Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Western EuropeAugust 6 2006

Eastward expansion

Nigel Dudley reports on the favourable fortunes of those Swedish banks that have set up shop beyond their borders, venturing into Russia and even China.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

In the middle of May, it is customary for Swedish students to celebrate the end of their exams by packing themselves into open lorries and driving around the centre of Stockholm, dressed rather eccentrically and making a lot of noise.

Had they been a less soberly minded bunch, the country’s bankers may have been tempted to join them, following yet another series of record results. Nordea’s net profits for the first quarter were up 34% on the previous year at €665m, while those at SEB climbed by 41% to SKr2.8bn (€305m) and at Svenska Handelsbanken they were SKr4.1bn.

These results were achieved despite intensive competition in the domestic market, which – as it has in the rest of Scandinavia – squeezed margins, and a stronger presence from western institutions looking for a chunk of the booming private equity market.

This was more than offset by strong growth, which has enabled companies – from the largest to the thousands of small and medium-sized enterprises that are the lifeblood of the economy – to post good results, enabling the banks to reduce their bad debt provisions.

And the prospects for the rest of the year and 2007 look equally good. According to SEB, Swedish gross domestic product is likely to grow by 3.5% this year with low capacity utilisation allowing further good growth for the next 12 months.

Domestic driven

SEB says that these two years of strong growth will be “mainly driven by domestic demand. Private consumption will be fuelled by an expansive economic policy while the upturn in capital spending will continue.” The bank’s economists expect employment to rise without appreciable inflationary pressure as the Riksbank (central bank) raises rates slowly to snuff out any pressures.

The outlook is equally strong for central and eastern Europe, which have become increasingly important markets for the four banks that dominate Sweden’s markets – the pan-Scandinavian Nordea and local institutions SEB, ForeningsSparbanken (Swedbank) and Svenska Handelsbanken.

According to SEB, there will be some signs of overheating in the Baltic states, while Poland’s economic recovery will be sustained and Russia will grow at a healthy pace, boosted by high energy prices and a more expansive fiscal policy.

But, says SEB economist Bo Enegren, while the outlook for Russia is positive in the short term, “the low investment level is a cause for concern when it comes to long-term growth. Investments are growing but at a low level compared with other growth economies.”

The leading banks are focusing more on this region as they develop strong franchises outside their domestic markets. The Nordea Group includes the largest Finnish bank and the second largest financial institutions in Denmark and Norway, while Svenska Handelsbanken has a significant presence in the other Nordic states and the UK. Swedbank has – after its purchase of 100% of Hansabank Estonia – the leading market share in the Baltic states and SEB has bought banks in Norway and Russia, as well as having a presence in the Baltics and Germany.

The reason for this type of expansion is in part because they are following their corporate customers that are doing good business in these countries – and also in China.

But the main reason is that they have little alternative, following the controversial decision in 2001 by Mario Monti, then the EU’s competition commissioner, to block a merger between Swedbank and SEB on the grounds that they would have too dominant a share of the Swedish market.

Local frustrations

It is a decision that still rankles with Swedish bankers, who argue that it runs counter to the principles of the EU as it denies Swedish banks the opportunity to grow to a sufficient size that they can compete on equal terms with the largest European and US financial institutions.

They say the Nordic banks are too efficient to be an attractive purchase for a major western bank but they cannot move into the larger EU markets as France is so hostile to foreign ownership and there are major problems in modernising German financial institutions.

According to Nils-Fredrik Nyblaeus, executive vice-president and member of the group executive committee at SEB: “Sweden has come a long way in getting its banking system together. It is efficient and very different to Germany, where the system still needs restructuring, even if they are now moving in the right direction.”

SEB is now one of the leading five banks in Germany, and while the merchant, asset management and real estate business is performing well, Mr Nyblaeus says: “The return levels in the retail operations are not satisfying. Germany is on its way to becoming healthier and doing business is becoming easier, but the structure is still very bureaucratic.”

In recent years, cost cutting in Germany has helped boost profits but there is now a feeling that this has gone as far as it possibly can. SEB’s Mr Nyblaeus says that it is always possible to improve efficiency, but “our retail organisation has been through five major cost-cutting exercises so the organisation has become tired”.

“Now it is a matter of injecting energy to improve the quality of service to our customers and to increase our sales activities. Today revenue generation is much more important than cost control in our German operation.”

As there is little sign that competition policy will change, bankers are reconciled to the banking structure remaining broadly the same – in the short term there is unlikely to be any major strategic alliance.

