The continued weak economic environment is affecting banks, resulting in weak earnings and a continuing high level of impairments. Overall, banks earned profits of DKK 3.6 bn. before tax compared with a profit of DKK 4.1 bn. in the previous year.
Impairments on loans for the year amounted to DKK 24 bn. which, although somewhat less than the previous year (DKK 36 bn.), reflect a significant increase in Q4 2011 compared with the first three quarters of the year. In relative terms, impairment losses are 1.1% of lending and guarantees against 1.4% in the previous year. Continued high impairments on loans are expected in 2012.
New regulations for impairment losses on weak loans took effect 1st April 2012. The new regulations include a relevant tightening of rules for distressed property loans. Many banks are already applying this new approach to impairment losses on their property lending. These banks will have to increase impairment losses on the loans for which they have previously applied other approaches. This is likely to result in an increase in their total impairment losses, although the increase will be modest in most cases. However, there will be a small group of banks for which the increase may have a sizeable effect on their total impairment losses.
Overall, the capital situation of banks is stronger and the assessment is that most banks, including the largest, will be able to absorb larger credit losses. The financial resilience of banks - capital compared to the statutory requirement (solvency need) - amounted to 7.2% of lending and guarantees at the end of 2011 against 5.4% in the year before. However, the sector-wide figure covers a considerable dispersion between banks, and a number of smaller banks are being challenged by weak credit quality and a vulnerable capital situation.
The funding situation for the sector is moving towards a better balance and the sector's total deposit deficit fell in 2011 from DKK 326 bn. to DKK 161 bn. When adjusted for repurchase agreements (repos), the deposit deficit comes to DKK 71 bn. This development includes a drop in lending of DKK 167 bn., concentrated mainly on repos and corporate lending. On the other hand, deposits remained more or less steady with a slight drop of DKK 2 bn. (0.1%).
There are still banks facing challenges with regard to expiry of the individual state guarantees in 2012 and especially in 2013. As part of its ongoing monitoring of the issue, the Danish FSA has requested reports from these banks, and is monitoring developments closely.
Overall the situation has improved during 2011 and in early 2012. Firstly, the instruments in Bank Packages IV and V have helped improve challenged banks' solution options. Secondly, the new lending facilities from Danmarks Nationalbank are providing relief with regard to the expiry of the individual state guarantees. Finally the banks themselves have adjusted their balance sheets by reducing lending and increasing deposits.
In conclusion, the general assessment is that the funding and liquidity challenges have become significantly smaller. Looking forward, however, new challenges are on the way, stemming from the new liquidity regulations in Basel III/CRD IV.
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