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Nordic European Banks


Viking

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Does anyone have any thoughts on the investability of the Nordic Banks currently caught up in the money laundering in the Baltic states? Their share prices have been cut in half. The news flow the next year or two will likely be ugly. However, i think they have very strong franshises in their home markets that should help them weather the storm.

 

John, given you live in Denmark and your understanding Bank stocks in general, do you have any thoughts? Sorry to put you on the spot :-) most importantly to me, is if there is a risk their home governements are going to be very punitive (possibly put them out of business)?

 

I have made my best investments buying solid companies when they face an ugly issue (resulting in shares trading very cheaply). The key is the issue was not one that would put them out of business; it just resulted in a year or two of poor earnings and some reputational damage (both of which reversed a couple of years later). So i am trying to understand if this is a sector that i should start to learn more about.

 

1.) Danske Bank: “Since the scandal surfaced last year the bank has replaced its CEO and the chairman, pulled out of Russia and the Baltics, boosted its compliance efforts and promised to donate 1.5 billion Danish crowns (£172 million) to fighting financial fraud.”

- https://finance.yahoo.com/news/2018-low-point-turning-point-145654322.html

2.) Swedbank

3.) Nordea Bank

 

Financial Times Summary Article: The Russian shadow over banking’s Nordic noir

https://www.ft.com/content/86b9d520-5791-11e9-91f9-b6515a54c5b1?ftcamp=traffic/partner/feed_headline/us_yahoo/auddev&yptr=yahoo

 

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Couple of risks

1) The banks may have to pull out of the Baltic states (Estonia, Lithuania etc), which have been very profitable

2) Heavy fines by US and demotic regulators

3) Management is consumed to deal with the scandal and can’t take care or the ongoing business (see WFC and this problem is far worse, imo)

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I am local. Reading on daly basis about all these things here  :)

 

Danske Bank is out already.

Nordea technically is still here, but is on the way out. Nordea and DNB Bank created joint bank called Luminor (https://www.luminor.lv/en)

and most probably will sell it soon.

Swedbank will stay. They call Sweden and Baltics their home markets. It will be huge political blow if they decide to leave. I believe that governments will kick in some effort if things will start to move in to this direction.

 

For Danske and Nordea exposure to the Baltics was small compared to the rest of their business.

Damage will be more to reputation than to business if they avoid heavy fines.

 

Swedbank is more exposed. 10.8% of all their lending is in Estonia, Latvia and Lithuania.

 

Hope that helps.

 

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Interesting parallel here with a previous discussion:

http://www.cornerofberkshireandfairfax.ca/forum/books/a-blueprint-for-better-banking-svenska-handelsbanken-niels-kroner/

It looks like Svenska Handelsbanken is (again) showing that, for a bank, what counts is not necessarily to be where the puck will be but to avoid being caught with one's pants down.

 

From Viking's link:

"Bankers stress their role should be to set up suitable processes that can identify risky customers and transactions but that policing actual money laundering is a matter for law enforcement. “Nobody really understands any of this. We’re getting a lot of concepts mixed up. I barely understand what money laundering is,” says the senior banker. (my bold)

 

From the Blueprint for Better Banking (p.158)

"Ask Handelsbanken’s competitor Swedbank, which made a lot of money in the Baltic countries during the good years, how much they are in charge in the macroeconomic upheaval in these countries and how much they can decouple themselves from these developments beyond their control."

 

Simply stated, Svenska Handelsbanken has a different definition of an "edge" in terms of understanding and shows again how to increase market share when it is advantageous to do so. I guess Svenska Handelsbanken comes as close as can be to the definition of anti-fragility, at least for a bank.

https://luxtimes.lu/economics/36612-dirty-money-scandal-gives-one-swedish-bank-way-to-tout-virtue

(free registration required and similar coverage can be found at Bloomberg)

 

 

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Thank you, Viking,

 

And it's certainly OK to put me on the spot. [ : - ) ]

 

I'm unopinionated and unable to contribute anything of value for Swedbank and Nordea. So here is a bit about Danske Bank. Your key question about investability is to me personally the exactly right approach here.

