Vestjysk Bank’s Q1 2020 Quarterly Report
Nasdaq Copenhagen A/S
13 May 2020
Q1 2020 Highlights
Vestjysk Bank reported a profit after tax of DKK 57 million in Q1 2020. The reported profit was adversely affected by the impact of the Corona crisis on the financial markets as well as on impairment provisions. The Bank increased impairment provisions by DKK 50 million. The Bank has made a total impairment provision of DKK 100 million for economic uncertainty, corresponding to 1% of the Bank’s loans and advances.
- Profit after tax was DKK 57 million (Q1 2019: DKK 72 million), for an annualised return on equity after tax of 7.7%.
- Core income of DKK 198 million (Q1 2019: DKK 221 million).
- Negative market value adjustments of DKK 4 million (Q1 2019: positive value adjustments of DKK 20 million).
- Cost ratio of 63.7% (Q1 2019: 55.8%).
- Core earnings before impairment allowances of DKK 72 million (Q1 2019: DKK 98 million).
- Impairment of loans and receivables, etc. of DKK 12 million (Q1 2019: DKK 22 million). Impairment allowances on agriculture amounted to a net reversal for the quarter.
- The Bank’s capital requirements were 13.0%, consisting of an individual solvency need of 10.5%, a general capital conservation buffer of 2.5% and a countercyclical buffer of 0.0%. The MREL was phased in at 1.875%, 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 22.1, implying an excess cover of 9.1 percentage points or DKK 1,230 million.
- The Bank’s MREL ratio was 22.1. This taken into account, the excess cover was 7.2 percentage points, or DKK 975 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 our society since 12 March 2020. The vast majority of the Bank’s employees have been working from home, and the Bank’s branches were closed for business 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 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. To date, 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 effect 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 adversely 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, pig and dairy farmers have not been hit by the crisis, and although pork settlement prices dropped towards the end of the period, they are still at a high level. The high pork prices have enabled customers, some of which are credit-impaired, to repay debt to the Bank. This resulted in reversals of impairment allowances within this sector in Q1 2020. We expect this development to continue, but if the price level starts to fall, it could have an adverse effect on the Bank. Agriculture still faces risk factors such as an outbreak of African swine fever in Germany and/or in Denmark and a potential adverse impact of Britain’s exit from the EU (Brexit).
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. So far, private residential rentals have not been affected, 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 and that some of the Bank’s retail customers may be affected by unemployment, for example.
The Bank’s DKK 100 million impairment provisions due to economic uncertainty and DKK 50 million capital reservation in the individual solvency need are expected to 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
At 25 March 2020, Vestjysk Bank suspended its 2020 profit guidance due to the unforeseeable effects of the Corona crisis. The Bank has prepared a new 2020 profit forecast based on the current economic outlook. As it is entirely dependent on the duration and depth of the Corona crisis, the forecast is subject to considerable uncertainty. With this qualification, the Bank guides a profit after tax of DKK 160-240 million, as compared with the previous guidance of DKK 250-300 million.
In addition to the ongoing Corona crisis, we also face uncertainties relating to the global economy and, in particular, agricultural settlement prices. As mentioned, any major adverse development in these could impact the Bank’s impairment allowances.
Please address any enquiries regarding the present announcement to Jan Ulsø Madsen, CEO, at tel. (+45) 96 63 21 04.
Vestjysk Bank A/S
Jan Ulsø Madsen
Vestjysk Bank A/S
Tel. (+45) 96 63 20 00
CVR no. 34 63 13 28
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