Conservatism, strong deposit bases and past consolidation bode well for Finland’s banks in the global credit squeeze, writes Robert Anderson.

Finnish banks have ridden a strong boom since the country’s banking crash in the early 1990s, and the global credit squeeze looks unlikely to change that. The earlier financial crisis may have immunised Finnish banks against the current global disease.

The banking sector crash was part of a broader economic crisis caused by the collapse of the Soviet Union, which until that time had been the main Finnish export market. Finnish gross domestic product (GDP) fell 13% between 1991 and 1993, and unemployment rocketed to 20% as many companies’ export market disappeared.

The banking sector was in a vulnerable state even before the economic crisis because banks had expanded credit and cut margins in a fight for market share after financial deregulation. As the economy nosedived and interest rates rose, non-performing loans increased and asset prices fell. The government felt compelled to bail out several banks and offer guarantees. Only in 1996 did the sector as a whole return to profitability.

Conservative approach

Today, banks remain conservative in their risk management, and their liquidity and solvency ratios. They have an average Tier 1 ratio of more than 12%, according to Moody’s rating agency, and have kept loan losses very low. Nordea, the largest Nordic bank, has had 15 consecutive quarters of net write-backs of loan provisions, according to Markku Pohjola, deputy chief executive and head of Finnish operations.

Because of this conservatism, Finnish banks made few forays into US structured products and have therefore had to make only limited write-downs so far. One of the worst affected – Pohjola Bank, the treasury bank for the

OP-Pohjola co-operative group – had to make a €57m mark-to-market write-down on its E6m liquidity buffer.

Nor are Finnish banks likely to be hit hard by the global credit squeeze on wholesale funding because of their strong deposit bases, with deposits up 13% last year, according to the Federation of Finnish Financial Services (FFFS). OP-Pohjola, Sampo (owned by Danske Bank of Denmark) and the smaller Aktia Group of savings banks all obtain more than half their funding from customer deposits.

The banking sector also looks less exposed to any US recession because companies are global in their outlook and are benefiting from the resurgence of neighbouring Russia. “Companies are in good shape,” says Mr Pohjola. “Their order books seem to be good still; the effect of any downturn in the global economy is not reflected yet.”

Finnish corporate lending rose 13% last year, according to Pohjola Bank, which focuses on that segment, but it predicts slower growth this year. “It’s slowing down a little but not dramatically,” says chief executive Mikael Silvernnoinen.

More competitive

The banking crisis also helped to make the sector become more competitive by promoting consolidation and the entry of foreign banks. Banks in trouble were taken over, while stronger banks sought economies of scale through acquisitions. The three largest banks now provide three quarters of loans and foreign-owned banks have a market share of more than half of lending and deposits.

Merita, the largest Finnish bank, was acquired by Nordea in 1997, becoming the most significant part of what became the biggest Nordic banking group. Nordea has a more than 30% of the market share in mortgages, consumer lending, retail deposits, corporate lending and corporate deposits, and a 25% share of the investment fund market.

Sampo, the third largest bank and the only one that had successfully expanded abroad into the Baltic states, was acquired by Danske Bank in 2006 for $4bn. This spring it was integrated (with some problems) into Danske’s IT platform. Sampo has a market share in most businesses of less than 20% but is particularly strong in asset management, corporate lending and in the big cities of southern Finland. Danske’s entry into the market is expected to lead to the introduction of new products into the rather conservative market, particularly in mortgages.

The only large Finnish-owned group remaining is OP-Pohjola, which has used its wide branch network to maintain a market share of 35% in mortgage loans, 32% in deposits and 26% in corporate loans.

Distance banking

Banks have cut jobs and branches to improve efficiency and have encouraged distance banking, particularly over the internet. Finland’s large territory and sparse population, as well as its early adoption of computers and mobile telephones, have assisted this process.

“Finland was a laboratory for internet banking,” says Mr Pohjola. Two-thirds of Finns now use the internet to pay bills, compared with just 3% who pay over the counter.

Finnish banking is today at least as efficient as that of its Nordic neighbours because of the consolidation and rationalisation that followed the banking crisis. “It created a good platform for the future,” says Mr Pohjola. Nordea’s Finnish unit has a cost-income ratio of 44%, the lowest in the group.

Finnish banks enjoy slightly higher margins than their Nordic neighbours – average net interest margins are about 1.5% – despite tough competition in mortgages and corporate loans. Profitability has also been impressive, at least compared with the rest of the Nordic region, with commercial banks achieving a return on equity of about 20%.

Higher lending, together with higher eurozone interest rates, led to a rise in net interest income last year. Nordea’s Finnish unit posted an operating profit up 12% to €1bn, the fastest growth in the group, and Pohjola increased its net profit by 18%.

New products

However, the future is more uncertain. Banks need to find new sources of growth to replace the mortgage boom they have ridden over the past decade.

Mortgages boomed because it was only relatively recently that Finland became a wealthy country and moved to liberalise its credit market. Finns bought properties as they moved to the big cities from the countryside and many still live in smaller flats than their Nordic neighbours.

Credit liberalisation enabled banks to improve their mortgage offerings, particularly by extending the maturity of loans, though products are still relatively limited compared with Denmark’s, for example, and loans are still low compared with housing valuations.

The mortgage business is a volume business because tight competition makes margins very low – less than 60 basis points, according to Moody’s. Mortgages are the “most thinly priced in Europe”, says Mr Pohjola, but banks use them to sell other products to their clients.

However, the market is past its peak, not least because of the eurozone interest rate rises in the first half of last year. Still, mortgage loan volumes rose by 12% last year, according to the financial services federation. “Mortgages will still be important for banks but they will no longer be the main driver,” says Arto Elomaa, chief economist at the FFFS.

Banks have therefore been trying to widen their offering and promote cross-selling of products to their stable client bases. Fee income is currently only 17% of operating income, says Moody’s. That is below average for the Nordic region and if increased, could help to compensate for the slowing growth in net interest income.


Banks have become more diversified, launching or acquiring insurance, pension fund and asset management arms to mine new business areas and encourage cross selling. Both OP-Pohjola and Aktia have bought non-life insurers in recent years. Mr Silvernnoinen says that in the two years since Pohjola acquired its insurance arm, it has increased the number of clients who use the group for both banking and insurance by 200,000 to almost one million (in a country of five million people).

Banks are now looking much more at retail savings products, particularly mutual funds and life insurance, as Finns become wealthier and begin to worry more about their retirement. There is great potential to increase long-term savings – mutual funds still only represent 13% of Finns’ financial assets, according to Moody’s, lower than in neighbouring Sweden. However, mutual fund savings grew by just 8% last year, according to the financial services federation, and growth appears to have fallen back this year because of worries over global equity markets.

The ageing population is a major issue in Finland because it will be the first country in Europe to experience a significant demographic shift. Between 2005 and 2020 an estimated 900,000 baby boomers are due to leave the workforce (40% of total employees), bringing the proportion of people over 65 years old to 25% of the population.

Although Finland has a solid occupational pension system, many Finns are interested in supplementing this as they approach retirement. “Ageing is the long-term driver behind the shift from mortgages to funds and insurance,” says Mr Elomaa.



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