Sweden is a forward-looking country when it comes to financial services, and its dominant banks have adapted to post-crisis regulation, turning the new reality of the market to their advantage. Jim Banks speaks to Swedbank’s CFO Göran Bronner about rebuilding a profitable, cost-efficient and digitally enhanced bank in an era of low interest rates.
Europe has no map for the path it is treading. It has not experienced a prolonged period in which interest rates have struggled to stay above zero in many states, and quantitative easing is now a familiar tactic. As business and the banking industry acclimatise, it is essential to look at the risks and potential opportunities.
Central banks in the UK, the European Union and Scandinavia are eager to control inflation and have, therefore, set historically low interest rates. The European Central Bank, for instance, has launched a quantitative easing programme that could see €1 trillion in bond purchases to bring inflation in line with targets and interest rates hit a record low of 0.05% in September 2014.
In the UK, interest rates were cut to an all-time low of 0.5% in 2009, and have stayed there ever since. In February, Sweden's Riksbank became the first major central bank to take its interest rate into negative territory.
The move to make the Scandinavian nation's main repo rate negative, along with a quantitative easing programme, is an effort to combat deflation and comes after the European Central Bank, Denmark and Switzerland moved to impose negative deposit rates. So, what does this mean for banks and businesses across Europe?
"The impact of negative interest rates has not been felt yet in Sweden because banks have not passed it onto clients," says Göran Bronner, CFO of Swedbank. "The rate is effectively zero. Clients don't pay banks to hold their money. It is hard for banks to introduce negative rates - clients won't pay to deposit money - it encourages people to keep their cash out of the bank in a country that has already started to leave cash behind.
"With zero interest rates, money is free, or at least very cheap, and that is a great challenge. In the rest of Europe, economic growth is sub-optimal, but the Swedish economy is strongly driven by population growth and a housing shortage. Adding zero interest rates will create a strong property market for many years, but big industrial companies operate in a global market in which the picture is similar to the rest of Europe, so top-line growth is slow."
There is concern is that by targeting inflation the Riksbank may be encouraging asset bubbles, so regulators are looking to counteract this potential outcome by tightening lending standards.
"We could be in the zero-interest-rate environment for a long time, and the only thing that would change it would be some kind of debt write-off in Europe," Bronner explains. "While the debt is big, you put a ceiling on interest rates. It is uncharted territory, and we must be humble in our assessment, or risk a sharp rise in interest rates when conditions change."
A macroscopic approach
Bronner, who will be a keynote speaker at Finance Director Europe's Q2 breakfast briefing in Stockholm in May, took an unusual path to his job at Swedbank, which gives him an interesting perspective on the pressures the bank has faced since the financial crisis. His career began at SEB, Sweden's leading corporate bank, as a trader, spending eight years in Stockholm before stints in London and Singapore. He was a currency trader before taking a management role, then left SEB to start a macro hedge fund, which he ran for nine years, and which still exists. He joined Swedbank in 2009 as chief risk officer when Michael Wolf became CEO, then took the CFO job in 2011.
"When I joined, it was a stressful time for the bank, but my experience has been very useful in dealing with that situation," he remarks. "Banking is about macro issues and risk. It is about managing the many different types of risk, so it was helpful that I had competence in that. As the manager of a macro fund, you have to look at where the world is going, which is useful in my job at Swedbank.
"I may lack competence in other areas, however, and CFOs usually have a finance background, so they know about different accounting rulebooks. The role of the CFO, however, is becoming much broader at many banks. The CEO cannot cover every aspect of risk, especially with regulations changing all the time, so the CFO now has a more general function."
Bronner's macro approach sees him looking far wider than many CFOs to understand the challenges Swedbank - and the economy of Europe as a whole - is facing. He has certainly considered Japan, where low interest rates have become the norm.
The Asian country's benchmark interest rate is zero. It first hit bottom in 1999, and since the nation's economic bubble burst in 1990, it has been historically low and has been associated with a heavy reliance on quantitative easing. Zero interest rates seem normal in Japan, as does the risk of expanding public debt at seemingly little cost.
