Pricing themselves out of the market
"If it should work anywhere in the world, it should work in Scandinavia." Arne Martensson, group chief executive at Svenska Handelsbanken, is discussing the integration of national markets and the possibility of Scandinavia's banks becoming pan-Nordic players in terms of image and the geographic distribution of their business. "There are certainly close enough cultural links," he says.
Banks in the region are expanding, and the question is no longer whether they can become Nordic, but who will get there first. But the competition is not just local. Scandinavia's large, high-profile corporates such as Volvo, Nokia and Ericsson need large investment banks with global reach rather than simply regional players. So what's left for the local banks? They must now fight it out in the region's retail market and for the business of Scandinavia's small to mid-sized firms. Each bank has its own approach. And as a few choice mergers have reshaped the region's banking sector, new players with their own growth strategies are emerging.
The region's banking sector is still recovering from the banking crisis of the early 1990s. Most banks owe money to the government or have debt-financing arrangements. For example, Finland's Merita has just issued a $300 million FRN to help finance repayments. Other banks are setting aside some of their profits to pay back loans provided as part of government bail-outs. But recovery has not been uniform throughout the region. Finland's banking sector as a whole started to make profits only in 1996. Norway's banks became profitable in 1993, those in Sweden the year after and those in Denmark the year after that.
Nordic countries do have close cultural and economic ties. But they also have their differences, especially in the approach of their governments to the banking sector. During the crisis, the Norwegian government took over most of the country's banks, and has since monitored the industry closely. Mergers are frowned upon, and Norway remains overbanked.
In Sweden and Denmark, though, the authorities have little doubt that mergers and takeovers should take place. Finland's government is not opposed to consolidation either, and indeed the country may soon find itself overrun by foreign banks if local players do not work quickly to improve efficiency and profitability. Den Danske Bank recently announced that it was considering buying a Finnish bank, and others may soon follow.
Rumours have recently been circulating that the Finnish state-owned bank Postipankki will be privatized. One of the leading contenders to acquire it is Svenska Handelsbanken. Managers at Postipankki are keen to play down the rumours. At a bank reception where the main drink served was scotch whisky, the chairman took the opportunity to make a play on the word "malt" - similar to a Finnish expression meaning to hold one's tongue - to remind staff not to discuss the issue.
In Sweden banks have been quick to merge. This year alone there have been two significant deals. First, Svenska Handelsbanken acquired Stadshypotek. Then Swedbank and Foreningsbank merged to become ForeningsSparbanken. Four banks now control 90% of the Swedish market, down from seven only a few years ago. And there may be more consolidation to come. A merger between Nordbank and Skandinaviska Enskilda Banken (SE-Banken) has been rumoured for a while. But in addition to staying among the top rank of banking in Sweden, these banks want to achieve the size and strength to become Nordic players. They see this wave of mergers and acquisitions as a way of growing without having to absorb the different cultures and traditions of foreign banks.
The merger between Swedbank and Foreningsbank is a case in point. According to Lars-Olof Odlund, executive vice-president of Swedbank, the amalgamation has been relatively easy, as the two banks have similar corporate cultures. "We look upon each other as equal partners," he claims. But he admits that Swedbank is five times larger than Foreningsbank. The merger has been ratified by Foreningsbank's shareholders, and for the time being Foreningsbank will technically be a subsidiary of Swedbank.
So how can this deal be regarded as a merger rather than a takeover? Odlund is quick to point out that the subsidiary status of Foreningsbank is part of a "declaration of will" or compromise agreed between the two executive managements. "We have eliminated potential conflicts," he adds. The merger places the new bank second in Sweden behind Handelsbanken in terms of assets and equity. While the new bank has an impressive retail base, the branch overlap between the two banks provides an ideal opportunity for cost-cutting. One analyst estimates the overlap at around 80%.
But the analyst was sceptical about the future of Foreningsbank. "Although they have created a new name, it just looks like they have been swallowed up," he says. "Let's see what happens to the board." Certainly it seems that a merger was the only way for Foreningsbank to survive. But the bank's staff may not see it as survival. Under the merger proposal, 270 managers of both banks have had to leave their jobs and reapply for posts at the new bank. With at least three applicants being considered for each position, there is by no means any guarantee of reappointment. Even the executive board - where, according to the official line, some members have retired or moved on - is not immune. Meanwhile Odlund stresses that the bank's priority is that the clients do not suffer amid the changes. "The client base is sacrosanct," he asserts.
The merger has highlighted the strategies banks need to adopt in Scandinavia's changing banking climate. ForeningsSparbanken will focus its commercial activities on a select few quality companies, work to keep its strong retail base and try to reduce costs.
It is a strategy that most Nordic banks are embracing, especially since they stand little chance of succeeding in areas such as investment banking. A league table of 1997 bookrunners for Nordic bond issuers shows foreign banks dominating in terms of both value and number of issues. In fact only Den Danske Bank makes any impression on the ranking. In terms of equity issuance, only Carnegie, SE-Banken and Merita are among the top 10 bookrunners. But a 1997 league table of loan arrangers for the region shows the Nordic banks in a healthier position. Enskilda (SE-Banken) comes top, with Merita in third place. But still only five of the top 10 are based in Scandinavia.
