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Nordea Group: Why the Biggest Nordic Bank Re-domiciled to Finland

 5 min read / 

Nordea Group is the leading financial services group in the Nordic market. It is the biggest bank by total assets in Sweden, Finland and Norway and the second in the Danish banking sector.

It was unexpected news when Nordea announced its strategic decision to re-domicile its parent company from Sweden to Finland. The economic impact of the move is significant: in 2016, the banking group recorded €615.7bn in total assets and €4.6bn in pre-tax profits. That year, it paid €859m in taxes.

To contextualize the significance of Nordea in the Nordic market, one can compare its size with the other biggest banks in Finland and Sweden. The Swedish banking sector has three major players other than Nordea. Svenska Handelsbanken, the second biggest bank in total assets, and SEB Group, the third player in the country, which recorded assets of €263.7bn and €262.3bn respectively. The other large bank is Swedbank with €215.2 in assets.

In contrast, in Finland, there are only two banks which have assets larger than €100bn. In 2016, the first player was Nordea Finland, a foreign-owned subsidiary of Nordea Group, and the second was OP Phjola Group. With the relocation of Nordea to Finland, a historical change has occurred in the Scandinavian banking market.

The EU Banking Union and Nordea’s Relocation

To understand the reasons why Nordea has chosen to move its legal headquarters, the different regulatory framework rules in Sweden and Finland need to be explored. In 2010, the EU established its banking union to integrate national banking systems more deeply. Any nation within the EU may join the EU’s banking union but – even though it is a member of the EU – Sweden has always refused to.

The country is also not part of the Eurozone, thus it enjoys its own national currency, monetary policy and central bank. On the contrary, Finland has entered the Eurozone since 1999 and is part of the banking union. The relocation of Nordea to Finland offers Nordea the opportunity to work under the regulatory framework of the union. First, considering costs and benefits, the European Central Bank’s Single Supervisory Mechanism requires lower regulatory capital ratios than Swedish rules, leaving Nordea with an excess equity. According to an article published by the Financial Times, Nordea would benefit from an excess equity of around €6.4bn.

In addition, Nordea would gain from savings related to resolution fees, deposit guarantees and other transitional effects. According to the figures released by Nordea, relocating to Finland may reduce costs by around €200m per year. Significantly, Nordea would exit the costly Swedish bank’s resolution scheme which is financed by Swedish banks and is used to bail out a bank in case of collapse.

Until 2016, the stability fund required any bank to pay an annual fee which was 0.09% of a base that consisted of the bulk of the institution’s debts. From 1 February 2016, the Swedish government created a new fund, the resolution reserve, which charges banks with higher fees. According to Reuters, with the new rules, from June 2016 the figure has increased from 0.09% to 0.125% until 2019.

After that year, the fees will be reduced before being cancelled in 2025. However, before planning its relocation, Nordea’s management complained that the new rules would have increased its fees significantly: from $500m in 2016 to $690m in 2019. Lastly, the Finnish corporate tax is 20%, compared to 22% in Sweden. Nordea will profit from paying fewer taxes over its annual performance.

The EU Banking Union and the Nordic Market

Nordea’s relocation has encouraged Sweden to reconsider its membership inside the EU banking union. However, the discussion over the banking union is also taking place in other countries within the Nordic market. In 2015, the Danish Central Bank published a report in which it illustrated why the Danish banking sector would benefit from a membership inside the union. However, if Denmark decides to participate in the union, it is unclear as to when this would happen.

As explained by the Danish Central Bank, countries may benefit from joining the banking union because it would improve national financial stability and supervision efficiency. A supranational supervision may improve the cost-effectiveness of managing cross-border externalities of international banks.

In addition, there is a share of risk. Thus, any bank, regardless its size, will be large enough to threaten the stability of the whole national banking system. Lastly, if banks operate under the same legal framework, there will be a fairer competition in the financial sector.

Conclusion

The opportunity to find a more accommodating legal environment drove Nordea to Finland. The bank will enjoy a regulatory framework which allows Nordea to significantly reduce its operating costs. The Finnish banking system, which works under the EU’s banking union, requires lower regulatory capital ratios and lower overall fees. However, Nordea is not the only bank in question. In the Nordic countries, there is an institutional discussion on whether being a member of the banking union would improve national financial stability and international competitiveness.

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Europe

May Meets Macron

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The UK prime minister agreed to pay £44.5m towards tighter border security at Calais.

Editor’s Remarks: The French president arrived in the UK for the Anglo-French summit amid widespread complaints from the Tory party about just why Britain is paying another £44.5m for tighter security in France. One Tory MP pointed out that this addition brings the total figure the UK has paid to France in recent years up to £170m. France, meanwhile, says that the amount is necessary because the migrants in Calais are trying to get to the UK, who must, therefore, contribute towards their costs. The talks were also consumed by the imminent task of reaching consensus over the UK’s trade deal with the UK after Brexit goes through.