 

One thing I have learned here on CoBF is not to engage in major compromises with regard to management in an investment. I think the new chairman Karsten Dybvad is the right person for the position based on reading about him. The former chairman Ole Andersen got fired on the initiative by the Maersk sphere. The functioning CEO Jesper Nielsen is interim. I think the rest of the management team in the bank involved in the money laundering case already has left the bank voluntarily [by resigning] or has been fired. The CEO situation for the bank has been an open & unresolved issue for now more than a half year. I'm on the sidelines because of that, not even trying to study the bank further at this stage, to avoid any temptation. So, in short: I want to see "the giraffe". [i don't consider myself in any way mean by nature, but I can't help a bit a of sarcasm here : The headhunter who have this - most likely very lucrative - gig of finding the next CEO is on a tough mission - I think he/she is actually searching for Mr. Moynihan's double ... - and I don't think he exist, - despite lots of Brian's here, there & everywhere! [ : - ) ] - well, Birgitte Mogensen just became available - however I think the headhunter will not call her ... [ : - ) ]]

 

Especially banks are to me not companies that can be run by an idiot, to refer to one of Mr. Buffett's quotes. They are more like one of the existing 20 Northrop Grumman B-2 Spirit. Basically this thing can't fly, but you need that particular shape for a certain purpose, then you install highly advanced flight controls in the thingy so that it doesn't drop out of the sky for the pilot.

 

For DANSKE, the command central appears properly staffed [Chairman], the flight control system installed in the plane [a competent management team - free of the money laundering case - referring to the CEO to come], -we just need the right pilot for the plane [the new CEO] before doing further.

 

- - - o 0 o - - -

 

Edit: If any of my fellow board members are up for some leisure reading, please look here. The full Bruun & Hjejle Report will be worth your time, no matter interested in DANSKE or not. Reading parts of it is almost like being a fly sitting on the wall of the board- & meeting rooms in DANSKE, listening. [ : - ) ]

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John, thanks for providing your perspective :-).  Do you have a feel for how Danes view the scandal? More importantly (from an investment perspective), are they moving their business away from the bank? Or does it look like will give Danske a chance to get it right (like, pehaps, WFC customers who look to have been very patient with that bank)?

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Thank you for asking, Viking,

 

- - - o 0 o - - -

 

Off topic: I'm soo frustrated at the moment because of what is going on on the political scene for our fellow European board members in the UK, and what that may bring to us all going forward. So to me this conversation about DANSKE is a good mental diversion [ : - ) ]. - Now back to topic.

 

- - - o 0 o - - -

 

In short, to me, there is not much doubt that DANSKE will rerate upwards in the future, based on ignoring a lot of macro stuff looking forward, but taking still into consideration some local issues and certain DANSKE specific issues. The question to me is only how much and when.

 

It's to me an obvious investment case candidate for you, based on how you like to invest, ref. your starting post in this topic. - with proven success - documented by you here on CoBF, and "When it rains on the priest it drips on the clerk". [i'm among the clerks here [ : - ) ].]

 

The stock is hammered down - cut in half - by this money laundering case. Peteris has already posted it as a one-liner in this topic: It's a non-event, except with regard to reputational risk and fines, however an important thing I would like to add here is class action lawsuits by groups or clusters of shareholders.

 

The whole mess actually started back in 2007 [!] [it's in the full Bruun & Hjejle Report.] In short, the thugs and criminals doing this stuff abusing the DANSKE Estonian branch were way ahead - not only of existing control systems in the branch [lack of migration of branch IT systems to DANSKE group systems, but also way ahead of the ruling AML regulation with regard to requirements NYC-Know your customer.] So, everybody involved in to getting to the bottom of this have ended up stuck - some of the data simply does not exist inside DANSKE, because they were never asked for. [Full identification/legitimation of persons, for companies, LP's, LLPs etc. records of owners and such.]

