OCCASIONAL PAPER SERIES No 5 / 2015

Transcription

BANK OF LITHUANIA. WORKING PAPER SERIES No 1 / 2008 SHORT-TERM FORECASTING OF GDP USING LARGE MONTHLY DATASETS: A PSEUDO REAL-TIME FORECAST EVALUATION EXERCISE
OCCASIONAL PAPER SERIES
No 5 / 2015
BUSINESS MODELS OF SCANDINAVIAN
BANKS SUBSIDIARIES IN THE BALTICS:
IDENTIFICATION AND ANALYSIS
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ISSN 2424-3213 (ONLINE)
OCCASIONAL PAPER SERIES
No 5 / 2015
BUSINESS MODELS OF SCANDINAVIAN BANKS SUBSIDIARIES IN THE
BALTICS: IDENTIFICATION AND ANALYSIS
by Aldona Jočienė*
* The Centre for Excellence in Finance and Economic, Bank of Lithuania, Totorių g. 4, LT-01121 Vilnius, Lithuania.
E-mail: [email protected], Vilnius University, Tel. +370 698 48685.
© Lietuvos bankas, 2015
Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged.
Address
Totorių g. 4
LT-01121 Vilnius
Lithuania
Internet
http://www.lb.lt
The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania
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Abstract
Since the crisis in the Baltic countries in 2009, the question on the particularities of business models adopted
by foreign-owned banks has been often raised. The business models of these banks have changed
significantly, but they still remain of major concern. The aim of this paper is to identify what type of
business models have been chosen by the Baltic foreign-owned banks, to assess them as well as to provide
recommendations on how to address the outlined challenges.
The Literature Review showed that the Business Model Canvas approach can be used for bank business
model analysis. However, banking specialness should be taken into account. Empirical research was carried
out using a combination of qualitative and quantitative methods for nine Scandinavian banks subsidiaries
operating in the Baltics. The main focus of this research was the complex analysis of bank business model
components, using the newly created system of key business model indicators. Business model analysis was
based only on publicly available information, which is limited and not standardised.
The main characteristics of the business model of Scandinavian banks subsidiaries established in the Baltics
are as follows: retail banks operating in one jurisdiction, dependency on the parent bank decisions, aversion
to risk, stronger focus on non-interest income and high efficiency due to cost cutting and e-banking,
orientation on safety (banks meet prudential requirements with large reserves), and medium profitability with
a negative trend for the future. It was determined that if banks keep on doing their business as they are
currently, their possibilities of generating acceptable returns will be of major concern. The biggest
opportunity for banks in a low interest rate environment is to focus on increasing the volume of interest
bearing assets. Financing small and medium-sized enterprises (SMEs), especially in productive sectors and
innovative companies, could be the best outcome for banks and Lithuania’s economy. To achieve this goal,
banks need to set SMEs financing as a strategic priority, make fundamental changes in their lending policy.
The EU and local governments should give financial support for SMEs to strengthen this sector, and that
should encourage banks to finance SMEs more actively as well.
The analysis of bank business models is a relatively new approach towards banking industry analysis. This
paper is the first attempt of deeper analysis of business models of Scandinavian banks subsidiaries operating
in the Baltics. This paper can serve as an eye-opener for Financial Supervisory Authorities and Central
Banks, Scandinavian banks when drafting strategies for their subsidiaries and Government representatives
who are responsible for the banking system strategy and strengthening SMEs sector.
Keywords: Baltic countries; foreign-owned bank; business model, sustainability, small and medium
enterprises (SMEs).
JEL Classification: G21; M21.
-I would like to thank Marius Jurgilas for the invaluable comments and suggestions, Mihnea Constantinescu
for scientific advice, Karina Majevska for technical support, Prudential Supervision, Financial Stability and
Economics Departments of Bank of Lithuania, Latvian Financial and Capital Market Commission and
Estonian Financial Supervision Authority for the data and comments.
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Santrauka
Nuo 2009 metų krizės Baltijos šalyse dažnai keliamas klausimas apie užsienio bankų verslo modelių
ypatumus. Skandinavijos bankų patronuojamieji bankai, veikiantys Baltijos šalyse, taikomus verslo modelius
gerokai pakeitė, tačiau jie ir toliau kelia susirūpinimą. Šio darbo tikslas – nustatyti, kokios rūšies verslo
modelius yra pasirinkę Baltijos šalyse veikiantys užsienio bankai, įvertinti šiuos modelius ir jų keliamus
iššūkius, taip pat pateikti rekomendacijas, kaip su nustatytais iššūkiais būtų galima susidoroti.
Atlikta literatūros apžvalga parodė, kad toks metodas kaip verslo modelio paveikslas (angl. Business Model
Canvas) gali būti taikomas bankų verslo modelių analizei, tačiau turi būti atsižvelgiama į bankininkystės
verslo ypatumus. Empirinis tyrimas atliktas naudojant kiekybinių ir kokybinių metodų derinį ir jį taikant
devynių Skandinavijos bankų, veikiančių Baltijos šalyse, verslo modeliams išanalizuoti. Koncentruojamasi į
atskirų verslo modelio komponentų kompleksinę analizę, jai taikant sukurtą verslo modelio indikatorių
sistemą. Verslo modelių analizė atlikta naudojant tik viešai prieinamą informaciją, kuri yra ribota ir
nestandartizuota.
Nustatytos tokios Skandinavijos bankų, veikiančių Baltijos šalyse, verslo modelio pagrindinės savybės: tai
mažmeninis bankas, vykdantis veiklą vienoje jurisdikcijoje, labai priklausantis nuo patronuojančio banko
sprendimų, vengiantis rizikos, dedantis pastangas gauti daugiau nepalūkaninių pajamų ir pasiekti didesnį
veiklos efektyvumą, besiorientuojantis į banko saugumą (vykdo riziką ribojančius normatyvus su didele
atsarga), jo pelningumas vidutinis ir pelningumo tendencija ateityje neigiama. Nustatyta, kad jei šie bankai
veiklą vykdys taip, kaip vykdo šiuo metu, jų galimybės generuoti priimtinas grąžas ateityje bus
problemiškos. Didžiausių galimybių bankams, esant žemų palūkanų normų aplinkai, teiktų palūkanas
uždirbančių aktyvų didinimas. Aktyvesnis mažų ir vidutinių įmonių (MVĮ) kreditavimas, ypač orientuojantis
į produktyvius sektorius ir inovatyvias įmones, galėtų duoti geriausią rezultatą bankams ir Lietuvos
ekonomikai. Kad pasiektų šį tikslą, bankai turi laikyti MVĮ finansavimą strateginiu prioritetu, atlikti
fundamentalius pokyčius kreditavimo politikoje. Europos Sąjungos ir vietinės valdžios institucijos,
teikdamos finansinę paramą MVĮ, dar labiau sustiprintų šį sektorių, o tai skatintų bankus aktyviau finansuoti
MVĮ.
