Higher admin fees and better agri prices lift DLR

DLR Kredit reported a 63% growth in pre-tax profit in 2012, driven by higher administration fees on its portfolio and declining provisions for loans, according to an official at the issuer.

The Danish mortgage company reported annual results on Thursday of last week (21 February), posting pre-tax profits of DKK602.5m (Eu80.8m), up from DKK369m in 2011.

Jens Møller, managing director at DLR Kredit, said that the increase in profits marks the fifth consecutive year of positive results for DLR and proved the resilience of the issuer’s activity to challenging economic conditions in Europe.

Møller said administration fees on the loans transferred to the issuer by the 80 Danish institutions it co-operates with increased by around 5%, contributing to the positive performance.

“We were able to impose higher administration fees in line with the market in comparison to three years ago,” said Møller.

Another main driver of the growth was declining provisions for loans, which were down from DKK141m in 2011 to DKK87m in 2012. Møller said that the decline was due to improvements in Denmark’s agricultural sector, to which DLR is mostly exposed.

“After a couple of bad years for the Danish agricultural sector, in 2011 and 2012, the prices of cereal and pork meat increased, resulting in better terms of trade between product prices and production costs,” he said. “This improved the capacity of farmers to repay their loans, and resulted in lower loan provisions for us.”

DLR completed three rounds of auctions of its covered bonds last year. The December session was the first auction based on a AAA rating for its covered bonds that DLR obtained from S&P in September. DLR covered bonds were previously rated by Moody’s at A2, after being downgraded from Aa1 following an issuer downgrade in May. DLR ended the contract with the rating agency on 3 December 2012.

“The December session was very successful,” said Møller. “We managed to obtain some of the best results both in terms of all time low interest rate level as well as spread differentials to other Danish mortgage banks.”

DLR will engage in a new round of auctions next week. Møller expects the issuer to achieve levels similar levels to those in the December session, with the spread differential between DLR and other Danish mortgage banks to be “close to zero”.

DLR also plans to issue more senior secured bonds pursuant to Section 15e of Danish covered bond legislation, after launching an DKK4bn issue on 29 November. A new issue may be launched in the first half of 2013, said Møller.

“We need to have a buffer for supplementary security when we issue covered bonds, and we need to have a buffer too­ in terms of OC levels for rating purposes, so it is convenient for us to issue senior secured debt, although we don’t have to do it,” said Møller.