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Danish banks exposed to defaults by farmers hit by Russian ban

[COPENHAGEN] Danish banks' rebounding profits could prove short-lived as tumbling agricultural prices and Russia's ban on European food imports threaten to spark more defaults among farmers who have borrowed billions of crowns.

The country's top lenders reported better-than-expected earnings for the third quarter, with its largest bank Danske almost doubling profits and promising higher dividends amid overall lower loan losses and cost cuts.

But the earnings conceal a growing problem: some banks'a gricultural loan losses are increasing because the ban and falling commodity prices are forcing some farmers off the land and producers out of business. "The current prices will make it difficult for them (agricultural companies) to balance their finances and some of them will have to cease production and sell their farms,"Sydbank, Denmark's fourth-largest lender, said in its third-quarter report on Oct 28.

It estimates prices for milk and pork have fallen 20 per cent since a peak earlier this year. This is having serious repercussions in a country where In a country where pigs outnumber humans two-to-one.

Pork alone accounts for 5 per cent of Denmark's total exports and the country stands to lose US$685 million, or 12.5 per cent, of its pork export revenues this year due to Russia's refusal to accept EU meat imports, the Danish Agriculture and Food Council has estimated.

Sydbank booked around 60 million crowns (S$13.05 million) of losses on its agricultural loans in the third quarter, as the volume of impaired loans grew by 191 million crowns to 1.79 billion crowns, or 15 perc ent of Sydbank's pretax profit for the quarter. "The current situation within the agricultural sector could push to further consolidation among small and mid-sized banks,"analyst Peter Falk-Sorensen at research company Dansk Aktie Analyse said.

More than 60 banks in Denmark have either merged with rivals or closed since the financial crisis began in 2008. Consolidation in the sector has reduced the total number of farmers by 5,000 since 2007 to below 40,000.

The Danish Financial Services Authority (FSA) has put agricultural loan losses in focus in its supervision of the banks. "The banks must...consider the need for increased collective impairment charges and reserves for solvency requirement," FSA Deputy General Director Kristian Via Madsen told Reuters.

Loan losses at Denmark's number three bank Jyske, overshot analysts' expectations in the third quarter by 150 million Danish crowns, rising to 495 million crowns against 232 million a year ago.

In the first nine months of the year loan impairment charges for the agricultural sector almost doubled to 273 million crowns, inflated by the Russia crisis, which has eroded expectations of agricultural clients' ability to service debt, the bank said. "We have booked loan impairments at a level that we think is right but if the crisis continues further impairments could be necessary," Jyske Bank Chief Executive Anders Dam told Reuters.

About 8.6 per cent of Jyske Bank's corporate lending goes to the agricultural sector but its latest figures show almost 32 per cent of its impairment charges came from farmers.