Negative rates are a cash cow for Denmark's mortgage lenders
In Denmark, where banks have been grappling with negative interest rates longer than in any other country, there's one corner of their business that's raking in a lot more money.
Low rates are driving record numbers of borrowers to seek cheaper mortgages, generating bumper fees for an industry that’s otherwise feeling battered.
Danske Bank, which runs the country's second-biggest mortgage finance unit, reckons borrowers may switch more than $70 billion in fixed-rate mortgages this year to take advantage of lower borrowing costs. That's equivalent to more than one-fifth of Denmark’s gross domestic product. Central bank Gov. Lars Rohde says the extreme rate environment is leading to "a historically big wave" of households getting new mortgages.
Christian Heinig, chief economist at Danske's mortgage unit Realkredit Danmark, says borrowers are moving "faster out of the gate" to work with their banks.
The Danish central bank's benchmark interest rate (currently minus 0.65%) is likely to fall to minus 0.85% and stay there through 2021, according to the latest prognosis by Nordea Bank.
Lenders are now laying the legal groundwork to issue mortgage bonds for as long as 30-year terms with negative coupons, meaning more borrowers are likely to join the party.
In Denmark's unusual mortgage market, lenders operate as brokers, issuing bonds on behalf of homeowners and passing payments through to investors. As compensation, they collect issuance, prepayment and loan-administration fees. Denmark made headlines last month when one of its biggest lenders, Jyske Bank, announced it would finance 10-year mortgages with a bond bearing a negative coupon. Jyske won't actually pay borrowers. Rather, bond buyers get back less than they invested.
David Hellemann, chief financial officer of Nykredit Realkredit, Denmark's biggest mortgage bank, says the firm has been relatively insulated from the impact of negative rates by the relative size of its bond-backed mortgage unit. It raised its full-year results forecast in July, citing in part remortgaging.
"With our business model, where we have 95% of our lending as mortgage lending, you can say we are somewhat immune to the negative interest rates, due to the fact that they are passed on to the investors and we get the administration margin," he said in an interview.
Jacob Skinhoj, head of fixed income and Nordic research at Nykredit, says there's no sign investors are balking at negative rates. "All other rates are below zero," he said. "Even today, investors get a decent pickup from buying Danish covered bonds — Japanese investors, German investors, U.S. investors."
Banks in Denmark have steadily increased the fees they charge households and businesses to finance and administer mortgages. They're now about 50% higher, as a proportion of total lending, than they were a decade ago, according to a government report in February.
Rohde of the central bank says the greater fee income is one reason he's not worried about banks' ability to cope with negative rates. Between 2012, when the benchmark deposit rate first dropped below zero, and last year, the country's banks made a total of about $32 billion in profits. Their aggregate costs from negative rates over that period were less than $590 million, he said.
However, Rohde said the banks shouldn’t expect to relive the returns they enjoyed in 2016 and 2017, when profits reached historic highs.
Nor should the damage from negative rates be understated. Stripping out the mortgage operations, banks' business models are under pressure. After seven years of pain, some are now passing costs along to their richest depositors. Net interest income for the industry has declined steeply.
The bankers' association, Finans Danmark, has asked the central bank to step in with measures to support the industry. But Rohde this week rejected those pleas, pointing to overall healthy earnings across the industry, chiefly because of fees.