2010.08.3109:43:00UTC+00Moody's Retains Negative Outlook For Denmark's Banking System

Moody's Investors Service on Tuesday retained negative outlook for Denmark's banking system. There is uncertainty regarding the banks' medium-term liquidity due to phasing-out of the extraordinary government support that has assisted the banks over the past two years, the rating agency said.

Further, recent macroeconomic data point to a weak economic recovery, the rating agency noted. "In the absence of strong economic growth, banks' ability to maintain profitability through loan-book growth will be constrained," said Oscar Heemskerk, Vice President and author of the report.

While there are some indications that residential house prices may be starting to recover, prices of agricultural property and commercial real estate have continued to drop. "Moody's believes that the prices in these two sectors will continue to be vulnerable to further reductions in the short and medium term, putting further pressure on the banking system's asset quality as a result of high industry concentrations," Heemskerk added. Danish banks also continue to have high exposure concentrations to vulnerable asset classes.

Despite these negative factors, Danish banks are supported by their recent recapitalization. Again, low interest rates enhanced borrower affordability. In addition, the EU has extended the deadline for the issuance of individual government-guaranteed debt up to year-end 2010, which will support Danish banks by reducing their liquidity risks, Moody's said.

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