Limited impact from second Danish LTRO given low drawdown

Danish banks drew down some Dkr34bn (Eu4.96bn) of three year loans in a second LTRO held by the country’s central bank on Friday, a take-up that analysts considered limited and as likely to have little market impact.

The total amount of three year loans drawn down by Danish banks under Nationalbank’s temporary facility stands at Dkr53.2bn, according to the central bank. Just shy of Dkr19bn was borrowed in March.

The Dkr34bn for which the facility was tapped on Friday compares with expectations of Dkr30bn-Dkr50bn by Nordea Markets, Dkr75bn-Dkr100bn by Danske Bank analysts, and Dkr75bn by Nykredit Markets.

Jacob Skinhøj, chief analyst at Nordea Markets, said that the limited drawdown means that the longer term refinancing operation (LTRO) will have only a small market impact, and shows that most Danish banks do not need central bank funding.

“A limited drawdown indicates that funding is already in place for most banks,” he said. “This should reduce uncertainty and the need for Cibor funding and thus lead to lower Cibor fixings.”

Contrary to some other market participants’ expectations, he added, Nordea does not believe that any revenue from the three year loan drawdown will primarily be invested in three year adjustable rate mortgage (ARM) bonds, with banks likely to stick to one year ARMs or even shorter bonds.

Rune Kristensen, fixed income analyst at Nykredit Markets, said that Danske Bank took up less than half of what he expected at the LTRO. After taking Dkr15bn in the first LTRO, the bank took Dkr20bn on Friday, a spokesperson for the bank told The Covered Bond Report, with the collateral being part of the bank’s liquid bond portfolio.

Nykredit’s Kristensen said that the likely drawdown by Danske had injected a large element of uncertainty into expectations of the overall take-up.

“The take-up was limited, and has not had a big impact,” he said, comparing it with a much larger influx of liquidity before the LTRO that stemmed from maturing short term debt and prepayments on long term callable covered bonds, with the latter alone adding up to Dkr85bn.

“That led to some performance in the ARM market, but it was not due to the LTRO,” said Kristensen.

Away from the LTRO, Kristensen noted that the European Banking Authority (EBA) yesterday (Thursday) announced positive results for Danish banks from an EU-wide stress tests of capital levels.

This showed that Danske Bank, Jyske Bank, Nykredit and Sydbank have core tier 1 ratios in the range of 12.8%-14.3%, in excess of a 9% minimum target.

“Data disclosed together with the final report,” said the Danish central bank, “confirms that the Danish banks are not exposed to vulnerable sovereign debt issuers to any significant extent, neither directly via sovereign bonds nor indirectly in the form of credit protection on sovereign exposures (e.g. CDS contracts).”

Danmarks Nationalbank governor Nils Bernstein said that the final results are consistent with the central bank’s analyses showing that the largest Danish banks are well-capitalised and robust.