The last two years have been brutal for the five largest banks in Denmark, with earnings down 26% and share prices down 27%. Their valuation in price-to-book terms is now 0.9, the same level as in 2013, indicating expectations for return on equity at below the cost of capital, which essentially means the destruction of shareholder value for investors in Denmark’s largest banks.
Despite robust real GDP growth of 1.8% since 2009, the Danish policy of conducting a fixed exchange rate policy against the euro has caused the Danish central bank to follow the ECB into deep negative deposit rates. In fact, the exigencies of maintaining the EURDKK peg meant that the Danish central bank started the regime of negative rates in 2012, before the ECB, and now has the world’s longest standing record of negative rates.
Now, Denmark matches Switzerland with the world’s lowest rate. Pressured by the ECB, the Danish deposit rate hit -0.75% in 2015. It was -0.65% in the years 2016-2019, but recently lowered again to –0.75% after Draghi’s “last hurrah” of a 10 basis-point cut on his way out in 2019.
Seven years of negative rates and five years of deep negative deposit rates are taking their toll on Danish banks and recently the largest banks even introduced negative deposit rates for wealthy clients with large surplus deposits. If we look at Jyske Bank, the second-largest Danish bank, it had around DKK 106bn in banking loans in 2012 and deposits of around DKK 103bn. In Q3 2019, banking loans are around DKK 102bn and deposits of around DKK 138bn. In the same period, the net interest margin has gone from 2.26% to 0.96%, squeezing profits as excess deposits have grown.
In 2020, however, the narrative and the interest rate reality undergo a sea change. Under mounting pressure from banks, savers across the EU at large, German politicians and economists, the ECB hikes the deposit rate and pledges an end to negative rates. The five largest Danish banks get a massive relief and earnings expectations rise dramatically: pushing their share price up by 40% in 2020.