Illustration: Kevin February
Banks are wringing their hands over what to do about weak earnings growth, new technology and the looming convergence of Europe’s banking markets. Sound familiar? That was in the late 1990s. Then – perhaps as now – the answer for the most ambitious banks was scale through M&A. It was the start of a trend Euromoney at the time termed ‘euro-gigantism’, which only ended after the 2008 financial crisis.
Nordea is one of the original euro giants. The 1997 merger of Sweden’s Nordbanken and Finland’s Merita was the first step to creating a pan-Scandinavian lender. Nordbanken’s chief executive Hans Dalborg, who stepped down as Nordea’s chairman in 2011, had a vision of a flag bearer for Nordic capitalism: the biggest and the best.
Thanks to mergers in 2000 with Norway’s Unibank and Denmark’s Christiana Bank, Nordea now has top-tier market shares in all four countries. Today, its balance sheet is about €600 billion, roughly equal to the GDP of Switzerland and about twice that of most of its Nordic peers.
However, in an echo of similar problems elsewhere in Europe, Nordea comes close to being the worst of the top-tier Nordic lenders – largely because of its greater size, complexity and international spread. Even if its roughly 10% return on equity beats almost all other large European banks, it is lagging its Nordic peers on price-to-book value and ROE, its most important financial benchmark.
Can Nordea finally make good on the rationale behind its formative mergers, just as Scandinavian property markets begin to slow?
Chief executive Casper von Koskull gives Euromoney his answer to that question, but not in the country where the bank has its largest market share and now intends to move its headquarters, Finland. Instead, he rushes in apologetically late to a meeting in Stockholm, which has served as the bank’s base since its Swedish – now honorary – chairman, Dalborg, first built up the group.
Perhaps characteristically of Nordea’s sometimes confusing executive model, the interview takes place not in a lived-in CEO’s office but in the rather bland and clearly rarely used office of Dalborg’s successor, Björn Wahlroos, who, like von Koskull, is Finnish. It is in a modern corporate hulk of a building, looming over much older and more elegant headquarters of rival Swedish banks, clustered around Stockholm’s waterfront.
The reality is that creating one bank was always the vision when the banks were put together,” he says, “and we really haven’t done it. We are only doing it now- Casper von Koskull
Often giving straightforward answers rather than getting bogged down in numbers, von Koskull readily admits that the job of making good on those now decades-old mergers is far from over. He is determined to make it his legacy to bring the bank’s inharmonious internal organization together.
“The reality is that creating one bank was always the vision when the banks were put together,” he says, “and we really haven’t done it. We are only doing it now.”
Together with building up its capital and compliance defences, pulling together Nordea’s diverse operations was the mandate on his appointment in 2015 by Wahlroos, who is also chairman and third-largest shareholder of Finland-based insurance group Sampo, Nordea’s largest shareholder, with 21%.
Nordea’s decision this September to shift its headquarters from Sweden to Finland is another way to rationalize the banks’ spread. The way von Koskull sees it, the incipient banking union in Europe is the natural place for a lender that has large market shares across so many western European countries, even if only one of those countries (Finland) is part of the eurozone.
“This is a result of business and economic integration going faster than national regulation,” he says, alluding to the asymmetry between regulation in Sweden, Denmark and the banking union. “We belong to that club.”
The change in Nordea’s legal structure in early 2017 made the move all the more urgent, as making all four Nordic operations branches of the parent would have seen its Swedish regulatory charges become an even heavier burden. Due to Sweden’s high and rising resolution and deposit guarantee fees, Nordea expects to gain €1.1 billion from the move.
“We didn’t run one bank; we had a parent bank and three subsidiaries. We’re doing this [in the period from] 2016 to 2020 – 15 years after the original mergers.”
Heart of integration
At the heart of Nordea's integration plan is a massive IT project of a kind very few banks have attempted before on this scale and across so many countries simultaneously.
It will in effect rip out the four core banking systems, and the numerous tributary networks beneath them, and create an entirely new system, common to all markets, over the next four years. Commonwealth Bank of Australia is one of the few to have already done such a thing, and the Scandinavian lender has hired staff who worked on the Australian project.
Day to day control of this endeavour is with the bank’s number two, Torsten Hagen Jørgensen, chief operating officer and head of the corporate centre. Based in Copenhagen and Danish in origin, Jørgensen is a central figure in the bank, not least as the biggest part of the business is in Denmark. Although younger, Jørgensen has less of the easy manner of von Koskull, who was formerly head of Goldman Sachs’s Nordic business.