Bankų verslo modelių analizė yra naujas požiūris bankininkystėje. Šiame straipsnyje pirmą kartą pateikiama
išsamesnė Skandinavijos bankų, veikiančių Baltijos šalyse, verslo modelių analizė. Straipsnis turėtų būti
naudingas finansų priežiūros institucijoms ir centriniams bankams, taip pat Skandinavijos bankams,
rengiantiems patronuojamųjų bankų strategijas, ir valdžios atstovams, kurie yra atsakingi už šalies bankų
sistemos strategiją ir MVĮ sektoriaus stiprinimą.
Pagrindiniai žodžiai: Baltijos šalys; užsienio bankai; verslo modelis; tvarumas; mažos ir vidutinės įmonės
(MVĮ).
JEL klasifikacija: G21; M21.
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CONTENT
INTRODUCTION .......................................................................................................................................................... 7
I. LITERATURE REVIEW ON BANK BUSINESS MODELS .................................................................................................. 8
1.1. CONCEPT OF BUSINESS MODELS....................................................................................................................................... 8
1.2. BANKING SPECIALNESS................................................................................................................................................. 10
1.3. BANKING BUSINESS MODELS AND FINANCIAL CRISIS OF 2008-2009 ..................................................................................... 11
1.4. BANKING BUSINESS MODELS CLASSIFICATION ................................................................................................................... 13
1.5. BANK BUSINESS MODEL SUSTAINABILITY ASSESSMENT BY SUPERVISORS.................................................................................. 17
II. EMPIRICAL RESEARCH ON BUSINESS MODELS OF SCANDINAVIAN BANKS SUBSIDIARIES IN THE BALTICS............. 19
2.1. RESEARCH METHODOLOGY ........................................................................................................................................... 19
2.2 OVERVIEW OF THE DEVELOPMENT OF BANKING SYSTEMS IN THE BALTICS IN 1990-2014 .......................................................... 21
2.3. SCANDINAVIAN BANKS GROUPS AND THEIR SUBSIDIARIES IN THE BALTICS ............................................................................... 26
2.4. ANALYSIS OF THE BALTICS MARKET FACTORS .................................................................................................................... 30
2.4.1. Macroeconomic environment ........................................................................................................................ 30
2.4.2. Regulatory and supervisory changes ............................................................................................................. 33
2.4.3. Technological development ........................................................................................................................... 34
2.5. QUANTITATIVE ANALYSIS OF BANK BUSINESS MODELS ........................................................................................................ 35
2.5.1 Analysis of the main business model components .......................................................................................... 35
2.5.1.1 Size and performance ................................................................................................................................................. 35
2.5.1.2 Key activities ............................................................................................................................................................... 38
2.5.1.3 Key financial resources ............................................................................................................................................... 42
2.5.1.4 Revenues streams ....................................................................................................................................................... 44
2.5.1.5 Cost structure ............................................................................................................................................................. 47
2.5.1.6 Risk appetite and prudential requirements ................................................................................................................ 48
2.5.2 Correlation Analysis ........................................................................................................................................ 50
III. MANAGERIAL SOLUTIONS ON THE IDENTIFIED BUSINESS MODEL CHALLENGES .................................................. 55
3.1 BUSINESS MODEL CANVAS FOR SCANDINAVIAN BANKS SUBSIDIARIES IN THE BALTICS ................................................................ 55
3.3. ENSURING SUSTAINABILITY OF THE BUSINESS MODEL THROUGH FINANCING SMES................................................................... 59
3.3.1. Financing of SMEs should be a strategic priority of banks............................................................................. 59
3.3.2. EU and local governments risk sharing with banks for financing SMEs ......................................................... 60
CONCLUSIONS........................................................................................................................................................... 62
REFERENCES .............................................................................................................................................................. 65
ANNEXES .................................................................................................................................................................. 69
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INTRODUCTION
Banks have always traditionally performed their fundamental roles in the economy as credit allocators,
maturity transformers, risk managers, financial infrastructure providers, and financial innovators. All
countries want to build the most advanced banking systems. If each bank in the country creates value for
customers, shareholders, employees, public sector and for society as a whole, that impacts the country
economy growth and progress significantly. The better bank system the country has, the more competitive
the country is.
Some researches in the academic world (H. Huang and P. Lin, 2012; Y. Altunbas et al., 2012; David T.
Llewellyn, 2011) demonstrated that the banking industry has become too volatile, too interdependent and
inflexible in the last ten years. It has become difficult to understand how banks conduct their business. Banks
have been operating under non-sustainable business models.
Baltic banking sectors are dominated by the subsidiaries of Scandinavian banks. Before the crisis in 2009,
these banks were part of shock creators in the Baltic countries, later they become shock absorbers. After the
crisis, the question has been often raised on the particularities of business models adopted by the foreignowned banks. Recently, the business models of Scandinavian banks subsidiaries operating in the Baltics have
changed significantly; however, they still remain of major concern due to possibilities of generating
acceptable returns in the future.
The analysis of banking business models is a relatively new approach towards the banking industry analysis,
as well as in prudential supervision. The crisis revealed that a traditional prudential supervision approach,
which mainly focuses on the adequacy of bank capital, liquidity and risk management, is insufficient.
Therefore, many additional measures have been introduced. The quantitative measures cover capital buffers,
Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) and leverage ratio, while the
qualitative ones include recovery plan analysis, stricter requirements on corporate governance and business
model analysis. This business model analysis should allow at an early stage for supervisors to assess the
viability and sustainability of business models and to detect key vulnerabilities. At the end of last year,
European Central Bank assumed responsibility for euro area banking and set the assessment of viability of
business models and profitability drivers as the supervisory priority for 2015 (European Central Bank,
2015a).
Some research work (R. Ayadi et al., 2011, 2012, 2014; R. Roengpitya et al., 2014; M. Tomkus, 2014) has
already been carried out on business model analysis of the biggest European and American banks. However,
the situation in the Baltic countries was quite different compared to the advanced countries. So far, only one
academic paper which analysed bank business models and the changes in Central and Eastern Europe
countries during the period from 2006 until 2011 (I. Erins and J. Erina, 2013) has been written. Therefore, in
this study deeper analysis of the particularities of the Baltic foreign-owned banks business models was
performed: types of business models chosen by these banks were identified, their main characteristics were
established, and recommendations on how to address the outlined challenges were provided.
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I. LITERATURE REVIEW ON BANK BUSINESS MODELS
1.1. Concept of business models
Recently the topic of a business model has been often discussed both in the professional and academic
publications. The concept is usually used as an analytical tool to have a schematic and complete picture of
organization business from a high-level perspective. The term of a business model is widely applied;
however, sometimes it is used in a too narrow sense referring only to the revenue model or the operating
model, and sometimes too broadly.
The academic literature provides several definitions of a business model (Table 1).
Table 1
Definitions of a business model
Author
H. Chesbrough, and
R.S.Rosenbloom,
2000
Definition
“A Business Model creates value and captures a portion of that value”.
Business models are summarized into six simple components: Market segment,
Value proposition, Value chain structure, Competitive strategy, Revenue
streams, and Cost structure.
A. Osterwalder and Y.
Pigneur, 2010
“A Business Model describes the rational of how an organisation creates,
delivers and captures value”.
The definition involves nine building blocks of business models: Customer
segment, Value proposition, Channels, Customer erelationships, Revenue
streams, Key resources, Key activities, Partner network, and Cost structure.
