Continued negative outlook for Denmark banking – Moody’s

The outlook for Denmark's banking system remains negative, although with an improving trend, reflecting the expectation that key fundamental drivers of credit quality will deteriorate further in the short to medium term, Moody's Investors Service said in a new Banking System Outlook.
The rating agency said that the most recent macroeconomic data point to a weak economic recovery. While there are some indications that residential house prices may be starting to recover, prices of agricultural property and commercial real estate have continued to drop.
"Moody's believes that the prices in these two sectors will continue to be vulnerable to further reductions in the short and medium term, putting further pressure on the banking system's asset quality as a result of high industry concentrations. In the absence of strong economic growth, banks' ability to maintain profitability through loan-book growth will be constrained," explained Oscar Heemskerk, author of the report.
There is also uncertainty regarding the banks' medium-term liquidity due to the announced phasing-out of the extraordinary government support that has assisted the banks over the last two years, and in particular the upcoming expiry in September of the general government guarantee on deposits and senior debt. While some banks were able to fund senior debt and even raise market capital during the crisis, others are fully reliant on the government guarantee to refinance their debt. Moody's therefore expects the liquidity of these "fully-reliant" banks to remain under pressure for the next few years.
Danish banks also continue to have high exposure concentrations to vulnerable asset classes, including agriculture, real estate, and shipping finance, and while the economic recovery has been weak, banks' growth opportunities will remain limited. The banks are also heavily reliant on wholesale funding. The country's specific mortgage funding system means that first-lien mortgage loans are provided by mortgage credit institutions, so Danish banks' exposure to first-lien retail mortgages — a typically safe and substantial asset class in other European banking systems — is limited. This increases the relative risk position of Danish banks, as well as increasing portfolio concentrations in the banks' corporate portfolios.
Despite these negative factors, Danish banks are supported by recent recapitalisation which will enable renewed risk taking once the economic recovery gains momentum. Low interest rates have enhanced borrower affordability, which has suppressed delinquencies in the banks' mortgage portfolios. In addition, the EU has extended the deadline for the issuance of individual government-guaranteed debt up to year-end 2010, which will support Danish banks by reducing their liquidity risks.