Chief executive Casper von Koskull
As the former chief financial officer, Jørgensen might have seemed a natural choice to succeed former chief executive Christian Clausen (also Danish) in 2015, especially given his long tenure at the bank. Nordea was careful to underline Jørgensen’s importance to the firm in its announcement that the board instead was making him deputy to von Koskull, previously head of wholesale banking. Rather than releasing a photograph of von Koskull alone, the two were pictured together.
The COO’s job, therefore, looked like a promotion for Jørgensen. Meanwhile, Heikki Ilkka, his Helsinki-based successor as CFO, unexpectedly resigned in November after less than two years in the role. The bank announced the departure of deputy CFO Tom Johannessen a day later.
If Jørgensen is a leader in waiting, he has a lot on his hands. The hope is the new core back office will improve the bank’s efficiency, as well as the customer experience.
“Speed, agility – being able to manage data, create more segmented products” is how von Koskull summarizes the benefits. By eliminating parallel processing functions, it should help close the profitability gap between Nordea and banks that have a simpler geographic spread, such as Svenska Handelsbanken.
But some see a white elephant. With all the time and effort involved, and the €1 billion price tag, it is already testing investors’ patience.
“A lot of these large schemes have ended badly,” says one local banker with experience of implementing technology investments at large banks.
Most banks content themselves with building on the existing spaghetti of IT systems, even though they often date back 50 years, because it is so complicated and expensive to start again, as the new and old systems have to operate simultaneously. Other banks also prefer to update existing systems because technology is changing so rapidly (the recent rise of mobile banking undid some mid-2000s investments in internet banking, for example).
Danske Bank has a single core banking system across its international network, but this was developed acquisition-by-acquisition from the more-dominant Danish business. Santander, which like Nordea has no single dominant country, has approached integrating its systems much more tentatively through an experimentation with an entirely new IT mainframe in its revamped online-only brand, Openbank.
Is Nordea doing this, some wonder, not because it is visionary, but because the continual arrival of new digital products has made its combination of three or four banks’ legacy systems unmanageably convoluted and costly?
Von Koskull still sees a future competitive advantage: “Our starting point may have been more complex, given that we are the result of a merger of banks. Ultimately everybody is seeking the answer to how to compete in a more digitalized world with alternative providers.”
Nordea’s core banking gambit could be typical of how large and international banks’ managements have to work harder on their own institutional organization.
News on progress of the core-bank replacement project further frustrated equity analysts hoping for a more rapid reduction in its costs in the third quarter results.
Credit Suisse analyst Jan Wolter, for example, downgraded the bank to neutral.
“The company is not yet in the harvest period; they’re still sowing,” he says.
According to him, the simultaneous announcement of another 4,000 job cuts, more than 10% of the workforce, is just one more symptom of an onerous internal focus.
In the same vein, Wolter points to how von Koskull has had to work to create a compliance department equivalent to other big and international universal banks. Compliance spend is now up to the European average of 7% of total costs versus about half that before von Koskull’s arrival, and compared with about 10% at HSBC. That too has had an impact on recent relative profitability (and, perhaps, customers’ patience with more frequent checks).
That extra cost seems necessary, as Nordea’s proneness to compliance accidents has been another challenge for von Koskull. The bank has suffered its fair share of reputational problems – most recently a large number of mentions in the 2016 leak from Panamanian law firm Mossack Fonseca.
The so called Panama Papers triggered an internal investigation at Nordea involving 60 staff and a total of 30,000 hours of work. It showed insufficient implementation of tax-compliance measures in Nordea’s Luxembourg private banking unit, even if employees did not proactively contribute to tax evasion.
Sweden’s financial inspector had already fined Nordea SKr50 million ($6 million) in 2015 because of lax money-laundering controls, which somewhat tarnished the tail end of the former CEO’s term.
Given the extent of media coverage of such scandals, this may have played its part in Nordea’s placing last in both of corporate and retail banking in a widely cited Swedish survey of customer satisfaction, Svenskt Kvalitetsindex.
Worse, unlike the next lowest scorer, Swedbank – which like Nordea has a relatively lower-income customer base – there is no consolation of market-beating profitability.
We are very Nordic – diversified Nordic – which I think makes us a low to medium-risk bank. That’s how the regulator would characterize us- Casper von Koskull
Von Koskull does not belittle the danger that unhappy customers could undermine the franchise more fundamentally, especially as digital technology brings in new competitors. The bank cannot afford to lose customers because of a bad image.
“I am very focused and conscious about that customer satisfaction; the banking industry is suffering.” he says. “If people leave, which of course they do, it should be for the right reason.”