M. Tomkus, 2014
“Business model as representation of a set of components utilised to outperform
the competition and to achieve optimal profit in a financial market where a
similar product strategy used.”
European Banking
“Business models are the means and the methods used to operate, to generate
Authority, 2013
profits and to grow. They result from multiple intertwined elements that reveal
the way a company organizes its core activities to achieve its main objectives.”
Source: formed by the author.
This demonstrates that there is no universally accepted definition, and the interpretation of a business model
is very diverse. One of the most well-known definitions was proposed by H. Chesbrough and R.S.
Rosenbloom (2000), the representatives of the Harvard Business School, which summarizes business models
into six components.
A. Osterwalder and Y. Pigneur (2010), the leaders in the field of business models innovation, carried out the
revolutionary work. They introduced the concept of a business model through the generalized view of 470
practitioners from a number of different countries. They used business models in an attempt to better explain
how firms do business. The business models were summarized into nine building blocks and shown visually,
using a diagram called ‘Business Model Canvas’ (Figure 1). Many organizations proved that this Canvas is
very practical and easy-to-use, it helps in generating new ideas by asking a few key questions:

Customer segments: Who are the group of customers?

Value proposition: What is the offer for each customer segment?

Channels: How to reach each of the customer segments?
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
Customer Relationships: How to relate with customers over time?

Revenue streams: How to earn revenues?

Key resources: What resources are required to run the business?

Key activities: What are the important activities/processes?

Partner network: Who are the key partners and suppliers?

Cost structure: What are the important costs?
Figure 1. Business Model Canvas
Source: A. Osterwalder and Y.Pigneur (2010).
M. Tomkus (2014) summarized business model concepts and emphasized that the main purpose and target of
a bank is an optimal financial performance. He defined the banking business concept, which he used in his
study, as representation of a set of components utilised to outperform the competition and to achieve optimal
profit in a financial market where a similar product strategy is used. M. Tomkus emphasized that banks
develop business models to manage three main processes: 1) acquisition of necessary funds for operating
activities; 2) loan service provision as a means to generate revenues; and 3) risk taking. He narrowed the
definition of the business model through a performance as a centric view focusing more on economic value.
The European Banking Authority (2013) defined that “business models are the means and methods used to
operate, to generate profits, and to grow”. It was highlighted that the concept of the business model is
broader than the business strategy as the latter is only one component of the business model. While the
business model provides insights on how an entity effectively does business at a point in time, the business
strategy refers to possibilities of an entity how to do business in the future. The strategic choice could then
lead to either change in the business model or to staying with the existing business model.
G. Georg and A.J. Bock (2011) determined that organisations adjust and redesign their business models
under the effects of a changed operational environment. The researchers highlighted that “the ability to
adjust or transform the business model is regarded as one of the major features in the banking business
model logic. A bank’s management is expected to change their business model as a response to foreseen
short- and long-term future opportunities and threats”.
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1.2. Banking specialness
The above described business model concepts may be used for banking business models. However, banking
business performs special functions in services and plays a fundamental role in the economy (Table 2).
Table 2
Main areas of banks‘ specialness
Infrastructure
Definition
Intermediation
and assets
transformation
Information costs
Banks are receiving deposits from retail customers (which are supposed to have a
liquidity surplus) and providing entrepreneurs and consumers with the amount of
funding they need to finance their projects (with an adequate maturity).
The large size of banks and long-term relationship with clients allow the collection of
information at a lower average cost (economies of scale) than doing this by
individuals.
Credit allocation
Banks are often used as the major, and sometimes the only, source of financing for a
particular sector of the economy, such as small business, residual real estate.
Maturity
Banks better bear the risk of mismatching maturities of their assets and liabilities.
intermediation
Banks are heavily reliant on retail funding resources (deposits). Profits come mostly
from the spread between interests paid for short-term deposits and interests received
from long-term lending activities.
Risk premium
Banks monitor their credit risk by incorporating a risk premium into the interest rate
charged to their borrowers. Banks hold the appropriate levels of capital to cover
unexpected risks.
Sources: A. Saunders and M.M. Cornett (2011), European Banking Authority (2013); formed by the author.
Banks traditionally play a key function of intermediation and assets transformation between depositors and
borrowers. At first glance, the business model of a bank is very simple: banks offer a lower interest rate to
the depositor, a higher interest rate to the borrower and make the money from the interest rate differential.
A. Saunders and M.M. Cornett (2011) highlighted that in the traditional business model, banks competitive
advantage relies on the information asymmetry between creditors and debtors. Risks associated with
investment projects are very costly to monitor and difficult to assess properly for an individual creditor. By
financing multiple projects simultaneously and monitoring them over a long period of time, banks can reduce
monitoring costs and risks thanks to diversification and economies of scale.
The original role of banks is to service the real economy. Credit allocation can be the main driver for the
economic growth of the country and for bank profitability, too. J. Brunel (2015) emphasized that currently
banks should perform the leading role in financing economy, and this function should be more important
than profitability and returns generation. On the other hand, R. Ayadi et al. (2011) presented arguments that
the performance and efficiency of the banks has a major impact on a country’s overall efficiency and
economic performance.
M. Tomkus (2014), having analysed the USA and EU business model changes, stated that “within past ten
years, the banking industry undertook a substantial transformation: that gradually formed modern banking
business models. Banking is an industry which expanded substantially and unsustainably (‘excessive
financialisation’)”. He presented how business models changed in several important ways. M. Tomkus
(2014) also pointed out that the importance of banks and the financial system has increased tremendously in
the economy in general.
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The banking sector is unique compared to other industry sectors since the sector is heavily regulated. Many
research and impact assessments (European Banking Authority, 2015; Ingves S., 2014)) have been carried
out seeking to find out how regulation influences banking business and its business models. On one hand,
very precise and strict regulation of banks made them much safer and prepared to withstand macroeconomic
shocks and other crises; however, on the other hand, banks became averse to risk and that negatively affects
economic growth of countries as well as profitability of the banks. Regulation plays an important role in
shaping banking business models.
According to R. Roengpitya et al. (2014), banks seeking to be different from one another choose a business
model to leverage the strengths of their organization. Each business model is unique, though common
business model characteristics may be observed across institutions. Nowadays banks have been facing rapid
and irreversible changes across technology, customer behaviour and regulation. The net effect is that the
current shape of industry and operating business models are no longer sustainable into the future.
1.3. Banking business models and financial crisis of 2008-2009
The crisis of 2008-2009 clearly showed that certain elements of banking business models were weak. These
elements became key in demonstrating banks resilience in times of crisis. According to Y. Altunbas et al
(2012), “institutions with higher risk exposure had less capital, larger size, greater reliance on short-term
market funding, and aggressive credit growth”. Banks as such were not able to withstand the shocks and
absorb losses. In Europe many bank business models failed, some banks were nationalised (such as UK Northern Rock, Bradford & Bingley, Royal Bank of Scotland; DE - Hypo Real Estate; BE – Fortis, Dexia
(partial nationalisation); DK- Roskilde Bank, Amagerbanken, Capinordic; IC- Glitnir, Kaupthing,
Landsbanki, Icebank; LV- Parex, Sweden - D.Carnegie & Co, IE - Anglo – Irish Bank, many retail banks).
