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Danish banks are record-breakingly cheap

Measured against traditional key figures, Danish bank shares have not been this cheap since the most desperate days of the financial crisis, according to new figures from a consultancy company.

19. Oct 2020
5 min
Af Bjørn Willum, freelancejournalist

Measured against traditional key figures, Danish bank shares have not been this cheap since the most desperate days of the financial crisis, according to new figures from a consultancy company. This is due to a lack of trust in the banks’ accounting and their ability to earn money both at home and elsewhere in Europe.

At least on paper, it would currently be extremely good business to buy all the shares in the listed Danish banks.

This is because the total market value of the listed Danish banks this year fell further, while their equity rose to a historically-high level, according to a report from Bank Research.

The financial consultancy company has printed key figures in Nyhedsbrevet Finans for Danish Banks at the end of the third quarter, and they show that, overall, the banks had accumulated equity of DKK 249.3 billion. It is quite simply unprecedented, and it is a consequence of the increased capital requirements after the financial crisis.

However, by comparison, the market value of the banks, i.e. the overall value of all

listed Danish bank shares, as of 30 September constituted just DKK 127.0 billion. Roughly half.

“Measured according to traditional key figures, the Danish banks are as cheap as they have ever been, if you ignore the period when the financial crisis was at its absolute peak,” says Nicholas Rohde from Bank Research.

Investors lack confidence in banks

Equity is also known as a banks booked value and corresponds to all the bank’s assets – receivables with customers, deposits with the National Bank, property value, etc. – minus what the bank owes.

If you believe the banks’ accountants and financial statements, an investor with deep pockets could, in theory, buy the banks for DKK 127 billion, liquidate everything for DKK 249 billion and pocket the difference of DKK 122 billion. 

But investors are not doing that – and they lack confidence in the ability of established banks to earn money. “The decreased returns on equity and perhaps, in particular, that investors are sceptical of the development in the returns of banks in coming years means that they are looking elsewhere or reducing their exposure with banks,” indicated Nicholas Rohde.

Doubts concerning losses on loans

The same doubt – both concerning the accounting of banks as well as their ability to earn money in the future – is also prevalent with respect to European banks in general.

Simon Samuels from the British consultancy company Veritum Partners – who as Bank Research makes a living from advising financial institutions – remarks that “the valuation of European banks on the stock markets is very, very low and much lower than in other parts of the world.”

“I think this largely reflects the uncertainty of investors concerning calculation of loss from loans in some of these financial institutions. The strategy to defer loan losses, spread them out over many years and pretend that the problem does not exist or does not need to be addressed has not worked with respect to the stock market,” says Simon Samuels.

European banks have written down a far smaller part of their loans resulting from the corona pandemic than American banks. And this is like shooting yourself in the foot, warned several participants at an online conference on Thursday, which was organised by the European Banking Federation – a lobby organisation that represents 3,500 European banks.

Shooting yourself in the foot

“It is important to start by dealing with the pain. If we look at what American banks do, they normally deal with the pain and move on. They are in a better position to support the economy,” said Jean-Pierre Mustier, CEO of Italian Unicredit and president of the European Banking Federation.

“I would compare it with going to the dentist. If you have a toothache, it’s painful for a long time. If you go to the dentist, it hurts, but then you are done and can move on,” added the CEO.

The president of the European Central Bank’s supervisory board, Adria Enria, also criticised European banks at the same occasion. “To postpone adjustments does not help the banks re-establish themselves as attractive investment options,” said Adria Enria.

Ban on dividends

To ensure the best possible level of capitalisation for the banks so that they can withstand bankruptcy among their debtors due to the corona pandemic, the European Central Bank (ECB) implemented a ban in July forbidding banks from paying dividends to shareholders.

However, this has also contributed to driving bank shares down.

Among the hardest hit are French banks, which had allocated the greatest returns to their shareholders. Namely, the large bank Société Générale experienced a 62 percent drop in its share price since New Year.

“For a while, the only real benefit that investors enjoyed from banks – the only thing that attracted them to banks – were the nice big returns. However, this year, ECB effectively stopped payment of dividends in the Eurozone to maintain the level of equity,” says Samuels.

Raising capital will be difficult

However, the low market value also makes it difficult for the banks to raise capital on the stock markets when and if they need it again.

“If a bank is not investable, it cannot attract capital. And if it cannot attract capital, it cannot distribute it to society and consumers,” says the general secretary of the European Banking Federation, Wim Mijs, to Nyhedsbrevet Finans.

But why is this a problem at all – after all, banks have huge equity today?

“Absolutely. The banks are part of a solution and they are well-capitalised,” replies Wim Mijs, adding that there is a big but. And this is that the banks, the corona pandemic and the lock down have not resulted in a particularly large number of bankruptcies among their customers due to agreements on postponement of loan instalments as well as general public stimulus packages.

“The bankruptcies over the last six months have been on the lowest level in years. This tells us that the economy is behaving naturally. This means that we have to be careful and continue to be investable. If no one will invest in the banks, they cannot pass the money on to society and the companies that need it,” said Mijs.

Read more in Magasinet Finans no. 05/2020, which comes out on 23 October 2020.