Nordic Credit Rating (NCR) has raised its assessment of the Danish banking market and expects improvements in the domestic operating environment due to fewer social restrictions, high vaccination rates and a strong rebound in the services sector.
We recently raised our assessment of the Danish banking market to 'a-' from 'bbb+' to reflect our view that COVID-19 is unlikely to seriously damage most banks in terms of loan-loss reserves or access to funding (see Nordic banking assessments raised on reduced COVID threat, published 9 Sep. 2021). The revised assessment also reflects a return to pre-pandemic unemployment levels, a strong export sector, and a well-capitalised banking sector relative to other European countries. We believe that solid government finances and available support packages together with a flexible labour market should counterbalance any temporary turbulence.
Consolidation of the Danish banking sector continues, with recent merger and acquisition activity higher than in other Nordic countries. In our view, this is partly a result of margin pressure caused by negative policy interest rates to protect the Danish krone peg to the euro. In addition, domestic banks have reported higher volumes of non-performing loans and loan-loss reserves than their Nordic peers, partly due to more conservative regulatory loss-provisioning expectations.