Danske Bank A/S is racing ahead of its rivals in issuing a key type of debt as investors desperate for yield look past the lender’s history of financial scandal.
The bank at the centre of a $220bn Estonian money-laundering scandal has made considerable inroads into its issuance of senior non-preferred bonds even as most of its peers in Scandinavia hesitate, according to data compiled by Bloomberg.
The debt class, which is essential for building a buffer to meet European rules that protect taxpayers from financial crises, is proving irresistible to investors struggling to generate returns amid a sea of negative interest rates.
“Everyone in the investor base is waiting for the senior non-preferred” from Nordic issuers, said Mattias Frithiof, an analyst at Swedbank. That’s because the debt class let’s you “get a positive yield in good names.” According to Frithiof, Danske is also benefiting from a reputation of having “always been very investor friendly.”
He says that “especially in this environment, and what happened [in the money-laundering scandal], they are happy to leave a little bit of performance for investors and maintain a happy investor base.” Shares in Danske rose more than 2% on Thursday, making it the day’s best performing Nordic bank in the Bloomberg index of European financial stocks.
Danske just sold $1.75bn in senior non-preferred bonds at considerably smaller spreads than at the beginning of the year. The offering brought to roughly 82bn kroner ($12bn) the so-called bail-in-able debt that Danske has issued – more than two years ahead of the deadline.
Christoffer Mollenbach, head of treasury, says Danske has been able to proceed in part because “we have a clear set of rules here in Denmark.” That’s despite the fact that the bank is waiting to learn whether it may be facing more onerous capital requirements due to its latest scandal.
Europe’s banks face a January 2022 deadline to create a buffer of equity and debt designed to absorb losses. Senior non-preferred notes were created to fill the requirement, known as MREL. Danske stands out for being way ahead of others in its issuance. Of the six major Nordic banks, only Nordea Bank Abp and Svenska Handelsbanken AB have even started.
The industry says it’s waiting to learn how local authorities will implement Europe’s latest version of the Bank Recovery and Resolution Directive, a groundbreaking piece of legislation adopted after the global financial crisis. Its purpose was to shift the cost of a collapsed bank from taxpayers to creditors. Countries face a Dec. 28, 2020, deadline to transpose the revised directive into national law. How they choose to implement it could make a significant difference to how much banks will need to issue, potentially by billions of dollars. There’s now also an option to push the deadline to 2024, which some countries may choose to do.
With banks’ net interest income already under pressure against the backdrop of negative rates across Europe, they want their authorities to give them as much leeway as possible. Thomas Ahman, head of group treasury at Handelsbanken, said earlier this month that his bank wants “greater flexibility to use own funds” rather than debt.
Handelsbanken, which has the biggest capital buffer to regulatory requirements among its Swedish peers, has said it won’t take advantage of the current rate environment to issue more of the debt until there’s more clarity.
Bankers in Sweden Forgo Ultra-Low Rates Amid Doubts Over Rules Frithiof said that for Swedbank, which is also being investigated for money laundering, the debt requirement today is 75bn kronor ($7.7bn) but could drop to 45bn kronor, depending on how Swedish authorities interpret the directive.
These are “quite big numbers” and given there’s also uncertainty about the deadline for implementation, there’s also “quite a lot of volume that can change the issuance pace.” Sean Cotten, an analyst at Nordic Credit Rating, estimates that the biggest banks in the region will issue more than €100bn ($110bn) in total, with Sweden’s eight main lenders probably accounting for just under a third of that.
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