 

Add to that, the Hjejle Report does not - at all - shed a positive light on the Danish FSA and the Estonia FSA - to put it mildly - in this case. The Danish FSA and the Estonian FSA have publicly been pointing fingers at each other, saying the other part is to blame for this mess, that nobody can get to bottom of. [i haven't posted about this here on CoBF - I think I would have been accused of spamming CoBF - but I can assure you it has been great entertainment for me to follow.]

 

Now what do you get when you take this oversize & already overcooked lump of spaghetti of a cascade calamities of errors, misjudgements, wrong decisions and actions and try to spice it up with a huge stint of moral hazard? [ : - ) ] - It just happens sometimes ... - to me, this is a lonely swallow - I think the rest of the bank is OK. This is afterall about some events in Estonia, not Denmark - but with some managerial ties to Denmark, however & naturally.

 

The new CEO does not need to be a surgeon [ref. Buffett's quote about sometimes you need a surgeon cut out the bad part of a business to get the good one.] The Estonian branch is already gone, also ref. Peteris' post above.

 

With regard to fines, for the Danish part, from the Danish FSA, after the release of the Bruun & Hjejle Report, there were a political pressure with questions about why DANSKE has not been fined by the Danish FSA for all this. [i have for years had a loose feeling that DANSKE got special [positive] treatment - I have seen inspection reports for other Danish banks less grave than for DANSKE resulting in fines.] The situation here is that DANSKE has an option to appeal while fined, - while it has bent over - and because of "double jepardy" rule in this part of the whole system, there is no way for the Danish FSA to punish DANSKE for THE PAST further.

 

At the same time the head of the Danish FSA repeated his request for more funds to run the FSA - which he got. [sometimes - even if it's just a tiny part of it - reason rules in some places of Europe.] He has been struggling with his best people leaving for better paid jobs, based on a public & rigid non-competitive salary system.]

 

- So in short, the political system here in Denmark has now settled with the case, based on reason. In short : Just these movements up and down with the shoulders - one time, combined with the comment : "Here are some money - now, make sure it won't happen again." [Which to me has been the exactly right conclusion.]

 

I have read 1 [one!] political comment in the Danish news, just after the release of the Bruun & Hjejle Report yelling: "We denititely now need a State [owned] bank to take care of our money!" - with no traction at all. No Ms. Warren here.

 

Then there is the potential US fines. I have read no concrete evidence of anything but start up on investigation. My overall perception as of now is, that they have a tendency not to go totally haywire, if the accused cooperates. Which DANSKE does. It may well end up being a dent, however manageable for DANSKE.

 

With regard to class action lawsuits from groups & clusters of shareholders, I'm not aware of any Danish pension fund etc. who has joined this kind of game. Deminor - mentioned by me earlier in the Vestas Wind Systems topic here on CoBF - is on a mission here, - as far as I know it has been turned down by every Danish pension fund etc.

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I am local. Reading on daly basis about all these things here  :)

 

Danske Bank is out already.

Nordea technically is still here, but is on the way out. Nordea and DNB Bank created joint bank called Luminor (https://www.luminor.lv/en)

and most probably will sell it soon.

Swedbank will stay. They call Sweden and Baltics their home markets. It will be huge political blow if they decide to leave. I believe that governments will kick in some effort if things will start to move in to this direction.

 

For Danske and Nordea exposure to the Baltics was small compared to the rest of their business.

Damage will be more to reputation than to business if they avoid heavy fines.

 

Swedbank is more exposed. 10.8% of all their lending is in Estonia, Latvia and Lithuania.

 

Hope that helps.

 

Peteris,

 

How about SEB? I haven't spent much time on it for some years now, because it has been doing quite well over the years since I first invested in the Wallenberg Sphere via Investor AB [, which hold a large chunk of SEB].

 

Naturally both the bank and Investor AB are mute right now - perhaps working like crazy internally to get a firm grip on it if the bank has a problem similar to Danske Bank, Swedbank & Nordea in the Baltic States.

 

Any news related to that from your angle? -Thank you in advance.

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Just a possibly stupid question - how can the US enforce a fine for  Danske? Danske has no operations in the US - could they just tell the US to take a hike? This is different than Deutsche Bank or even BNP since the latter do investment banking in the US.

