Jyske, BRF see ‘great match’, covered increase

Feb 27th, 2014

Jyske Bank and BRFkredit are planning to merge, they announced on Monday, in a move that will step up competition in the Danish banking industry, with the potential for steep growth in mortgage lending for the combined entity and a tightening of BRFkredit bond spreads among effects cited.

BRF300Subject to regulatory and shareholder approval, the merger would be by way of Jyske acquiring BRFkredit from its sole owner, BRF Holding, for around Dkr7.4bn (Eu964.8m), based on a cash payment of Dkr100m and in 23.76m new Jyske Bank shares. Jyske Bank, which is Denmark’s third largest bank, will be the parent company in the combined group, and BRFkredit, the country’s fourth largest mortgage credit institution, will be a 100% subsidiary of Jyske Bank.

In a statement Jyske and BRFkredit said that they are “a great match”.

“The merger between BRFkredit and Jyske Bank is a pro-active merger between two strong and well consolidated financial groups which in terms of strategy and business operations complement each other well and will create a fully integrated banking and mortgage credit group in Denmark,” they said.

Shares of Jyske Bank jumped on news of the merger, rising 10.5% on Tuesday. BRFkredit is not listed.

Standard & Poor’s on Monday affirmed the long term ratings of Jyske Bank and BRFkredit at A-, affirmed the stable outlook on Jyske’s rating, and changed that on BRFkredit’s rating from negative to stable.

“The affirmation of the ratings on both institutions reflects our view that they will form a bank with business and risk profiles that largely reflect the risks associated with the Danish economy,” said S&P.

It changed the outlook on BRFkredit because it expects the mortgage credit institution to be a strategic core subsidiary following the merger.

As measured by total assets, Jyske Bank Group will almost double in size as a consequence of the merger and become the fourth largest fully integrated banking and mortgage services group in Denmark, noted Merete Poller Novak, head of debt IR and capital market funding at Jyske Bank.

“With Jyske Bank’s full access to debt and capital markets, the future enlarged group will also be strongly positioned to participate in the ongoing consolidation in the financial sector in Denmark,” she said.

Novak noted that liquidity management of the enlarged Jyske Bank Group will be managed at the group level, and that integration of BRFkredit into Jyske Bank is not expected to change the group’s senior unsecured funding needs.

The merger will diversify Jyske Bank’s funding platform, with “a good split between bond, deposit and interbank funding,” and provide direct access to the Danish covered bond market, according to a Jyske investor presentation.

An official at BRFkredit noted that the mortgage bank’s issuer rating has benefitted from the merger plans given S&P’s outlook change, and said that the speed with which the rating agency carried out the rating action is encouraging.

“It is important to highlight that the merger is between two large, and healthy Danish financial institutions,” he said. “The merger is seen as a break with most bank acquisitions in Denmark in recent years, which have involved smaller banks as part of the consolidation in the Danish banking industry.”

In a presentation BRFkredit noted that overcollateralisation requirements and capital expenses are expected to be reduced as a result of the merger. The official said this is due to a more diversified portfolio, economies of scale, and improved capital allocation. Lending and issuance of covered bonds (SDOs) in capital centre E are expected to increase, as are volumes and turnover in all bond series, according to the mortgage bank.

S&P said that there is potential for steep growth in residential mortgage lending as a consequence of the merger.

“We expect the new bank to price its mortgage products to attract new customers and take large efforts to refinance the loans of its current retail customers in BRFkredit in the future,” it said. “At present, a dominant part of the residential mortgage loans have been transferred to Totalkredit A/S.”

Danske Bank analysts said that the merger creates a major financial institution with a balance sheet of Dkr480bn that “will be better equipped to compete with the largest financial players in Denmark”.

“Nykredit is likely to feel some pressure following the merger between Jyske Bank and BRFkredit, as Jyske Bank has been its largest source of new lending via Totalkredit,” they said.

The analysts expect several positive effects from the takeover, such as spreads on BRFkredit interest reset bullet bonds and senior secured bonds tightening to trade in line with those of the other major mortgage banks within a short space of time.

“Credit quality in BRFkredit’s capital centre E should gradually improve due to the influx of more personal borrowers with lower LTV,” added the analysts. “In total, Jyske Bank has passed lending worth Dkr83bn on to Totalkredit and we believe a large share of these borrowers can be ‘reconquered’ from Totalkredit.”

Nykredit responded to the merger by saying that it “stands prepared to meet fiercer competition” and it expects Jyske to withdraw from Totalkredit partnership. It noted that the Dkr83bn of Totalkredit business referred by Jyske corresponds to about 7% of the Nykredit Group’s total lending of nearly Dkr1,200bn.

BRFkredit held sales of adjustable rate mortgage (ARM) bonds on Wednesday and today, and the Danske analysts have recommended buying BRFkredit non-callable bullets, which in one year ARM bonds trade at a premium of up to 1bp over Realkredit Danmark (RD) bonds.

BRFkredit has joint funding agreements with Jyske Bank and other Danish banks, such as Sydbank, Arbejdernes Landsbank and Ringkjøbing Landbobank, and the official at BRFkredit said that it expects “business as usual with our partner banks”, subject to the institutions’ agreement.

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