Moody’s: Danish financial package is positive, ratings still ‘negative’

Moody's Investors Service said that the second government support package announced by the Danish government for the domestic financial sector is a positive development, but the rating agency does not expect it to lead to rating upgrades, with the credit outlook for the Danish banking system remaining ‘negative’.
The package comprises the recapitalisation of the financial sector and the extension of the guarantee scheme for the issuance of medium-term loans by banks. It also includes senior unsecured debt of mortgage credit institutions and junior covered bonds.
This second support package follows the two-year government guarantee scheme announced in October 2008 and means that Danish banks can now benefit from capital support.
The institutions eligible to participate in the recapitalisation scheme of approximately DKK 100 bln (EUR 13 bln) include all solvent banks and mortgage credit institutions in Denmark as well as Danish Ship Finance. The institutions have until June 30 to apply for the capital injection, which will be in the form of hybrid core capital with an annual interest rate of 9-12%. The government expects the participating institutions to have Tier 1 ratios of a minimum of 12% after the capital injection. This level is viewed as sufficient by the government to support lending growth as well as to cover loan losses in the current downturn. Recapitalisation is intended to be temporary and the participating institutions can repay the injected capital after three years.
In addition, the government will also expand the Act on Financial Stability to include a possibility for banks and mortgage credit institutions to issue medium-term loans with a state guarantee until the end of 2010.
Moody's said higher capital levels would be viewed favourably given the pressure on profitability that Danish banks are experiencing.
The Danish economy has deteriorated significantly and the outlook remains weak. Due to a worsening operating environment and difficult funding conditions, corporate bankruptcies have increased rapidly, particularly in the property development sector. The export sector has also been adversely affected by the global downturn.
In light of the difficult economic conditions, Moody's expects the corporate loan books of the Danish banks to continue to be negatively affected in the next 12-18 months. The rating agency also cautions that the combination of falling house prices and the high indebtedness of Danish households poses a risk for financial institutions, especially in the event of rapidly declining employment.