Interview: Merete Poller Novak, Jyske Bank

The Covered Bond Report’s Neil Day spoke to Merete Poller Novak, head of strategic funding and debt investor relations at Jyske Bank, about the bank’s funding strategy and developments in the Danish banking industry.

Jyske has not issued a public senior unsecured bond in euros since May 2011 — how have you met your funding needs?

You have to look at the history of Jyske Bank, at how we were positioning ourselves even before the crisis started in 2007. We then had a very strong profile because we were running liquidity risks scenarios much like the LCR before it actually became fashionable. And from 2007 to 2010 we were absent from the public markets as our funding gap narrowed by Dkr 15bn and we did a lot of private placements.

The May 2011 activity was to refinance an April 2012 redemption, and we haven’t been in the public space since then. Instead we have been doing private placements, Eu550m since then. The average weighted duration of these has been 2.6 years, which is spot on the maturity preference we have in the public space. Since 2007 only Eu1.1bn of our Eu4bn of senior debt issuance has been in public benchmarks.

The situation at Jyske is that we don’t have much of a funding gap left. If you look at our balance sheet, our deposits more or less fund our loans. Furthermore with the new BRFkredit agreement we will in three years have almost no long term commitments left on the balance sheet because we will gradually transfer our residential loans, “Jyske Prioritet”, approximately Dkr13bn, to BRF to do the joint covered bond funding. Thus the normal maturity mismatch that a bank is looking at will be very limited.

Our presence in the debt capital markets in the coming years will therefore simply be focusing on the shorter end of the curve. We basically need to do debt capital markets funding for our liquidity buffer to offset run-off risk in stress scenarios. Furthermore to maintain access to the market you need to show your name from time to time. So basically we are there just to remain prudent when it comes to liquidity management, and also to have access to the markets because you never know what the balance sheet would look like further into the future.

How do the redemption of two euro benchmarks next year fit in?

In Denmark we have a zero growth or maybe even negative growth environment, so the loan portfolio will not demand any new long term funding. At the same time, the Danish private sector has a very high propensity to save, so in deposits we are looking at a stable to growing trend.

If you look at our two 2013 redemptions, the first, which matures in June, has been prefunded already because we have done Eu300m in private placements and we have already transferred Dkr1.6bn (approximately Eu200m) of our residential loans to BRFkredit, so the Eu550m total is basically done. The BRF agreement implies that we will transfer a further Dkr4bn-Dkr6bn in the next 12 months — that’s a significant supplement to our EMTN issuance.

But part from that, as I already mentioned, we like to keep a presence in the markets and we hope the market conditions will remain strong to pave the way for a public trade this year, which could follow after the release of our Q3 results on 18 October. We could go in the weeks or months after that or potentially in early 2013. But whatever strategy we choose, it’s very important for us to get a redemption in 2015 to have a smooth curve because we already have a bond in 2014.

We always want to have a steady hand and issue on an ongoing basis via a combination of private placements when we see them and public benchmarks from time to time, so that we avoid getting into a panic situation where you are forced to issue because you need liquidity or have rating pressures. You would typically see us go out one year in advance of redemptions. And I’m always posting prices in the private placement market because I’m always interested in taking liquidity, it’s just a question of price.

With four mergers in as many weeks, consolidation appears to be picking up in Denmark. What part could Jyske play in this?

You have to look at the situation we have in Denmark. Organic growth is zero, and we have a banking sector where we need consolidation. If you take away Danske and Nordea, the big ones, and ourselves as number three, and add the next 2-3 institutions in line then you have a lot of small institutions

At Jyske we last year implemented an adaption strategy because we are in a different market now. We focus on improving our cost-to-income ratio by cost reductions, and strengthening of the income base. The income base can be strengthened by margin hikes, but at the end of the day you need volume to improve your net income. So after focusing on only organic growth for 20 years Management is now ready to look at participating in the consolidation..

We did two small cherry-picking acquisitions last year, the healthy parts of Fjordbank Mors and the leasing operations of Spar Nord Bank. In recent weeks our CEO Anders Dam has come out and clearly confirmed our interest in participating in the consolidation process and even stated a long term vision of Jyske Bank achieving a 10%-15% market share by 2020, so he is definitely now open to entering into a constructive dialogue with other banks. If you look at our conservative funding structure and our solid capital ratios (we have strengthened our capital base raising core equity twice during the crisis) we are to be considered as one of the consolidators in Denmark.

On the other hand, until end of 2012 our hands are kind of tied as we are in the process of transforming all our data systems to a new platform Bankdata. But once it has been accomplished we will be able to integrate other banks much more easily and also much more cost efficiently. So you could expect Jyske to be a bit more pro-active in 2013.

Has Bank Package IV affected sentiment?

In general investor sentiment towards Danish bank credits has improved over the last 12 months because we have seen the Bank Package IV set-up used three times without any negative consequences. Of course we have had a lot of rating downgrades, but that’s based on what happened in the past, which caused the spread widening we saw over the last two years.

Together with the fact that Denmark is one of the last triple-A countries, investors seem to be becoming increasingly aware that the larger Danish banks really offer attractive relative value in senior debt issues. After the “Bank Package III & rating downgrades” widening during 2011, our spreads have come in with the general rally in the market, but if you compare where Nordea and Svenska issue with Danske, ourselves and Nykredit, it’s pretty juicy. You can’t justify such high differences by the differences in the credits. n