For example, in Ireland the domestic retail banks and subsidiaries of foreign banks experienced damage of
their business models by the classic real estate bubble, a reliance on non-domestic funding and focus on
growth instead of concentrating on risk management, banking culture and internal governance. As regards
the Baltic banks subsidiaries, there were many similarities at that time. The Baltic banks experienced
significant losses during the crisis of 2009, but parent banks covered them (this topic is presented in more
detail in Section 2.2). The case of the Baltic banks has been analysed by some researchers and institutions
(International Monetary Fund, 2014; S. Ingves, 2010; A. Gronn and M.W. Fredholm, 2013).
The European Banking Authority (2013) has noted certain changes in the EU banking business models
before the global financial crisis:
 Favourable economic circumstances and the related upturn in the financial cycle together with a low
interest rate environment led to the emergence of new business models based on under-priced risks, high
demand for loans and short term strategies to meet the shareholders request for high returns on equity;
 Steadily increased collateral values also allowed for high rates of credit growth, and European banks
further expanded outside their national boundaries. The enlargement of the European Single Market in
2004 and 2007 (with most Central and Eastern European countries) further improved the conditions for
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EU banks for cross-border expansions in this region. This cross-border expansion drive was clearly noted
in the increase of loans from non-resident banks.
 In this time of expansion, European banks financed their leverage with funding from the interbank and
wholesale market and less from stable funding (e. g. customer deposits).
It may be stated that macroeconomic environment was favourable for economic growth, but banks failed to
solve the financial challenges related to the global financial crises due to weaker bank business models.
Soon R. Ayadi et al. [2014] presented a more radical summary of the factors that led to the crisis. “The
previous decades saw a frenetic race to high returns on equity coupled with excessive risk taking, encouraged
by lax monetary policy and liberal banking regulations”. It could be noted that R. Ayadi et al. [2014] openly
criticised the activities of banks for expanding their activities in performing the role of the intermediator too
much and thus failing to manage them responsibly and properly. Consequently, real economy lacked
financing, and a threat of systemic instability occurred. This led to major changes in the way banks conduct
business. Banks stretched the traditional intermediating role up and beyond its limits and also extended their
proprietary activity. This resulted in a ballooning banking sector that attached less value to financing the real
economy and put systemic stability at risk. “The failure of several banks with unsustainable business models
spurred contagion and contributed to the global financial crisis”. However, not all types of banks are facing
the same challenges or responding in the same way to crises – it depends a lot what business model was used
(R. Ayadi et al., 2014).
Many researchers emphasized (D.T. Llewellyn, 2010; Y. Altunbas et al., 2012) that the main reasons for the
crisis may be considered the following ones: the systemic under-estimation and under-pricing of risks
because of the favourable economic situation and the collective euphoria which was prevailing due to active
borrowing of customers and banks readiness to issue as many loans as possible.
D.T. Llewellyn (2010) focused more on banks that they adopted more short-term strategies to maximize the
rate of return on equity due to various reasons, including the nature of the competitive environment at the
time. He provided arguments that profitability was enhanced not by superior banking performance, but by
banks raising their risk threshold and moving up the risk ladder. Another reason, stressed by D.T. Llewellyn
(2010), is that internal reward and bonus structures created a bias towards short-termism and also towards
excess risk-taking.
The European Banking Authority (2013) defined that more than five years after the beginning of the
financial crisis, bank business models still remain a major concern. Banks face great challenges to adapt to
the new economic, financial and regulatory reality. The current drivers of change can be divided into a set of
exogenous factors (e. g. market pressures, new regulatory measures) that are influencing business models
and endogenous factors (such as search for more sustainable profits) which further enhance pressures on
banks to adjust.
After the crises in the Baltic countries a question has been often raised, what was wrong with the way
business had been conducted in banks (S. Ingves, 2010). The funding structure of the banking sector has
changed dramatically after the crisis. Before the crisis, almost half of loans in Lithuania provided by Nordic
12
banks were financed by parent banks. This was clearly not sustainable. More reliance on local funding, what
is being observed nowadays, should mitigate sudden swings in capital flows. Crisis also showed that banks
need to seek higher diversification on assets side of the banking sector (not focus on one sector, such as real
estate). Credit risk strategy should allow banks to focus on most profitable credit segments, looking from a
risk-return perspective. Banks short-term insistence on earning fees and commissions needs to be considered
thoroughly.
1.4. Banking business models classification
As bank business models analysis is a relatively new approach in analysing banking industry, some
researches on business models classification and how various factors impacted different business models
were carried out after the crisis.
R. Ayadi et al. (2011) were among the first researchers who performed a unique, systematic and
comprehensive empirical study of different bank business models and their implications on risk
characteristics, system stability, bank performance, efficiency, and governance issues. In this pioneering
study the results of the first exercise of the business models of 26 major European banking groups (they
accounted for 55% of total EU banking assets, the period of 2006-2009 was covered, giving 108 bank-year
observations) before and after the crisis were presented. One of the main findings of R. Ayadi et al. (2011)
study was the assignment of each of the sampled banks to one of the three distinct business models: retail
banks (using customer deposits as a primary source of funding and providing predominantly customer loans),
investment banks (more engaged in trading and derivatives activities), and wholesale banks (more active in
interbank markets) using the state-of-art methodology and detailed statistical analysis. The study offered
valuable insights into how the crisis differentially impacted banks with different business models, retail
banks being affected less than the other two models, especially the wholesale bank model. The results also
showed that the performance of retail banks has in general been superior to the other two models. They were
also less prone to the need for state support during the crisis. The retail banks continued to support the
economy by continuing to extend loans to customers, despite the crisis.
The second phase of R. Ayadi et al. (2012) pioneering work provided some key findings. Firstly, it added a
new category of business models to the three previously identified: diversified retail banks (using diversified
sources of funding and providing predominantly customer loans). Secondly, it provided evidence that
diversified retail and retail-focused business models are clearly safer than others, as measured by the distance
from default (Z-score), amount of loss-absorbing capital and the long-term liquidity risks (NSF ratio). On the
regulatory side, the report called for stricter capital requirements on less diversified banks, including the
retail-focused, wholesale and investment banks. On leverage ratio, it was found that wholesale and
investment banks and some diversified retail banks more heavily leveraged than the retail-focused ones. In
terms of liquidity management, many recommendations on LCR and NSFR were proposed in the report.
Moreover, the report included various measures to enhance disclosure requirements.
R. Ayadi et al. in 2014 initiated an annual monitoring exercise on bank business models in the EU. The
Banking Business Models Monitor 2014 was the first edition of a new series of publications and extended
13
the previous research of the authors under R. Ayadi et al. (2011&2012). Based on their balance sheet
structures, 147 European banking groups that account for more than 80% of the industry assets were
categorised in four business models, using a novel clustering model using SAS programming, 1126 bankyear observations. The Monitor emphasised the ownership structures and assessed the financial and
economic performance, resilience and robustness, before, during and after the financial and economic crises
across retail diversified-, retail focused-, investment-, and wholesale oriented banks. The main observations
of these four business models are summarised in Table 3.
