Sweden is a forward-thinking country when it comes to financial services, and its dominant banks have adapted to post-crisis regulation and turned the new reality of the banking market to their advantage. Future Banking speaks to Swedbank CFO Göran Bronner about rebuilding a profitable, agile, cost-efficient and digitally enhanced bank in a post-crisis era of low interest rates.
Europe has no map for the path it is treading. It has never before experienced a prolonged period in which interest rates struggle to stay above zero in many states and quantitative easing is a familiar tactic. As the business sector and the banking industry acclimatise to this new reality, it is essential to look at the risks and the potential opportunities.
Central banks in the UK, the European Union and Scandinavia are eager to take control of 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 0.50% in 2009 and they 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 Sweden'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. 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 where there is already a strong move away from cash," says Göran Bronner, CFO of Swedbank.
"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 below optimum, but the Swedish economy is strongly driven by population growth and a housing shortage. If you add in zero-interest rates you have a very strong property market for many years, but big industrial companies operate in a global market where the picture is similar to the rest of Europe, so top-line growth is slow," he adds. There is concern that ,by targeting inflation, the Riksbank is creating the potential for asset bubbles. That is why regulators are pushing in the opposite direction, as they counteract the potential for asset bubbles with tighter 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 write-off of debt in Sweden. While the debt is big, you put a ceiling on interest rates. It is uncharted territory and we need to be humble in our assessment or there is a big risk of a sharp rise in interest rates when conditions change," Bronner explains.
Take the macroscopic approach
Bronner's unusual path to the CFO job at Swedbank gives him an interesting perspective on the pressures the bank has faced since the financial crisis. He began his banking career at SEB, Sweden's leading corporate bank, as a trader in its capital markets division, spending eight years in Stockholm before stints in London and Singapore. He was a currency trader before taking a management role, then he left SEB leaving 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 got the CFO job in 2011.
"When I first joined, it was a stressful time for the bank but my experience has been very useful in dealing with that situation. It is good to have diversity. 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," he remarks.
"I may lack competence in other areas, however, and CFOs usually come from the finance function, so they know about different accounting rule books. But the job of CFO is developing into a broader role for many banks. The CEO cannot cover all aspects of risk, especially with regulations changing all the time, so the CFO takes on a more general role now."
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 looked to Japan, where low interest rates have become the norm.
Japan's benchmark interest rate is zero. It first hit bottom in 1999 and since the country'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 Japan and, say, the US. The US acknowledges its over-indebtedness and it has written off some debts and moved on. It is a much harsher system, but it is a prerequisite for a quick turnaround. Japan did not do that. It has kept its debt and it did not ease quickly, which creates a drag on the economy. There is no proof that quantitative easing works. It could come at the price of another bubble," says Bronner.
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 we now have a much safer banking system. Our pre-crisis return on equity seems bigger but from a risk-adjusted perspective it is actually better now. In nominal terms, we have never made as much money as in the past two years. There was a tough period of regulatory change, but it has been good for the bank 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," he adds.
Seek efficiency in a digital economy
Improving banks' 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 model to become more responsive, agile and cost-conscious.
"In general, if you have an environment where the top line is growing, you often have a lot of cost in your operation. So, you must develop a culture of low-risk, cost-efficient operations. You need to change your attitude. We have exited some markets, particularly in Eastern Europe, and we have changed our operational model to introduce more digital processes and straight-through processing (STP) to take out the human element," notes Bronner.
"The Nordic banks are healthy - they generate a 15% return on equity - because the economy is healthy. 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. At only eight of our 300 branches can customers withdraw cash without prior warning. 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, where six banks represent 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 we are using new technology for STP and simplifying our digital offering to mitigate margin erosion. We must be more productive every year and make transactions 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.
"We have a vast amount of customer data. Swedbank, for instance, has 50% of the card transaction data in the country, and we must leverage that to define products and services. We need to analyse it and transform it into something commercial, but the industry as a whole is struggling with that. Banks' legacy systems are old and not well adapted to the much faster world in which we live. We have to transform our 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. Banks are becoming enablers of the processes that underpin financial services. We must not lose the opportunity because we have the data and we must capitalise on it now. We are not a big bank and many banks have a more complex operational environment, but what we are doing is a good template for the industry," Bronner believes.