S&P considers Nykredit, DLR cuts on BRRD

Standard & Poor’s on Tuesday placed Nykredit and DLR Kredit on CreditWatch Negative but affirmed its ratings of fellow Danish banks Jyske, Danske and Nordea Bank Danmark, after completing a review relating to the potential withdrawal of government support for the banking sector under the Bank Recovery & Resolution Directive.

BRRD will come into effect in Denmark on 1 June, its implementation having been approved by the Danish parliament on 26 March, with S&P stating that in some cases Danish banks’ capital strength will not be sufficient to compensate for a consequent removal of support notches in its ratings.

“As a result of the new laws, we think that extraordinary government support for commercial banks is likely to become less predictable in Denmark,” the rating agency said.

S&P placed on CreditWatch with negative implications the A+ long term ratings of Nykredit Realkredit and core subsidiary Nykredit Bank, and the BBB+ long term rating of DLR Kredit.

It said the two notches of government support factored into Nykredit’s ratings may be at risk if it deems Denmark’s government less likely to offer support to the banking sector under BRRD, because the bank’s stand-alone credit profile (SACP) is not expected to strengthen sufficiently to mitigate such a loss.

The one notch of government supported incorporated into DLR Kredit’s ratings could also be removed, S&P said, because it believes the bank might not sufficiently increase its capital level. The rating agency had previously expected DLR to achieve a risk-adjusted capital (RAC) ratio that would sustainably surpass 15%, but said this no longer appears certain.

S&P noted that while both banks have improved their funding profiles, it still perceives them to have a reliance on short term wholesale funding. It said that a deviation from the improving funding trend could lead it to revise downwards the SACPs of Nykredit and DLR.

Meanwhile, the rating agency affirmed the A- ratings of Jyske and subsidiary BRFkredit on stable outlook. The rating agency said the group’s increasing capital levels could grow by 30bp-40bp annually over the next two years, to a level sufficient to mitigate a loss of government support and consistent with a “strong” assessment of capital and earnings.

Also affirmed were the A rating of Danske and the AA- rating of Nordea Bank Danmark, both on negative outlook.

S&P said it believes Danske can continue to improve its earnings generation to a level in line with its peers’, which could result in the removal of the negative adjustment notch. It said it sees potential for the bank to achieve a RAC ratio sustainably above 10%.

The rating of Nordea Bank Danmark is aligned with the Nordea group, S&P said, as it believes any support offered by the Swedish government to Swedish parent Nordea Bank would be made available to the subsidiary. The ratings of the group will be addressed when S&P reviews Swedish government support, it said.

The rating agency added it intends to continue discussions on the practical implications of BRRD laws with the Danish authorities before it makes a final decision on the state of government support for the affected banks.