Biggest Danish Mortgage Bank Cuts Jobs as Regulation Takes Toll

Nykredit Realkredit A/S will cut costs by almost 10 percent as Chief Executive Officer Michael Rasmussen steers Denmark’s biggest mortgage bank through the broadest overhaul to hit the home-loan market in a decade.

Nykredit will fire 300 employees who don’t deal directly with customers, including managers, reduce lending to foreign customers, and close its Polish retail market operations to cut costs by 500 million kroner ($92 million), the Copenhagen-based lender said in a statement.

“The market, our surroundings and the conditions for running a modern financial business such as Nykredit have changed significantly over the past six months,” Rasmussen, who was appointed in September, said in the statement.

Issuance of one-year mortgage bonds in Denmark’s $530 billion market, the world’s biggest per capita, is poised to shrink as regulators clamp down on refinancing and liquidity risks.

At the same time, banks face tougher capital demands to ensure taxpayers don’t foot the bill should another financial crisis hit. The Danish government earlier this year named Nykredit among seven systemically important financial institutions, adding 85 billion kroner in capital requirements to the industry.

Market Evolution

Demand for short-term mortgage bonds, especially one-year notes, helped fuel the industry’s growth since the securities’ introduction in 1996. In 2003, banks began offering interest-only loans, further eroding the volume of fixed-rate, 30-year loans that once formed the backbone of the industry.

Closely held Nykredit said it will adopt measures to increase earnings from core operations by 1 billion kroner and consider “any opportunities for raising capital.”

The Financial Supervisory Authority will next year unveil guidelines on how much in short-term and interest-only bonds mortgage lenders may issue after Denmark’s central bank, Standard and Poor’s and Moody’s Investors Service warned the debt’s preponderance poses a risk.

Nykredit finances about 25 percent of its home loans with one-year bonds. To reduce the threat the securities pose to the economy and the market, the government last month introduced a bill that would extend maturities on bonds funding adjustable-rate loans by 12 months at a time in the event of a market crisis.

EBA Plan

Also last month, it emerged that the European Banking Authority plans to ignore its own findings that covered bonds are at least as liquid as government debt, and will instead recommend their use to meet liquidity buffers be limited to 40 percent. The EBA will also advise the European Commission to force banks to book covered bonds at less than their market value, imposing a so-called hair-cut on the securities.

“It is natural for Nykredit to realign and develop its business path in the wake of the financial crisis, enhanced national and EU regulation, new requirements from credit rating agencies and a Denmark with moderate economic growth,” Nykredit said in its statement.

Rasmussen’s strategy, which he will implement over the next two years, will also focus on building up its Totalkredit A/S brand and on Danish customers, Nykredit said. The brand represents an agreement with a network of community banks through which Nykredit sells its mortgages.

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