Danske Bank Follows Other Major Euro Banks To The Slaughter

Danske Bank A/S (CPH:DANSKE) (PINK:DNSKY) Q3 2012 report

This is the edition that can be seen without adult supervision – though recommended.

Have I read it? Good Heavens no! After the internet and the superfluity of telephone directories bankers obviously feel that a need is left uncovered: To burden a reader with volumes of uninteresting information interspaced with perhaps one line of interest. I hope to enlighten investors with patience.

But a few comments should be added and my liver will have to cope with being sloshed  – a prerequisite to writing this:

1)      The observant readers of bank inspection reports should have noticed a pattern over the last couple of years. A pattern of what and where the inspection is performed.

Inspection has concentrated (though not to the exclusion of other areas) on branches outside Denmark. The actual remarks are ranging from indifference to decided ticked off (Dates of report):

  1. Sweden among others:  Oct 1st 2012
  2. Northern Ireland: Jan 2nd 2012
  3. Luxembourg: Feb 10th 2011
  4. Republic of Ireland: Sep 30th 2011
  5. Estonia and Latvia: Feb 10th 2011
  6. Finland: Feb 10th 2011
  7. Lithuania: Jun 30th 2010

The only ones absent seem to be the US and German branches. Several of the other branches have been haunted more than once – only the latest after 2009 are given here.

Please note that it has nothing to do with the EUR as such, because they criss-cross currency rather freely. The main issue was if these branches had made proper impairments.

This looks most like a preparation to sell these loans in properly impaired condition – and get out of there. A preparation for splitting a company in more than one sense? Q3 2012 report has continued heavy impairment in Ireland.

The proceedings would be in accordance with the latest Spanish initiative to force Spanish banks in the dustbin to hand off loans – impaired that is.

2)  The CEO, Eivind Kolding, announced an issue of shares – again – the one in 2010-11 (3 bio. EUR) has hardly had time to settle; now they announce a new one of 1 bio. EUR. The question is however, how “new” it is! Could it be leftovers from last year and/or repossessed from defaulting costumers? Compared to the 16 bio. EUR it seems a bit of tempting fate trying to market shares in a market with reservation (not to say write-offs). Could it be an effort to pay back the loans from 2008 with a public guarantee that chafes around the neck?

An odd detail: The last couple of months, the share of Danske Bank A/S (CPH:DANSKE) (PINK:DNSKY) has hovered slightly above 100 or parity. According to Danish corporate law (if I recall correctly – and I do) it is illegal to issue stock below parity – last year the stock took quite a knock when ATP and PFA (two large pension funds in Denmark) sold off their stock seepingly, and  is has been at 80% parity until recently.

3) The sale of Danica Pension is officially abandoned. If Danica is anything like the other pension funds, the reason might be none to flattering. If they are using a discount factor of 5% in calculating the present value of their life insurance and pension obligations, they must have severe problems with an interest rate on Danish sovereign bonds of 1½% for 10 year maturities. One of is having to pay the buyer to take over the obligations, as every year leaves you 3½% short. Old fashioned real estate annuity mortgages are few and very expensive – as they are convertible, the coupon is hardly applicable.

Add to this that sovereign bonds are standing loans that will result in an adjustment when they reach maturity. There was a flurry of deals in July-August 2011 that pretty much matched a 3% coupon. Sovereign bonds are not likely to be bursting the seams of the coffer. Conversely, a convertible annuity – although locked-in – will also result in a loss, if kept to maturity. That is the opposite of a sensible investment strategy.

A convertible bond is released with peace of mind hoping the borrower has been overcharged sufficiently to cover the loss at conversion – ultimately only happy to receive your money ahead of time.

