Negative Rates Costing Billions Won't Hurt Clients, Danske Says

More than 3 1/2 years after Denmark first resorted to negative interest rates, the country’s biggest bank is renewing a pledge to retail clients that they won’t foot the bill.

Danske Bank, which this year surpassed Deutsche Bank AG in market size, has “no plans to introduce negative rates to our private customers,” Chief Financial Officer Henrik Ramlau-Hansen told Bloomberg.

QuickTake Negative Interest Rates

Speculation on how lenders will survive years of sub-zero rates has gripped investors as the policy spreads to some of the world’s biggest central banks. In Danske’s home market, Denmark, most economists predict rates won’t go positive until 2018 at the earliest. In neighboring Sweden, there’s a similar outlook.

“There are considerable costs associated with negative rates,” Ramlau-Hansen said. “In 2015 alone, narrowing deposit margins resulted in a cost of more than 2 billion kroner” ($302 million) for the bank, he said.

But negative rates aren’t all bad. Fewer customers default on their loans when borrowing costs sink, and that means banks suffer fewer impairments. After writing down 853 million kroner in the fourth quarter of 2014, Danske wrote back 139 million kroner in the final three months of 2015. For all of last year, impairments were just 57 million kroner, compared with 2.79 billion kroner in 2014.

And despite the Nordic region’s negative interest rates, Danske Chief Executive Officer Thomas Borgen has described it as a “fantastic” place to run a bank.

“Low interest rates put pressure on the banking sector, but even so, the Danish banks’ earnings have recovered significantly over the recent years,” Jesper Berg, director general of the Financial Supervisory Authority in Copenhagen, told Bloomberg.

That’s helping boost Danske shares. They’re virtually unchanged since the start of the year, while the Bloomberg Europe Banks and Financial Services Index has plunged 22 percent.

The FSA in neighboring Sweden says its banks, too, are in good shape to withstand more blows to the industry’s biggest source of revenue. “Negative rates clearly create a pressure on net interest income for the banking sector, and Swedish banks are not an exception,” according to Uldis Cerps, the agency’s executive director for banks.

That said, Swedish banks are “better positioned” because of their “good profitability,” Cerps said. That “increases their capacity to absorb further NII reduction.”

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