Danish banks caught in recession

Copenhagen: Denmark’s regional banks are showing signs of slipping back into crisis mode as a contracting economy prolongs a property slump the financial regulator says may force lenders to take more writedowns.

“I don’t know anything that’s pointing in the right direction,” Andreas Hakansson, an analyst at Exane BNP Paribas, said in an interview. “To say in that environment that the housing crisis is over, I don’t know why people are so confident.”

Denmark’s banks, whose misplaced lending created a property bubble in 2007 that the industry has yet to recover from, are now at struggling to recover as the economy teeters on the brink of its second recession in less than a year. Almost 8,000 jobs disappeared in the second quarter in the biggest quarterly decline since 2009, the country’s statistics agency said this week, as regional banks reported surging loan losses.

“We do see that there continue to be writedowns on loans as long as we continue to be in these economic circumstances,” Kristian Vie Madsen, deputy director general at the Copenhagen-based Financial Supervisory Authority, said in an interview. “As stated before, there is of course a risk that some banks may run into troubles eventually.”

Recent housing data had suggested Denmark may be emerging from a housing crisis that sent prices down by as much as 25 per cent since their 2007 peak.

Default swaps

Denmark’s credit-default swaps sank earlier this month to the lowest level in more than a year after the Association of Danish Mortgage Banks said September 17 that prices rose for the first time in two years last quarter, gaining 0.9 per cent from the three months through March,

The country’s housing industry has been a beneficiary of AAA rated Denmark’s emergence as a haven from Europe’s debt crisis. A capital influx into Denmark forced the central bank to cut its key deposit rates below zero to defend the currency’s peg to the euro. Yields on one-year mortgage bonds, which set rates on home loans, have fallen to 0.32 per cent, according to Spar Nord Bank A/S Chief Economist Jens Nyholm.

“The only reason house prices aren’t falling at the moment is that mortgage rates are at exceptionally low levels,” Hakansson said. Does that mean the market fundamentals have improved? No, it doesn’t.”

More losses

Joblessness has hovered above 6 per cent for almost three years. The gross unemployment was 6.2 per cent in August, down from 6.3 per cent a month earlier, the statistics agency said on Thursday. The rate was expected to be 6.4 per cent in a Bloomberg survey of five economists.

This week revealed further evidence that more losses may be ahead for Denmark’s bank industry, which has seen a dozen failures since 2008. Vestjysk Bank A/S, the country’s sixth- largest listed bank, fired its chief executive officer and more than doubled its estimated loan losses. Foreclosures rose in August to a seasonally adjusted 447, the highest since March, the statistics agency said September 6. The economy shrank 0.5 per cent in the second quarter and probably contracted again in the three months through September, according to Fitch Ratings.

The stalling expansion prompted the government last week to propose funnelling as much as 12 billion crowns to businesses to revive growth and prevent job cuts. The central bank on September 20 cut its economic growth forecast for 2012 to 0.3 per cent from 1.2 percent previously, citing faltering demand from households and businesses.

The government has been encouraging banking mergers. Failure in banks such as Amagerbanken A/S and Fjordbank Mors A/S last year triggered senior creditor losses under Denmark’s bail-in laws, locking as many as 113 commercial lenders out of funding markets.

FIH model

Business Minister Ole Sohn on Wednesday left open the possibility that the government would be willing to purchase bad farming and real estate assets from troubled banks in a repeat of its rescue of FIH Erhvervsbank A/S.

“The FIH solution was not tailor-made to that bank but to banks in the situation that FIH found itself in,” Sohn said in an interview in Copenhagen. He ruled out further rescue packages by the government. After five bank aid packages, the industry has the tools it needs to emerge from its crisis, he said.

The cost of insuring against a default by Danske Bank A/S, the Nordic country’s largest lender, rose on Wednesday to its highest against Swedish peer Nordea Bank AB in more than two weeks. The spread widened to 98 basis points, according to data compiled by Bloomberg.

The bid yield on Denmark’s benchmark 3 per cent note due 2021 eased to 1.27 on Wednesday. Denmark pays 19 basis points less than Germany to borrow over 10 years.

“I would rather say that we have a temporary breathing space with rates as low as they are,” Hakansson said.