The credit outlook for
Key challenges include an increasing level of competition from both Danish entities and players from other Nordic countries, which is continuing to exert pressure on interest margins. In addition, profitability for both banks and mortgage lenders is stable but remains low by European standards.
“The market turmoil in mid-2007 has so far had limited impact on the Danish banks, as only larger banks with well-diversified earnings have had direct or indirect exposure to the sub-prime market. In terms of liquidity, the Danish mortgage market has so far been functioning helping both nationwide banks and regional banks funding mortgage loans. However some of the regional banks continue to have a relatively high reliance on interbank funding despite the banks focus on longer maturities,” said Janne Thomsen, a Moody’s Senior Vice President and author of the report.
The rated Danish financial institutions continue to display solid financial fundamentals on the back of increased activity levels that to a certain extent mitigate not only the pressure on margins that derives from the fierce competition but also the effect of negative market revaluations of bond portfolios and continued write-backs of previously made provisions. Although Moody’s does not anticipate any dramatic change in the financial institutions’ earning patterns over the next few years, it believes the banks will be challenged to sustain their low cost levels.
The banks are attracting a considerable volume of customers with new products that mix mortgage loans and more traditional banking products.
Margins on these products are lower than on normal bank loans and Moody’s thus expects margin pressure to continue. In addition, re-mortgage activities have fallen from their historic high levels. “the newly implemented changes to the regulations for covered bonds allowing banks to issue covered bonds and thereby give them a competitive advantage over the mortgage banks could potentially result in an easing of the margin pressure,” noted Janne Thomsen.
In Moody’s judgment, the probability that the Danish authorities would support each of the rated deposit-taking banks in a period of financial distress ranges from moderate to very high given their strong national or regional presence. As a result, each of the banks receives either a one-notch or a two-notch uplift for its debt/deposit ratings from its respective baseline credit assessment.
