Frontpage News 2013 The banks are comi...

The banks are coming out stronger from Q3

31 October 2013

Things are going in the right way for the Danish banks. Capital adequacy has increased and write-downs decrease. However, low earnings still characterise the sector.

A number of the country's largest banks, representing approximately 70 percent of the Danish banking sector in terms of assets, have just presented their financial statements for the third quarter. Overall, they represent a picture of a more robust sector, which, however, is still challenged by a low return on equity.

"It is very positive that the banks’ write-downs fall. It reflects that the Danish economy is generally feeling better," said the Danish Bankers Association’s Chief Economist, Niels Storm Stenbæk.
The quarterly accounts show a marginal improvement in bank earnings. It is not only good for the shareholders, but it is also good for the economy, says Niels Storm Stenbæk and explains:
"Higher earnings strengthen the banks' ability to raise capital. Partly because the potential return increases, and partly because a portion of the surplus may be transferred directly to equity. More capital in banks strengthens financial stability and prepares the banks to borrow more money for sound investments in Danish companies and private customers." 
Figure 1. The banking sectors key figures in the third quarter for 2013

Source: The chosen accounts cover approximately 70 percent of the entire sector measured on assets. It is typically the larger banks that make quarterly accounts, and thus, the figures reflect this part of the sector to a larger extent.  


Earnings in investor requirements

Stenbæk points out, however, that the banks have not yet reached the goal with the adjustment of costs and revenues that is necessary to meet investors' minimum requirements for the return that can be calculated by the so-called "Cost of Equity". It will mean adjustments in several areas, Niels Storm Stenbæk predicts.
"Things are going in the right direction, but there is still a relatively large gap between the banking sector's actual return on equity and the price of equity. Therefore, most banks warn about cost savings and increased focus on the revenue side," said the Danish Bankers Association’s Chief Economist.
Figure 2: The banks' actual earnings and the cost of equity

Source: Nasdaq OMX, banks accounts and the Danish Bankers Association’s calculations.
Note: The price of the banks' own funds - the so-called "Cost of Equity" - is calculated from a CAPM model, which is based on historical values of a number of bank share prices, the C20 Index and a 10-year government bond. The very low government bond interest pushes the price of the equity down.
The method is inspired by BIS (2009): "The cost of equity for global banks: a CAPM perspective from 1990 to 2009."
The Danish banks' return on equity in 2013 is based on an initial collection of quarterly accounts for Q3 2013.
We gather statistics by using cookies. If you continue using the site, you automatically agree to this. Reject here