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Amid 'permanent' low-rate environment, Danske passes on bill to retail customers

Danske Bank A/S's decision to pass on negative interest rates to more retail customers will affect around 10% of the approximate 1.3 million retail account holders it has in Denmark, the bank told S&P Global Market Intelligence.

Denmark's largest lender has significantly lowered the threshold at which retail customers will pay a negative interest rate on their deposits, a move that was necessary in response to growing deposit volumes in what "seems to be a permanent negative rate environment," according to CFO Stephan Engels.

Effective next year, Danske will apply a negative interest rate of 0.6% to retail customer deposits above 250,000 kroner, equivalent to $40,000, down from 1.5 million kroner before. The interest rate is the same that the lender pays to deposit money at Denmark's central bank.

Speaking to analysts Nov. 4, CEO Chris Vogelzang said Danske needed to "align our pricing more with the market situation." Just nine months ago he had said the bank did not plan to impose negative rates for "the average Dane."

The change in direction comes as deposits are generally growing in the Nordic countries amid the coronavirus crisis. Deposits across Danske's corporate and retail clients have increased 22% since the end of 2019 due to low consumer spending as well as government support to customers, the bank said it its interim report.

Danske continues to operate in a negative interest rate environment, which the bank expects to continue for "a prolonged period of time," Engels said in a statement, adding that it "would not be viable" if this was not reflected in the bank's interest terms.

Positive NII effect

Danske announced in September that corporate customers in the country will be charged negative interest rates on their entire deposits from next year.

The two interest rate initiatives are expected to contribute positively to the bank's net interest income by 500 million kroner annually, all else equal and subject to changes in customer behavior, Engels said, speaking to analysts. This should counter "some of the ongoing NII pressure," he said.

Danske reported net interest income of 6.97 billion kroner in the third quarter, a slight increase from 6.83 billion kroner a year before. But the bank has, like other Danish lenders, faced pressure from a low rate environment for several years before the coronavirus crisis. Between 2015 and 2019, net interest income for the aggregate Danish banking sector declined by 23%, according to S&P Global Market Intelligence data.

Other large Danish lenders such as Jyske Bank A/S and Spar Nord Bank A/S already have in place the 250,000 kroner negative interest rate threshold for retail customers, while Nordea Bank Abp and Nykredit Bank A/S have said they would follow from Jan. 1, 2021. Sydbank A/S, meanwhile, has gone one step further, announcing last week it would lower the threshold to 100,000 kroner.

When asked by analysts whether the growing deposit volumes will change Danske's wholesale funding plans, Engels said: "I think we have to assume that not all of them are sticky enough to really change our funding patterns."

He said the deposit flow was driven by "a certain level of deleveraging" at commercial customers, lower spending among retail clients in the first and second quarters, while some corporates had also drawn short-term credit facilities and redeposited the money back with the banks. "As long as we can price these deposits accordingly, I think we are okay with that," Engels said.

The Danish banking group reported a third-quarter net profit attributable to shareholders of the parent company of 1.99 billion kroner, compared with 2.81 billion kroner a year ago.

As of Nov. 3, US$1 was equivalent to 6.35 Danish kroner.