Danske CEO Questions Bond Boom Prophecies After FSA’s Order

The head of Denmark’s biggest bank is questioning predictions that corporate bonds will replace traditional bank lending even as his own regulator adds to the cost of providing loans to businesses.

“I don’t think the bulk of corporate lending will move into bonds in the next 10 to 20 years,” Danske Bank A/S Chief Executive Officer Eivind Kolding said in an interview in his office in Copenhagen. “In the very long term it may be so, but things take time and the corporates are more ready than the investors.”

Danske Bank is reaffirming its commitment to corporate lending after the Financial Supervisory Authority ordered it to adjust risk calculations in a step that will force the bank to add about 100 billion kroner ($18 billion) to its risk-weighted assets “over time,” according to a June 17 regulatory filing.

The move follows a campaign led by the Basel Committee on Banking Supervision to force lenders to review their risk models as global regulators work to prevent bank losses from hobbling economic growth. The Danish FSA’s risk-weight rule comes on top of additional capital demands linked to Danske’s too-big-to-fail status. Industry groups, including the Danish Chamber of Commerce, have warned that the FSA risks choking business growth by pushing measures it says restrict lending.

‘Overly Harsh’

“We’ll shoot ourselves in the foot if we make overly harsh implementation of financial rules or regulation,” Bo Sandberg, business and tax policy chief at the chamber in Copenhagen, said in an interview. “Companies already have substantial problems obtaining credit.”

FSA Director General Ulrik Noedgaard said the risk-weight order will align Danske’s calculations with those used by banks elsewhere in Europe and the Nordic region.

“We think that any effect on the price of bank loans will be modest,” Noedgaard said in a phone interview yesterday. “We haven’t jumped on this conclusion: it’s something we and Danske Bank have been in a dialog about for a long time. We would have preferred if Danske Bank had moved on this themselves rather than us having to issue an order.”

Danske said the FSA’s requirement won’t prompt it to change its strategy as the lender keeps corporate lending as a key plank in its business model. Still, additional reserve requirements are pushing the financial industry toward areas that place a smaller burden on balance sheets, Kolding said.

Shares in Danske Bank slipped 1.1 percent to 103.70 kroner at 9:41 a.m. in Copenhagen, after declining 6.1 percent yesterday. The stock has gained 29 percent in the past 12 months compared with a 17 percent increase in the Copenhagen benchmark.

Cheaper Form

“There’s no doubt banks will work more on bond issuances for the major clients,” he said. Danske last year helped arrange a bond sale by the owner of the world’s largest container line, A.P. Moeller-Maersk A/S. This month, the bank helped on a krone-bond sales by Denmark’s biggest trucking company DSV A/S and DLG Amba, the nation’s biggest producer of animal feed.

Yet for most Danish companies, bank loans will remain a cheaper form of financing than bonds, Kolding said. Denmark’s small and medium-sized enterprises employ about two-thirds of the workforce and the government is struggling to find ways to increase the flow of credit to businesses to help restore economic growth. Lawmakers are now debating a proposal to pool company bond financing to boost liquidity and attract more investors.

Return Requirements

“Investors have high return requirements, so when we move into the SME segment, we don’t always see yet that bonds make a good proposition considering the high return requirements,” Kolding said in the June 13 interview. The comments were confirmed by e-mail yesterday. “The SMEs will still, to a very large extent, rely on bank financing.”

Demand for high-yielding securities has been fueled by unprecedented monetary easing from Washington to Frankfurt to Japan. European companies have sold a record 174 billion euros ($233 billion) of bonds in euros, pounds and dollars, according to data compiled by Bloomberg this month.

Yet there are signs the extreme monetary accommodation that’s driven investors into riskier asset classes may be scaled back. In the U.S., Federal Reserve Chairman Ben S. Bernanke has signaled it may be time to consider tapering bond purchases, sending borrowing costs on benchmark 10-year U.S. debt to 2.21 percent this week from as low as 1.63 percent in May.

“In general it’s right for central banks to keep interest rates as low as they do and have the quantitative easing both in Europe and the U.S.,” Kolding said.

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