COPENHAGEN: Denmark's tougher new rules on loan impairments will make Danish banks sturdier and more transparent, though loan writedowns will first have to increase, rating agency Moody's said in a research note.
The rules introduced in April are forcing Danish banks to review their exposures to property loans and the effects were seen last week, when Jyske Bank posted a first-half pretax loss of 209 million crowns ($34.5 million) after impairments of 900 million.
"We expect to see the effects of increased provisioning in the first-half results of most Danish banks, and view the refined impairment regulation as credit positive because it increases banks' reserves against loan losses and improves the transparency of banks' asset quality," Moody's said.
With more than 100 banks, including many small local lenders, Denmark has the most fragmented banking sector in the Nordic region, and many analysts expect further consolidation.
At the end of May, Moody's downgraded ratings of five Danish banks, while last week Standard & Poor's said between five and 15 small Danish financial institutions could fail over the next three years due to bad loans.
Denmark's new loan impairment rules stipulate that the "fair value" of a property is the price an independent buyer would be willing to pay for it within up to six months.
INCREASED IMPAIRMENTS
Real estate lending made up 12 percent of Danish banks' loan portfolios at the end of 2011, according to official data. But provisioning for real estate accounted for 22 percent of banks' total impairments, Moody's said.
A dozen small Danish banks have failed since the financial crisis began in 2008, several of them because of property loans.
Increased loan impairments by banks reflect a drop in property prices, Moody's said, adding that commercial property prices in Denmark fell by 23 percent from the first quarter of 2010 to the first quarter of 2012. "We do not expect this decline to reverse in the near future, as office vacancies reached 9.2 percent in April, the highest level since the Danish Association of Chartered Estate Agents began publishing such data in 1988," Moody's said.
Some banks have already announced impairments related to the new regulations. In addition to Jyske Bank, Spar Nord Bank said on July 6 that it expected second-quarter impairments to be double those of the first quarter.
Others, such as Sydbank and Danske Bank , have not made disclosures related to the new rules.
Moody's said bank capitalisation could weaken if the regulations lead to provisioning exceeding income.
"However, improved transparency and reserve increases that shield against further portfolio deterioration are more important than higher capital achieved with inadequate reserves," it said.
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