"I think we can learn from Japan, but there is a difference between there and, say, the US," opines Bronner. "The US acknowledges its debts, and has written some off and moved on. This system is much harsher, but is a prerequisite for a quick turnaround. Japan did not do that: it has kept its debt and it did not ease quickly, which created a drag on the economy. There is no proof that quantitative easing works: it could come at the price of another bubble."
The regulators are acting as the brakes on another asset bubble in Sweden, and Bronner believes that the big changes between 2009 and 2011 - that demanded more capital as buffers and pushed banks into more secure funding positions with greater liquidity - have been beneficial.
"We've adjusted to that, and now have a much safer banking system," says Bronner. "Swedbank's pre-crisis return on equity seems bigger, but from a risk-adjusted perspective, it is actually better now. In nominal terms, the bank has never made as much money as in the last two years. There was a tough period of regulatory change, but it has been good for Swedbank and for Sweden's banking system in general," he says.
"We can raise money internationally at the cheapest rates because our banking system is robust. We have created trust around the banking industry. Now, regulators are looking to calm the property market, but the way to do that is to fix the supply side by building more houses. Nevertheless, the initial response to the financial crisis from the regulators was very good. It was good to be an early mover in getting the banking system back into shape."
Efficiency in a digital economy
Improving a bank's profitability in an era of higher capital and liquidity requirements depends on increasing efficiency and remaining competitive in a rapidly evolving financial services market, in which new entrants are exerting a lot of competitive pressure. Traditional banks need to reinvent their operating models to become more responsive, agile and cost-conscious.
"In general, environments in which the top line is growing often create a lot of cost, so, you must develop a culture of low-risk, cost-efficient operation. You need to change your attitude. We have exited some markets, particularly in Eastern Europe, and have changed our operational model to introduce more digital processes and straight-through processing (STP) to remove the human element," notes Bronner.
"The Nordic banks are healthy - they generate a 15% return on equity - because the economy is in good shape. We continue to reshape our business models, and make our products and services cheaper. Digitalisation is a big driving force, as it changes the distribution model and gives consumers more choice. It is important to recognise that digital is a game-changing environment; top-line growth for banks won't go back to pre-2008 levels. When the top line is subdued, you have to change your internal processes."
Swedbank's proactive efforts to cut costs are aided by Sweden's very modern approach to banking services.
"In the future, there will be a smaller number of people in the bank as we streamline processes to customers. Online banking is important, but mobile banking much more so. Customers increasingly use self-service applications on mobile devices. Sweden uses digitalised payments to a great extent, as there is a very low propensity for cash. Customers may withdraw cash without prior warning at only eight of Swedbank's 300 branches. In Sweden, you can buy a packet of chewing gum with your card, as the processing costs are so low."
The country has quickly adopted free, person-to-person, real-time cash transfer through the extremely successful Swish payments service. In such a small country, in which six banks occupy 90% of the market, the system was relatively easy to implement, but it serves as a strong test case for larger markets with a more complex banking infrastructure.
"The next step in efficiency is to develop that mindset further, to continue streamlining processes and to take out manual work. Clients want cheaper products, so Swedbank is using new technology for STP and simplifying its digital offering to mitigate margin erosion. Productivity must increase every year and transactions be made cheaper. Banks are latecomers to some areas of the digital economy, particularly social media, but there is a fantastic opportunity in big data," Bronner explains.
"Swedbank has a vast amount of customer data. It has, for instance, 50% of the card transaction data in the country, and must use that to define products and services. It must be analysed and transformed into something commercial, but the industry as a whole is struggling with that. Banks' legacy systems are old and poorly adapted to the much faster world in which we live. Swedbank has to overhaul its fragmented IT department and the finance function plays an important part in transforming it into a more holistic environment."
Swedbank is in the midst of a four-year project of massive investment in IT infrastructure and digital services to become better at big data and customer analytics. Its CFO will have one hand on the tiller to steer the bank through its process of transformation, cutting costs and injecting investment to keep it competitive in the new world of banking.
"I must be proactive in IT investment and infrastructure," believes Bronner. "Banks are now enabling the processes that underpin financial services. Swedbank must not lose the opportunity, because it has the data and must capitalise on it now.
"Swedbank is not a big bank, and others have more complex operational environments, but what it is doing is a good template for the industry."