Outlook for Denmark banking still negative, says Moody’s

The outlook for Denmark's banking system remains negative, as it has been since November 2008, Moody's Investors Service said in a new report, adding that low profitability and reduced earnings quality will restrict the system's ability to absorb any further weakening of asset quality or other earnings shocks, and constrain the banks' ability to build capital to support their future growth.
Moody's expects weak GDP growth of 0%-1% for Denmark in 2013 and any recovery is likely to be gradual and fragile after four years of economic stagnation. Weak growth will reduce credit demand and limit the likelihood of a recovery in private consumption.
The low economic growth both domestically and in key export markets will continue to exert pressure on the corporate sector, while high household debt and the uncertainties in the housing market will negatively impact the quality of lending to households. Moody's sees a risk that problem loans will increase further over the outlook period, following the increase to 3.7% of total lending in 2012 from 3.5% in 2011.
Low credit demand, impacting both interest and fee income, combined with low interest rates, high loan losses and increased levels of capital and liquidity, will continue to suppress the banks' profitability over the outlook period.
While Moody's sees some improving trends in the sector, as well as an increasing differentiation in financial performance between the Danish banks in the recent period, it does not regard the earnings outlook as stable and notes that the system's continued high dependence on bond-investor confidence exacerbates the risks stemming from weak financial performance. The sector's reliance on market funding, specifically covered bonds, will thus remain a credit weakness in light of the continued fragile credit markets and the weak financial performance of Danish banks.
The rating agency concluded that weak earnings will also result in limited capacity for internal capital generation and dividend distributions, although Tier 1 capital ratios are now in line with similarly-rated European banks. Measured by the cost-to-income ratio, Danish banks are largely in line with other systems and the potential to significantly increase profitability in the near term through increased cost efficiency seems limited.