In an article published in Dagens Industri (2020-10-08, “Nordea het bricka i storspelet – bankbjässar lurar i vassen”) the author, Martin Rex, points out the crowding in the European market and where the average European bank perform worse in comparison to banks on other continents. At the same time Nordic banks are in general viewed as providing high and consistent returns to the shareholders. The article mentions the consolidation of the Nordic banking sector post the 90’s crisis as part of the explanation and that, for European banks, there simply are too many of them in the European market compared to the size of available revenues. With this as a backdrop, we found it interesting to run some numbers for the Nordic banking sector, primarily comparing its size and performance to larger European banks.
Some basic stats
First, let’s put the size of the institutions in perspective. The assets of the analysed Nordic banks (see below) amounts to ~ SEK 28 trillion which is a staggering amount by itself. This figure may however be compared to the likes of the U.S mega banks and where JPMorgan Chase & Co. (JPMorgan), standalone, is close to matching the largest Nordic banks in total.
Measuring the net profit 2019 JPMorgan (~SEK 340 bn) far exceeds the summed net profit for the Nordic Banks which amounts to SEK 143 bn. The RoE (Return on Equity), weighted by assets, equalled 9,6% for the Nordics while JPMorgan achieved 15%. A testimony to the earnings capacity of JPMorgan since the Equity to Asset ratio amounts to ~10% for JPMorgan and only ~6% for the Nordic banks (being more leveraged).
Returning the focus to the largest institutions by geography at large, key metrics (for the analysed banks) are found in the table to the right.
Plotting the relationship between RoE and Cost / income, here removing effects from depreciation, bank levy’s, SRF-contributions, litigation costs etc., confirm the notion of the Nordic bank success vis-a-vis its European competitors and where the 95% confidence ellipse for Nordic banks are further up the upper left hand corner, indicating a high efficiency in its operation which in turn is a key driver (but not the only one) for the higher RoE.
But a wide dispersion of European bank performances can also be observed, with some banks operating at extremely low, as well as high, Cost / Income ratios.
For this purpose we remove the lower and upper 5% of the combined adjusted Cost / Income- and RoE performances (at equal weight) by each region in order to get a better representation of the data points (removing outliers).
As expected, not much change with respect to the story. The Nordic banks still dominate the upper left quadrant with low cost structures being a supporting component to the high RoE.
Though, this illustration does not take into consideration any trends from the past five years. And since the discourse in the industry is set on a bank-by bank-basis (i.e. the typical Nordic bank is more profitable than the typical European bank) it is of further interest to dig into the evolution of costs and income over the period, indexing the components and performing measurements on a bank-by-bank average basis (i.e. not weighing the measurements by e.g. assets).
Albeit only covering five years, there are indications that the European banks have managed to take actions with respect to their cost levels and where even small positive changes to income would generate “positive Jaws”. This while the Nordic banks seems to be on a trend of increasing costs, only partially compensated by increased revenues.
In the case where the European banks could solidify the cost reductions and increase income going forward, their trend would appear more attractive in comparison to their Nordic peers, eventually starting to catch-up in terms of RoE and C/I. This since there may be challenges for the Nordic banks to further increase the income growth in a strongly competitive landscape. The other option being to target the cost side as well, but where the already efficient operation may lower the potential for cost reductions.
But short-term this observation comes with a big caveat, the loan loss provisions that may materialise if the economy, at large or in different regions, face a second and potentially more severe dip as a consequence of additional lock-downs or other policy measures.
As reported by EBA (Quarterly Risk Dashboard, Oct 2020), the asset quality show clear signs of deterioration, and the potential credit losses will correlate with how successful a country is in containing the spread of Covid-19. And with respect to dividend distributions and share buy-back programmes there are no indications that ECB or other banking supervisors are interested in lifting any restrictions / expectations as of now (although the pressure is rising), closing the path for any semi-artificial corrections in the RoE dispersion between the Nordics and Europe.
All this considered, there may very well be reasons to continue clustering the Nordic banks into a separate and more high-performing group. At least on a short- to mid-term basis. As the above mentioned author of the article pointed out, digitalization and economies of scale are interesting market drivers for the future of the European as well as Nordic banking markets.
Nordic Banks: Nordea, Danske Bank, Svenska Handelsbanken, SEB, DNB Bank, Swedbank, Nykredit Realkredit, OP Osuuskunta, Jyske Bank, SBAB, Länsförsäkringar Bank, Sydbank
European Banks: ABN Amro Bank, AIB Group, BNG Bank, BNP Paribas, Banco BPM, Banco BVA, Banco Santander, Banco de Sabadell, Bank of Ireland, Credit Mutuel, Barclays, Bayerische Landesbank, Belfius Banque, Caixa Bank, Commerzbank, Rabobank, DZ Bank, Deutsche Bank, Erste Group Bank AG, Group BPCE, Credit Agricole, HSBC Holdings, ING Group, Intesa Sanpaolo, KBC Group, Landesbank B-W, Landesbank H-T Girozentrale, Lloyds Banking Group, Nedelandse Waterschapsbank, Raffeisen Bank, Societe Generale, Royal Bank of Scotland, UniCredit, Union di Banche Italiane SPA, Caixa Geral de Depositos
U.S Banks: Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, Wells Fargo