There is a further problem with a bank owned pension fund: If your overpaid actuaries have gotten their sums wrong, the savers have recourse in the bank for promises not kept. An independent pension fund might end up with fuming depositors; but there is not very much they can do about it. They could technically declare the fund bankrupt; but that would only result in taking their loss as a haircut on dividends in a bankruptcy. If the bank owns the pension scheme it is a whole different ballgame, as the owners of the pension fund can be sued (even in a lenient Danish court) and will probably win, with the balance having to be paid by the bank. It might be a limited company; but if the fund has invested heavily in your junk-bonds that just might prove bad faith – and then we are looking at jail time – not just embarrassment. That is one VERY good reason why it is insane for a bank to own an insurance company or pension fund – the jerks in sales don’t read the small print – provided they read at all.

A pension savings is ALWAYS a “to the best of my ability” – again company pension funds are suicide for the company – if they are liable for losses with respect to generous offered guarantees and ability to prove bad faith if any of the funds are ploughed back into the company!

In Danica Pension the chances are that the figures between asset and obligations simply do not add up, unless the Black Death returns – and soon.

4)  Now this is a quaint one – and I might be wrong (the reader must for himself evaluate the possibility of that):

This is an inspection report dated Jan 2nd 2012. The interesting part is that it states that Danske Bank loans to small and medium business enterprises is 20% of 300 bio. DKK business loans and what is that? My thick fingers make that 60 bio. DKK.

By odd coincidence the admitted borrowings of Danske Bank A/S (CPH:DANSKE) (PINK:DNSKY) in ECB and Danish CB adds up to 60 bio. DKK (41 bio. and 20 bio. – respectively). Now never mind the loan! The problem is collateral – a CB does NOT extend credit without putting its sweaty paws on collateral.

I would remind my regular reader that Benny Engelbrecht, MP,spokesperson for business and growth of the ruling Social Democratic Party, has made it abundantly clear that the government would NOT allow (did I detect a thick German accent in that hiss between clenched teeth?) small and medium businesses to be credit strangled (Denmark is mainly small and medium businesses LEGO and Maersk not withstanding). Too many jobs are in danger there!

Now these loans cannot be called home by the bank, as they are pawned at “Uncle Niels’ ” CB bank – again, fraud against the CB bank carries a stiff penalty served with some unsavory characters with not much to lose and ugly tattoos.

The only trouble with this is that such loans demand a “haircut” of 33% – which fits the 40 bio. DKK (41 to be precise); but not the last 20 bio. – now I don’t know what deal has been made; but I do know that Benny Engelbrecht and the PM would dearly love to perform Wagner’s “Im fernem Land” from Lohengrin – as performed by Lauritz Melchior – for a public benefit of SME’s.

5)  Now the small customers that officially do not contribute to profits are to be scared off and the Private Investment Banking for the very wealthy is to be partitioned off, according to Eivind Kolding.

That is perhaps putting the cart before the horse! Partitioned – definitely; but from what? The fact of the matter is that a separation occurs – not least from investment banking: Who is divorcing whom? Investment banking or customers?

The pride of Danske Bank A/S (CPH:DANSKE) (PINK:DNSKY) used to be their computer – costumer interface, so why now drop the high transaction volume/ net worth segment?

6)  3,000 out of 21,000 employees are to be fired. a) What have they been doing up to now? b) Why not three years ago? Why are “ordinary people” in such a precarious situation?

The significant is not what is said; but what is not mentioned.

a)      Why not a word on mortgage banking?

b)      Why not a word on paying peoples bills – and not just the mortgages they don’t intend to pay anyhow? How many defaulted Realkredit Danmark on Dec 30th 2011?

c)       Why not a word on the massive public support?

No, the pattern is clear:

A)     Withdrawal from all foreign countries in the realisation that the home country is ultimately liable.

B)      Pensions, detail banking, investment banking, SME, insurance, and mortgage banking are mutually incompatible.

C)      Integrating several bankruptcies only shifts debt until they run out of liquidity.

D)     Did banks really think that states would just sit pat and take what the banks dish out.

E)     This has NOTHING to do with currency; USD, EUR, nor RMB; but everything to do with lending out to someone that has neither the means nor the ability to pay interest – not to mention principal.

Danske Bank A/S (CPH:DANSKE) (PINK:DNSKY) will die the death of the all the major European banks: Dinosaurs slaughtered with a paring knife.