The capital levels of Danish banks are set to experience some of the steepest falls among European peers as a result of the adoption of tougher risk estimation rules by global regulators, but analysts said that thanks to their high asset quality and earnings power, there should not be significant falls in shareholder payouts or profitability.
Nordic and Dutch banks have emerged as the credit institutions set to be most harshly affected by the new Basel III rules limiting firms' autonomy to gauge how likely their assets are to default, and set capital aside accordingly. In effect, the rules — dubbed Basel IV by many in the industry — mean banks will have to increase their risk-weighted assets, which serve as the denominator for the crucial common equity Tier 1 ratio.
In Sweden, the regulator might be able to lower its own capital requirements to accommodate for the declining figures while still remaining within international parameters, but Danish banks do not enjoy the same room for maneuver, according to one analyst.
"All Nordic banks suffer from Basel IV as they have high-quality loan books and therefore low RWAs," said Andreas Hakansson, a banks analyst at BNP Paribas in Stockholm. "The Swedish FSA, [which] has had very high capital requirements in place already, yesterday made a statement that it will reduce some of these buffers to offset the impact of Basel IV. In Denmark there are no such offsets which therefore could make the impact larger."
The new standards, set to be fully implemented by 2027, will have "a major impact" on Denmark's lenders, business minister Brian Mikkelsen said Dec. 7, citing a capital gap of as much as €11.2 billion for the whole sector.
Denmark's five largest banks all have risk-weight densities below 50%, indicating that risk-weighted assets amount to less than half of balance sheet total assets, according to S&P Global Market Intelligence data. The figures range from 21.7% at Danske Bank A/S to 49.2% at DLR Kredit A/S.
The EU and national governments will have to legislate for the new rules, and Mikkelsen said Denmark would try to water them down as much as Brussels will allow.
"Denmark will present in the EU with a request that the Danish financial sector should not be hit unnecessarily hard and we will work for the capital requirements to continue to reflect the actual risk," he said.
However, should the demands be taken up as they now stand, Danish industry advocates warned that extra costs may be imposed on the public.
Banks will charge "probably higher interest rates on loans to cover the higher capital costs, especially on low risk loans," said Jakob Legård Jakobsen, economic director at Finans Danmark, a lobby group. The burden will be felt the hardest by banks "heavily exposed to loans secured by real estate property and exposed to loans to larger corporates above the €50 million euro turnover threshold," he added.
Still, in comparison with banks in other European countries, which have had historically lower profits and higher costs than those in Scandinavia, Danish lenders might come away with few scars.
"I think that the Nordic banks will be relative winners, compared to a European perspective. Nordic banks will still be able to pay out high dividends — higher than Europeans — and grow [at] the same time. Many European banks will have to choose one of the two," said an analyst with a Swedish investment house. "Yes, they may have the highest drop in capital ratios, but they are also the best capitalized from a starting point," added the analyst, who requested anonymity due to his employer's news media restrictions.
Sydbank A/S will likely remain unaffected, while Jyske Bank A/S will still have room to increase dividends and Danske Bank — the country's biggest bank — may see only a small cut in shareholder rewards, he forecast. Nykredit Realkredit A/S, Denmark's largest mortgage lender, is primarily customer-owned — its parent recently scrapped plans for an IPO — while DLR Kredit is owned by dozens of Danish banks whose mortgages it securitizes into covered bonds.
"Small Danish banks might be slightly better off compared to expectations before the press conference yesterday, due to revised loan-to-value bands on standard approach on secured real estate lending," the analyst concluded via email, referring to last-minute changes the Basel Committee made to ease requirements on some mortgages when calculating risk-weighted assets using a standardized, rather than internal, model.