Interview: Peter Holm, Danske Bank

The Covered Bond Report’s Sue Rust spoke with Peter Holm, senior vice president, head of group funding, treasury, at Danske Bank about its recent Tier 2 issue, last week’s Sampo covered bond and more.

What factors determined the execution of Danske’s recent Tier 2 issue?

We had seen that the Tier 2 market had been functioning much better in the second half of this year compared with earlier. We had prepaid an outstanding Tier 2 issue in the first half of 2012, and we also have some possibilities for calls on similar issues in 2013 and know that CRD IV is forthcoming. We decided that, with a functioning market, it was time to take another step in the ongoing adjustment of the capital structure of Danske Bank with a view towards the future European capital requirements for banks, which many other European banks are probably also considering.

First on our agenda was fulfilling the Danish requirements for Tier 2 capital. In addition our goal was to make the issue CRD IV-compliant. On top of this we also considered the downgrade by S&P earlier this year when the rating agency pointed out that Danske Bank could benefit from an improved RAC (risk-adjusted capital) ratio in its calculations. Thus with this issue, we tried to tick all the boxes required by S&P to get the issue RAC-compliant.

With respect to the currency, we believed that if we did a dollar issue, we could not only attract the Far Eastern market but we could also get private bank clients and institutional investors in Europe. We achieved all of that and got an extraordinarily strong book of close to $8bn. Therefore we got the broadest possible investor base to participate in this $1bn issue, which has also performed very well in the secondary market.

How did the recent Sampo covered bond go?

A Sampo Bank covered bond deal had been planned for the second half of this year, but as Sampo had not been in the covered bond market for around one year, we decided to give investors time to revisit the credit story. We therefore went out allowing one day whereby investors could refresh their credit analysis. We also offered a conference call on that day with good participation from investors in Europe.

We opened the books at the 38bp area and the book built very quickly to Eu1.8bn. We decided to fix the price at 37bp and the orders stayed in the book. The issue has performed nicely. I think this is a very positive story.

Danske Bank has not issued a euro benchmark covered bond for some time — why ?

This year the senior market has been working much better compared with previous years. Thus even though our rule of thumb would be to fund our medium and long term needs 50:50 with senior unsecured and covered bond issuance, 2011 was a year when we did more covered bonds than senior issues. The senior market has been working much more effectively in 2012 and as a result, we have been doing more senior issues than covered bond issues so far this year.

Our covered bonds issues this year have been more focused towards other European currencies and private placements. However, there is no doubt that the euro benchmark market is very important for our global covered bond programme, thus we will be back at some point. Looking at our global covered bond programme, excluding Sampo which has only issued euro benchmark issues, some 65% of our outstanding issuance is denominated in euro so it is a very important currency for our covered bonds. However, being a Nordic bank and having the underlying collateral denominated in Nordic currencies, we also appreciate issuing in the Nordic currencies when opportunities arise.

What role do Nordic markets play for you?

We have been in the benchmark covered bond market, but in Swedish krona rather than euro, issuing out of our C cover pool. We made a decision some time ago that we would like to use more of the Swedish krona denominated cover in the C pool for benchmark issues in the Swedish market. Accordingly we have started a close cooperation in that respect with Danske Markets and Swedbank as market makers. We have done two issues, the first one a Skr3bn five year in April and in September a Skr5bn three year. The currency match between assets and liabilities makes very good sense.

We also tap different currencies in senior format through our EMTN programme when we see there is investor interest that we can match with our required maturity and expected pricing. We have done around Dkr85bn of medium and long term financing in 2012 against an estimated demand of Dkr60bn. Thus we have already started to pre-fund for 2013.

Danish banks have traded wide of their Nordic peers — why is this?

First of all it is important to note that Nordic covered bonds in particular have performed very well during 2012, including outstanding Danske Bank and Sampo Bank issues. Danish bank spreads have been performing and have been improving recently. I think the reason why Danish banks are trading wider than the rest of the Nordic financial institutions market is the rating situation with Danish banks. In Denmark different bank packages were introduced, and in particular Bank Package 3, which has been amended along the way, came as a surprise to many investors around the world, and also I think to Moody’s.

If one looks at Moody’s ratings, one will see that because of this, they only give Danske Bank one notch uplift related to sovereign support whereas the majority of our Nordic peers get three notches uplift. This of course has an impact. We also cannot escape the fact that the economic development and the downturn in Denmark, where Danske Bank has its largest business, has been more severe than in the other Nordic countries. Danske is also present in Ireland. Thus a combination of these factors has had an impact on the impairment levels of Danske and its ratings.

As mentioned, with S&P we were looking into the RAC ratio and trying to tick the boxes of S&P’s RAC criteria on our new Tier 2 issue to improve our ratio. It should be noted that the hybrid Tier 1 and Tier 2 issues we have outstanding in the market, including the government hybrid capital we received some years ago, do not get any credit from S&P in its RAC calculations. This is one of the reasons why Danske came out a little bit weaker on that calculation.