Negative interest rates have created a European banking industry that’s ripe for consolidation, according to the chief executive officer of the biggest Nordic bank. But bankers have lost their nerve, so the mergers aren’t happening.
Casper von Koskull, the CEO of Nordea Bank Abp, says a lack of confidence within his industry is now the “biggest impediment” to the cross-border mergers he says are needed.
Negative interest rates “should actually accelerate” consolidation, he said in an interview. But the “much larger question” now facing the industry is one of insecurity, in part due to a tougher regulatory environment, he said.
Nordic banks have been dealing with negative rates since 2012, when Denmark’s central bank first introduced the tool to defend the krone’s peg to the euro. Sweden’s Riksbank went below zero a few years later, after a bout of deflation.
In the euro area, the European Central Bank is signalling interest rates will be held lower for longer, weighing on banks’ ability to generate income from lending, leaving them without a cushion to fall back on when income from trading dries up. Over the next few weeks, earnings from some of Europe’s largest banks are set to offer a peek into the negative-rates abyss. That, combined with several waves of stricter financial regulation, has created a banking environment that von Koskull warns is too fragmented.
In Germany, Deutsche Bank AG and Commerzbank AG in April shelved talks to combine, citing execution risks. Since then, M&A speculation around Commerzbank has touched on names including ING Groep NV and UniCredit SpA. Much of the logic behind such mergers centers on a goal to reduce costs. A particular focus is technology, as banks begin to face competition from big tech firms like Apple Inc, Amazon.com Inc and Alphabet Inc’s Google.
Nordea, itself a product of mergers between roughly 300 Nordic banks over two centuries, held preliminary talks with Dutch authorities in 2016 about joining forces with ABN Amro Group NV. The talks didn’t lead anywhere. There’s no scope for Nordea to take part in major moves over the next three years, von Koskull said earlier this year.
Nordic banks had for years been widely regarded as some of Europe’s strongest, best capitalised and safest. But the sector now looks increasingly beleaguered, with scandals also playing a prominent part. Last year, one of the worst performing financial stocks in Europe was Danske Bank A/S. This year, it’s Swedbank AB.
Danske is dealing with the fallout of a vast money-laundering scandal. But a more recent embarrassment stems from its decision to overcharge retail investors. The Danish financial regulator hinted that negative rates probably played a role in tempting the lender to offer a product on which it could charge fees that compensate for interest rates below zero.
“Negative rates actually do hurt bank business models,” von Koskull said. “As such, in an industry like in Europe where we have overcapacity, consolidation would be very natural, particularly domestic consolidation, but also cross-border consolidation.”
Nordea, which is the biggest Nordic bank by assets, signalled on Thursday it may need to start scaling back its shareholder rewards in an effort to adapt to the tougher environment. The market responded by driving its shares down as much as 7.4%. Nordea also published second-quarter total operating income that fell short of even the lowest analyst estimates, in part as sub-zero rates continue to weigh on interest income.
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