Large Nordic banks enter 2022 in very good shape

We analysed the financial performance and strategic position of the 8 largest banks in the Nordic region¹ after they announced their 2021 financial results and updated their strategic outlook for 2022 and beyond. What we can conclude is that the Nordic banking sector is in very good shape with high levels of capitalisation and good profitability.

While we observe only one true full-service Nordic player in the market, there is cross-border competition in the most profitable business segments (mainly large corporates and asset management). Additionally, the #1 bank in each local country is a different player², creating a competitive environment across the Nordics and pushing all banks to continuously improve their operational efficiency and customer offering.

In our view, the capital requirements in the Nordics are currently too stringent and expected to be tightened even further, which is a development we don’t find necessary. Hence, we would welcome a sea change from the local regulators towards the banking sector. We believe that would enable much of the excess capital to be redeployed to further business development or returned to the shareholders, thus benefitting the Nordic banking customers and societies at large.

Strong performance in 2021 with one exception

The average return on equity (ROE) of the banks we observed was 10.6% in 2021, which can be considered a very good level, especially when considering their high capitalisation levels and the fact that two players, Nykredit and OP Group³, are not listed companies and as such not driven as strongly by shareholder returns as their peers (see chart 1 below)⁴.

_{Chart 1: Key financial figures FY2021. Source: Sample banks’ Q4/2021 interim reports.
FX rates as of 31 December 2021. Source: https://www.ecb.europa.eu/stats/policy_and_exchange_rates/html/index.en.html}

The obvious leaders of the pack are SEB and Swedbank with ROEs north of 13% and C/I ratios below 45%. In the long run, both aim at an even higher ROE of 15%. We will also consider Nordea to be in this top tier given their more diversified business model that we believe merits a slightly lower profitability as it is associated with a lower risk profile. The only large Nordic bank that is currently underperforming is Danske Bank. That is largely due to them still being stuck deep in their compliance woes. Their financial outlook for the next two years does not provide much optimisms either as they target a ROE of only 8.5–9.0% by 2023, which simply cannot be considered a satisfactory level. We understand that Danske is still only midway through its strategic Better Bank plan and hope to see that translating into much stronger financial performance in the mid- to long-term.

Nykredit had a very strong year and in fact the best in their history. However, we’ll note that their C/I ratio of 38% is not directly comparable to the rest of the banks due to their business mix with >80% of their balance sheet comprised of mortgage loans. Finally, we want to recognise OP Group’s strong market position because their numbers don’t quite do justice to them. The OP Group is by far the #1 player in the Finnish financial market, dominating market shares in almost all retail banking categories and also in insurance.

Innovation and efficient business models

All banks in our sample group invest significantly in their business development and emphasise innovation as a key lever in improving their competitiveness. As two examples of this, we will acknowledge the efforts of SEB and OP Group. Both converted their operating models fully into agile ways of working already several years ago and have since then very deliberately developed their end-to-end operations from customer channels all the way to their core platforms. In our view, the current Nordic innovation leader is SEB with an extensive (and very transparent) development agenda for their current strategy period and concrete historical innovation examples such as SEBx, their separate innovation start-up established in 2018 and their strategic partnership with Google Cloud launched in 2021.

The large Nordic banks are very efficient with an average cost-to-income (C/I) ratio of 47%. Out of our sample group, we must specifically highlight SEB, DNB and Swedbank for having built extremely well-oiled machines running at top-of-the-class C/I ratios (43%, 43% and 44%, respectively). While the banks in our sample are not directly comparable and these three banks have very different business mixes, they all carry balance sheets in the range of EURbn 270–320, so achieving those numbers is nothing short of a great achievement.

One true Nordic champion

The turnaround in their performance during the past 2.5 years is quite remarkable and can be attributed to the relentless cost focus of the CEO, Frank Vang-Jensen, and his leadership team. Nordea reached its 2022 financial targets of a ROE >10% and C/I ratio of <50% one year ahead of schedule and has now published new goals for the following strategy period of 2022–2025.

Those new goals include a new ROE target of >13% and a C/I ratio of 45–47%. While those can be considered ambitious, they are also rather conservative and we would have hoped to see Nordea capitalise on its leading position more forcefully and really attack the markets it operates in. We do see some signs of this with investments into the asset and wealth management area and Sweden, in particular⁵. We also recognise that this was not an optimal time for Nordea to make large strategic moves given the recent and soon upcoming changes in Nordea’s ownership and Board structure⁶.

The only player who could challenge Nordea in terms of its size and business mix is Danske Bank. While we don’t believe they are currently ready to do that, we wish to be optimistic and note some preliminary positive signs towards this direction recently. These include an improved lending market position in Denmark in Q4/2021 and the changes in their company structure with the split of Personal Customers and Business Customers into two separate divisions. Furthermore, Danske was able to convince the ex-Nordea executive Christian Bornfeld to return to the Nordics from the Netherlands and we believe that this will bring new focus and positive momentum to Danske’s commercial efforts⁷.

