Mortgage Bank in Danish IPO Dispute Warns on Capital Assumptions

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Nykredit A/S is trying to persuade clients and owners that it’s not as well capitalized as it may look.

The somewhat unusual approach comes as Denmark’s largest mortgage lender defends its plan to do an initial pubic offering. Nykredit says it needs an IPO to generate extra capital and meet stricter regulatory requirements. Some of its owners -- an association mostly made up of the lender’s own customers -- have questioned that logic, arguing that Nykredit would be better off staying private.

Most official calculations show Nykredit has more than enough capital to meet existing regulatory requirements. The European Banking Authority earlier this month recommended a leverage ratio -- capital relative to total assets -- of 3 percent. That’s well below the 4.4 percent that the Copenhagen-based lender held at the end of 2015.

“Unfortunately, the leverage ratio is not the only regulatory constraint,” Soeren Holm, Nykredit’s chief financial officer, said in an interview.

Holm, who will become Nykredit’s head of risk and regulatory affairs next month, says the leverage ratio doesn’t reflect the changes that threaten Nykredit’s model for estimating the risk in its loan portfolio. Nor does it include a buffer of about 0.5 percentage points that the bank needs to hold on top of the minimum requirement.

The leverage ratio “is a backstop,” Holm said, but it doesn’t give the full picture.

EBA stress tests last month showed the lender experienced the biggest deterioration in its capital relative to risk-weighted assets of all Nordic banks. Nykredit’s common equity Tier 1 would fall more than 5 percentage points to just under 14 percent in the event of a recession and property market slump, the test showed. The most resilient bank in Europe was DNB ASA of Norway.

Nykredit says clients and investors need to keep in mind that it faces tougher risk weight requirements from the Basel Committee on Banking Supervision. These may force mortgage banks in Denmark alone to raise about 130 billion kroner ($20 billion) in additional capital, according to industry estimates. Nykredit has said it may need to raise another 15 billion kroner.

Nykredit is a cooperative, founded in 1851 by homeowners and 90 percent owned by the Nykredit Association. The group plans to remain a majority shareholder after the IPO, which is due to happen in 2018 at the latest.