Scandals such as the Panama Papers have only sharpened popular mistrust of banks, which has lingered since 2008, even though the Nordic region was relatively untouched by the global crisis. Grumbling about banks and mortgages is a common dinner-table activity, particularly in Sweden.
Nordea’s size, again, is a hindrance, as von Koskull admits, and not just because its bigger international business needs more complex controls.
“In the Nordics, we’re the biggest,” he says, “and the biggest usually gets the attention.”
On top of the compliance headaches, closing almost two thirds of branches and more job losses (largely linked to the transformation project) do not help that image, particularly among former clients of the Swedish postal savings bank, now part of Nordea, and among communities that might rely on Nordea as an employer.
Nordea’s past as a government-owned bank, after a Swedish bail-out in the early 1990s and until roughly the time of Wahlroos’ arrival, seems to harden the general Swedish frustration that banks are not motivated by domestic social concerns.
By contrast, says a local advisory banker, Handelsbanken and SEB have the benefit of backing from the two conglomerates that have long been hallmarks of establishment capitalism in Sweden: Industrivarden and the Wallenberg family, respectively. Handelsbanken makes another unfavourable comparison in its rare branch-centric strategy.
“We are in a huge shift,” says von Koskull. “This transformation into new channels will make noise. Of course, it will have an impact on customer satisfaction in that transition.”
There is now, at least, a recognition that closing off the old channels must happen at the same pace as development of new ones. “We need to be self-critical,” he says. “We’ve done a lot of good things, but we haven’t always got everything right.”
As if cuts and scandals were not enough, moving the bank’s headquarters to Finland has sparked new anti-Nordea emotions in Sweden and new doubts among investors about the stability of the customer franchise there.
Swedish trade unions say they would shun the bank because of it.
“There’s a lot of hype and noise out there,” says the CEO. “You only see these kinds of things with delay. The branchification created the same kind of nationalist, populist, emotional reactions in Norway, Finland and Denmark – particularly in Finland. There was the same noise in Finland that we now see in Sweden. In hindsight, 18 months ago, we saw no impact on lending or deposit volumes.”
The bank is monitoring the situation at least weekly and has not yet detected an impact on business. “I don’t expect it,” says von Koskull, “though I don’t say that with arrogance. We’re working on this every day.”
Björn Wahlroos: a ‘rightly demanding’ chair
Wahlroos’s criticism of Sweden’s regulatory charges might again not have helped von Koskull manage the fallout from the move to Helsinki, or wider efforts to improve its image, particularly in Sweden. The chairman is outspoken and his neoliberal economic opinions can grate in some quarters. Many took his advocacy last year of a reverse takeover by Dutch bank ABN Amro as another ploy to skirt the regulatory implications of its Swedish base through an Amsterdam head-office move.
Despite Wahlroos’ membership of Finland’s Swedish-speaking minority, he is “not an asset in Sweden,” says one analyst. Nevertheless, some investors appreciate his influence and the fact the chairman has skin in the game.
Von Koskull says Wahlroos is “rightly demanding” and that they meet and speak regularly.
In addition, Sampo’s chief executive Kari Stadigh is also on Nordea’s board, and has chaired the committee that approves the bank’s risk framework since 2011.
“Sampo is a very savvy, very professional investor,” says von Koskull. “There’s no doubt that their fingerprint is there and should be there. They’re a very returns-driven shareholder, not short-term, but very pragmatic in their business decisions, what is good for the shareholders, as well as the customer. It has a philosophy, as I do, that excess capital should be returned to shareholders, and that the company should be run with return as a major measure. All that is a discipline that they have brought in. It’s a strong, influential shareholder.”
Von Koskull’s own successful use of capital consumption as a lever to boost returns when he ran the wholesale unit between 2010 and 2015 gained him Sampo’s respect and gratitude.
“That is also a Sampo discipline, how you allocate capital,” he says. “If the capital does not have the right return, you need to take it away, or allocate it in a smarter way.”
Under von Koskull, there has been a further shift away from the so-called Great Nordea growth-focused strategy, which Clausen put in place before Sampo’s arrival as the biggest shareholder in 2009. If Dalborg had the pan-Nordic bank vision, Sampo now wants to make sure that vision is viable.
“There’s a little bit of maybe justified criticism,” says von Koskull. “Maybe you can get a little carried away with talking about being a ‘great European bank’. I definitely think we have toned that down. We are a good bank, but there’s a lot of things that we need to improve. We accept that with humility. We honour that past, that has given us this position – 11 million customers in one of the more attractive regions in the world. But we have a lot to do.”
