Bank Investors in Denmark Warned of New Round of Impairments
Bank Investors in Denmark Warned of New Round of Impairments
(Bloomberg) -- Danish bank investors would be wrong to think that the worst is behind them when it comes to impairments.
Jesper Berg, director general of the Financial Supervisory Authority in Copenhagen, says current economic forecasts indicate that “the expectations would definitely be for more impairments” ahead.
Berg says history provides a good guide of what to expect. During past recessions, impairments have in some cases exceeded 2% of loan books, as an annual average, he said. After the first quarter, as Denmark was sinking into its worst recession in at least a decade, the reported average was somewhere around 0.3% to 0.4%.
“If you multiply that by four and have similar impairments in the subsequent quarters, you’re starting to get close,” Berg said.
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Denmark’s lenders are among Europe’s best capitalized. They’re also among the least exposed to sectors like leisure and retail, which have been devastated by the crisis, according to an analysis based on European Banking Authority data. That means Danish banks might actually be facing smaller impairments than their peers elsewhere in Europe.
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But Denmark’s FSA has taken a hard line on provisions. Berg says the banks he oversees shouldn’t be inspired by an easing of European requirements intended to encourage lending during the crisis. According to Berg, understating potential loan losses is like pretending a sick patient doesn’t have a fever.
Banks have made a “good start” with the writedowns they’ve taken, Berg said. Given the uncertainties, “it’s incredibly important to be honest and forward-looking in relation to your impairments.”
Though some mid-sized Danish banks appear to have weathered the crisis reasonably well, Berg says profitability “is clearly an issue.” Even before Covid-19 hit, Danish banks were struggling to adapt to eight years of negative rates (a world record).
On Wednesday, Nordic Credit Rating cut Denmark’s banking sector to bbb+ from a-. The rating company cited the expected economic fallout from the Covid-19 pandemic.
“The first line of defense is already weakened because of the net interest income and the interest rate levels,” Berg said. “The one thing we really have going for us is that capital levels are very solid.”
Berg says his agency will be watching to make sure banks under pressure from Covid-19 and negative rates don’t use the crisis as an excuse to cut corners on compliance.
Denmark’s biggest lender, Danske Bank A/S, is still being investigated in Europe and the U.S. amid allegations it was at the center of a vast Baltic money laundering scandal. Lawmakers and the FSA have tightened rules significantly, but banks need to invest more in compliance, Berg said.
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