Table 3
Main observations on European bank business models (2006-2013)
Model
Ownership
Model 1 –
Investment
(188 obs.)
Largest share of
shareholder
value banks. Mostly
listed.
Barely any
cooperatives
(Financial) activities
Largest banks.
Holding large trading
assets and funded
through debt securities
and negative
derivative positions.
Internationally
oriented.
Model 2 – Primarily
Among smallest
Wholesale stakeholder value
banks. Most active in
(145 obs.) banks. Few listed
interbank lending and
banks. Largest share borrowing. Least
in private blockfunding from customer
owners. Most
deposits. Domestically
cooperative and
oriented.
state owned banks.
Model 3 – Least share of state Average sized. Most
Diversified owned banks.
customer loans
retail
outstanding and debt
(303 obs.)
liabilities for funding.
Internationally
oriented.
Model 4 –
Focused
retail
(490 obs.)
All ownership
indicators
around sample
average.
Source: R. Ayadi et al., 2014.
Among smallest
banks. Primarily
providing customer
loans funded by
customer deposits.
Domestically
oriented.
Financial and
economic
performance
Least dependent on net
interest income. Low
earnings during crises.
Declining customer
loans.
Relatively inefficient.
Risk
Average distance to
default. Most
leveraged. Lowest
average risk-weight.
High loan losses
during the crisis.
Least stable funding.
Most dependent on net
interest income.
Exposed to large
trading losses during
the crisis. Relatively
efficient.
Average distance to
default. Low riskweight. Least risk
cost. High leverage.
Limited stable
funding.
Most profitable.
Relatively stable
returns during the
crises. Receiving
largest share from
trading income.
Average efficiency.
Largest distance to
default. High riskweight. Moderate
leverage and loan
losses. Lowest reg.
capital. Low
volatility in share
returns. Stable
funding.
Limited distance to
default. Highest riskweight. Low
leverage. Highest
loan losses and
market risk (i.e.
CDS), especially
during Euro crisis.
Stable funding.
Least profitable and
decline in loans during
Euro crisis. Trading
income relatively
unimportant.
Average efficiency.
R. Ayadi et al. (2014) found that banks that engage more in traditional retail banking activities with a mix of
funding sources (diversified retail) fared well as compared to other bank models during the different phases
14
of the crisis. R. Ayadi et al. (2014) concluded that the focused retail banks have performed remarkably worse
than their peers during the recent global financial crisis. About half of these small domestically oriented
institutions are shareholder-value (SHV) banks. Most institutions providing traditional services such as
customer loans are funded by customer deposits. This is also reflected in the income, which consists mostly
of net interest income and commission and fees, while trading income is only a minor component. During the
crisis banks suffered the highest risk-costs, median return on assets was close to zero, and negative in 2012.
Banks are least leveraged, the model is closest to default. The customer loans have been declining for the
past three years.
Business models of parent banks of Baltic subsidiaries were also examined by R. Ayadi et al. (2014). The
results are presented in Table 4. All three banks are identified as diversified retail banks, but SEB has
features of three business models: diversified retail, focused retail, and investment.
Table 4
Business models of parent banks of Baltic subsidiaries
Rank
Name
Country
Type of
ownership
Total assets
(Euro
million)
26
DNB NOR
Bank
Skandinaviska
Enskilda
Banken
Swedbank
NO
Savings
Bank
Commercial
Bank
Commercial
Bank
28
35
SE
SE
Source: R. Ayadi et al. (2014).
Coverage
(period,
years)
Business
Models
285,715
Change in
assets (%,
first-last
year)
78%
2006-13
D
280,484
31%
2006-13
I, D, F
205,530
37%
2006-13
D
R. Ayadi et al. (2014) found that transparency and public disclosure practices remain an important concern –
the disclosure practices of banks were largely incomplete and incomparable. Since the previous two studies
(2011&2012) the situation has not changed much. R. Ayadi et al. (2014) noted that public dissemination of
supervisory as it is already done in the US and the implementation of standard disclosure formats, i. e.
XBRL, could solve most of the data related issues. However, there is an issue with the application of
different accounting standards as well as the coverage and depth of the information.
R. Roengpitya et al. (2014) identified three business models: a retail-funded bank, a wholesale-funded bank,
and a capital markets-oriented bank. Many technical aspects from R. Ayadi et al. (2014) were used in
methodology for classifying, but they differed in terms of the judgmental elements and the data used. The
core of the methodology is a statistical clustering algorithm. In contrast to R. Ayadi et al. (2014), which
focused only on Europeans banks, R. Roengpitya et al. (2014) used balance sheets data for 222 banks from
34 countries, covering the period between 2005 and 2013. 1299 bank-year observations were used. Drawing
rough parallels with the classification of R. Ayadi et al. (2014), the capital markets-oriented bank
corresponds to the investment bank model, the two wholesale models correspond to each other, and the
retail-funded model corresponds to the diversified and focused retail banks.
15
R. Roengpitya et al. (2014) found that the popularity of business models were different according to bank’s
nationality (Table 5).
Table 5
Distribution of business models in 2013
Retail-funded
North America
16
Europe
36
Advanced Asia Pacific
11
(Australia, Japan)
Emerging
market
45
economies
Source: R. Roengpitya et al., 2014.
Wholesale-funded
22
3
Trading
6
9
3
Total
22
67
17
2
3
50
One third of the European banks had a wholesale-funded model (data as of 2013). The research showed that
in North America retail-funded banks dominated, although actually in this region wholesale-funded banks
prevail; therefore, the classification of banks by R. Roengpitya et al. (2014) could be the result of sample
bias. In emerging market economies the retail-funded model is clearly preferred (90 %).
R. Roengpitya et al. (2014) determined systemic differences and similarities in the performance of banks
with different business models (Table 6).
Table 6
Characteristics of business models1
Retail-funded
Wholesale-funded
Trading
All banks
Return-on-assets (RoA)
1.16
0.45
0.98
0.94
Risk-adjusted RoA
0.68
0.09
0.57
0.48
Return–on-equity (RoE)
12.49
5.81
8.08
9.95
Risk adjusted RoE
8.76
2.57
-9.55
4.29
Share of fee income
22.11
23.28
44.30
25.84
Capital adequacy
14.56
12.23
17.29
14.27
Cost of equity
12
3
11
9
Total assets (in USD bn)
361.5
321.6
787.8
417.1
359
203
1299
Memo: number of
737
banks/years
Source: R. Roengpitya et al., 2014.
In was determined that the retail-focused banks exhibit the least volatile earnings. Regardless of the
profitability metric, the retail-funded model, engaging in traditional activities, is the top stable performer,
and their model has recently gained in popularity. Wholesale funded banks are the most efficient, but they
have the thinnest capital buffers, and the lowest cost of equity. Trading banks struggle to consistently
outperform the other two business types.
1
Average values of ratios in percent
16
Many other researches on bank business models classification have been carried out (Table 7).