However, there is room, they say, for some consolidation, but this will take the form of the smaller banks being bought by banks from other Nordic states – for example, SEB bought Privatbanken in Norway last year.

“We have a strong home market in Sweden and in the Baltic countries. We intend to be a leading bank in this region – and to do so we have to expand. We opened last year in Helsinki and we will concentrate on the Nordic and Baltic countries and on expansion in Russia,” says Mikael Inglander, executive vice-president and chief financial officer at Swedbank.

Indeed, the most significant trend of the past year has been the growth of earnings from outside the Swedish market. Nordea derives almost two-thirds of its operating profit from overseas business. For Svenska Handelsbanken, the figure is more than 15%.

The comparable figure for Swedbank is 15%, with the bulk of that coming from Hansabank, and SEB makes 60% of its operating profit from overseas, mostly from Germany and the Baltic states.

Rating agency Moody’s notes: “Foreign activities are strongly controlled by the Swedish mother company and asset quality remains sound.” However, it warns that “some of the international activities are in countries with a less favourable operating environment compared with Sweden and this may in some time lead to some pressure on asset quality”.

The dramatic speed of growth in the Baltics will ensure that these markets – although small – will continue to be profitable. But the real interest will come further east in Poland and Russia, where the involvement of Swedish banks is now gaining momentum.

Polish promise

Nordea, for example, points to the rapid growth in the Polish market, where it has both a banking and insurance business. That, says Thomas Neckmar, executive vice-president and head of Poland and the Baltic countries at Nordea, is set to continue because Polish industry can now match the productivity of its western competitors while charging one-sixth of the labour costs.

“We will open 20 new branches in Poland and growth will be organic. We want to ensure we are not buying bad assets. Now we know the market well as we have been there for five years,” he says.

Russia is also becoming an increasingly important market. Nordea has a 26% stake in International Moscow Bank and Frans Lindelow, deputy head of retail at Nordea, says: “There is a lot of potential and opportunity to grow.” Swedbank’s Russian interests include branches in Moscow and St Petersburg, while SEB owns Petro Energo Bank in Russia and Bank Agio in Ukraine.

The banks say they are meeting the needs of their clients that are doing an increasing amount of business in Russia.

The same argument applies to the decision of the banks to open up in China. SEB is in Beijing and Shanghai while Nordea will also be opening a representative office in China. One of the significant developments in Scandinavia is that even some small and medium-sized companies are selling to or manufacturing in China. “We are following the needs of our customers,” says Mr Lindelow.

Mr Inglander agrees that looking after existing customers is the main driver for entering these countries but adds that in Russia “there is also good business to be done in the consumer areas”.

On the homefront

Underpinning the performance of the banks is the continued strength of the domestic market, where despite the tough fight for customers, earnings continue to rise, the quality of assets improve and the readiness of customers to use alternative delivery options is reducing costs. According to Swedbank’s Mr Inglander: “We see volume growth but squeezed margins. In Sweden, lending is growing at 10%.”

At Nordea, Mr Lindelow says that the mortgage business continues to provide the banks with good earnings: “Mortgages provide 10% of our revenues. There are clearly margin pressures but we keep wider margins in other areas.

“Margins are tight for corporate lending too but this reflects the better credit quality and the reduced risk. Companies are doing well and we have a well-controlled credit portfolio.”

Foreign exodus

A bonus for the local banks is that there is little competition – except for the big corporate transactions – from the international financial institutions. “More than a decade ago there used to be 15-20 large international banks with a presence here. Now there are only a few left and they are only interested in the big deals,” says Mr Nyblaeus.

One area where banks such as Royal Bank of Scotland are actively involved is the rapidly growing private equity business.

A growing number of Scandinavian companies are converting from public to private and some are even being sold more than once – examples of this are Domestic, which was created by Electrolux, and Thule, which manufactures car accessories.

There has never been a better time to take companies private. “There is an extremely developed market in this sector. There is a lot more money than there are investment opportunities, which means that it is often possible to get a better price for a private equity sale than an IPO [initial public offering],” says Jonas Martin-Lof, head of corporate finance at Nordea.

Among the recent transactions are the acquisition of Outokumpu Copper, the metals and technology company, by Nordic Capital for €599m last year, while other major transactions have taken place for companies such as ISS, Danske Traelast and Elitefonster. And says, Martin-Lof, there is no sign of this trend coming to an end.

Was this article helpful?

Thank you for your feedback!

Read more about:  Western Europe , Sweden