Danish bank shares have performed strongly this year, defying expectations given the European Central Bank’s (ECB) eight interest rate cuts in the past year. Experts attribute this success to a combination of factors, including a price lag, robust earnings growth, and positive developments in banks’ write-downs.

According to analysts, the strong returns from Danish banks this year are due to a price lag, with earnings growth in 2023 and 2024 significantly exceeding share price increases. This year’s price increases have been driven by investors willing to pay more for each krone of earnings, reflecting a growing confidence in the sustainability of bank earnings.

A key factor contributing to the positive sentiment is the development in banks’ write-downs. Nordea’s recent financial statements revealed reversals of write-downs, indicating that the bank had previously overestimated potential losses on customer loans. This suggests a more favorable outlook for asset quality than initially anticipated.

While Danish banks have so far been unaffected by the potential consequences of a trade war, several economists anticipate that these effects may surface during the second half of the year. The uncertainty surrounding trade policies could lead to more cautious lending practices and increased group write-downs, particularly for companies heavily reliant on the U.S. market.

Experts also note that larger financial institutions are generally better positioned to weather economic downturns compared to smaller ones, as they tend to have a smaller percentage of small and medium-sized business clients, who are more vulnerable during economic hardship. However, potential risks remain, particularly for larger banks with exposure to private equity-owned companies with high debt levels.

Looking ahead, the ECB’s interest rate cuts are expected to continue to put pressure on net interest income, making cost control crucial for banks. Despite potential challenges, many financial institutions have solid share buyback programs, which are expected to support positive price development in the second half of the year.

While bank shares may face headwinds during economic downturns, analysts argue that the risk of major write-downs has been significantly reduced since the financial crisis. Moreover, higher inflation could positively impact bank shares by limiting the central banks’ ability to cut key interest rates, thereby benefiting banks’ net interest income.