Denmark’s Jyske Bank Appears to be in Trouble

By Tom
Updated on
Denmark's Jyske Bank Appears to be in Trouble
Denmark’s Jyske Bank A/S (CPH:JYSK) gets a rap over the knuckles

Benny Engelbrecht, parliamentary spokesperson for business and growth for the governing Social Democratic party in Denmark has a blog on Berlingske:

The most recent article is about Jyske Bank A/S (CPH:JYSK), where he in the nicest possible way takes a swing at Jyske Bank – the country’s third largest bank: He clearly illustrates how Jyske Bank has undermined their credibility through repeated and flagrant disregard for anything that could be termed good business practice. That is a normal political practice to let junior MP’s issue dire warnings in a diplomatic language.

Despite all indications Jyske Bank A/S (CPH:JYSK) still nourishes ambitions of filling the gap of the larger banks, should they be taken under the tender and loving care of the Bank Inspection (Danish or EU – which is not clear at the moment). It remains to be seen if they will take a hint this time.

Now Benny Engelbrecht has an agenda to seek out initiatives to provide investment credit to minor and medium businesses. These are under a severe credit squeeze at the moment.

Q3 figures are in for the real estate mortgages (which CB CEO Nils Bernstein has declared “systematically important” in their own right. Over the summer there has been a rather robust campaign to convert the real estate mortgage loans from flexible interest and no service to the much more stable fixed interest annuities. So far a lot of newsprint has been wasted to no avail.

It is true loans haven’t gone appreciably up – they are still 4/3 of GDP! – but much worse is that the effort to stabilise them into longer maturity has utterly failed. A full third have to be refinanced within a year.

We are talking loans just shy of ½ the GDP – that is what makes a CB CEO sweat! Spanish banks are refinanced through the ECB (or ESM) for 12½ years on average.

Benny Engelbrecht’s agenda might seem parochial; but it does fit into the efforts to stabilise a decidedly unstable financial sector: We are talking not only private homes – although admittedly close to 2/3 of the mortgage loans – it is also industry, agriculture and rentals.

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On the other side of the ledger are the investors that have nowhere to place their money even remotely fitting their long term pension obligations. For the time being they are buying any sovereign bond put up for sale. The demand is so great, that Danish sovereign bonds interest rates are between .1% and .3% (depending on maturity) BELOW German Bundesanleihen sovereign bonds.

Danish securities are seriously mismatched to investors needs – what is at least as bad is that the private and public debt structure is similarly mismatched in so far as long term investments are financed short term. When a house mortgage is refinanced annually there is a serious discrepancy between the normal 20-30 years maturity of an annuity and hand to mouth cash flow problem.

There are various methods to bring a maturity match between the obligations of pension funds and the yield of the investments.

1)      If you are talking long term public infrastructural investments like roads, bridges, power plants and –lines – and what have you.  Then sovereign standing loans of long maturity are very much the thing.

The yield of such investments are generally generated through a better productivity of the society which again makes the tax base of the country able to bear service on the loans – whether the taxes are to corporate or income tax on wage earners is a political matter – mainly dependent on the bargaining position of the wage earners.

Repayment generally takes place (ideally) when the economy is overheating with high inflation and high interest rates. This makes for tax increases and a public surplus which conveniently comes at the same time long maturity sovereign bonds are cheap and thus an intelligent way for the public to pay off debt by buying back their long maturity sovereign bonds.

This could seem like a lose, lose situation for the investor, but isn’t. The investor is fairly certain that they will be paid in good times at a fair price. There is no discrepancy that cannot be priced in. Particularly when the economy is in full swing it is not such a bad idea – even though from a bookkeepers point of view there is a small loss – which might be a good idea to take – PROVIDED there are interesting alternative investments, which there generally is – given a booming economy.

The fact of the matter is that standing loans – which tend to be the standard for long maturity sovereign bonds – are not particularly financial stabilising as their interest rates do tend to fluctuate rather much due to the remoteness of the maturity.

Their chief advantage for the investor is their great liquidity: You can always sell them, as there is always a greedy finance minister with unlimited buying power eager for a profit.

2)      To smooth out the mood swings during 20-30 years of economic fluctuation there is a need for a long maturity security that is paid back as obligations present themselves for the pension fund. The fixed rate convertible annuity is one such paper. Service on the loan ensures that collateral always stays within a sensible loan to value relationship.

From the investors point of view the salient characteristic is the convertabily of the loan: I.e. the debtor can at any time buy back the bonds and issue new bonds at higher interest or in case of falling interest rates pay the mortgage out at parity – then issue new bonds of lower interest rate.

Again that sounds like a lose /lose situation for the investor.

Indeed it is if the investor doesn’t know what he is doing. A professional investor knows how to price this risk in.  In fact the debtor is overcharged and periodically cashes in – which the creditor gladly accepts as the surcharge has been reserved for just this eventuality (here I assume a responsible investor).

The upside for the investor is – besides a high liquidity, as there are literally millions of greedy home owners just waiting to serve the loan before maturity: Well these windfalls do secure either the collateral behind the loan or the ability of the debtor to pay – which is the main concern of the investor. In practice a 30 year annuity rarely survives 10 years – something always come up that make the debtor pay before he is due.

3)      The series loan, which is a loan with equal instalments during the maturity so after 5 years of a 10 year maturity half the loan is paid back. This is not the case with an annuity that is sluggish in repayment.

The advantage is that with a linear depreciation plan the collateral always stays within the loan to value ratio. For the debtor it means you pay your dues when you have made your profit.

So which loan is the best?

The combination!

Most pension funds have a portfolio manager that fits investment to obligations. The trick is to have a finance structure which matches the creditors and debtors needs. The benefit of a good match will most likely fall to both creditor and debtor in terms of better interest.

The debtor will have to pay a lower interest, if the loan matches the creditor’s needs. The creditor will get a better interest, because he can place the money at a longer maturity and avoids large cash holdings.

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