By Frances Schwartzkopff and Nicholas Comfort
Danske Bank, hampered by negative interest rates for longer than any European peer, promised wealthy depositors it will resist a trend to pass the burden on to them.
Christian Baltzer, the chief financial officer of Copenhagen-based Danske, said that charging people to keep their deposits at Denmark’s biggest bank could pose a risk to society.
Some of Europe’s top wealth managers, including UBS and Credit Suisse, have introduced a fee on large cash balances.
A subject that most banks once treated as taboo is now being openly discussed as the prospect of even lower interest rates looms large.
Most analysts expect the ECB to cut its deposit rate by 10 basis points to minus 0.5% next month.
Denmark pegs its krone to the euro and has set its main rate at minus 0.65%.
Denmark was the first country in 2012 to adopt negative interest rates, when its central bank reduced the benchmark rate to minus 0.2% in July 2012, just before Mario Draghi made his “whatever it takes” pledge at the ECB.
With bond yields and many other rates close to or below zero around the world, investors’ options have narrowed dramatically.
Danske has “no plans to introduce negative interest rates on personal savings or current accounts”, Mr Baltzer said. Danske acknowledges that operating conditions are difficult for the financial industry.
But charging private customers to hold their deposits would create new risks, including eroding progress made toward developing a cashless society, he said.
“Doing so could have a negative impact at the societal level, including the risk of customers withdrawing more deposits in cash,” he said.
Danske is refusing to take a step others have deemed unavoidable.
UBS plans to charge its Swiss clients an annual fee of 0.6% on deposits of more than €500,000.
In Denmark, some smaller banks have hinted they are very close to having to pass on the cost of negative rates to retail depositors, while the country’s bankers association has asked the central bank to step in with measures to mitigate the pain.
Sub-zero rates are becoming almost ubiquitous in the Nordic country.
Denmark’s government debt is trading at negative yields across all maturities, with the yield on the 10-year note sinking to minus 0.6%.
Banks have already passed negative rates on to their corporate clients, but Danske says the risks of doing the same with retail customers are too great for the bank to consider doing so.
Bankers across Europ, including in Ireland, have greeted the news with a collective groan: The negative interest rates that had eaten into incomes for the last half a decade are set to continue and even worsen in the years ahead.
Pointing to yet another period of ragged earnings, executives called for special breaks from the ECB to soften the blow of further rate cuts and other measures to stimulate economies across the eurozone.
But some ECB officials have pushed back, saying interest rates aren’t the main culprit for feeble bank profitability and lenders actually benefited from the resulting economic growth.
In some ways, they both have a point. The good news is that lower rates on loans make repayments more manageable for borrowers, meaning they default less and banks can reduce the amount of money they set aside to cover soured debt.
Unfortunately for Europe’s banks, loan-loss provisions have started to creep up, on the whole, this year. While banks say this is due to their historically low levels and specific problems with certain corporate clients, it could be a sign of worse times to come as international trade disputes weigh on European economies.
Banks have responded to the low rates by reducing their dependence on income from lending. The catch is that the alternative, earnings from commissions and trading, is volatile and tends to drop off when clients are spooked by turbulent markets.
Their other main response, to cut staff costs and other expenditures, hasn’t borne much fruit so far in terms of profitability.
Banks are also increasing the volume of loans to make up for the loss of revenue from low rates. That’s one of the side effects the ECB was hoping for, but this is where it gets ugly for banks. A larger volume of lower-yielding business often means lower returns for shareholders.
That amounts to banks buying market share in lending to the detriment of their margins, said Michael Huenseler at Assenagon Asset Management. “The decline might not be alarming at first, but this is a continual deterioration,” he said from Munich.