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Danish downgrade could make it a dismal year

Don’t worry, it may never happen. Then again, the decision by ratings agency Moody last month to downgrade the ratings of Danske Bank and five other Danish lenders does not exactly bode well for bonus levels and hiring activity in Denmark in the coming months.

If the worst comes to the worst and bonuses are pared back this year and teams reduced in size as a result, ambitious Danish bankers are being told they have just one group of people to blame: the politicians sitting in their parliament, the Folketinget.

Moody’s downgraded ratings for Danske Bank, Jyske Bank, Sydbank, Spar Nord Bank, Ringkjobing Landbobank, and BankNordik last month after the Danish government implemented its new Bank Package III law in regard to defunct bank Amagerbanken.

The use of the new banking support law in this way sent out a strong signal that the government in principle favours market solutions in future rather than state support, according to Moody’s analyst Oscar Heemskerk.

This was, in turn, one the key factors behind Moody’s decision to downgrade, although there is recognition Bank Package III would be challenging to apply to larger and more complex banks such as Danske, Jyske and Sydbank, he adds.

“Danish banks are standing out in Europe because of the government’s indication that it is not going to support, which has had a negative impact,” he explains.

“Investors will perhaps not shun them, but they will be asking for additional margins or not lending on the lengthy maturities that they were previously willing to enter into, and that could certainly be harmful for the banks in terms of their profitability and their ability to raise funds.

“Danish banks will need to be showing their ability to improve profitability and to raise funds. But margin pressure on lending and funding combined with low lending growth will make it difficult for the banks to show improved core earnings,” he adds.

While Danish banks have been bullish in their response to the downgrade, it stands to reason that tougher funding requirements will lead to a greater focus on cost-cutting or containment, possibly even extending to headcount reductions and bonus trimming, agree analysts who follow the Danish market.

“Funding may be a problem. It is increasingly difficult for a lot of banks to raise money on the wholesale markets, and that is simply being reflected by the ratings agencies,” points out one, who declined to be named.

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