher look at the balance sheets now, so we’ll probably see the true picture now.”

Hybrid Debt

Property values in Denmark have dropped at least 20 percent since peaking in 2007, with farms and commercial property developments particularly hard hit. Vestjysk wrote down 12 percent of its total loan book in 2012, and said it continues to hold a “relatively large number” of weak commitments.

The writedowns have eroded the bank’s capital. Vestjysk said it had capital of 2.78 billion kroner as of Dec. 31, while the country’s bank regulators require it to hold 2.56 billion kroner. The bank is considering converting to shares some or all of 1.2 billion kroner in hybrid debt held by the government to bolster its solvency.

The Financial Supervisory Authority last year tightened requirements for calculating solvency. Yet to avert closing down banks that faced temporary setbacks, the FSA said it would give lenders that fall below required thresholds more than 48 hours to come up with the extra capital.

The FSA exercised that option yesterday for the first time when Internet lender Basisbank A/S failed to meet its solvency requirements after being told by the FSA to write down more loans. The lender was ordered to devise a capital recovery plan.

Vestjysk shares fell 10 percent to 8.1 kroner at 3:34 p.m. local time. The stock has lost 97 percent since a June 2007 peak.

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