Negative interest rates take their toll on lender

Denmark's fourth-biggest listed bank says it is being squeezed out of corporate lending as competitors offer rates that undermine profitability.

Negative interest rates have turned Denmark into a borrowers' market. Spar Nord Bank A/S says it has decided no longer to fight to hold on to some customers after finding that loan rates that would only just allow it to break even are still higher than those offered by rivals.

"We've been head-to-head and gone to the very limit of profitability in our offers, and we have still lost customers," Ole Madsen, senior vice-president at Spar Nord, said in an interview.

It's the latest example of how negative rates borne of AAA-rated Denmark's battle against currency speculators are distorting credit markets in the country. The key deposit rate is minus 0.75 percent. Yields on government bonds with maturities as long as five years are negative, as are mortgage-bond yields as long as two years.

"The low interest rates are making everything strange," said Jesper Rangvid, the author of a government-commissioned report on Denmark's financial crisis and a finance professor at Copenhagen Business School. "It is good for those who are borrowing but from a financial stability point of view and a banking point of view, it does create challenges."

Danske Bank A/S, the country's biggest lender, says it is preparing for negative rates to last through the rest of 2015. The Financial Supervisory Authority is still trying to assess the ramifications.

The agency "is monitoring risks connected with the development in the interest rate", Kristian Vie Madsen, acting director at the regulator, said in an e-mail. His predecessor, Ulrik Noedgaard, warns that record-low rates are also leading to "worrying" developments in Denmark's property market.

Tighten standards

The Danish FSA in March told banks to tighten lending standards.

Its review of new loans to businesses found medium-sized and smaller banks weren't properly analyzing proposals and some lacked up-to-date information on clients.

Loans to businesses are down by about 40 percent since peaking in 2008, central bank data show. Loan books totaled 252 billion kroner ($37.87 billion) in March, up 2 percent from a month earlier.

According to Karen Froesig, chief executive officer at Sydbank A/S, the main problem is that demand for borrowing is so low. "We have had a crisis and people want to save," she said.

Most banks are dealing with the slump in traditional lending income by generating revenue from fees on remortgaging, as customers convert to lower rates.

Sydbank said last week its income from remortgaging doubled in the first quarter. Spar Nord's climbed 52 percent.

"What we're seeing at the moment is a surplus of liquidity and capital," Madsen said. "It's the reverse of a credit crunch. There are too many banks wanting to lend."