Nordic banks have traditionally adopted decentralised management structures, incorporating collective business practices while eschewing securitisation. Brian Caplen assesses whether this model can be made to work overseas.

If you want to give some sound advice to a son or daughter joining the job market, tell them to get a job at Sweden’s Handelsbanken. Anyone smart enough to have done that 35 years ago – whether as a manager or as a receptionist – is looking at a retirement nest egg of €1m on top of their pension, regardless of their status. The bank’s policy is that every time it achieves its target return on equity (ROE) the staff foundation loads up on shares.

This compensation policy is only one example of a unique Nordic banking business model that ties staff, customer and shareholder interests together admirably and has delivered magnificent rewards to all parties over the past few decades.

Other features are the lack of securitisation, which is considered disloyal to the customer, a decentralised management structure that allows branch managers – in the words of Handelsbanken’s chairman Lars Grönstedt – to “run their own businesses with the company’s money”, and the absence of budgets, which are viewed as “an instrument of repression from head office”.

This business model has worked well for the banks so far and allowed them to offset contracting lending margins while continuing to deliver decent returns on equity. Swedbank recently reported fourth-quarter 2006 results with an operating profit 13% ahead of consensus and reiterated its target to deliver an ROE above its Nordic peer group, according to brokerage Keefe, Bruyette & Woods.

But as the Nordic banks expand outside their region, analysts are asking whether their trailblazing management style will be able to adapt successfully to different conditions?

In some overseas markets it has already worked well. Handelsbanken is growing fast in the UK, where the target customers, mainly self-employed professionals disillusioned by the mainstream banks, flock to a different kind of institution. Decisions are taken quickly and customers are not oversold to, says Mr Grönstedt. The bank’s 29 UK branches are manned by former managers at the clearing banks who are attracted to the Handlesbanken freedoms to take business decisions on staffing, salaries and sales policy “without reporting back to some snotty MBA [business graduate] at headquarters on how much he or she has sold,” again to use Mr Grönstedt’s words.

The model definitely works in markets such as the UK, says Mr Grönstedt, where “the margins are high, the payments systems are excellent, it’s stable, you have an intelligent regulator” and “people hate the banks”. “When you convince them you are different, it’s an easy sell,” he says.

But will it work in Poland or Russia, where the pool of banking talent is thin and the conditions are less straight forward? Handelsbanken has three branches in Poland and is interested in doing local business in Russia, as are most of its peers. As the Nordic banks expand beyond their natural first port of call – the Baltic states – and into eastern Europe and the Commonwealth of Independent States (CIS) countries, finding the appropriate business model is a major challenge.

Earnings threat

In its recent report ‘Scandinavian banks looking Eastwards’, Fitch discussed whether recent acquisitions in the region could lead to ratings downgrades. “Fitch considers the operating environments in central and eastern Europe to be inherently more volatile than those in Scandinavia, and this could damage the quality of earnings. Equally, the quality of lending, and also collateral, is likely to remain weaker than in Scandinavia, and margins/profitability will need to be higher to compensate for this. A key consideration for Fitch will be the approach banking groups take in managing their capitalisation as the exposure to more volatile markets increases,” concludes the report.

Recent Nordic forays into the CIS region include Swedbank’s investment in Russia’s Kvest Bank through its subsidiary Hansapank. Swedbank now intends to directly acquire Ukraine’s TAS-Kommertzbank. Nordea is buying Orgresbank after selling its minority position in International Moscow Bank and SEB has purchased Russia’s PetroEnergo Bank and Ukraine’s Agrio Bank via Vilnius Bankas. Danske Bank’s recent acquisition of Finland’s Sampo Bank gives it exposure to the Russian market.

The management style of Nordic banks is so distinctive that it has attracted the attention of academics and researchers. In a paper called ‘Teams need open leaders’, published in the 1990s by US psychoanalyst and anthropologist Michael Maccoby, Swedbank was held up as an example of “openness pushed to the limits with positive results”.

But Mr Maccoby also noted: “Probably it would be more difficult to achieve this degree of openness with such a large group in other cultures. Even in Sweden it takes exceptional leadership and skilful facilitation to develop openness.”

So can this approach be transferred to the Russian setting, where institutions are typically run top-down with lower echelons fearful of taking decisions and where conspiracy theories are given full play?

Mikael Inglander, chief financial officer of Swedbank, says: “We have a decentralised model with autonomous decision making for branch managers both in Sweden and in overseas markets. It’s our intention to work in the same decentralised way when we go into overseas markets. Branch managers are the most critical part of the organisation and their knowledge of the local economy is better than we have in head office.”

All the same, the circumstances in some countries could not be more different in style from the Nordic environment, where management is sufficiently enlightened to attack basic concepts such as budgets and cost-income ratios.

