The Danish Financial Supervisory Authority
Nasdaq Copenhagen A/S
19 August 2020
H1 2020 highlights
Vestjysk Bank reported profit after tax of DKK 142 million in H1 2020. The reported profit was adversely affected by the impact of the Corona crisis on the Bank’s impairment provisions, based on a management estimate. The Bank increased impairment provisions by an additional DKK 60 million in Q2 in light of the Corona crisis and the uncertainty concerning Britain’s exit from the EU (Brexit). The Bank has thus made a total impairment provision of DKK 200 million for economic uncertainty, corresponding to 2.1% of the Bank’s net loans and advances.
- Profit after tax was DKK 142 million (H1 2019: DKK 163 million), for an annualised return on equity after tax of 9.5%.
- Core income of DKK 425 million (H1 2019: DKK 453 million).
- Market value adjustments of DKK 14 million (H1 2019: DKK 20 million).
- Cost ratio of 58.3% (H1 2019: 53.1%).
- Core earnings before impairment allowances of DKK 177 million (H1 2019: DKK 212 million).
- Impairment of loans and receivables, etc. of DKK 24 million (H1 2019: DKK 37 million). Impairment allowances on agriculture amounted to a net reversal for the first half.
- The Bank’s capital requirements totalled 13.0%, consisting of an individual solvency need of 10.5% and a general capital conservation buffer of 2.5%. The MREL was phased in at 1.875%, which is added to the capital requirement. The individual solvency need includes DKK 50 million, or 0.37 of a percentage point, based on a management estimate of economic uncertainty.
- The Bank’s total capital ratio was 23.3, implying an excess cover of 10.3 percentage points or DKK 1,390 million.
- The Bank’s MREL ratio was 23.3. This taken into account, the excess cover was 8.4 percentage points, or DKK 1,136 million.
Preliminary impact of the Corona crisis on Vestjysk Bank
Like the rest of Denmark, the Bank has been impacted by the official lockdown of the country from 12 March 2020. The vast majority of the Bank’s employees have been working from home, and the Bank’s branches were only open for digital contact until 27 April 2020. During this period, the Bank was able to maintain a reasonable level of operations, and the level of customer activity has been normal.
The Bank’s advisers have proactively contacted all business customers several times to arrange how the Bank can help them through the Corona crisis and to advise them on how to apply the rescue packages provided by the Danish government and parliament. So far, the crisis has not directly impacted the Bank’s lending or impairment allowances to any significant extent. This is expected to change over time, however, if the crisis persists through the coming months.
For retail customers, Vestjysk Bank has provided a range of borrowing facilities in the form of permission to skip instalments, temporary overdraft facilities and increased credit facilities to support customers hit by the lockdown. These measures for retail customers have also had a limited impact on the Bank.
The sector distribution of the Bank’s lending plays a positive part in this. Most of the Bank’s lending is within sectors that have not been particularly badly affected by the Corona crisis so far. At this point, the hotel, restaurant, transport and retail sectors are the hardest hit, and these sectors account for some 10% of the Bank’s total lending.
Vestjysk Bank’s two main sectors, agriculture and real estate, have so far been relatively unaffected by the Corona crisis. Until now, the crisis has not affected dairy farmers, whereas pork prices dropped over the course of first half. They remain at a satisfactory level, however. Because of the relatively high pork prices, pig farmers, some of which are credit-impaired, have been able to repay debt to the Bank. This resulted in reversals of impairment allowances within this sector in H1 2020. We expect this development to continue, but if the price level slides further, it could have an adverse effect on the Bank. Agriculture still faces risk factors such as the risk of an outbreak of African swine fever in Germany and/or in Denmark and a potential adverse impact of Brexit.
The Bank assesses that a Brexit without a trade agreement between the UK and Denmark is also a real risk for the fisheries sector.
In the real estate sector, we are so far seeing an effect on commercial leases in the affected sectors, where agreements have been made to defer rent payments. Depending on the duration and depth of the crisis, this effect could widen. Private residential rentals have not been affected at this point, and this is not expected to change significantly.
Our retail customers are generally doing well and are in a strong position to withstand the consequences of the Corona crisis. In the long term, we expect to see an increase in impairment allowances, but on a manageable level overall.
The situation is expected to change over the coming weeks and months. The Bank forecasts that the negative impact will spread to a wider range of sectors, particularly exporters, and that some of the Bank’s retail customers may face unemployment, for example.
We assess that the Bank’s DKK 200 million impairment provisions due to economic uncertainty concerning the Corona crisis and Brexit and the DKK 50 million capital reservation in the individual solvency need will be sufficient to cover the Bank’s current risk exposure. Projections about the future consequences of the Corona crisis are subject to considerable uncertainty. In particular, the above-mentioned potential risks to pig farmers could lead to an increase in impairment allowances.
Outlook for 2020
On the basis of the preliminary impact of the Coronavirus situation, Vestjysk Bank issued revised full-year 2020 profit guidance on 13 May 2020. At that date, the guidance was a profit after tax in the range of DKK 160-240 million.
Positive financial market developments in the second quarter had a favourable effect on the Bank’s investment portfolio during the period. Also, the continued favourable settlement prices for agricultural products meant that the positive trend in the Bank’s impairment allowances, particularly in respect of agricultural customers, continued throughout the second quarter of 2020.
In an announcement issued on 14 July 2020, Vestjysk Bank upgraded and specified the full-year profit guidance after tax, and still expects a profit after tax to a range of DKK 200-260 million.
Please address any enquiries regarding the present announcement to Jan Ulsø Madsen, CEO, at tel. (+45) 96 63 21 04.
Vestjysk Bank A/S
Kim Duus Jan Ulsø Madsen
Vestjysk Bank A/S
Tel. (+45) 96 63 20 00
CVR no. 34 63 13 28