Table 7
Business model classifications done by researchers
Author
R. Ayadi et al., 2011, 2012, 2014
I. Erins and J. Erina, 2013
M. Tomkus, 2014
R. Roengpityaet al, 2014
Identified bank business
model types
Investment
Wholesale
Diversified retail
Focused retail
Investment
Wholesale
Retail
Universal
Investment
Retail
Universal
Trading
Wholesale-funded
Retail-funded
Implications on
Ownership
Financial activities
Financial and economic performance
Risk
ROE
ROA
Bank performance
These business models classifications can be helpful to understand very generally how bank business models
differ; however, the results from previous researches significantly vary depending on the number of the
banks chosen for the research, market (region), period of research, etc. Bank business models identification
through simple labels such as retail banks or investment banks is not sufficient for decision making
(especially for supervisors).
1.5. Bank business model sustainability assessment by supervisors
Bank business models analysis and assessment of their viability and sustainability is a new approach in
prudential supervision and it goes beyond the traditional approach, which mainly focuses on the adequacy of
bank capital, liquidity, and risk management. For the supervisors, business model analysis is part of the
supervisory review and evaluation process (SREP), and it allows to detect at an early stage when a bank may
generate risks that ultimately lead to its failure. Moreover, it is used for forming forward-looking supervisory
judgments (European Banking Authority, 2014d).
Before the crisis, supervisors focused on whether the institutions meet minimum regulatory requirements,
paid some attention to external vulnerabilities such as macroeconomic issues, risks associated with financial
markets and the situation of partners (counterparts, borrowers) but featured less prominently. The crisis
revealed that certain characteristics of weak business models were one of the main causes of the turmoil and
that they also turned out to be key determinants of banks’ resilience.
Then crisis showed that traditional prudential supervision approach was insufficient; consequently, many
additional measures were introduced, including business model analysis. In European Banking Authority
document “Guidelines on common procedures and methodologies for the supervisory review and evaluation
17
process (SREP)” (2014d) it is indicated that this analysis should allow for supervisors to assess at an early
stage business model viability (current) and sustainability (future) and detect key vulnerabilities that
ultimately can lead to its failure.
European Banking Authority (2014d) defined that determination of business model sustainability means the
institution’s “ability to generate acceptable returns over a forward-looking period of at least three years,
based on its strategic plans and financial forecasts”.
As supervisors have power to receive all the information needed for supervisory purposes and have other
instruments for banks supervision (e. g. on-site examinations, off-site supervision, meetings with banks
management), objective assessment of business models and determination of key risks and vulnerabilities is
a very important supervisory measure.
Supervisory approach requires identification of banks businesses in depth and assessment of each business
model component. Such approach allows a better identification of risks and vulnerabilities associated with
the overall bank business model.
18
II. EMPIRICAL RESEARCH ON BUSINESS MODELS OF
SCANDINAVIAN BANKS SUBSIDIARIES IN THE BALTICS
2.1. Research methodology
In order to identify what type of business models are chosen by Scandinavian banks subsidiaries in the
Baltics and to assess them, empirical research was carried out, using qualitative and quantitative research
methods.
Before identifying the business models, qualitative analysis in three areas was performed: 1) in order to
understand how the current systems dominated by Scandinavian banks were formed, analysis of the
development of banking systems in the Baltics in 1990-2014 was conducted; 2) to understand the strategic
role of parent banks in the activity of subsidiaries in the Baltics, another analysis of parent bank groups was
carried out; 3) to realize how market factors (e. g. macroeconomic environment, regulatory and supervisory
changes, technological development) impact business models of the Baltic subsidiaries, their analysis was
performed.
Business model identification and analysis was carried out using three quantitative methods: a system of key
business model indicators was created; correlation analysis and simple linear regression were used.
All nine Scandinavian banks subsidiary groups operating in the Baltic countries were selected for the
analysis (Table 8).
Table 8
Scandinavian banks subsidiaries in the Baltics
Country
Lithuania
Name of the bank
AB SEB bankas
“Swedbank“, AB
AB DNB bankas
Latvia
JSC “SEB banka“
“Swedbank“ JSC
JSC DNB banka
Estonia
AS SEB Pank
Swedbank AS
AS DNB Pank
Source: Banks Annual Reports, 2014, formed by the author.
Short name in this paper
SEB LT
SW LT
DNB LT
SEB LV
SW LV
DNB LV
SEB EE
SW EE
DNB EE
In each Baltic country three subsidiaries from three different banking groups operate. Subsidiaries were
analysed on the consolidated level (composition of their groups is presented in Annex 1).
The three largest banks (SEB, Swedbank, and DNB) hold 68.6 % of the Lithuanian banking sector, 71.4 % of
Estonian and 35.9 % of Latvian (Figure 2).
19
Figure 2. Share of Scandinavian banks subsidiaries in the Baltic banking system, 31/12/2014
Sources: Banks Annual Reports, 2014; Bank of Lithuania, 2014a; Financial and Capital Market
Commission, 2014; Estonian Financial Supervisory Authority, 2014; formed by the author.
Research data
In order to perform the analysis of banks business models, data covering the period from 2006 to 2014 as of
31 December of each year was collected.
The data extracted from publicly available information: banks annual reports, disclosed information on
individual banks in websites of the Baltic central banks and Financial and Capital Market Commission of
Latvia, Financial Supervision Authority of Estonia, the Associations of Commercial Banks of Lithuania,
Latvia and Estonia; data from 2014 ECB Comprehensive assessment (stress tests) results on individual
banks, BANKSCOPE data, SNL data, as well as other online documents from the websites of the analysed
banks.
Quantitative research methods
Business model identification and analysis was carried out using three quantitative methods:
 The system of key business model indicators was created. This system was used to perform the analysis
of the main business model components in order to identify business models and their sustainability;
 Correlation among subsidiaries in each bank group was chosen for the analysis (SEB, Swedbank, and
DNB) to identify whether subsidiaries in each bank Baltic group acted in the similar way or not;
The system of key business model indicators was created mainly based on European Banking Authority
documents (2013, 2014d) as well as personal knowledge and experience. This quantitative analysis focused
on P&L and balance sheet analysis, providing understanding of bank performance in the context of its risk
appetite. To have a standardised approach for nine banks analysis, key business model indicators (ratios)
were selected for each business model element. The key indicators were selected using two priorities: 1) the
most suitable for nine subsidiaries business model analysis; 2) the most important for business model
analysis.
Four business model elements correspond to Business model Canvas elements:
 Key activities element - focus on assets structure (composition of assets and detailed analysis of loans
portfolio);
20
 Key resources – focus on capital and funding structure (composition of liabilities and detailed analysis of
customer deposits and debt from parent banks);
 Revenues streams – focus on income structure (composition of income and sources of net interest income,
net fees and commission income, other income);
 Cost structure – focus on cost structure (composition of cost and sources).
Based on European Banking Authority (2013 and 2014d) a new element called Risk appetite and
performance was introduced to understand bank financial performance in the context of its risk appetite. It
was focused on prudential requirements (capital, liquidity), quality and riskiness of assets, the split of RWAs,
growth rates of assets, loans, and deposits.
Ratios of key business model indicators are presented in Annex 2. Some key business model indicators were
compared with the secondary data from the literature (e. g. EU average, parent banks indicators, EU survey
data).