 

The risk reward ratio for going long Danske looks quite good here.

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My understanding is the US has given itself the right to fine anybody doing illicit transactions in USD. No matter where. There have been big fines for Telcos bribing with USD in Azerbadjian and neighbours.

This.

I'm pretty close to the situation and do think the setup looks interesting (but I'm not allowed to invest), but it's difficult to handicap. Whether the equity is cheap depends on the size of an eventual fine. And then, like with Wells, costs are gonna be high for years due to increased compliance etc. etc. Another thing, which might be overlooked here, is that most Nordics banks are structurally struggling at the moment since interest rates have come down again - and are expected to stay down for a long time - and still consumers aren't really spending. And so far they haven't been very good at passing increased costs on to their customers so profitability might be weak for a long time. Which basically means most banks look very cheap on a p/TBV basis. But that's clearly a function of a low expected ROE.

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It's actually a good question, Spekulatius,

 

DANSKE does not even have a US banking license. I think it is about section 9.3.16 [p. 48] in the Bruun & Hjejle Report. A reporter has dived deep into this, and found out it was a US bank, that had cut ties in 2013 with the Estonian DANSKE branch on grounds of dirty money rolling in. I do not recall the information with full precision, but by best recollection it was a branch in Germany of C or JPM.

 

[Again, I do not consider myself mean, but I still remember the feeling of the endorfines that got released out in my body by reading it, because it was one the US banks that I own [ : - ) ]] [There may perhaps be a fine to that bank also for not stopping it timely.]

 

So I suppose a minor army of regulators after reading this stuff has jumped on an plane in New York and has been raiding a branch office of C or JPM, so every normal business routine there basically has come to a stop for a period, perhaps in Frankfurt?

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An example of what's going on here with DANSKE :

 

Finans.dk  [April 11th 2019] : Experts : Danske Bank is missing DKK 50 billion in [capital] buffer.

 

So, two so called "experts" - university professors - [publicly] "telling" both the Danish FSA and the bank, that none of them can calculate the actual capital situation of the bank correctly ... [*rolling eyes*]

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Danish Business Authority [April 12th 2019] : Danish Business Authority reports EY to State Prosecutor for Serious Economic and International Crime.

 

Now I think every Danish possible & relevant participant has joined the party in the mud puddle by "invitation" - I think the DANSKE auditors were the last ones missing. Here it is about the 2014 financials for DANSKE, and lack of reporting about money laundering for 2014 to the State Prosecutors money laundering office. The DBA investigation of DANSKE continues.

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I am local. Reading on daly basis about all these things here  :)

 

Danske Bank is out already.

Nordea technically is still here, but is on the way out. Nordea and DNB Bank created joint bank called Luminor (https://www.luminor.lv/en)

and most probably will sell it soon.

Swedbank will stay. They call Sweden and Baltics their home markets. It will be huge political blow if they decide to leave. I believe that governments will kick in some effort if things will start to move in to this direction.

 

For Danske and Nordea exposure to the Baltics was small compared to the rest of their business.

Damage will be more to reputation than to business if they avoid heavy fines.

 

Swedbank is more exposed. 10.8% of all their lending is in Estonia, Latvia and Lithuania.

 

Hope that helps.

 

Peteris,

 

How about SEB? I haven't spent much time on it for some years now, because it has been doing quite well over the years since I first invested in the Wallenberg Sphere via Investor AB [, which hold a large chunk of SEB].

 

Naturally both the bank and Investor AB are mute right now - perhaps working like crazy internally to get a firm grip on it if the bank has a problem similar to Danske Bank, Swedbank & Nordea in the Baltic States.

 

Any news related to that from your angle? -Thank you in advance.

 

It is clear that SEB subsidiaries in the Baltic countries also have non-resident accounts. I don't have special insights, but heard from CEO of Latvian branch words like: "looking back it is clear that we could ask more information from our customers, but we are absolutely sure that intentionally we never supported illegal cash flows".   

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