As chief executive, von Koskull has reduced exposure in risky areas such as shipping and Russia. The bank admits to being more cautious and to growing loans at a slower pace than the market in Swedish housing, one of Europe’s hottest markets. This latter is “not a sign of a more conservative attitude to risk” than rivals, according to the CEO, although there is no immediately obvious balance sheet-intensive product to which he can point where the bank is growing faster than the market.
The fact that Nordea's headquarters are in Sweden has often led to an unfavourable comparison with the more domestic-focused Swedish banks’ profitability. It might be unfair because, compared with its other countries, Nordea’s market share is smaller in Sweden, which is a more concentrated and more profitable banking market than Denmark.
Danske Bank is Nordea’s closest peer, both in size and because Denmark is both banks’ biggest market, although much less dominant at Nordea (about a third of the business versus two thirds for Danske).
The integration and IT investment programme show that benchmarking against Sweden and pressure from Sampo are not encouraging a damaging focus on Nordea’s short-term numbers, according to von Koskull: “Ultimately, return is the way you manage long-term success.”
Investment in belated technological integration is having a short-term impact on the bank’s relative profitability “for good reasons”, he adds.
However, the problem remains. It is largely because of these IT costs – the benefits of which are still uncertain – that most analysts think investors will find better returns from Nordea’s peers for now.
All this might make Nordea closer to a bank like UniCredit than others such as BNP Paribas, Santander and ING. This latter group have recently been more likely to outperform smaller and more domestically focused peers. By contrast, Italy’s smaller top-tier bank, domestically focused Intesa Sanpaolo, has consistently outperformed UniCredit in terms of profitability in recent years.
The comparison with UniCredit is, indeed, a telling one.
Like Nordea, Italy’s biggest bank has struggled to integrate formerly independent national banks, although it looks worse on a European level because of its less profitable geographies. Germany’s HVB, which UniCredit bought in 2005, has traditionally had UniCredit’s biggest capital markets operation (much like the Danish part of Nordea) and has tended to demand a large German component on the group board.
And the two banks’ strategic mottos are revealing: von Koskull’s ‘One Nordea’ echoes Jean Pierre Mustier’s ‘One bank, One UniCredit’.
While not as extreme as the German/Italian personality clash, the Nordic nations also exhibit differences in their working practices.
One rival Stockholm-based investment banker who knows Nordea well says the Swedish obsession with decision-by-consensus sits uneasily with the greater tendency of Danish managers to fight their corner, while the Finns are more comfortable with deference to higher authority.
Yet for all this, the consensus opinion is that Nordea has benefitted from its relatively large scale and its multi-country network in wealth management (now at an all-time high of €322 billion under management) and in investment banking, where senior bankers at a rival firm say it has eclipsed SEB’s previous dominance – recently encouraged by von Koskull’s own management of the wholesale division.
Nordea’s lead over its nearest rival in Nordic investment banking fees has extended in the past two years, according to Dealogic. It has had a top-three position in equity capital markets since 2014. Its market share in Nordic bond bookrunning is consistently about twice its nearest competitor, Danske.
The 2014 departure of Peter Nyegaard, the long-standing COO of the wholesale bank, and country senior executive in Denmark, was a key development, although it is unclear how this might have impacted the business. The announcement of Nyegaard’s exit from the bank, after 25 years, referenced his desire to spend time with family and consider his future career.
Shift in culture
Even rivals say von Koskull's own background at Goldman Sachs lends the franchise credibility.
Von Koskull says better performance in wholesale banking since he joined is because of a shift in the culture from a “siloed, country-focused” structure.
“Now we have that scale benefit but it wasn’t there in 2010; we hadn’t really reaped those benefits,” he says. “Since then we’ve made that business truly pan-Nordic with global distribution.”
Now he wants to do the same across the institution. He brought together 300 of its senior management in a three-day meeting in Copenhagen this summer, for example, to talk about working closer together. More of this may be needed.
As Nordea works on integration almost 20 years after its formative mergers, the idea of building big cross-border universal banks, big in wholesale and retail, has fallen out of fashion. But if any European bank could succeed, it should perhaps be a Nordic bank because their banking markets are more consolidated already, giving little chance for growth domestically, and because an easier 2008 crisis has given them the scope to focus on making it work.
Analysts expect Nordic banks’ ROE to beat the wider European sector by about four percentage points this year. Under von Koskull and Wahlroos, Nordea is if anything more focused than its Scandinavian peers on the much-lauded Nordic attributes of lots of capital and not much risk; low costs and digital advancement.
Von Koskull agrees: “Those are characteristics of the bank. That definitely resonates with who we are.”
