Dankse Bank has had a good year, unlike the wider FIG market. The Danish bank passed the European Banking Authoritys adverse scenario stress test with a spectacular 13% core tier one ratio for the end of 2012, and has so far funded itself without trouble.
"Were almost funded for the whole year, which is good, given the market environment at the moment," says Steen Blaafalk, managing director, group treasury at Danske. "When people came to us with ideas that we liked, we followed them up, knowing that we might well finish our funding early. If we do anything else, itll be for 2012."
This funding took the form of five year euro benchmarks in March and May, with a dual tranche dollar deal in April, raising 1bn each time in euros and $1.75bn in dollars. A 1bn 10 year covered bond from Finnish subsidiary Sampo Housing Loan Bank completes Danskes benchmark syndications so far in 2011.
But the long term debt syndications (providing 9% of Danskes debt funding) are dwarfed by the match-funded mortgage bond programme issued by its Realkredit Danmark subsidiary, which provides 24% of Danskes funding.
These bonds are auctioned, and predominantly offered in Danish kroner (though euro series are available). The most recent auction, in March, raised Dkr26.4bn (3.54bn) and 410m.
It is these mortgage bonds, which use the 200 year old Realkreditobligationer framework, that Moodys chose to attack in June. The agency said that the proportion of adjustable rate mortgages in the pools meant that issuers would depend more on market access and refinancing risk. The agency asked issuers to put in more overcollateralisation to keep triple-A ratings.
"S&P and Fitch havent responded this way and we have concluded that we fundamentally disagree with Moodys," says Blaafalk.
Danske dropped Moodys from the Realkredit Danmark programme at the end of June, and accused the agency of failing to understand Danish mortgage bonds. More pressing though was the real cost of complying with the revised criteria.
"From what we know, Moodys would have asked for an additional Dkr32.5bn in extra over-collateralisation," says Blaafalk.
Resolution gets real
The other fly in the smooth ointment of Danskes wholesale funding programme is Denmarks resolution regime.
Amagerbanken, the first bank to fail under the resolution regime, had assets valued at Dkr15.2bn when it failed. By contrast, Danske had assets of Dkr3.12tr at the end of the first quarter this year.
It is the most systemically important institution in Denmark and as such, the real target of the resolution regime. However, Blaafalk says the resolution regime hasnt hit spreads too hard.
"We had a temporary 5bp-10bp widening in senior spreads [after Amagerbanken], and we still get a lot of questions about applying the resolution regime," he says. "The systemic support is important, but our senior creditors also tend to analyse Danske as a standalone credit."
He explains that the resolution regime has hit the smaller Danish banks hardest, and that a level playing field would be preferable. "There has been some stigmatisation of the Danish banking system on the back of the resolution regime, as were the only country in Europe with one," he said. "It would be nice not to be the only one."
But Danskes strong capital position helps insulate it from resolution worries. The Danish bank finished a Dkr20bn rights issue in March this year and is hoping to repay a state guaranteed hybrid issue in 2012, rather than at the call date in 2014.
"Were negotiating this with the government," says Blaafalk. "We also saw it as a good window of opportunity most likely coming out in the market before others, which might need to issue equity in the next year or so. You could say that, with the state hybrid as well, were a little overcapitalised, but its nice to have clean capital. S&P and investors are looking more at equity than before."
Liquidity in the balance
While Danske is well capitalised, liquidity hangs in the balance awaiting final word on the Basel III Liquidity Coverage Ratio. The Basel III draft liquidity rules had an exemption for banks in countries likely to include Denmark without sufficient outstanding government bonds to make up liquidity buffers.
In Denmark, the equivalent rates products are the match-funded Realkreditobligationer mortgage bonds, prompting Danish bankers to expect the European Commissions CRD IV draft to give these instruments "Level 1" status in liquidity books. However, CRD IV delayed a ruling on the matter, committing to an observation period but adding no detail on eligible assets.
"We havent revealed our liquidity position under the LCR, but it will matter to us whether Danish covered bonds are reclassified as Level 1 assets," says Blaafalk.
Danske will rely more heavily on covered bonds under the 2007 law in future, though this is just a change in the mix of long term funding the match-funded mortgage bonds will stay.
"My funding strategy for the future will be 50/50 covered bonds and senior," says Blaafalk. "Ill use covered bonds to term out funding five to10 years can be done in covered, but theres no point paying up for senior, so Ill keep maturities at around three or five years."