Denmark's Roskilde: a small bank in big trouble

By Kim McLaughlin and Rasmus Jorgensen

COPENHAGEN, Aug 25 (Reuters) - Nordic banks have prided themselves on how little they have suffered from the U.S. sub-prime crisis -- but the implosion of Denmark's Roskilde Bank ROSK.CO suggests at least one has made similar mistakes.

The apparant reason for the firm's demise: a "slipshod" credit policy and a collapse in the local property market.

In what could be a cautionary tale for the region's financial sector, Denmark's central bank was forced to take over Roskilde and tell its investors on Monday they were unlikely to see their money again [ID:nLP567325]

Denmark's eighth-largest retail bank by customer share, Roskilde had put itself up for sale in July in the face of mounting writedowns on real estate loans.

When no one wanted to buy the firm, the central bank stepped in with a 4.5 billion crown ($890.7 million) bailout including money from the private sector as well as the taxpayer.

Denmark's real estate market has been extremely hard hit as the country has fallen into recession.

Its housing market downturn deepened in the second quarter, spreading from Copenhagen to the rest of the country, according to the Association of Danish Mortgage Banks.

House prices across the country have fallen 3.9 percent from a year earlier, while Copenhagen prices slumped 10.7 percent.

This year, a large number of developments have gone bust in Denmark, a country of 5.5 million, although individual home owners are more insulated as years of prosperity mean they have built up a lot of equity in their assets.

Roskilde's heavy exposure to property always meant it was a potential victim, although Danish central bank governor Nils Bernstein pointed to the bank's own policies as well. He said Roskilde had a "slipshod" credit policy.

In it full-year accounts in February, Roskilde said real estate project finance accounted for 23 percent of its outstanding loans and buy-to-let real estate accounted for an additional 20 percent. In other words, nearly half its lending was tied to property.

According to BJ Consult, an independent consultancy, the banking sector average in real estate exposure was closer to 20 percent in July with leading banks Jyske (JYSK.CO) at 11 percent and Sydbank (SYDB.CO) at 13.5 percent.

BJ Consult also noted how quickly Roskilde had grown. It has 33 billion crowns of loans now, versus just 7 billion in 2003. The bank has has 24 branches in Zealand, with 600 employees and about 100,000 customers.

Its market capitalisation of $203 million -- as of Friday before its shares were frozen -- is now dwarfed by its debts.

Roskilde said an uncompleted audit had revealed a further 1 billion crowns in likely writedowns on loan provisions that would hit six-month pretax earnings. This is in addition to the expected loss of 520 million to 540 million forecast in July.

Roskilde's half-year report will be published on Aug. 29.

According to Roskilde, customers have withdrawn 6 billion crowns since July, despite guarantees from the central bank.

In its first-quarter accounts, Roskilde said it had total debt of 37.6 billion crowns with 2.5 billion in subordinated capital and hybrid core capital. It had 15.8 billion crowns in deposits and had extended 33.4 billion in outstanding loans.

External auditors says that a few major real estate accounts have yet to be recorded in the bank's accounts.

The central bank said that shareholders and holders of hybrid core capital and subordinated loan capital would most likely lose their money.

(Reporting by Kim McLaughlin and Rasmus Nord Jorgensen; Editing by Erica Billingham)