COPENHAGEN, July 18 | Wed Jul 18, 2012 6:55am EDT
COPENHAGEN, July 18 (Reuters) - Between five and 15 small Danish financial institutions could fail over the next three years due to the impact of bad loans, following a dozen failures since 2007, rating agency Standard & Poor's said.
Denmark has the most fragmented banking sector in the Nordic region with more than 100 banks, and the economy is still struggling to emerge from the deepest recession since the Second World War, which has forced banks to take heavy loan writedowns and put some out of business.
Standard & Poor's said in a risk assessment of the Danish banking industry late on Tuesday that it saw potential for a further 30 billion Danish crowns ($4.9 billion) in impairment provisions in Denmark over the coming four years.
"Lingering economic imbalances are affecting smaller financial institutions and we expect an additional five to 15 banks could become insolvent," S&P said, adding that such failures could cost the financial sector losses of 6 billion to 12 billion over a three-year period.
The biggest bank failures so far in Denmark have been those of Roskilde Bank in August 2008 and Amagerbanken in February last year.
Denmark's central bank said last month that the country's largest banks are robust but some small and mid-sized financial institutions should boost capital to cope with potentially difficult market conditions.
But the Nationalbank also said that any problems arising among small and mid-sized banks could be solved within the existing framework for mergers and resolution of banks.
The central bank has also said that it expects the number of financial institutions in Denmark - currently 107, to continue to decline. The number is down from 185 in 2000.
S&P also said it expected the number of banks to fall, partly through a speeding up of consolidation within the sector.
But it said that refinancing of 200 billion crowns of government debt issued under a state aid package for banks in 2008 and 2009 would likely be a lesser challenge than earlier expected, owing to a large reduction in bank lending.
Total Danish bank lending fell from a peak of 1.5 trillion crowns at the end of 2008 to 1.2 trillion at end-2011, S&P said.
It said its economic risk scores for Denmark and the Danish banking were both "3" on a 1-10 scale where 1 is the lowest risk. It said that rating put Denmark in a category with countries like the United States, the UK, New Zealand and Korea.
The economy grew by 0.4 percent in the first quarter of this year from the fourth quarter of last year, driven partly by brisk investment, but the overall recovery has remained meagre and Denmark is the weakest-performing Nordic economy. ($1 = 6.0926 Danish crowns) (Reporting by John Acher; Editing by Jon Loades-Carter)
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