Friendly foreigners
Citibank is one of a number of foreign banks with a strong presence in the region. According to James Morrow, Citibank's country managing director in Sweden, the bank's activities are complementary to those of the local banks. "We don't compete for purely domestic business, our focus is on serving global customers," he says, adding that he sees the situation as one of "stable and fruitful coexistence". He is quick to point out that the local banks are well run, and are now well placed to earn a good return for their shareholders. Meanwhile Citibank's presence in the region is designed to capitalize on the international perspective of the Nordic corporates. Citibank, and others like it, have more experience in cross-border transactions than the domestic banks, and they have greater resources. It is not surprising that large Scandinavian corporates should use the services of global investment banks, but does that leave any profitable business for the local banks? Morrow thinks that they should not worry too much: "It is difficult for foreign banks without an extensive physical presence and deep roots in the market to compete for a meaningful share of the domestic market, at least in the short term."
But the competition for the local market is getting more intense. Swedish and Danish banks in particular see scope for achieving economies of scale by muscling in on the markets of neighbouring countries. With Norwegian banks enjoying implicit government protection, Finland is the natural target.
Banks in Finland compare badly with their Swedish counterparts. A study by Kari-Pekka Pietilainen of Finnish securities firm FIM has shown that the difference in efficiency between Swedish and Finnish banks is substantial. And despite the supposed recent restructuring of the Finnish banks, this gap has not narrowed in the past few years. A comparison of income-to-costs ratios shows that with the exception of Alandsbanken, a small, profitable Finnish bank, the Swedish banks are well ahead of their Finnish counterparts. Morrow of Citibank points out: "Swedish banks are ahead of the pack in terms of cost-efficiency and in actually having a Nordic strategy."
Finnish banks insist that they are catching up. Merita is still reaping the benefits of the merger between Kansallis-Osake-Pankki and Unitas from which it was formed, and Okobank and Postipankki are restructuring. But the banking sector is still rather flabby. "You only need to look at the number of staff the Finnish banks employ to realize why the Swedish have such an edge," says Pietilainen. Other analysts point out that Merita has too many disparate interests, including real estate, to turn itself into a lean operation.
But the urge to take over weaker banks is not the whole story behind the desire of Scandinavia's banks to become pan-Nordic players. European integration is another factor. Finland is set to join Emu in the first wave, with Sweden and Denmark likely to adopt a wait-and-see policy. But Norway, having rejected EU membership in a referendum, is out of the whole project for the foreseeable future. With Finland likely to be the first Scandinavian country to lose its currency, Finnish banks will be the first to feel the impact of currency union. "Emu will remove the last barrier to entrance to the local bond market," says Citibank's Nordic market manager Per Etholm.
The need to be big
But there are other factors at play. Scandinavia's experiences reflect the global trend for consolidation, cost-cutting and streamlining in the banking sector. There is also the threat of competition from other financial sectors such as insurance companies. But most Nordic bankers take the view that this is not something to worry too much about. Most banks believe that it is easier for them to provide insurance products than it is for insurance companies to provide banking services.
Instead, competition comes from within the industry. Each bank sees its competitors expanding and fighting harder for business, and feels the need to join in. Morrow of Citibank says: "There is pressure on bank managements to be proactive, to grasp opportunities." Thomas Rywe, head of treasury and capital markets for HSBC Midland in Stockholm explains: "It is driven by fierce competition and the need to be big. Banks need a Nordic approach now, otherwise they are simply too small."
But this urgency in the market, the driving force of the consolidation in the rest of the region, seems to be felt less keenly in Norway. Some mergers have been resisted by the government, with the country's idiosyncratic law on takeovers forming another obstacle. And Christiana Bank's shareholders have vetoed one proposed merger involving the bank.
The Norwegian economy has been distinct from that of the rest of Scandinavia for a while because of its oil exports. For the moment, its banking sector seems to be following a separate course as well, with acquisitions of Norway's banks being put on the back burner. Even so, one banker suggests that Norwegian banks are "looking over their shoulders". The industry, as in Finland, still has a long way to go in cost-cutting. But the key to expansion or acquisition in the country is the government's attitude. "The state will have to decrease its stakeholding at some point," says one analyst. "Norwegian banks still look attractive." Indeed, Jens Stoltenberg, the Norwegian finance minister, announced late last month that the government would reduce its holdings in both Christiana Bank and Den norske Bank from just over 50% to one third. The sale is to take place in 1998.
For the moment, Swedish banks are the main predators. The acquisition of Finnish asset-management firm Ane Gyllenberg by SE-Banken took some in the market by surprise, and was described as a well-kept secret. But many believe it was a good indication of the bank's strategy. "It shows that they are serious," says Jorma Vanninen, analyst at Okobank in Finland. One Finnish banker agrees: "It certainly seems a clever move. Gyllenberg is a valuable franchise and a good brand name. This is another piece of the jigsaw for SE-Banken as a pan-Nordic player." But another is less kind, describing it as a "glamour purchase". He goes on to say: "Everyone knows that Gyllenberg deals for some major families." This is a thinly veiled jibe at the appointment of Jacob Wallenberg - of the Swedish Wallenberg business dynasty - as president and CEO of SE-Banken.
