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Association board member questions Nykredit capital needs, IPO plan

Questionsare swirling around the real purpose of Nykredit's controversial and stock market listing.

is raisingadministrative fees on mortgage loans, and parent Nykredit Holding A/S is looking to launch an IPO within thenext two years, with both moves purportedly aimed at raising money to comply withfuture capital requirements.

But JensVesterbæk, a board member of the association that owns 90% of Copenhagen-based NykreditHolding, does not believe the bank needs extra capital — the real reason for thelisting, he thinks, is to fund an M&A expansion. In an interview, he said hewants to block the IPO, which he says runs counter to the interests of the bank'scustomers, damaging their ability to access affordable products.

Nykreditwas founded in 1851, "by homeowners for homeowners," the firm says, "withthe clear objective to make it possible for all Danes to own their own home."Today it offers mortgages via banks charging a fee to the end clients, half of whichgoes to the client's bank. It also securitizes mortgages and sells them as coveredbonds.

The bankis predicting sharply higher capital charges in the future. Nykredit launched itsIPO plans in early February, saying even the softest potential version of the finalizedBasel III capital rules would present a "substantial challenge."

The BaselCommittee on Banking Supervision on March 24 revealed plans that were perceivedin some respects as softer on banks than had been predicted, although moves to harmonizecredit risk-weighted assets could result in higher risk weights for mortgages inDenmark. The Danish covered bond market is the largest in the world per capita,and Nykredit is especially exposed: it had a 39.6% of the Danish mortgage lendingmarket as of the end of 2015.

Nykreditresponded March 30 by saying that despite the wider perception of the new proposals,its capital needs would "greatly increase." Projecting a minimum added requirement of 15 billion kroner,it reiterated that it would proceed with a hike of fees for customers of its brand loans, a controversialmove announced in February together with its IPO plans.

But Vesterbæk,who sits on the board of Nykredit Association, said he thinks the bank does notneed capital at the moment.

"Theyhave enough capital to meet the regulatory needs until 2019," he said. Potentialchanges to capital requirements beyond that date are unknown, he told S&P GlobalMarket Intelligence. Nykredit is so far the only Danish bank to have estimated itscapital needs due to potential new regulation. Vesterbæk said he thought the bankcould issue contingent convertible bonds to cover potential capital needs.

Othermarket participants stress that the finer points of upcoming capital rules are farfrom clear.

"Wedon't know yet how a new standardized approach to measure credit risk combined witha [capital] floor will come into force and how the floor might be calibrated,"Niels Storm Stenbæk, executive director at the Danish Bankers Association, saidin an interview. Proposed capital floors are levels below which banks cannot go,whatever the risk models say. He stressed, however, that Danish banks' risk weightson mortgage loans are very low compared to many other European countries at around15%.

AdamBarrass, an analyst at Berenberg, said in an interview that it is too early forDanish banks to be thinking about plans to bolster their capital as the new Baselregulations are still quite a long way off.

"Untilyou've got certainty or at least a concrete proposal of what's going to happen itwould be naïve to start talking about capital raises," he said.

Vesterbækbelieves there may be other factors at play. He suspects Nykredit is using the argumentof rising capital requirements to justify an IPO that would allow the lender toraise funds for acquisitions in the banking sector.

"Thereis absolutely no doubt in my mind that Nykredit wants to grow in the banking sector,"he said.

Nykreditcurrently operates a banking business via unit Nykredit Bank A/S. By acquiring other banks, it could boostprofits in its mortgage business, as the share of the fee that currently goes tothe bank transferring the client's mortgage request would remain in the group, Vesterbækexplained. Through its Totalkredit unit, Nykredit collaborates with around 60 lenders,including savings banks and cooperative banks.

Vesterbæk,who is also chairman of consumer organization Consum.dk, wants to halt Nykredit'sIPO, which he said would stifle clients' access to "cheap products." Hebelieves the listing was approved because the board of Nykredit Association no longerrepresents the interests of clients. In theory, Nykredit's clients elect the association'sboard members, but interest in running for election has been very low. Effectively,Vesterbæk said, Nykredit's management was selecting the board members, who in turnwould elect the management at the general meeting.

Consum.dkhas managed to get six of its members onto the board, including himself, and heis pushing to increase this number and eventually see off the IPO plans.

Nykreditdid not wish to comment when contacted by S&P Global Market Intelligence.

As of April 7, US$1was equivalent to 6.53 Danish kroner.