Basel Drives Nykredit to Close Book on 165-Year History With IPO

  • Cooperative plans to sell shares to meet capital demands
  • Mortgage lender's CEO pledges to cut costs to attract buyers

Scandinavia’s largest cooperative mortgage lender is abandoning 165 years of history as global regulations reshape banking.

Nykredit Realkredit A/S said Thursday it probably will list shares on the Copenhagen stock exchange because it can’t earn money fast enough to build the capital it expects regulators will demand. Yet the same problem that’s dogging its ability to build buffers -- a competitive market place -- may also lead to a lukewarm reception among investors.

Return on Common Equity

Chief Executive Officer Michael Rasmussen said he’ll wow them with cost effectiveness.

“I expect that we’ll have a cost percentage of close to 35 percent,” Rasmussen said in an interview at Nykredit’s Copenhagen headquarters, which the bank put on the market earlier this week to cut costs. “If we can generate stable, nice risk-adjusted returns, I’m sure there’s a market for the shares.”

Since Rasmussen was headhunted from Nordea Bank AB in 2013, he’s cut the cost-to-income ratio from 57.9 percent to 41.9 percent last year. The bank reported a negative return on equity after tax of 1.8 percent in the third quarter.

At the end of the third quarter, the lender had assets of about 1.4 trillion kroner ($206 billion), with total equity of about 65 billion kroner. Christian Hede, a banking analyst at Nordea, said it’s too early to set a value on an IPO but Nykredit’s would certainly be “a large” one in Danish history.

Global regulators have proposed setting minimum capital levels for banks like Nykredit that use models to estimate credit risks and determine how big buffers against potential losses should be. The Basel Committee on Banking Supervision is recommending a floor after repeated reviews of banks’ models showed wide variations.

Denmark is opposing the measure, which it says unfairly penalizes a system that performed well even during the financial crisis. Banks’ mortgage risk weights are low because of that success, the industry and government argue.

Rasmussen said he can’t bet on their success and it’s likely that regulators will demand more capital in one form or another. That’s why he’s going to investors. The bank faces a 15 billion-krone shortfall.

“We can’t just say that it’s dumb and we hope that it’ll go away,” Rasmussen said.

Nykredit hasn’t said how many shares it will sell. The Nykredit Association, which owns 80 percent, would retain a controlling interest under the proposal, on which a final decision is scheduled to be made Feb. 10.

Lars Holm, credit analyst at Danske Bank, said Nykredit should sell shares to cover the full capital shortfall it anticipates, because “it’s not something they can do every day.”

Given the bank’s history and culture as a cooperative, the announcement was a surprise, Holm said. “But I can understand why. The CEO wants to be ahead of the capital requirements, rather than feeling he’s behind them. Also, he’ll be able to run the company with lower buffers because it can go to the market and raise capital if it needs do. They can’t do that now.”

How to value the shares is a tough call, Mads Lerche Thinggaard, a banking analyst at Handelsbanken Capital Markets, said.

“You’re looking at a company with a lower return on equity: That’s the starting point for a valuation. That would point to a lower multiple,” Thinggaard said. Still, Nykredit holds the first liens on collateral so investors may “be satisfied with a lower return on equity.”

Book value of Nykredit’s equity

ATP, Denmark’s largest pension fund, would consider buying Nykredit shares, Chief Executive Officer Carsten Stendevad said Thursday in an interview. Nykredit’s IPO plans are “interesting,” he said.

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