Hidden depths - The truth about the Nordic retail banking landscape

The Nordic banking model has long been viewed through rose-tinted spectacles, but is that a reputation it truly deserves? Whilst Scandinavian banks might be one of the darlings of the European banking community, such pride often comes before a fall. So, what is the banking and debt landscape actually like? Is the region putting on a very brave face or is it really the land of milk and honey?

The Nordic region managed to largely circumvent the 2008 crisis and as such, it holds a rather uniquely strong reputation amongst the European banking community. It also helps that banks have seen lots of investment in recent years, with continued high valuations and strong profitability, with the region’s strongest bank, Nordea, boasting a €681 million profit in the second quarter of 2019 alone. However, the situation might be more complex than we have all been led to believe and the evidence is hardly well-hidden.

The Swedish housing problem

The dichotomy of the Nordic banking sector is embodied quite broadly by Sweden. You’ll rarely hear the word “crisis” attached to anything Swedish, but the country’s property market is perhaps the exception that proves the rule. There has been a chronic lack of housing in the country for several years, with house prices rising and renters in metropolitan areas struggling to find somewhere to live due to not only a physical lack of housing but soaring prices. 

Low interest rates and rampant inflation following the banking crisis in the early ’90s have caused house prices to spiral to the extent that they now outstrip average earnings by a factor of 10 - double the multiple of 20 years ago. Of course, another major contributing factor to the housing shortage is simply the fact that the building of new properties has failed to keep pace with population growth to the extent that, of the country’s 290 municipalities, there is a lack of housing in 255.

This housing crisis has led to an increase in borrowing that necessitated the Swedish government to instigate stricter mortgage rules. This obviously had a knock-on effect on the banking sector, but the Swedish banking system is notoriously robust. Still, the outlook is certainly darkening for the country’s banks as a result of the housing crisis and there are other challenges on the horizon too, not only for Sweden but for the Nordic region in general.

Challenger banks (the digital threat)

A study in digital disruption across Nordic banks by Accenture found that Nordic banks are no longer well-protected by their historically strong brands and large customer bases. Both global and local disruptors are attacking the entire banking value chain across all main product areas.

The top retail banks are facing mounting and evolving customer demands fuelled by digital technologies such as mobile, cloud computing, AI, and social media, and digital challenger banks are not only growing quickly but are very profitable.

These digital challengers are redefining the Nordic financial services industry to the extent that 36% of Swedish citizens now admit to never using cash. Denmark, meanwhile, is the EU leader for digital payments with digital challenger apps such as MobilePay taking the country by storm. 

These challenges are creating a new ecosystem that many legacy banks are simply not prepared for. Indeed, one Accenture estimate indicates that most Nordic retail banking revenue will be at risk by 2020. 78% of retail banks in the region are concerned or threatened by the digital challengers, 88% believe they need to rethink their business models to adapt, and yet fewer than 40% have clear digital strategies in place for the future.

Nordic banks might be profitable, but their success has led to a degree of complacency when it comes to the need for digital transformation. Aside from regulation, changing consumer demands from increasingly digital-savvy customers and external threats from challenger banks are the greatest challenges faced by most Nordic retail banks and if they fail to address these concerns then they could lose their shine entirely.

What the big boys are up to

It could be that Nordic banks are specialized to the point of weakness. Even Nordea is only really diversified within Scandinavia. Still, the top Nordic banks are often perceived as some of the biggest and best in the world. This is mostly because they have generated some of the strongest profitability across the sector, but also due to the ease with which they managed to weather the 2008 crisis.

But is a little of that shine starting to wear off? Nordic banks have been historically poor at addressing consumer trends and last year, the sector was hit by several high-profile money laundering scandals involving Russian oligarchs and organized criminals. These scandals caused shares in Nordea to drop by a fifth and according to Bill Browder, CEO, and co-founder of Hermitage Capital Management, he would be surprised if “we didn't find more accounts across Nordic banks getting caught up in the scandal.”

The real fly in the ointment, however, is the region’s surprising debt problem. As a direct result of the housing bubble, household debt in Sweden is running at around 180% of disposable income. In Norway, meanwhile, it’s at 230% and in Denmark, it’s at 280%. So, debt levels in the region are easily amongst the highest in Europe.

Nordic debt

Due to strong economic growth and low-interest rates, there has been a notable rise in high credit demand among Nordic consumers. Indeed, many commentators have suggested that Nordic households have borrowed too much. There was a growth in debt collection cases of 35% in Norway between 2017 and 2018 and 33% in Sweden. It’s not uniform growth across the board though, as in Denmark the number of debt collections cases decreased in the same period by 9%.

According to Intrum’s Northern European managing director Anette Willumsen: “Higher interest rates will reduce disposable income, and in turn reduce available money to pay off all other credit-related expenses. Hence, we expect an increase in debt collections cases as interest rates increase.”

Norway’s financial market regulator says that debt issued in Nordic nations needs no credit rating, with companies able to claim more or less what they like when selling new debt. There were €350 million of junk bonds sold in August 2017 alone by Lebara Group BV, a Netherlands-based provider of international mobile-phone cards.

Victor Kihlgren, the Nordic director for Pemberton Asset Management, said: “The unitranche structure has become more accepted and banks have been pulling back their lending, so borrowers can’t get the full leverage they want. As a result, there’s been a shift in the Nordics towards acceptance of direct lending as a replacement for the banks and also for high-yield bonds.”

The Danes have one of the highest levels of private debt in the world, though the level of private debt to GDP decreased to 269% in 2018 from 274% in 2017. Danish households have also proven remarkably resilient, primarily because their debts and other financial liabilities are balanced out by the fact that the financial assets in Danish households are more than twice the size of those liabilities. 

Louise Aggerstrom Hansen, a private economist at Danske Bank, explains: “The large debt is not a consequence of overconsumption by Danish households. It should be seen in the light of the significant build-up of both financial and non-financial assets that has taken place in recent decades – notably pension savings.” The Swedish central bank also agrees that household debt is the biggest risk to the economy.

#The major difference between Nordic debtors and debtors in the rest of Europe, however, is that while there might be a lot of Nordic people in debt, many of them are so asset-rich that they do not need to be debt-free upon retirement. No wonder the Nordic housing market is so overheated!

Good, but not golden

So is the Nordic banking landscape really as golden and glistening as we have been led to believe? Not at all. Granted there are areas in which the sector excels (sheer efficiency, for one) but there is also a lot of complexity and a lot of debt behind those mile-wide smiles.

In essence, the Nordic banking sector underlines the fact that perception and reality are often two sides of the same coin and that the former can feed into the latter, particularly when it comes to finance. The region has managed to build up a lot of good fortune in the years since the 2008 crisis but it can’t continue to rest on its laurels and its sizeable reputation. Indeed, that reputation might be what is holding it back.

The housing crisis in Sweden, the sheer amount of household debt in Denmark, and the lack of progress when it comes to digital transformation mean that there is still a lot of work that needs to be done if banks in the region wish to truly earn their reputation. Because, right now, things are certainly good, but they’re not quite golden.