Biggest Danish Mortgage Bank Seeks IPO as Capital Woes Mount

Nykredit is seeking an initial public offering as Denmark’s biggest issuer of mortgage-backed covered bonds looks for ways to generate enough funds to meet increasingly heavy capital requirements without resorting to dramatic price increases.

One day after announcing it will sell its Copenhagen headquarters, Nykredit said it is exploring the option of an IPO, according to a statement Thursday. 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.

“The expected capital requirements leave Nykredit at a crossroads,” Nykredit Chairman Steen E. Christensen said in the statement. “We can either raise new capital through a stock exchange listing or we could raise prices significantly and cut back activities and lending drastically.”

Equity in millions of Danish kroner

Global regulators want banks to hold a minimum level of capital for credit risks they face, a requirement that would hit hard lenders like Nykredit that have set levels for mortgage loans low using internal models. Denmark’s and Sweden’s governments and financial regulators are fighting the plan, which they say would unfairly penalize systems that proved robust even during the financial crisis.

The sale may be a hard one for Nykredit to make, if rival Danske Bank’s earnings is any indication, according to Jonathan Tyce, senior banks analyst at Bloomberg Intelligence.

Danske’s figures “confirmed that the Danish mortgage market remains less profitable than peer mortgage markets with significant political focus,” Tyce said. “A 40 percent market share at Nykredit, with ongoing margin and volume fears, makes any IPO a fairly tough sell.”

Nykredit didn’t provide any information on what sort of valuation it was aiming for. At the end of the third quarter, the lender reported a negative return on equity, after tax, of 1.8 percent on 3.1 billion-krone ($463 million) income before tax. The Copenhagen-based lender is scheduled to report fourth-quarter earnings on Feb. 11.

“You’re looking at a company with a lower return on equity,” Mads Lerche Thinggaard, banking analyst at Handelsbanken Capital Markets, said by phone. “That would point to a lower multiple. But perhaps they can add some features that would make it more attractive, a preferred dividend, for example.”

Nykredit said management “has for some time” been exploring the option of an IPO. Both the Nykredit Association and Nykredit Holding, as well as the lender’s executive board, “all unanimously recommend” going public, according to the statement.

A decision to IPO would be a historic shift for Nykredit, a cooperative bank founded more than 150 years ago. The lender sought legislative approval more than two years ago to issue preferred shares largely so it could meet capital requirements by offering debt securities that convert to equity.

Nykredit is also raising prices, but relying only on increases “would have had a detrimental impact on our core business,” Christensen said. “Danish homeowners, business owners and farmers would experience sizable price rises and deteriorating credit options. This is not a desirable scenario.”

Denmark’s government is urging the European Union to ensure new rules don’t add unnecessary layers to capital requirements that legislators in the Nordic country say are already high. The Danes also want the EU to ensure that the Basel Committee on Banking Supervision doesn’t dominate the global regulatory agenda amid concerns efforts to harmonize rules across borders will backfire.

Nykredit said effective July 1 it will impose higher fees, with adjustable-rate and interest-only loans seeing the biggest increases. The increases are “smaller than the price rise Nykredit would have been forced to implement without a stock exchange listing,” the bank said.

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