November 5, 2014 / 6:01 AM / 6 years ago

Danish farmers, hit by Russian ban, are a thorn in banks' side

* Many Danish banks have large exposure to agriculture

* Sydbank warns some farmers will have to sell their land

* Jyske Bank’s impairments overshoot expectations

* Nordea lending to farmers is 10 pct of its total in Denmark

By Sabina Zawadzki and Ole Mikkelsen

COPENHAGEN, Nov 5 (Reuters) - Danish banks’ rebounding profits could prove short-lived as tumbling agricultural prices and Russia’s ban on European food imports threaten to spark more defaults among farmers who have borrowed billions of crowns.

The country’s top lenders reported better-than-expected earnings for the third quarter, with its largest bank Danske almost doubling profits and promising higher dividends amid overall lower loan losses and cost cuts.

But the earnings conceal a growing problem: some banks’ agricultural loan losses are increasing because the ban and falling commodity prices are forcing some farmers off the land and producers out of business.

“The current prices will make it difficult for them (agricultural companies) to balance their finances and some of them will have to cease production and sell their farms,” Sydbank, Denmark’s fourth-largest lender, said in its third-quarter report on Oct. 28.

It estimates prices for milk and pork have fallen 20 percent since a peak earlier this year. This is having serious repercussions in a country where In a country where pigs outnumber humans two-to-one.

Pork alone accounts for 5 percent of Denmark’s total exports and the country stands to lose 4 billion Danish crowns ($685 million), or 12.5 percent, of its pork export revenues this year due to Russia’s refusal to accept EU meat imports, the Danish Agriculture and Food Council has estimated.

Sydbank booked around 60 million crowns of losses on its agricultural loans in the third quarter, as the volume of impaired loans grew by 191 million crowns to 1.79 billion crowns ($300 million), or 15 percent of Sydbank’s pretax profit for the quarter.

“The current situation within the agricultural sector could push to further consolidation among small and mid-sized banks,” analyst Peter Falk-Sorensen at research company Dansk Aktie Analyse said.

More than 60 banks in Denmark have either merged with rivals or closed since the financial crisis began in 2008. Consolidation in the sector has reduced the total number of farmers by 5,000 since 2007 to below 40,000.

The Danish Financial Services Authority (FSA) has put agricultural loan losses in focus in its supervision of the banks.

“The banks must...consider the need for increased collective impairment charges and reserves for solvency requirement,” FSA Deputy General Director Kristian Via Madsen told Reuters.

EROSION

Loan losses at Denmark’s number three bank Jyske, overshot analysts’ expectations in the third quarter by 150 million Danish crowns, rising to 495 million crowns against 232 million a year ago.

In the first nine months of the year loan impairment charges for the agricultural sector almost doubled to 273 million crowns, inflated by the Russia crisis, which has eroded expectations of agricultural clients’ ability to service debt, the bank said.

“We have booked loan impairments at a level that we think is right but if the crisis continues further impairments could be necessary,” Jyske Bank Chief Executive Anders Dam told Reuters.

About 8.6 percent of Jyske Bank’s corporate lending goes to the agricultural sector but its latest figures show almost 32 percent of its impairment charges came from farmers.

Russia imposed a ban on European food over the summer in retaliation for Western sanctions over its actions in Ukraine, where pro-Moscow rebels are waging war in the east of the country.

“We don’t know how long this situation will continue. The farmers and banks can’t do anything about it. Only politicians can change the situation,” Dam said.

At Nordea Bank around 10 percent of the 81 billion euros ($102 billion) it lent in the third quarter in Denmark was to farmers. Impaired agricultural loans were 815 million euros, or 33 percent of its total impaired loans, according to its latest results.

Even Danske Bank, which has not lent heavily to farmers, has had to make a 100 million crown provision, Chief Executive Thomas Borgen told Reuters.

“For the time being we have not identified big issues but it is right to say that particularly for pig farming and on the milk side prices are falling and as a consequence we have taken a collective charge in the third quarter,” he said.

(1 US dollar = 5.9671 Danish crown)

1 US dollar = 0.7979 euro Editing by Laura Noonan and Susan Thomas

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