Danske Bank CEO Pledges to Cut Back on Risky Mortgage Bonds

Thomas Borgen, chief executive officer of Danske Bank A/S, says Denmark’s largest lender doesn’t need legislation to drive a reduction in mortgage bond issuance identified by the financial regulator as risky.

Danske, which together with its home-loan arm and six employees is being investigated by police for allegedly manipulating mortgage bond prices in 2009, is capable of responding to market risks without being goaded by rules, Borgen said in a Feb. 7 interview in Copenhagen.

The bank is already cutting sales of adjustable-rate mortgage bonds and interest-only home loans to address concerns raised by the central bank and rating companies, Borgen said. “We will take care of it,” he said.

Lawmakers agreed last week to the most sweeping reform of Denmark’s $550 billion mortgage bond market -- the world’s biggest per capita -- in at least a decade. Legislators responded to criticism from Standard & Poor’s and the central bank that too large a share of the market was based on short-term funding. About a third of Danish mortgages as long as 30 years are refinanced annually.

The new law, which is due to take effect in April, means bonds being refinanced can have their maturities extended by 12 months at a time if auctions fail or if interest rates jump 5 percentage points.

‘Good Trajectory’

“I don’t think it was necessary but now that’s it’s done, that’s fine,” Borgen said. “It’s just a part of the whole puzzle, but it’s important to bring it down and that’s what we’re doing.”

S&P said last week the new law alleviates some refinancing risks, while arguing the measures don’t go far enough to address over reliance on short-term funding.

Danske has cut back on one- and two-year mortgage bonds by 42 percent over two years, according to Borgen. “It may happen that the Financial Supervisory Authority or others start with some regulation but I think the market will adjust it and we are on a good trajectory.”

The government is now looking into drafting legislation to encourage homeowners to amortize their mortgages faster in an effort to reduce debt burdens. Danes owe their creditors 321 percent of disposable incomes, a world record, according to the Organization for Economic Cooperation and Development. Though the borrowing is offset by pensions and home equity, both the OECD and the International Monetary Fund have warned the high level of indebtedness is a key vulnerability for Denmark’s $340 billion economy.

Predecessor Fired

Borgen, who took over as CEO in September after Chairman Ole Andersen fired his predecessor Eivind Kolding for lacking the financial acumen needed to run a bank, told shareholders last week they will receive their first dividend since 2007.

The 49-year-old plans to cut Danske’s debt by $8.2 billion this year and push through a number of “income initiatives” to help generate enough revenue to boost return on equity. Shareholders in Danske got 5 percent on their investments last year, a figure Borgen promises will almost double to 9 percent next year. He cut the bank’s previous 12 percent target in October, telling owners that goal was only reachable in the long term.

So far, shareholders have rewarded Borgen. Danske’s stock has risen 9.5 percent this year, compared with a 2.2 percent gain in the 43-member Bloomberg index of European financial companies. Danske shares gained 0.7 percent to 136.20 kroner as of 10:44 a.m. in Copenhagen.

Price Manipulation

Images of Borgen, who used to head Danske’s corporate and institutional banking division before becoming CEO, were plastered all over Denmark’s financial news media on Feb. 7 after the bank said it was being investigated by police for allegedly manipulating mortgage bond prices five years ago.

Business Minister Henrik Sass Larsen said he would consider tightening regulatory requirements if the Danske case reveals a need to do so, Borsen reported today.

Danske said on Friday it had suspended six employees after Danish prosecutors started a probe into price manipulation on mortgage bond trades conducted in 2009. The bank, which said an internal investigation found that its rules had been violated in transactions with its home-loan arm Realkredit Danmark A/S, notified the FSA last week, prompting the police investigation.

Borgen said Danske is cooperating fully with the authorities. The suspended employees face jail time, according to Hans Fogtdal, who represents the Danish Public Prosecutor for Serious Economic and International Crime.

‘No Excuse’

The charges relate to a “less liquid mortgage bond” based on the Copenhagen interbank offered rate, the crime squad said. “The possible price manipulation was conducted in such a way that it harmed customers at Realkredit Danmark in agreements between employees at the two institutions in February and March” of 2009, it said.

Danske began its investigation of the trades in the fall of last year after an internal audit flagged something suspicious, according to a person with knowledge of the matter who asked not to be identified by name because he wasn’t authorized to discuss the case.

“It’s a very regrettable case,” Borgen said. “We have clear rules and procedures, which all employees are instructed in and are very familiar with. There’s no excuse for not following the rules.”

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