That is why the banks are finally better off

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The worry wrinkle may have diminished slightly among the country’s bank directors. In any case, several of them have seen reason to raise expectations in the past week.

Most recently, the top manager of the mortgage giant Nykredit, Michael Rasmussen, announced on Thursday that the bank expects a better result for last year than first assumed.

“It is now clear that the result for 2021 will not only be better than expected, but Nykredit’s best ever.”

Michael Rasmussen is not the only director in the Danish banking landscape who right now can rejoice that the figures in the annual accounts will look a little nicer than expected at the beginning of 2021. Among others, Jyske Bank, Spar Nord and Ringkjøbing Landbobank have made adjustments within the past week, as well as figures on expectations for 2022.

“It seems that the banks will be tied to a fine loop in the year 2021,” states senior analyst at Sydbank Mikkel Emil Jensen.

And there is reason for continued optimism if one heads a bank. We return to the reasons a little later, first just an elaboration of why the banks have upgraded.

Active business customers

One of the reasons goes again over a wide comb. Customers borrow more money.

“It is both new business customers who demand loans, and it is our current customers who draw more on their credits,” said Jyske Bank’s CFO, Birger Nielsen, earlier this week.

A development that the banks anticipate will continue into 2022. The most recent lending survey from Danmarks Nationalbank showed that several banks had increased expectations of lending demand from corporate customers in the first quarter of the year. That optimism is reflected in the recent announcements from banks about expectations for earnings in 2022.

Also in Denmark’s largest bank, Danske Bank, which most recently raised its profit expectations in July last year, companies are borrowing more money. According to the head of Danish business customers, Niels Bang-Hansen, small and medium-sized companies are starting to draw on the bank’s overdraft facility again, after replacing it for a longer period with a free one of its kind at Skat in the form of deferred A- tax and VAT. That is positive, he believes.

By far the biggest activity, however, must be found in the large companies, which, unlike the small and medium-sized ones, play ‘offensively’, he explains. In general, the largest companies have a strong focus on becoming more digital, just as they also do their part to reverse the negative development for the earth’s climate.

“They are doing really well in a lot of things,” says the business manager, referring to the fact that several companies, for example, issue debts and make acquisitions.

“It drives the demand for loans, but also for all sorts of other banking services,” continues Niels Bang-Hansen.

Clouds in blue sky

But while the largest companies are investing heavily in digitalisation and climate change in particular, the smaller companies are more hesitant. This is due to what Niels Bang-Hansen calls “big clouds in the sky”, which is otherwise blue because the business community generally thrives.

Of the clouds, he mentions, among other things, high inflation in both the USA and Europe, which could risk leading to rising interest rates. On Wednesday, the figure for US inflation landed in December, with consumer prices rising by seven percent, the highest increase in 40 years.

At the same time, there is a relatively large shortage of labor in Denmark.

“It can help to hold back some companies from making large investments if they can not find the manpower to follow up on the investment,” explains Niels Bang-Hansen.

Here we turn our gaze back to the banks. For what might be characterized as gray clouds for other parts of the business, for the banks is a weather forecast with mere round suns.

Banks make a lot of money on the interest rates that customers pay to borrow money, so (slightly simplified) when interest rates rise, earnings also rise in the banking sector.

“Banks benefit from the prospect of rising interest rates,” says Mikkel Emil Jensen from Sydbank, who points out that an increase in lending by banks has a “double effect” on earnings when interest rates also rise.

The development is in stark contrast to two years ago, when banks had seen earnings fall in 2019, and they realized they could make even less money in 2020. The corona crisis has meant declining lending, just as negative interest rates in recent years have caused the banks have earned less on the lending they have had after all.

“The interest rate environment we live in, we have never tried before. We are in a situation where the prospects for the banks are serious, «said Jesper Berg, director of the banks’ watchdog Finanstilsynet, to Berlingske at the end of 2019.

For example, Danmarks Nationalbank’s benchmark interest rate has been negative since 2014.

Happy bank shareholders

Although there are still negative interest rates at Danmarks Nationalbank, those who know anything about economics expect that interest rates will rise – and rise further in the places that are already on the rise. In the US, the yield on ten-year government bonds has risen to 1.75 per cent, the highest in two years, and in Germany the ten-year government bond is moving away from minus. It has not been positive since the spring of 2019.

The prospect of higher interest rates and greater optimism among the banks themselves is also reflected in what investors will pay for the Danish bank shares.

“We have a long way to go in history before we find the same optimism from the banks. Particularly for corporate customers, the outlook for growth is positive, and this is the optimism that investors largely acknowledge, “says Mikkel Emil Jensen, who emphasizes that the banks’ expectations for the current year are also” strong “.

Bank shares already began to rise last year, and in the short life of 2022 alone, shareholders have, for example, wanted to pay almost 15 per cent more for a share in Danske Bank than at the beginning of the year, while it is over 22 per cent more for one in Jyske Bank or Spar Nord.

While the Danish elite index, C25, fell 0.3 per cent on Thursday, the Danske Bank share was up 2.7 per cent, the Jyske Bank share 3.5 per cent, while Spar Nord rose 6.2 per cent.

All three banks will publish their annual accounts for 2021 within the next almost two months.

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