Flat cost targets

While less radical in its approach than Handelsbanken, Sweden’s largest bank, Nordea, also rejects budgets in favour, in its case, of rolling financial forecasts. Where Handlesbanken uses cost-income ratios as a tool to measure branch managers, Nordea uses flat cost targets instead.

“I don’t believe in cost-income ratios. It’s more a reflection of an operation’s business mix than the skills and abilities of the managers,” says Nordea president and group CEO Lars Nordström. He says that mortgage and consumer lending naturally produces low cost-income ratios but credit cards give high ones because of the processing costs, even though the credit risks in the business might be lower.

Mr Nordström says that when he was first CEO of Nordea and was faced with a cost challenge, he introduced flat-cost targets and managers competed to bring down costs. But there was such a focus on costs that there was a risk that the bank missed out on revenue opportunities. Since then, the bank has moved on to using a broader range of targets to guide it.

“We have a rolling financial forecast,” he says. “ It’s not as bad as a budget but it still has its weaknesses. The disadvantage with having budgets is that you get into this internal manoeuvring and [of managers] being tactical. There is also a problem with a lack of top management capabilities [to correctly assess the situation]. They may say ‘you are delivering above budget, you are a good guy’ or ‘you are delivering below budget, you are a bad guy’, instead of having an intelligent discussion about what is really happening. The budget procedure also takes up a lot of management resources in administrative work.”

Mr Nordstrom adds: “We work with a rolling financial forecast. We also have a profitability measurement, ROE, or rather return on capital allocated to the branches.

“With a rolling financial forecast, the managers make their best estimate right now – where they will be on cost income and credit losses quarter by quarter 12 months ahead. Another problem with budgets is that you do your budget and don’t change it. This is more flexible.”

But Mr Nordstrom says that Nordea does not exclude cost-income ratios totally: “Our target is to have a continuous improvement in the cost-income ratio so it is more like a golf handicap. But it is profitability, ROE [that concerns us]. It is also the gap between the possible increase in cost and the increase in income. We have also introduced a seven-year target that we should double risk-adjusted profit during that time.

“This is so we are not guided too much by ROE numbers year by year. There are some businesses that we would like to add, such as Russia and Poland, that may not deliver immediately in ROE terms.”

Nordea also eschews securitisation for the same reason as Handeslbanken, that it impairs the relationship with the customer. “We don’t securitise anything. It’s not that easy and it’s not that cheap and you give away your relationship with the customer. Even when we had the crisis in the Nordic countries 15 years ago, the banks lost very little money on mortgage lending... securitisation in order to lift lending volumes and get rid of the risk that’s not an issue or at least it’s not an issue yet,” says Mr Nordstrom.

Swedbank’s Mr Inglander says: “We did a synthetic securitisation amounting to 150 basis points of the balance sheet five years ago. Since it was synthetic, we kept the relationship with the customers and we haven’t repeated the exercise. Basel II will initially lead to a 20% reduction in risk-weighted assets and free up considerable capital, putting us in a good position going forward.”


Handelsbanken’s Mr Grönstedt says: “We are focused on customer relationships and over 30 years we have achieved an ROE above that of the peer group. We do that through high levels of customer satisfaction. If you come to Handelsbanken as a customer, regardless of whether you are big or small, you stay with us. Your loan is not sold off as part of a book.”

Mr Grönstedt says that the bank generates sufficient capital so that there is lending capacity and last year, for the first time ever, issued hybrid capital to demutualise one of its insurance companies. “I can’t see us changing the policy on hybrid capital unless we make a big acquisition,” he adds.

By contrast to Handelsbanken and Nordea, Denmark’s largest bank, Danske Bank, does use budgets and Denmark has had its own mortgage institution for more than 100 years that securitises every mortgage. What is new in Denmark is the imminent move to covered bonds that will give banks and their customers more choice of products.

In Danske Bank, executive board member Per Skovhus says: “Local managers are responsible for marketing activities and they decide who to market to, but they are not responsible for product offerings, which is done centrally. They are to some extent in charge of pricing.

“We normally have three criteria to judge their performance: cost/income; ROE, which is now based on economic capital; and growth of net income. This is done on a brand basis and each brand is divided into regions, for example, in Denmark we would have nine regions and each regional manager and each branch is measured on the same criteria.

“We are using budgets. There is always a certain amount of sandbagging [the practice of setting low expectations so they can be topped later] but if people do that they are not as good as they should be. We like to have a budget but we also pay attention to the comparable position the previous year.”

Analysts will watch with interest how the Nordic systems fare as the banks move deeper into emerging markets.Lars Grönstedt: Handelsbanken


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