He adds: “We are very Nordic – diversified Nordic – which I think makes us a low to medium-risk bank. That’s how the regulator would characterize us.”
Improving the capital position has been another element of his first two years in the job, with the common equity tier-1 ratio rising from about 15% to about 19%, albeit partly because of greater demands after the Swedish regulator changed how banks should calculate corporate risk weightings. An €8.4 billion synthetic securitization of corporate and SME loans in mid 2016 helped.
“When banks have excess capital, they destroy it,” von Koskull argues. “In an industry that shouldn’t grow, [costs] should be down.”
And yet he is quick to defend the grand creation of Nordea in 1997.
He bristles at one analyst’s assertion to Euromoney that the four combined banks’ market capitalization would be bigger, now and in the future, had they not merged into Nordea.
People forget what the 2008 crisis did to undiversified banks, the CEO says.
“How would those banks have come through?” he asks. “They would have all been sub-scale in wholesale banking, sub-scale in asset management, sub-scale in most of their businesses… Had Nordea been its four parts, one of those parts would have had a more difficult time.”
The stability of Nordea’s returns over the last 10 years, instead, amply shows that the mergers were worth it. Even in the depths of the crisis, he says, ROE only dipped to 8%.
“In 2008, 2009, 2010, we were a great European bank. European banks were on their knees. Nordea had good return on equity; it was able to lend to its customers. We would never have been able to do that unless we had gone through those mergers. We were the only bank that had a balance sheet that was able to proactively lend to Swedish corporates. Then we actually grew market share radically. The balance sheet and capital base that the bank had in 2008 and 2009 was unique.”
Today, it is one of the biggest ship financiers in the world, but shipping is less than 3% of the portfolio – “the benefit of diversification.”
Although the Nordic countries have close trade and financial links, their economies are diverse: Norway is based on oil, Denmark agriculture, Sweden and Finland on industry.
“We are the only bank with balanced pan-Nordic exposure, so you could argue that at any specific point of time, there should be a mono-liner with a higher return,” says von Koskull. “But we have a more stable return than any bank in the Nordic [region] on revenue and capital volatility. We are one of the least volatile banks in Europe.”
He, like most in Sweden, argues that banks are more exposed to the housing market through the wider consumer sector than from the mortgage market itself, as borrowers would prioritize repayment. But “it’s mathematics” that in a Swedish housing downturn Nordea will outperform peers for whom Sweden might be two thirds of their business (such as Swedbank).
Swedish mortgages are only 7% of Nordea’s loan book and Sweden as a whole not much more than a quarter of its business, “and still we’re still one of the large players in Sweden”.
So, does this mean von Koskull would follow Dalborg’s example, and do it all again? The answer is yes, although in a context where Nordea is still to capture synergies from 20-year-old mergers, ‘stability in a crisis’ is not the only reason he gives.
“We’re going into a world where scale will play a completely different role in whatever you do,” he says. “Banks have not been good process engineers… The bank mergers you saw in the past were expansions. They didn’t create value. Banks need to industrialize their processes and systems. Real value-added bank mergers have to add volume to larger platforms, with greater efficiency.”
The hypothetical future integration of ABN Amro, in other words, must take fewer than two decades.
Swexit: How to move a bank’s headquarters
Nordea has decided to shift its headquarters to Helsinki from Stockholm, the city where it has been based for its entire 20-year life as a pan-Nordic institution. So will Swexit be easier than Brexit?
After Nordea made its banks in the Nordic region branches of the parent earlier this year, the legal manoeuvre is simply to merge the listed company into a newly established Finnish subsidiary. The starting shot was when the board announced it would initiate the process of changing domicile in late September. The bank must now gain approval from the regulator and shareholders.
In practical terms, however, there may be very little operational difference to where Nordea is run, at least initially. Much of its operations are already spread across Scandinavia.
The head of the corporate centre is based in Copenhagen, for example, where the chief financial officer and largest capital markets business have also been based.
The chief executive is officially based in Stockholm, although the chair’s office is in Helsinki, where biggest shareholder, Sampo, is also resident.
If there could be a longer-term migration to Helsinki, in the short term there could be just one job relocation – just Casper von Koskull, the chief executive. But he is Finnish, so the move will be easier for him. As a former Goldman Sachs banker covering the Nordic region from London, he is used to spending much of his week moving around.
The bigger challenge may be how to manage the fallout among Swedish customers angry at how the bank they supported as taxpayers for many years (Nordbanken, later Nordea) has suddenly decided to up sticks as a means to get around Sweden’s high bank resolution fees.
Analysts at UBS say there could be a much longer-term impact to the franchise from that debate.