The coronavirus pandemic could severely impact Danish banks' earnings, according to experts, but the crisis may also provide an opportunity for them to strengthen their client relationships.

Shares in Danish financial institutions have dropped dramatically in recent weeks, with the S&P Denmark BMI Banks Industry Index decreasing by close to 40% since Feb. 20.

The coronavirus outbreak and subsequent lockdowns will have an "extensive" impact on Danish bank earnings in 2020, Jyske Bank equity analyst Anders Vollesen said. As such, and given the huge uncertainty surrounding the crisis, the share price drops have "not been an overreaction," he said.

"This crisis affects virtually all banks' different revenue streams and also some of their costs," he said.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

Several Danish banks have changed their outlooks for 2020 in light of the pandemic. Ringkjøbing Landbobank A/S downgraded its expectations for the year, while Jyske Bank A/S, Spar Nord Bank A/S, Djurslands Bank A/S, Jutlander Bank A/S, Salling Bank A/S and Kreditbanken A/S have suspended their outlooks.

Sydbank A/S has terminated a 250 million kroner share buyback program, Nykredit A/S has postponed the distribution of 2019 profits to shareholders, while Danske Bank A/S is also reassessing its dividend. They, too, have suspended their guidance for 2020.

Moody's, meanwhile, downgraded its outlook for the Danish banking system to negative on March 26, saying it expects the coronavirus outbreak to lead to an uptick in problem loans and to exacerbate pressure on banking sector profitability.

NII, trading fees

On the income side, net interest income and as well as trading fees are likely to take a hit, Vollesen said.

Falling interest rates in the interbank market are driving down net interest margins across the board, he said, adding that the extent of the impact on net profits will depend on how diversified an individual bank's business is and how dependent it is on net interest income.

Banks in Denmark have recorded a steady drop in net interest margin and net interest income over the past few years, which has put their profitability under pressure.

Since 2015, NII for the aggregate Danish banking sector has declined by 23%, according to S&P Global Market Intelligence data.

Most banks have already imposed negative interest rates on businesses and retail customers, leaving them with limited scope to alleviate the continued downward margin pressure, Vollesen said.

Impairments

Asset quality of Danish banks is also set to deteriorate, according to Moody's, which said the repayment capacity of borrowers in coronavirus-exposed sectors such as leisure and transportation will be the worst affected.

Vollesen said impairments as a result of the crisis are likely to have the most severe impact on banks' results in 2020, but the extent is hard to predict. Impairments could be about half the levels recorded by banks during the financial crisis of 2008, although this number is subject to significant uncertainty, he said.

As for Danish banks' exposure to high-risk sectors, there is a "huge variation" among them, Vollesen said. For example, Danske Bank has an exposure of about 1.7% to hotels, restaurants and retail, whereas this figure is 4.5% for Jyske Bank and 17.8% for Sydbank.

Well capitalized

While Danish banks may be facing an earnings shortfall this year, it is not a long-term earnings crisis, said Lars Krull, a banking researcher at Aalborg University in Denmark. Small or large, the country's banks are well capitalized and can "withstand relatively large shocks," he said.

The average common equity Tier 1 ratio for Danish banks is one of the highest in Europe.

Furthermore, the Danish government released the banks' countercyclical capital buffer on March 11, increasing their lending capacity by about 200 billion kroner, according to government calculations.

The banks' solid capital position enables them to support their customers through the downturn and thus gain a deeper footprint in society, Krull said.

"As opposed to the financial crisis [of 2008], banks are not the problem, but part of the solution. They will become more important partners for companies in the future," he said.

Danish banks have already announced measures to help their clients through the crisis. Danske Bank, for one, has extended credit periods and suspended negative interest rates for small businesses.

The Danish government has also launched various schemes to provide financial support for businesses and workers, which will make a significant difference for the country's banks, Krull said.

As of March 27, US$1 was equivalent to 6.74 Danish kroner.