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Bayeux Tapestry on Loan

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Emmanuel Macron has offered to loan the famous tapestry to the UK in an effort to improve relations.

Editor’s Remarks: The offer is expected to be announced this Thursday, when Macron will meet UK officials at the Anglo-French summit at Sandhurst. The Bayeux Tapestry was commission by William the Conquerer’s brother to celebrate his 1066 conquest of England and depicts the Norman king defeating the Anglo-Saxon ruler King Harold. Although it was made in England, the piece – which measures about 35 square metres – has remained in France for the past 940 years. At the upcoming summit, Macron is also expected to petition the UK to join his combined European military initiative – a move many expect Britain’s new defence secretary Gavin Williamson to push back on.

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Why 2018 Will Be the Year of European Stocks

 4 min read / 

European Stocks 2018

2017 has been an incredible year for stock markets all over the world. 2018 will probably be the same. Last year, the MSCI Europe index rose 22%, compared to 19% for the S&P 500. In my opinion, 2018 will be an even better year for European stocks.

A Favourable Political Landscape

In the last years, European stock markets have suffered because of a very uncertain political environment. After surviving a number of difficult elections in 2017, the European political landscape now looks much more favourable. While some risks remain, with a particular focus on the Italian general elections in March, the chance of results that could rattle markets is very slim, as populist parties appear to have softened their rhetoric against the single currency or abandoned the plan to leave it altogether.

Positive Economic and Monetary Environment

The European economy is growing quite strongly. Real GDP is expected to grow by 2.1% in 2018, unemployment has reached the levels of 2009 and consumer confidence is well above pre-crisis numbers. The improving economy should boost EPS, making European stocks look relatively cheap compared to bonds.

“In Europe, the combination of easy credit conditions and falling unemployment should support confidence, earnings and equities […] An incredibly tight correlation has existed throughout history whereby rising consumer confidence in the euro zone boosts equity prices, and you get this virtuous cycle. We think that will continue.” Mike Bell, JP Morgan Asset Management

In addition to a recovering economy, the European Central Bank will keep buying bonds until at least September, continuing to support markets. Recovering European companies might use this cheap debt to complete cross-border mergers and acquisitions.

The Rising Euro

2018 is likely to be the year of the Euro as well. After an incredible 2017, where the currency strengthened considerably against the US dollar, many analysts predict that the EUR/USD exchange rate will reach 1.30 – a level not seen since 2014. Some suggest that the pair will end the year at 1.24.

Source: StockCharts

Since the beginning of the year, the euro has already seen some interesting movements on the upside, thanks to Germany getting closer to a government, hawkish comments by the ECB and China suggesting that they might diversify their FX reserves. However, as a strong euro would not benefit European exporters, we can expect the ECB to act to weaken the currency, especially since inflation is expected to remain low for years.

Cyclical Sectors Look Particularly Interesting

Given the positive economic environment, cyclical stocks are attractive investments. In fact, in the first week of trading in 2018, cyclical stocks in the Stoxx 600 have performed much better than defensive ones.

“In an environment of solid growth and rising long-term yields in Europe, financials and value stocks in general are likely to outperform, as well as energy.” Valentin Bissat, Mirabaud Asset Management

Source: Bloomberg

However, UBS analysts warn that the European banking sector could suffer earnings downgrades due to risks generated by sluggish revenues, cost inflation and the threat of regulatory uncertainty. As a consequence, investments should be chosen very carefully, favouring cheaper banks with strong levels of free cash flow generation.

The Old-Economy Might Produce Healthy Returns As Well

After the financial crisis and the European sovereign-debt crisis, in old-economy industries, like building material manufacturers and homebuilders, firms have restructured their balance sheets and rationally changed their business models. As many weak companies have failed, there is less competition as well. With consumer and business confidence increasing quickly, demand for these businesses will increase as well. Those firms that have survived might even be able to raise prices, generating higher EPS.

European Stocks Are Just Cheaper than US Stocks

As said, fundamentals would justify a European equities rally in 2018. Although they are not cheap in absolute terms, they look particularly so when compared to US stocks, meaning that the Eurozone could be less vulnerable if a correction comes. In fact, the S&P 500’s forward P/E ratio is 18x, the highest since 2002, while the Stoxx 600 trades at 15x – below its 2015 peak. This same trend is confirmed by the price-to-book ratio: the Stoxx 600 trades at 2x, while the S&P 500 is trading at 3.4x – again, the highest level since 2002. The spread between the two has never been this high.

“There’s definitely less euphoria in European stocks at the moment […] Now the big question is: will European stocks be immune if there’s a correction on Wall Street?” Andrea Tueni, Saxo Banque France.

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