As banks across Denmark raise their profit expectations for 2021, analysts warn that it is too soon to celebrate the end of the coronavirus crisis, arguing that the improved earnings lack quality and are largely the result of temporary drivers.
For some of the largest Danish banks, 2021 looks set to be a better year than before the pandemic, with lenders such as Jyske Bank A/S, Sydbank A/S and Spar Nord Bank A/S guiding for full-year net profits above 2019 levels, citing high customer activity, positive developments in the financial markets and lower-than-expected impairment charges.
Danske Bank A/S, Denmark's largest lender by assets, has also changed its guidance ahead of releasing its second-quarter earnings, saying on July 8 that its 2021 net profit would breach 12 billion kroner, up from a previous forecast of between 9 billion kroner and 11 billion kroner.
Nykredit Realkredit A/S, Djurslands Bank A/S, Nordfyns Bank A/S, Jutlander Bank A/S, Kreditbanken A/S, Hvidbjerg Bank A/S and Totalbanken A/S have also lifted their 2021 expectations in the past few weeks.
But the upgrades are "generally of low quality," according to Mads Thinggaard, equity analyst at ABG Sundal Collier. "Much of what drives the upgrades is not something that, in my view, lifts the banks' structural earnings in the coming few years," he said in an interview.
Thinggaard said banks' 2021 earnings are helped by activity that is likely temporary in nature, for example by a boost in trading fees amid favorable financial markets.
Mikkel Emil Jensen, an equity analyst at Sydbank, warned that customer activity following the recent reopening of the Danish economy is unlikely to continue.
"Especially on the revenue side, there is a lack of quality," Jensen said.
Impairments lower than expected
Another significant driver of Danish banks' improved expectations is the low impairment charges they are recording as government support measures such as salary compensation and deferred taxation have largely mitigated the impact of the coronavirus crisis on companies, said Thinggaard.
"The banks' credit quality is excellent right now. So there is not really this COVID-19 issue that one could have feared a year ago," he said.
In the Danish central bank's latest lending survey, published July 8, almost half of the 17 surveyed banks reported a decrease in the share of loan impairments for both private and corporate customers from the first to the second quarter of 2021.
For Danske Bank, lowering its full-year impairment guidance to 1.5 billion kroner from 3.5 billion kroner was a key driver of its net profit guidance upgrade. The bank recorded impairment charges of 443 million kroner in the first quarter, and it expects this number to drop to 200 million kroner in the second, down from the respective 4.34 billion kroner and 1.10 billion kroner in the first two quarters of last year.
Yet Thinggaard said it is too early to conclude that no problems will emerge from the crisis as the pandemic is likely to result in changing consumer behaviors that will put some companies' business models under pressure once state support ends.
"When it comes to impairments, I still have some reservations, even if the banks say there are no problems here and now," Thinggaard said. "One cannot rule out that there is a certain element of zombie exposure at the banks, as we have not seen which companies are going to survive on the other side of the massive state support granted to them."
Any potential issues may only be visible from next year, when banks risk facing a rise in impairment charges, Thinggaard said.
Jensen at Sydbank agreed that there is still "some uncertainty associated with the repayment of the large bill to the state" that companies will face once tax deferral schemes end, but said even if bankruptcies were to rise as a result, Danish banks have already set aside sufficient buffers to absorb potential losses without an impact on future financial results.
Danish banks took impairment charges worth a total of 12.86 billion kroner in 2020, up from 2.76 billion kroner a year earlier, according to S&P Global Market Intelligence data, and, as such, front-loaded potential pandemic-related losses.
As of July 14, US$1 was equivalent to 6.29 Danish kroner.