Danske Bank: Too Big to Fail But Not too Big to Crush

By Tom
Updated on

Danske Bank A/S (CPH:DANSKE) (OTCMKTS:DNSKY) still seems to working under the misapprehension, that being classified as a “Systemic Important” (SIFI) monetary and financial institution is a good thing. It isn’t.

Danske Bank

Nils Bernstein On Danske Bank A/S (CPH:DANSKE) (OTCMKTS:DNSKY)’s Issue

The former CB CEO Nils Bernstein was very explicit when he said in the wake of the unlimited guarantee issued to Danske Bank at the height of the crisis in 2008 that never again should such extensive guarantees be forthcoming. The present CB CEO Lars Rohde, at the time CEO of the largest pension fund in Denmark (ATP) has publicly pointed to the enormity of the guarantee of 2008. The point made can be illustrated with mentioning that apart from Cyprus no other European country has a bank with a balance of Danske Bank in relation to the GDP.

The Swedish banks are large as well, but there are four of them roughly the same size as Danske Bank A/S (CPH:DANSKE) (OTCMKTS:DNSKY), but in an economy only double the Danish. Thus it should be for the reader to evaluate if Sweden as a nation can back those guarantees given to the Swedish banks: Cyprus certainly could not.

That is the point of Michael Møller’s remark: Denmark can back up its banks if need be.

As to Danske Banks access to funding the question remains if it is considered desirable that Danske Bank A/S (CPH:DANSKE) (OTCMKTS:DNSKY) should fund abroad at all. The DKK is a small currency in a large forest that has survived by being firmly bolted to the EUR. Shifting huge amounts of short term funding is one of CB CEO Lars Rohde’s avowed nightmares, as it would seriously bring the ability to defend the DKK into question. Allowing that to happen is highly unlikely.

The writing should have been on the wall with “ring fencing” in Britain and the disentanglement of bank subsidiaries in other countries.

Considering access to funding: It is true that credit is being denied Danske Bank A/S (CPH:DANSKE) (OTCMKTS:DNSKY). Nationalbanken (Danish CB) has cash deposits of about 50 bio. USD yielding downright negative interest rate. Danske Bank does get funding from the CB. At the moment we are talking about 20 bio. USD (Danish CB plus ECB) at interest rates between .5 and .2 percent annually. This credit is extended with “good loans” put down as collateral.

Danish CB Loans

It should be noted that the credit in the CB has shrunk this past month – the red line on the graph – with ½ bio. USD. The names attached to the notches are company names of some largish companies that have publicly announced that they had refinanced their debt to business bonds of between five and ten years of maturity at an interest rate of 3½ %.

Clearly some companies have decided that their collateralisation in the CB is just about the best credit rating they can get. This is a good sales point when they approach investors directly in search of better terms than the ones Danske Bank A/S (CPH:DANSKE) (OTCMKTS:DNSKY) is offering. As already noted there is a lot of cash seeking long term employment with the Danish pension funds. The investors are not fastidious with yield, but there IS a dearth of quality investment.

In this way the cheap CB funding may end up being very, very expensive, at the clients willing and able to pay for their credit will move their business elsewhere.

The other consideration is that Danske Bank A/S (CPH:DANSKE) (OTCMKTS:DNSKY) has been exceedingly rude to their small depositors (the cheapest funding at all), which ARE covered by a government guarantee demanding a fee from every small depositor for the privilege of depositing money in Danske Bank. Danske Bank arrogantly brushed off the public outcry with the question by one of their journalistic mouthpieces: “Does the mob want to burn Danske Bank at the stake?” The answer was loud and clear: “Where are the bloody matches?”

Danske Bank has in public opinion polls – even those performed by Danske Bank – got the worst popularity rating ever recorded. Staunch conservatives have moved their nest eggs from Danske Bank.

Danske Bank really, really doesn’t get it!

Being designated “Systemic Important” is NOT a quality stamp – it is a death sentence. SIFI’s are not wanted. In Britain they have been talking about “ring fencing” the broken up parts of the major banks – still Danske Bank isn’t concerned.

Danske Bank A/S (CPH:DANSKE) (OTCMKTS:DNSKY) is still bleeding – although less profusely the last quarter – from the withdrawal from Ireland. Danske Bank simply isn’t wanted in Ireland. This goes for other Danish banks as well that in the last couple of years have closed their foreign branches – Sydbank f.i.

CB CEO has made no bones about wanting to push the variable interest loans “up the interest curve” by extending the maturity from annually to 3-5 years. The intention is probably to raise interest on real estate mortgages so much that interest payment plus variable interest fees are larger than the interest payment on fixed rate annuities. This would give a relief to funding needs, as the fixed rate annuities are easily sold to investors whereas the mortgage banks have to buy the variable interest bonds themselves – directly or via dummies.

Danske Bank really, really doesn’t get it!

The first crisis management step of changing the board of directors has more or less been done in Danske Bank with the premature retirement of CEO Peter Straarup. Further retirements have happened and the process is moving down in the ranks. Other SIFI heads have been rolling like bowling balls down the alleys. Nykredit’s Engberg Jensen suddenly announced the customary urge to see more of his family a couple of months ago as an explanation for his early retirement. Thus leaving his ejection seat vacant for the CEO of Nordea Danmark (another SIFI), Michael  Rasmussen, to tumble into after his hasty exit from Nordea Danmark – leaving the succession there in a somewhat confused state.

The next step is the stronger capitalisation of SIFI’s where debt might be converted into equity and stopping dividends and interest payment.

Danske Bank really, really doesn’t get it!

There are several ways to increase the equity to loan ratio:

  1. Issue new stock, which isn’t likely to be successful, as Danske Bank major shareholder have been shedding the stock from their portfolio starting with the pension funds ATP and PFA two years ago to a capital fund – and the recent sale by RealDania Fonden (that got shares in return for the merger of Danske Bank and Realkredit Danmark) to the same capital fund. Who in reality funded those purchases is still not clear. So that path is not the obvious one.
  2. Not pay dividends – well that is obvious from the standard steps. Limits to executive bonuses and salaries is another (though merely symbolic) method. Considering the abysmal earning power of Danske Bank that will not be a serious aid towards consolidation.
  3. Selling of parts of the banks to “new” money. The sale of the RealDania shares could be a way to raise capital to buy the fixed interest annuity part of Realkredit Danmark (just guessing).
  4. Slimming loans off – this is apparently going on at the moment – ever so slowly – by offering better terms to debtors by business bonds. Speaking of Benny Engelbrecht: He has a blog on Berlingske where he promises to provide at step by step discussion of the governments “Growth Package” to the hard-of- hearing tone deaf community. He has started out with the extended period of grace for small businesses to pay their VAT, thus giving a smaller financing burden to small and medium businesses, thus freeing one hostage from the banks. The next instalment is probably the easier access to issue business bonds – for small and medium businesses.

Danske Bank really, really doesn’t get it!

Danske Bank A/S (CPH:DANSKE) (OTCMKTS:DNSKY) and the other SIFIs are NOT going to be helped by being SIFIs: They are to be broken up and sold for spare parts. Each lump so small that it will not be a SIFI.

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