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Danish banks enjoy short-term profit hikes but face gloomy 2020

Several Danish lenders have upgraded their profit guidance for 2019 as they benefit from short-term gains in their mortgage books.

Spar Nord Bank A/S, Vestjysk Bank A/S, Skjern Bank A/S, Kreditbanken A/S, Jutlander Bank A/S, Salling Bank A/S and Djurslands Bank A/S all cited strong activity in the mortgage credit area as a driving force as they raised their profit outlook last week.

Low interest rates have prompted a record number of Danes to refinance their mortgage loans, replacing variable mortgages with long-term fixed-interest loans. The boom in remortgaging activity is good business for financial institutions across the country, including Denmark's largest banks, Mads Thinggaard, an equity analyst at ABG Sundal Collier, a Nordic investment bank, told S&P Global Market Intelligence.

"The activity could help the largest players meet their guidance for 2019, despite pressure on underlying earnings," he said.

Fixed rates

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The average interest rate on a 30-year fixed-rate mortgage bond was 1.29% as of Oct. 4, down from 2.09% the same time last year and 7.43% at its peak in 2008, according to data from Realkredit Danmark.

"There is historically high activity on mortgage loan conversions, where customers secure a very low interest rate for a very long time. For us, it generates activity-driven earnings on fees," Ole Madsen, senior vice president, communication and business development at Spar Nord, told S&P Global Market Intelligence.

Spar Nord upgraded its full-year after-tax profit expectations for 2019 to between 925 million Danish kroner and 1.03 billion kroner, up from an already revised guidance of between 850 million kroner and 950 million kroner announced in July. It is the third time the bank has revised its guidance for the year since its 2018 annual report forecast profits of between 700 million kroner and 800 million kroner.

Cloudy outlook for 2020

Thinggaard warned that the lift in earnings is only temporary and will likely lead to lower mortgage income for the banks in the future.

Banks share this view, with Spar Nord expecting the number of mortgage refinancings to decrease next year. "When we look a further ahead, it's less positive," Madsen said. "When everyone has gradually converted their mortgages, it could be a while before they'll do that again, assuming that interest rates stay at the levels they are now. So already next year we will face bigger challenges on the revenue side."

Lars Frank Jensen, CEO of Kreditbanken, said remortgaging activity will start to normalize next year. "My assessment is that this is a one-off, and therefore I don't imagine we can maintain the high level of earnings in 2020. This applies to most other banks. Combined with the fact that the Danish national bank has lowered interest rates further on our certificates of deposit, it will be difficult for us to make money next year," he said in an interview.

Bank earnings in decline

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Profitability has been under pressure for a few years, with the 45 largest Danish banks posting an aggregate net income of 16.26 billion Danish kroner in the first half of 2019, down from 22.50 billion kroner in the same period in 2017, according to data compiled by S&P Global Market Intelligence. Banks have also recorded a steady decline in net interest margin since the second half of 2017.

Financial institutions across Europe are under pressure from the low rate environment. In September, the interest rate on deposits at Denmark's national bank was lowered from -0.65% to -0.75% after the European Central Bank dropped its main interest rate from -0.40% to -0.50%.

The low interest rates are driving down banks' earnings, a trend that recent profit hikes from remortgaging fees cannot mitigate, said Finance Denmark, a trade body. "Despite extraordinary revenues from the extensive loan restructuring, bank earnings are declining, which is confirmed by the latest financial statements for the first half of 2019," said Ulrik Nødgaard, CEO of Finance Denmark.

Apart from the low interest rates, intensifying efforts to prevent money laundering are driving up costs at Danish lenders, said Finance Denmark. The association's recent analysis found that total expenditure on administration and staff at the country's 17 largest financial institutions grew to 26.4 billion kroner in the first half of 2019, an increase of 2.3 billion kroner from the same period last year.

As of Oct. 15, US$1 was equivalent to 6.76 Danish kroner.