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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.