Danish Bank Takeovers Stall as Troubled Lenders Avoid Buyers

More than half a decade after a housing bubble rocked the foundations of Denmark’s community banks, the consolidation cure lawmakers prescribed is stalling.

Spar Nord Bank A/S, Denmark’s fourth-largest listed lender, says it can’t find the right target to spend its excess capital on. The bank, which has room to absorb an extra $1.2 billion in risky assets through takeovers, may give up its search in about a year as investors start demanding reserves be paid out as dividends, according to Lasse Nyby, Spar Nord’s chief executive officer.

“It’s not necessarily easy to find targets, even though there still seems to be a need for consolidation in the Danish banking sector,” Nyby said in an interview in Copenhagen.

Denmark’s housing crisis sent property prices plunging 20 percent from their 2007 peak. Since 2008, 62 community banks have been wiped out, a government-appointed commission said in September. In two of those failures, senior bondholders got a taste of Denmark’s bail-in legislation, marking Europe’s first cases of burden sharing within a bank resolution framework.

The experience stunned investors, and wholesale funding markets all but shut down for Denmark’s community lenders in 2011. The nation’s biggest bank, Danske Bank A/S, funded itself at a higher cost relative to its Swedish competitors.

Merger Law

In response, parliament agreed on legislation designed to encourage mergers and prevent insolvencies from triggering more creditor losses. Yet those measures have fallen short of fueling the consolidation wave lawmakers had envisaged.

Even after being dragged through a housing crisis, Denmark’s financial industry employs more people than any other Nordic country, according to an annual survey by the Danish Employers’ Association for the Financial Sector. There are 34 percent more employees working in banks in Denmark than in neighboring Sweden, Scandinavia’s biggest economy.

“I don’t see the obvious choice to sell out but there will be some consolidation,” Christian Clausen, CEO of Nordea Bank AB, the Nordic region’s largest lender, said in an interview.

“It is probably more likely that we see smaller banks consolidating than seeing them consolidate with larger banks,” he said. While Nordea always keeps its “eyes open” in its existing markets, “it is unlikely” the bank will make any purchases in Denmark, Clausen said.

Fine Form

Danish banks are generally in “fine form” after several years of writing down loans and amassing capital, Ulrik Noedgaard, director general of the Financial Supervisory Authority, said in an interview in today’s Jyllands-Posten. Writedowns shrank last year by about a third, to 0.8 percent of loans, the newspaper said, citing FSA data.

Still, according to Nyby at Spar Nord, a number of troubled banks are reluctant to be taken over and are instead trying to sell shares to restore their regulatory buffers.

“In my view, some of the smaller banks with capital challenges ought to consider whether it is better for their shareholders to seek a merger partner rather than issuing new shares,” he said.

Spar Nord targets holding 12 percent in core Tier 1 capital relative to its risk-weighted assets. The bank had 14.1 percent at the end of December, leaving it with about 900 million kroner ($165 million) in cash for purchases, Nyby said. That’s equivalent to 6.5 billion kroner in additional risk-weighted assets, he said.

The bank’s shares lost as much as 1.8 percent today and traded 0.9 percent lower at 55.50 kroner as of 12:58 p.m. in Copenhagen. The move puts this year’s gains at 13 percent.

Absorbing Risk

Spar Nord’s most recent acquisition was in 2012, when it bought community lender Sparbank A/S. Spar Nord also bought seven branches sold off during the liquidation of Roskilde Bank A/S, whose 2008 failure marked the start of Denmark’s banking crisis.

If Spar Nord can’t find the right target, it’s only a question of time before investors demand that surplus capital be returned to them, according to Nyby. About 15 percent of Spar Nord’s shareholders are based outside Denmark, mostly in North America, he said.

“In the last year or so, we have seen a surge of interest from U.S. investors,” Nyby said. The bank’s shares soared 91 percent last year, three times the 30 percent gain at Danske. The 43-member Bloomberg index of European financial stocks rose 19 percent in 2013.

Outperforming Danske

Even after a series of mergers since 2008, in which insolvency was often averted at the 11th hour, there are still about 80 independent banks left in Denmark, a nation of 5.5 million inhabitants.

Jyske Bank A/S, Denmark’s second-biggest listed bank, last year bought Sparekassen Lolland A/S after the smaller lender failed a regulatory inspection. Sydbank A/S, Denmark’s No. 3 listed lender, acquired Toender Bank A/S in 2012 after the watchdog found more impaired assets than Toender had equity to absorb.

Smaller banks are also merging, with Lollands Bank A/S and Vordingborg Bank A/S last year agreeing to combine. Other mergers in the past few years include the combinations of Salling Bank with Vinderup Bank, Moens Bank with Fanefjord Sparekasse and Sparekassen Vendsyssel with Sparekassen Hvetbo.

Denmark’s bank industry “has recovered pretty well,” said Clausen, who is also president of the European Banking Federation. “The banks are now looking through their business model and how to position themselves for future regulation.”