As the data available (annual data for the period 2006–2014) is not sufficient to perform an accurate and
comprehensive regression analysis, correlation analysis among subsidiaries in each bank group (SEB, SW,
DNB) was performed in two stages:
Stage 1: Five indicators were used in the analysis (Balance sheets): Correlation in Growth of Loans and
Advances; Correlation in Growth of Securities; Correlation in Growth of Due from Banks; Correlation in
Growth of Customer Deposits; Correlation in Growth of Due to Banks.
Stage 2: Four indicators were used in the analysis (P&L): Correlation in Growth of Net Interest Income;
Correlation in Growth of Net Fees and Commissions Income; Correlation in Growth of Administrative
Expenses; Correlation in Growth of Impairment.
Simple linear regression was chosen to estimate relationship (trend) between Interest Income Growth and
Loans and Advances Growth (the covered period was from 2006 to 2014).
Limitations and assumptions
As subsidiaries disclose very limited information about their strategies (strategic plans and forward-looking
forecasts), business model analysis and sustainability assessment were based on quantitative analysis of
publicly available information.
Business model analysis involved four main components from Business Model Canvas; however, five
components (Value Proposition, Customer Relationship, Customer Segments, Key Partners, and Channels)
were not analysed deeply due to not available information.
A lack of standardised information was a major issue concerning the data collection for this research.
2.2 Overview of the development of banking systems in the Baltics in 1990-2014
To understand the formation of the current Baltic banking systems dominated by Scandinavian banks
subsidiaries, key facts on the development of these banking systems were collected (Annex 3). Summarising
21
the development of these banking systems, a lot of similarities were identified due to the Soviet past and
Scandinavian bank entry. Six stages of the Baltic banking system development were distinguished (Table 6).
Table 6
Stages of the Baltic banking systems development in1990-2014
Stage
I
Year
1990–1993
Main features
Transformation of former Soviet banks into commercial banks;
rapidly growing number of new banks
II
1992
Banking crisis in Estonia
1995 –1996
Banking crisis in Lithuania and Latvia
III
1998 – 2002 Strengthening of the remaining banks, consolidation in banking sectors, foreign
bank acquisitions of major Baltic banks (including state-owned banks)
IV
2003 –2008
Rapid growth of banking
V
2009
Crisis in economies of the Baltic countries (hard landing of economies, explosion
of the real estate bubble)
VI
From 2010
Recovery after the crisis
After the collapse of the Soviet Union in 1990, the initial stage of formation of the banking systems in the
Baltics started. Former Soviet banks transformed into commercial banks, a lot of new banks were established
(at the end of 1993, Lithuania had 27 banks, Latvia had 66 banks, and Estonia had 42 banks before the crisis
in 1992).
The systemic banking crisis in 1992 in Estonia and in 1995-1996 in Latvia and Lithuania was a serious blow
to the economies and financial systems of the countries. According to the researchers (A. Fleming et al.,
1997, T. Kim, 1998) the main causes of the banking crises were the following ones:
 The banking sector developed more rapidly than the economic environment;
 The real estate market was weak, it was difficult for banks to obtain a real collateral for their loans;
 Both bankers and businessmen lacked experience in how to work in the market economy;
 Business plans of borrowers were assessed incorrectly, “new” businesses had no credit history;
 Shareholders tended to regard banks as a source of finance for their own businesses;
 Falsification of bookkeeping entries and submission of false information to supervisors was a problem.
According to the statement of a Latvian regulator L. Vojevoda (2000), “at that time regulatory authorities
introduced Western principles and approaches, but they were “too civilized“ to be able to detect direct fraud
and other explicitly criminal activities“. After this crisis, banking sectors stabilized and became stronger and
more conservative in lending.
As the banking sector was dominated by state-owned banks, which the countries needed to privatize, the
privatization of these banks progressed slower than it had been expected initially. Since 1993, the interest of
foreign banks in buying Baltic state-owned banks was diminished. Some foreign banks opened
representative offices in 1993-1995.
In 1997, all the three Baltic countries started to actively prepare for privatization of state-owned banks.
Estonian Eesti Houipank (Savings bank, Estonia) acquired controlling stake in Latvijas Žemes Bank (Latvian
22
Land Bank). In Lithuania, the Government also attempted to privatize the State Agricultural Bank, but failed
due to Russian crisis in 1998 (four banks were interested in privatization of this bank).
At the same time consolidation started in the banking sectors. In Estonia, the merger of Hansabank and
Hoiupank created the largest financial institution in the Baltics, and the merger of Uhispank and Tallinna
Pank created the second largest bank in Estonia (these 2 new banks controlled 85 % of the Estonian banking
market). In Lithuania, the State Commercial Bank was merged with the State Savings Bank in 1997, AB
Vilniaus Bankas merged with AB bankas Hermis in 2000.
In 1998, after banking consolidation, leading banks of Scandinavia invested in Estonian banks: Swedbank
invested in Hansapank and SEB in Uhispank. SEB also invested in Lithuanian AB Vilniaus Bankas and in
Latvian Unibanka.
The remaining state–owned banks were privatized later. In 2000, Pirma Latvijas Komercbanka (former Rigas
Komercbanka) and in 2002 Lithuanian State Agricultural Bank were sold to Norddeutsche Landesbank
Girozentrale (Germany). In 2001, State Lithuanian Savings Bank was sold to Hansapank (Estonia).
Until 2002, the Baltic banking sectors were mainly dominated and run by Scandinavian banks and are still up
to now. Estonia played a key role in attracting Scandinavian banks in the Baltics as the country has had the
strongest link with Scandinavian investors (they account for more than half of total Estonian FDI)
(International Monetary Fund, 2014). The inflow of foreign capital, strong links between the Scandinavian
and Baltic countries, mergers of smaller commercial banks, and a more conservative approach of prudential
supervision strengthened the domestic banking systems.
Rapid growth of banking took place between 2003 and 2008, especially after Lithuania, Latvia and Estonia
became part of the European Union. The banking sectors experienced a phenomenal credit boom. By 2006,
annual credit growth reached more than 50 %, by 2007 about 40 %. The main driver was strong competition
for lending, primarily using foreign funding (from Sweden and other Nordic countries). Real GDP and Credit
growth in the Baltics 2006-2013 is presented in Figure 3.
year-on-year percentage change
Figure 3. Real GDP and Credit growth in the Baltics 2006-2013
Source: International Monetary Fund, 2014.
23
All the banks suffered significant losses during the hard landing of the Baltic economies and the explosion of
the real estate bubble (especially in such sectors as real estate and transport) in 2009. The Scandinavian
banks covered the financial losses of subsidiaries by additional contributions and ensured business
continuity. However, as a result of this crisis, further development of the Baltic banking sectors slowed
down. Banks tightened lending standards, gave more attention to the work with problem loans, focused more
on their activities on banking safety (well-capitalised, over liquid). However, the input of Scandinavian bank
subsidiaries in the Baltic countries economy recoveries was too little.
Since the crisis, the activity of three banks in the Baltics was terminated. In Latvia, systemically important
bank Parex Bank (which operated in Lithuania through its subsidiary as well) collapsed in late 2008. In
Lithuania, the licences from two not systemically important banks were withdrawn: from AB bankas
SNORAS (which also operated in Latvia through its subsidiary Latvijas Krajbanka and in Estonia through a
small branch) in 2011 and from AB Ūkio bankas in 2013. As the collapse of these banks was related to
irresponsible actions of the banks‘ shareholders (with certain criminal elements), the domestic banking
systems in Lithuania and Latvia became more transparent and sound.
