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The Mortgage-Credit Institutes

The financial result of the mortgage-credit sector was extremely favourable in 1997. The profit before tax rose to kr. 7.6 billion, compared to kr. 6.4 billion in 1996, thus exceeding the previous record of kr. 6.8 billion in 1995.

The profit for the year was primarily achieved from net reversal of loan-loss provisions amounting to kr. 0.2 billion. The fact that the reversal of previous provisions exceeded new provisions is related to the high level of activity in the property market and rising property prices, reflecting the low interest rates, the general improvement in customers' finances, and thereby a low number of enforced property sales.

Capital gains on the securities portfolio rose to just under kr. 2 billion.

Income from interest, fees and contributions amounted to kr. 8.4 billion. This is a stabilization of the 1996 level.

In recent years the mortgage-credit sector's expenditure on staff and administration has risen. The reason is the strong activity in the property

market and the efforts to promote more direct customer contact, which requires additional staff, as well as continuing relatively large investments in computer systems and system development.

In 1997 lending by the mortgage-credit institutes rose by 7 per cent, cf. Table 13 of the Appendix of Tables.

Chart 28 shows the distribution of net new lending on respectively "old" and "new" mortgage-credit institutes. Net new lending is compiled as gross new lending less early redemptions, thus excluding remortgaging transactions. Should early redemptions exceed new lending, this figure may be negative.

In 1994 the "new" mortgage-credit institutes accounted for 94 per cent of net new lending. Net new lending by the "old" mortgage-credit institutes was kr. 2 billion in 1994, whereas total net new lending amounted to kr. 26 billion. A high number of remortgaging transactions was seen in 1994. The bank-owned mortgage-credit institutes, which in 1994 had just entered the market, thus used the banks' traditional contact with customers to take over customers' mortgage-credit loans in connection with remortgaging.

The market stabilized in 1995, 1996 and 1997. Remortgaging declined to a lower level, while the "new" mortgage-credit institutes' share of net new lending fell to around 50 per cent. Total net new lending amounted to kr. 81 billion in 1997.

In the period 1994-97, as a consequence of their large share of net new lending, the "new" mortgage-credit institutes increased their share of total mortgage-credit bonds in circulation, but the three "old" mortgage-credit institutes still dominate the market with 84 per cent of bonds in circulation at end-1997, cf. Chart 29. The "old" institutes receive larger ordinary instalments since a greater proportion of their loans were granted a long time ago, so that their share of the volume of bonds in circulation declined in 1997, even though they accounted for more than 50 per cent of net new lending.

The ability to offer loans at variable interest rates was a parameter of competition for the mortgage-credit institutes in 1997. Efforts to reduce the development costs for this product among other things induced two otherwise independent mortgage-credit institutes to initiate cooperation.

Other structural changes included the establishment of a new mortgage-credit company owned by a bank and a mortgage-credit institute, and the acquisition by a mortgage-credit group of a "telebank" from a bank. The background to these two constellations appears to be the opportunity for optimum utilization of the expertise held by the respective personnel groups and of the existing computer systems. This reduces the traditional establishment phase involving training of employees and the development of new computer systems and provides for a competitive edge in the competition for customers.

The development in the mortgage-credit sector also shows that the banks are no longer the sole cause of the erosion of sectoral barriers. The mortgage-credit sector now competes actively with variable-interest loans which have similarities to bank loans, or even more directly by offering a full programme of banking services.

Investment Associations

The first Danish investment associations were established in the 1920s, although the present structure of the sector emerged in the 1960s. In recent years investment associations have become an important part of the Danish market for savings and investments, and the number of sections specializing in certain securities has increased. At the end of 1991 the various investment associations had a total of 128 sections, while at end-1997 the number had increased to 223. The assets of the investment associations have trebled to kr. 89 billion in the same period.

In 1997 the assets increased by kr. 34 billion, of which kr. 24 billion is attributable to sales of new investment certificates, while the remainder of kr. 10 billion was due to value adjustments on securities, etc. held by the associations.

Price increases on bond and share markets are thus part of the reason for the growth in the assets held by investment associations in recent years. At the same time the low level of interest rates has induced savers to seek other investment opportunities than e.g. deposits with banks.

The associations' spreading of their investments on various securities contributes to reducing the investors' risks, but the associations cannot eliminate all of the risks such as general share-price drops on all markets. A case in point is the autumn of 1997 when the price drops were a consequence of the crisis in Southeast Asia.

Most of the investment associations were initiated by Danish banks and the two largest investment associations are closely linked to the two largest Danish banks. At the end of 1997 these investment associations accounted for just under 60 per cent of the total assets held by the investment associations. Investment associations established by foreign banks made up 3 per cent of the Danish market at end-1997.

VB Finans and Himmerlandsbanken

At the end of 1993 the Nationalbank made available a government-guaranteed overdraft of maximum kr. 4.4 billion to VB Finans, the company responsible for the winding-up of Varde Bank. As described in the 1996 Annual Report, p. 54f., bankruptcy proceedings were instigated against VB Finans at the beginning of 1996, at the request of its Board of Directors. In 1997 VB Finans af 1996, which took over all assets and certain liabilities from VB Finans in connection with the bankruptcy, continued the work of winding up the activities of the previous Varde Bank.

During 1997 the company was able to pay kr. 0.7 billion to the Nationalbank as a result of the winding-up of exposures, sale of properties and share portfolios. The company's total debt to the Nationalbank was thus reduced from kr. 1.1 billion at the beginning of the year to kr. 0.4 billion at year-end.

The company still holds considerable assets to be wound up, and a number of legal actions have been filed against the winding-up estate. It is therefore not possible to calculate the final costs of the collapse of Varde Bank.

In 1997 no amounts were paid under the guarantee furnished by the Nationalbank and a number of banks to the winding-up estate of Himmerlandsbanken, cf. the 1993 Annual Report, p. 48ff. Final calculation of the costs of the winding-up of Himmerlandsbanken cannot be made until the rulings in the court cases filed against the estate have been passed down.