Focus, what focus?
Jacob Wallenberg stresses that the bank's strategy is to focus on its areas of strength: "Shareholder value governs us." SE-Banken has a very high proportion of fee-based earnings, and wants to concentrate on the fast-growing areas of merchant banking and asset management. He adds: "We can't be everything to everyone everywhere."
Or perhaps they can. Just three weeks after Wallenberg's conversation with Euromoney, SE-Banken announced the acquisition of Trygg-Hansa, Sweden's second largest insurance firm. The move is puzzling. Trygg-Hansa has not been particularly dynamic in fund management, one of SE-Banken's self-proclaimed strengths. And Wallenberg is reported to have no plans to sell-off Trygg-Hansa assets. Although there are potential gains in distributing Trygg-Hansa products via SE-Banken's network, this seems a change of direction from Wallenberg's talk of focus on areas of strength. The move is nothing if not ambitious.
Svenska Handelsbanken has also made its ambitions clear. "We want to be seen as a Nordic bank, not just as Swedish," says Arne Martensson, group chief executive. But the process is very much long-term. Handelsbanken's strategy to dominate the region is not just one of acquisition, but of organic expansion. This way the bank can maintain its low cost levels and avoid sacrificing efficiency. Martensson believes the bank's reputation as a lean operator has, if anything, been enhanced by the banking crisis. "I don't want to sound cynical, but the crisis was in a way lucky for us," he explains. "We didn't ask for government support, and are seen as a better bank for it." Handelsbanken's approach has placed it at the forefront of Scandinavia's emerging regional banks. One banker describes it as "the Nordic bank with the Nordic strategy". Its acquisitions of both Sweden's Stadshypotek and Skopbank in Finland were both seen as intelligent moves.
Capital-raising activity provides one pointer to acquisitions ahead. For example, Svenska Handelsbanken's $350 million perpetual FRN in February was part of the financing for its acquisition of Stadshypotek. But SE-Banken's frequent participation in the bond market has not yet resulted in a major deal, such as the much-rumoured merger with Nordbanken. "I'm sure they were considering something that didn't quite come off," says one market insider. But bond issues are not necessarily part of an acquisition package. "Nordic banks are forward-thinking," says Damian Chunilal, managing director of global client products capital markets at Merrill Lynch. "They are happy to access the capital markets when conditions are positive, to repurchase old issues when the timing seems right."
One possible direction for Scandinavian banks is to move into the Baltics. Proximity, historical links and similarities of culture give the Nordic banks an advantage over other international competitors. Matthew Czepliewicz, director of equity research at Salomon Brothers says: "The potential Baltic market is phenomenal. At the moment, the local banks there are not so strong." He adds that Merita's interest in the region could well be with a view to moving into St Petersburg. Matti Copeland, first vice president of Merita, agrees that the Baltic market could be enormous. He stresses that Merita's experiences in the region have been positive, but admits that in countries such as Estonia there is much work to be done. Merita has pushed forward, setting up a branch in Tallinn, which is described as "a strategic move that will grow in importance".
But Merita is a pioneer in this market. Although there is enough Finnish-related business in the Baltics to justify the move commercially, Finnish banks haven't rushed to copy Merita. "Business affairs in the Baltics are not like elsewhere," comments Vanninen of Okobank. "There are bigger risks. We will wait and see." This cautious policy was prompted by a recent Estonian privatization that Okobank participated in, where not everyone "played by the same rules". Another word of warning comes from a fellow Finnish banker, who suggests that Merita may lose touch with its core client base in Finland. "Merita is perhaps in danger of becoming complacent at home. It is understandable when they have such a large market share."
The technological route
Although acquisitions and mergers may appear the key to Nordic banking supremacy, technological developments may provide another route to leadership. Internet banking has particular potential in a sparsely populated region with relatively high income per head. It could result in a decrease in the importance of branches for conducting business.
So far, the extensive branch network of the local banks has been a major barrier to entry for any foreign bank which wants to compete locally. But technological advances have already allowed at least one firm, Citibank, to relocate its Nordic infrastructure to London, while keeping foreign exchange and customer-relation teams in the region. But even the key advantage of having resident staff, their local knowledge and experience, is being eroded by the widespread knowledge of the English language in Scandinavia and the global standardization of products and services. It has long been predicted that sooner or later one of the large German banks will buy a bank in the region. But this may come to nothing if the costs of setting up a skeleton office backed up by new banking technology are low enough.
"German banks are only really interested in expanding in Denmark," remarks one banker. "The rest of the Nordic countries seem too far away." But not everyone agrees. "I find it hard to believe that Deutsche Bank isn't coming," says a banker in Finland. And with a number of promising acquisition targets still available, it may yet be an outsider that becomes Scandinavia's first truly regional bank.