Nordic Credit Rating (NCR) applies a score of 'a-' for the Danish banking market and views the domestic operating environment as stable. The Danish economy is highly dependent on the international cycle, which is expected to weaken. Positively, the country scores highly on sovereign strength, and unemployment is low. The Danish banking market has been heavily affected by the recent Baltic money laundering scandal, among other environmental, social and governance related cases, which we see as a negative factor for the country's banking environment and consider in our final national banking assessment. The banking market score is a component of NCR’s issuer ratings for financial institutions. Depending on the nature of the rated entity’s exposure and geographic profile, the score can affect up to 20% of an issuer’s overall credit rating.
"Weakening European economies have not yet impacted Danish growth, which is supported by the non-cyclical pharmaceutical industry and strong demand for windmills", says Geir Kristiansen, credit analyst at NCR. "There is downside risk to our expectations, though. European economic growth will be negatively affected by a hard Brexit even though the direct effect should be manageable as Danish exports to the UK equal only about 2% of GDP. In addition, the large Danish shipping industry is particularly vulnerable to an international trade war that would affect exports from China and elsewhere in Asia".
NCR has revised downward its assessment of the international cycle to reflect our view that global growth prospects are weakening. While this view has not resulted in lower banking market assessments for the Nordic countries, it could become a rationale for weaker scores and subsequently weaker bank ratings over time. The rating impact will be evaluated on a case by case basis, dependent on factors affecting specific banks, their customers and their operating environment.
Danish bank earnings remain below their Nordic banking peers. Denmark is in an extreme interest rate situation, with policy rates 10 basis points below the ECB, putting material strain on deposit-funded banks' earnings. Relatively slow credit growth and years of debt consolidation has increased competition in Denmark and put further pressure on margins. Given shifting global economic conditions, NCR expects that margin pressure and slow credit growth will continue to affect banks' earnings forcing them to pursue digital solutions and automation, or to accelerate consolidation, to reduce costs.
Earnings for mortgage banks are more stable. Despite Jyske Bank receiving international recognition in August 2019 for negative coupons on 10-year covered bonds and negative yields on covered bonds with tenors of up to 20 years, mortgage banks are still able to earn a relatively stable margin and collect refinancing fees from customers seeking to lock in mortgages at historically low interest rates.
Denmark – scoring of national indicators
| SUBFACTOR | SCORE | RATIONALE |
|---|---|---|
| Sovereign strength | aa | Major credit rating agency average: AAA, minimum: AAA. |
| Output growth | a- | We expect economic growth to improve in 2019 due to strong exports, but to decline in subsequent years due to slower international growth. |
| Credit growth | bbb | Credit growth is lower than GDP growth and has been sub-zero recent years. |
| Housing prices | a | Moderate growth in housing prices; we expect stability to continue. |
| Unemployment | aa | Unemployment is low in a Nordic context and is expected to fall somewhat. |
| Available stable funding | aa | ASF in the form of deposits and domestic covered bonds exceeds monetary financial institution (MFI) private-sector loans by a good margin at both a consolidated level and at individual banks and mortgage companies. |
| International cycle | bb+ | Global growth prospects are weakening, though supported by significant monetary stimulus. Increasing trade rhetoric and the prospect of trade and currency conflicts and the UK leaving the EU without a withdrawal agreement could affect global economic growth. Asset prices are at or near peak levels. |
If you have any questions, please contact:
Geir Kristiansen, Analyst, +47 90 78 45 93, geir.kristiansen@nordiccreditrating.com
Sean Cotten, Lead analyst, +46 735 60 03 37, sean.cotten@nordiccreditrating.com
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