Of the Swedish, banks SEB provides the best competition to Nordea with strong market positions in the large corporate and financial institutions segments. SEB is currently the undisputed leader in the Nordic custody business with many of its competitors having exited the segment in recent years. In the retail banking sector, the Swedish banks, DNB and Danske, seem quite comfortable in staying focused on their primary home markets, i.e., Sweden, Norway and Denmark, and in fact, some are even pulling out of their non-core markets as evidenced by SHB’s ongoing divestment of their Danish and Finnish businesses.

Punitive regulatory environment

The Nordic banks have begun to return some of their excess capital accumulated during the covid-19 pandemic to their shareholders in the form of dividend payouts and share buybacks and hence, are able to optimise their capital positions to certain extent. However, we are of the opinion that the Nordic regulatory environment is not optimal for banking with extremely high capital requirements compared, e.g., with the large banks in the EU and in the US (see chart 2 below).

<sub>Chart 2: Average CET1 ratios of selected groups of banks
* Santander, BNP Paribas, Intesa Sanpaolo, Deutsche Bank, ING
** JPMorgan Chase, Bank of America, Citibank, Wells Fargo, Goldman Sachs, Morgan Stanley</sub>

While high levels of capital and strict regulatory scrutiny have no doubt been prudent policy amidst the Covid-19 pandemic, we don’t believe the current requirements (not to speak of the expected stricter ones such as the re-introduction of countercyclical capital buffers and the Swedish bank tax) are necessary. The delta in current Common Equity Tier 1 (CET1) ratios between the Nordic banks and their EU and US peers is currently 5–6%, and although that is not equal to capital requirements, we believe that this is due to de facto expectations from the regulators.

We are of the opinion that the current regulatory regime is disadvantageous for the Nordic populations as they hamper the banks’ ability to invest in their business and develop better solutions for their customers. Consequently, we would encourage the Nordic regulators to consider the regulatory environment of banks more holistically and not be too consumed by political pressure that has been driving a punitive policy approach towards the banking sector after the Great Financial Crisis in 2008–2009.

Digital and sustainable

We see this journey dominating the Nordic banks’ investment agenda still for many years to come. This is due to the complexity of banks’ legacy system landscapes that still prevail, even after all the investments and improvements in this space in recent years.

Another major trend that has raised its head in recent years is sustainability. We think that this is one of the most fundamental changes faced not only by banks but also their customers. 

We have seen the first concrete actions from the Nordic banks in this regard as Nordea announced in their latest Capital Markets Day that it will wind down its whole ~EURbn 1.0 offshore lending portfolio by 2025 and Swedbank deciding to stop financing much of the oil and gas sector. As more banks begin to reshape their lending policies, this will pose a real challenge to the business models of many companies. At the same time, it will contribute significantly to the creation of more green and equal societies and open new business opportunities, and hence, we welcome this development. For the banks, financing the green transition is a major business opportunity and accordingly they are all preparing their organisations to be in a good position to capitalise on this trend.

Looking ahead

^{Please note that this article was written prior to the ongoing war in Ukraine and does not include analysis on its impact on the banks in question.}

As we stated at the beginning, the large Nordic banks enter this year in very good shape. They are well-capitalised, profitable, keep developing their business and take their responsibility in advancing the environmental, social and governance (ESG) agenda very seriously. We expect the aggregate income of the large Nordic banks to be somewhat lower this year than in 2022 due to the extraordinary tailwinds experienced in 2021 normalising (e.g. favourable capital markets conditions and historically low loan loss levels) but believe that they will be able to improve their profitability with continued focus on operational and capital efficiency.

We would welcome a real challenger to Nordea as the Nordic champion but do not see one emerging anytime soon. At the same time, we believe that the cross-border competition in some of the most profitable banking segments and in all local markets will keep Nordea and all other players focused and secure in their continuous improvement of customer solution in all the Nordic countries.

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About BearingPoint

BearingPoint is an independent management and technology consultancy with European roots and a global reach. We support world-leading businesses and organisations in over 75 countries, through three focused business units: Consulting, Business Services and Software Solutions.

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[1] Nordea Bank, Danske Bank, SEB, Handelsbanken (SHB), Swedbank, DNB, Nykredit, OP Group
[2] Danske / Nykredit in Denmark, OP Group / Nordea in Finland, DNB in Norway, SHB / Swedbank in Sweden
[3] Nykredit is a financial mutual and OP Group a cooperative.
[4] Average ROE of the group in 2021 excl. Nykredit and OP Group was 11.4%.
[5] Nordea Q4/2021 earnings call and Capital Markets Day 2022. https://www.nordea.com/en/investors/webcasts
[6] Nordea’s main owner, Sampo Group, reduced its ownership since end-2019 to end-2021 from 19.9% to 6.2% and is expected to sell their remaining shares during 2022. Nordea will also change its Chair of the Board in October 2022.
[7] https://danskebank.com/news-and-insights/news-archive/company-announcements/2022/ca07012022