Denmark: central bank warns on rising loan losses

Denmark’s central bank is clearly in a sour mood, perhaps tetchy after the country’s untimely World Cup exit this week. Fretting about the effects of inflation on interest rates, it warned on Thursday that in a severe recession house prices might fall by almost a third, testing Danish banks’ capital buffers.

While Danish house prices boomed in the run-up to 2008, this time around it is the rising real estate risks for its Nordic peers that worry the central bank.

Unlike Sweden and Norway, Danish monetary policy follows that of the European Central Bank due to a longstanding currency peg. Despite years of ultra-low ECB interest rates, Danish property values have exhibited surprising restraint by comparison.

House prices in Denmark have only risen by about a quarter since 2008. In both Sweden and Norway they have roughly doubled. This year the trend has reversed for all three. However, in Sweden, home prices have dropped 13 per cent just since March.

For the Danes, tighter lending standards and a lower proportion of floating rate mortgages have helped put a lid on speculation. At leader Danske Bank, still recovering from its 2018 money-laundering scandal, average loan-to-value on its domestic mortgage book is below 50 per cent. On its Swedish book this is closer to 60 per cent.

Commercial real estate, too, presents significant risk across the border. Landlords in Sweden overextended themselves with debt-fuelled expansions. As rates climb and valuations drop, expect asset sales and deleveraging to follow.

Danske may avoid the worst with its Swedish commercial exposure equal to just 3 per cent of total, says Citi. Compare that with 12 per cent at Swedish lenders Handelsbank and Swedbank. Danske has its own challenges. It has more credit impaired (stage 3) loans in sectors vulnerable to an economic slowdown, such as hotels and leisure, than other Nordic banks.

Yet given Sweden’s current problems, the Danish central bank is right to blow the whistle early on property risks.