Jyske Bank and BRFkredit announced that they are planning to merge yesterday (Monday), a move S&P said paves the way for steep growth in mortgage lending and that BRFkredit expects to lead to increased SDO issuance and lower OC requirements.

Subject to regulatory and shareholder approval, the merger would be by way of Jyske acquiring BRFkredit from its sole owner, BRF Holding, for around Dkr7.4bn (Eu964.8m), based on a cash payment of Dkr100m and in 23.76m new Jyske Bank shares.

Jyske Bank, which is Denmark’s third largest bank, will be the parent company in the combined group, and BRFkredit, the country’s fourth largest mortgage credit institution, will be a 100% owned subsidiary of Jyske Bank.

In a statement yesterday Jyske and BRFkredit said that they are “a great match”.

“The merger between BRFkredit and Jyske Bank is a pro-active merger between two strong and well consolidated financial groups which in terms of strategy and business operations complement each other well and will create a fully integrated banking and mortgage credit group in Denmark,” they said.

Standard & Poor’s yesterday affirmed the long term ratings of Jyske Bank and BRFkredit at A-, affirmed the outlook on Jyske’s rating at stable, and changed that on BRFkredit’s rating from negative to stable.

“The affirmation of the ratings on both institutions reflects our view that they will form a bank with business and risk profiles that largely reflect the risks associated with the Danish economy,” said S&P.

It changed the outlook on BRFkredit because it expects the mortgage credit institution to be a strategic core subsidiary following the merger.

As measured by total assets, Jyske Bank Group will almost double in size as a consequence of the merger and become the fourth largest fully integrated banking and mortgage services group in Denmark, noted Merete Poller Novak, head of debt IR and capital market funding at Jyske Bank.

“With Jyske Bank’s full access to debt and capital markets, the future enlarged group will also be strongly positioned to participate in the ongoing consolidation in the financial sector in Denmark,” she said.

Novak noted that liquidity management of the enlarged Jyske Bank Group will be managed at the group level, and that integration of BRFkredit into Jyske Bank is not expected to change the group’s senior unsecured funding needs.

The merger will diversify Jyske Bank’s funding platform, with “a good split between bond, deposit and interbank funding,” and provide direct access to the Danish covered bond market, according to a Jyske investor presentation.

BRFkredit noted that its issuer rating benefitted from the merger plans given S&P’s outlook change, and that overcollateralisation requirements and capital expenses are also expected to be reduced. Lending and issuance of covered bonds (SDOs) in capital centre E are expected to increase, as are volumes and turnover in all bond series, according to the mortgage bank.

S&P said that there is potential for steep growth in residential mortgage lending as a consequence of the merger.

“We expect the new bank to price its mortgage products to attract new customers and take large efforts to refinance the loans of its current retail customers in BRFkredit in the future,” it said. “At present, a dominant part of the residential mortgage loans have been transferred to Totalkredit A/S.”

Jyske Bank has had a joint funding agreement with BRFkredit, whereby home loans are transferred into BRFkredit’s capital centre E for funding. The bank also has distribution agreements with DLR Kredit and Totalkredit, and said that it intends to keep these in place, subject to these institutions’ agreement.