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2016-05-24 05:09:14
Swedbank s success is built on old-fashioned thrift and modern technology
May 21st 2016 | STOCKHOLM
TWO years ago Swedbank, Sweden s biggest retail bank, moved from its offices in
the centre of Stockholm to a drab business park outside the city. Employees
fretted about leaving their prime location, a few doors from the Riksbank, the
central bank, and a stone s throw from Parliament. The move, which has saved
$25m-odd a year, was symbolic not only of the bank s thrift, but also of its
desire to retreat from the exciting but risky end of banking. Instead, much
like the Scandinavian furniture in its office, it is returning to something
simpler and more straightforward. That strategy has made Swedbank not only one
of the safest banks in Europe, as judged by the thickness of its cushion of
capital, but also one of the most profitable.
European banks are struggling. Economic growth is low; regulators demand ever
more capital, and negative interest rates, which most banks do not dare to pass
on to depositors, squeeze margins. All this, bankers tell aggrieved
shareholders, has inevitably pushed returns far below their pre-crisis levels.
Yet Swedbank has defied the inevitable. It is nearly twice as profitable as the
average European bank, despite holding twice as much capital on a risk-weighted
basis (see chart). Last month it announced profits for the first quarter of
SKr4.31 billion ($510m), well above market expectations and virtually the same
as last year (SKr4.32 billion), before Sweden and the euro zone adopted
negative rates. This was doubly unexpected given the sudden departure of the
bank s CEO in February, amid criticism of his policing of suspected conflicts
of interest among the staff.
Underlying the bank s success is the idea that in the post-crisis world,
running a retail bank is not that different from running a utility. The
business strategy is simple: sell lots of dull, low-risk products while keeping
operating costs as low as possible. Of its 8m customers, 7m are households.
Mortgages make up 60% of its loan book. Although there is plenty that banks
cannot control, Swedbank focuses relentlessly on what it can: cost and risk.
Hard and sweaty work is the only way forward, says Goran Bronner, the bank s
CFO. Swedbank has cut its staff by a third since 2009; slashed the number of
branches in Sweden (it also operates in the Baltic states) from over 1,000 in
1997 to 275 today, and made all but eight of those completely cashless.
Discipline on spending pervades the bank, from procurement (switching phone
companies recently reduced its telecom bills by 58%) to staffing (it is moving
part of the workforce to the Baltics, where wages are up to 70% lower). It is
over halfway through a two-year plan to reduce group expenditure by SKr1.4
billion. The $1.6m salary of the new CEO, Birgitte Bonnesen, is modest for the
industry.
As a result of this frugality, Swedbank has a cost-to-income ratio of 43%,
meaning that 57% of the money it takes in can be distributed to shareholders or
reinvested. This is over 16 percentage points more than the average for the EU
as a whole. The Baltic branches are even more efficient, thanks in part to even
greater use of digital banking than in Sweden.
The bank s efforts to move customers from branches and phones to websites and
apps are crucial to its success. In the future people may well only visit a
branch once every five years, suggests Ms Bonnesen, who believes extreme
efficiency , abetted by technology, is the nub of retail banking. Across the
road from Swedbank s headquarters, in a converted warehouse, 200 developers and
business managers flit from breakout areas to meeting pods, planning this lean
but customer-pleasing future. One of their most popular creations is the shake
for balance function on Swedbank s app, which allows users to shake their
phones to find out how much money they have in their account. It is used 30m
times a month.
It helps that Swedbank s biggest market is Sweden. Its economy has grown faster
than most of Europe. Swedes have also been easier to wean off expensive cash
and human contact than other Europeans, thanks to their digital savvy. And the
Swedish banking bust of the 1990s instilled a wariness of lax lending in local
bankers long before the global financial crisis.
Nonetheless, Swedbank still lent too freely to borrowers in the Baltics, Russia
and Ukraine in the early 2000s. Some 20% of loans in those countries had soured
by 2009 (compared to 3% for the bank as a whole). What makes the bank
remarkable, says Alexander Ekbom of Standard & Poor s, a rating agency, is how
it responded. It promptly sold its Russian and Ukrainian business and wrote off
bad loans in the Baltics. Only 0.4% of its current lending is in default.
This experience made Swedbank the conservative, slightly boring bank that it is
today. It says it has no ambition to expand to new markets or to trim its
capital. It avoids risky assets, preferring those with solid collateral, such
as property. Any new business must have a risk-adjusted return of at least 20%
to be considered worthwhile. In Sweden it tries to steer clear of lending to
industries exposed to private consumption, which tends to suffer in downturns.
Much of its corporate lending goes to farming, forestry and housing
co-operatives, which it considers safer.
Despite this obsession with risk management, the bank faces some risks that are
hard to control. Because Swedes don t keep much money in the bank, Swedish
banks rely heavily on wholesale funding, making them vulnerable to investors
mood swings. And Swedbank s impressive risk-adjusted capital ratio is largely
the result of the very favourable treatment that mortgages in rich countries
still receive under the Basel banking rules compared to other types of lending.
If global regulators approach to mortgages were ever to change, Swedbank would
look much less strong: its leverage ratio, an unweighted measure of capital, is
pedestrian.
By the same token, if Swedes ever defaulted on their mortgages in large
numbers, Swedbank would be in big trouble. Swedish house prices, and thus
mortgage lending, are swelling at a tremendous pace, generating fears of a
bubble. Swedish policymakers and bankers seem remarkably sanguine that, even if
there were a correction, households would not default on their mortgages,
although the broader economy would suffer as households cut back on other
spending. But even if these grim scenarios were to materialise, Swedbank would
be starting in a much stronger place than most European banks.