Analysing the size of banking sectors, Lithuania among the three Baltic countries has the smallest banking
sector compared to GDP (the country has had the largest GDP among the Baltics). Latvia has the largest
banking sector, which differs from other Baltic countries by the substantial number of local banks with
specialization on taking non-resident deposits. The differences in banking sector assets per capita are even
more significant (Figure 4).
Figure 4. The Baltic countries banking sector assets per GDP and per capita
Sources: Bank of Lithuania, 2014b; Financial and Capital Market Commision (Latvia), 2014b; Estonian
Financial Supervisry Authority , 2014; Statistics Lithuania, Latvia, Estonia, 2015; formed by the author.
The size of the Baltic banking sectors is still significantly lagging behind the average of EU (Figure 5).
Lithuania stands second to the last among the EU countries (Romania is the last one).
24
Figure 5. EU countries banking sector assets/GDP, 31/12/2014
Sources: European Central Bank, 2015b; Statistics Lithuania, Latvia, Estonia, 2015; formed by the author.
For presentational purposes the y-axis was truncated at 800 %. The values for Luxemburg is 2083 %.
In Table 7 below some indicators of the banking sectors of the Baltic countries are presented. The banking
sectors of these countries have a lot of similarities: financial sectors are bank-based, banking sectors are
dominated by Scandinavian bank subsidiaries, banks are well-capitalised. However, it is also visible that the
structure of banking sectors is not the same and other indicators are diverse.
Table 7
Key indicators of the banking sectors2 of the Baltic countries, 31/12/2014
Indicators
Banking sector/Financial sector,%
Number of banks
Number of foreign banks branches
Number of Employees in banking sector
Lithuania
81.1
Latvia
89.2
Estonia
92.1
7
8
17
9
7
8
8 835
9 845
5 639
24 077
30 816
21 205
66.3
128.3
108.6
14 742
14 666
15 094
Total Loans banking sector
40.6
61.0
77.3
16 293
22 192
14 879
Total Deposits banking sector
44.9
92.2
76.2
ROA ,%
0.92
1.11
1.57
ROE, %
8.05
11.07
12.30
Capital adequacy ratio, %
21.3
20.8
24.03
Population
2 963 103
1 998 102
1 312 300
Sources: Bank of Lithuania, 2014b, 2015a; Financial and Capital Market Commision (Latvia), 2014b;
Estonian Financial Supervisry Authority , 2014; Association of Lithuanian Banks, 2015a; Association of
Commercial Banks of Latvia, 2014; Statistics Lithuania, 2015; Statistics Estonia, 2015; Central Statistical
Bureau of Latvia, 2015; formed by the author.
Total Assets banking sector
mln. Euro
% of GDP
,mln. Euro
% of GDP
,mln. Euro
% of GDP
The banking sector of Latvia stands out by a number of banks and the largest banking sector. As in all the
Baltic countries, the Latvian banking sector is dominated by Scandinavian-owned banks, which rely on
resident deposits and on funding from parent banks. Domestically-owned banks in Latvia are largely
2
3
Consolidated data were used
Transitional floor is considered (without the transitional floor ratio, it would be 35.7 %)
25
dependent on non-resident deposits and mostly specialise in provision of financial services to non- residents.
In Latvia, non-resident banking is the prominent issue, in which the country has a long tradition and enjoys
several competitive advantages (non-resident deposits account for nearly half of all the deposits in the
banking system or 40 % of GDP); however, this business model requires strong anti-money laundering
policies (European Commission, 2014a).
Lithuania and Estonia have the same number of banks and foreign banks branches and are highly
concentrated (Latvia is less concentrated). The Estonian banking sector dominated by Scandinavian banking
groups holds about 95 % of the banking sector assets, foreign bank branches, for example, Nordea plays a
significant role in the banking system. The Estonian banking sector assets and loans in the absolute value are
a little lower than in Lithuania, but significantly larger compared to GDP (in Estonia assets account for about
109 % of GDP; loans account for about 77 % of GDP). The Estonian banking sector is a leader in providing
loans to customers (in the absolute value and compared to GDP), although it has the smallest population.
In Lithuania, after revoking the licenses of two banks, the number of participants of the banking sector
decreased, and assets and loan portfolios shrank. Lithuania having the largest GDP and the greatest
population has a relatively small banking assets and loans volume.
In all the three Baltic countries bank supervision authorities have different development stages and different
type of institutions. In Lithuania, the central bank was responsible for banks supervision from 1991.
However, after the reform in 2012, it became responsible for the supervision of the entire financial market
and financial services. In Latvia and Estonia, central banks were responsible for banks supervision from
1991 until 2001 and 2002, respectively. Later separate institutions were created for supervision of national
financial sectors. Since 4 November 2014, Latvian and Estonian banks and from 1 January 2015 Lithuanian
banks have been supervised not only by the national supervisory authorities but by the ECB, the European
supervisor, as well. Evolution of bank supervision authorities in the Baltics is presented in Annex 4.
Summing up this overview, it is important to highlight that current Baltic banking systems are the result of
twenty-five years of their development. After the privatisation of the state-owned banks and acquisition of
other major local banks, the Baltic banking sectors are dominated by the subsidiaries of Scandinavian banks.
2.3. Scandinavian banks groups and their subsidiaries in the Baltics
In order to understand the strategic role of parent banks in the activity of subsidiaries in the Baltics, the
analysis of parent bank groups was performed.
Two Swedish banks, SEB and Swedbank, came to the Baltic countries in 1998 by acquiring major local
banks (including the state-owned banks). Much later, only in 2006 the Norwegian bank DNB also came to
the Baltics. In Lithuania and Latvia, DNB was as the shareholder of DNB NORD banks together with the
German bank NORD/LB, and only in 2010 it acquired the residual shares from the German bank. In Estonia,
DNB started its operations as a branch, and in 2008 it changed its status to a subsidiary. More detailed
information about the history (key developments) of Scandinavian subsidiaries in the Baltics is presented in
Annex 5.
26
According to the assets, SEB bank is the largest bank in Sweden, whereas Swedbank is the second one
(Figure 6).
Figure 6. Swedish banking system structure (assets), 31/12/2014
Sources: Bloomberg; European Central Bank, 2015b; formed by the author. Solo bank data (only in Sweden
market) was used.
If we compare banking groups, Nordea and Handelsbanken groups are larger than SEB and Swedbank
groups as they have been working more internationally (Table 8).
Table 8
Largest banking groups in Sweden and Norway, 31/12/2014
Bank’s group
Sweden
Nordea group
Svenska Handelsbanken group
SEB group assets
Swedbank group assets
Norway
DNB group assets
mln. Euro
669 342
297 233
278 720
223 852
291 862
Source: SNL; formed by the author.
DNB group is the largest banking group in Norway as well as the largest parent bank group operating in the
Baltics (Figure 7).
Figure 7. Market shares of DNB in Norway, 31/12/2014
Source: DNB group, Norway, 2015.
These three Scandinavian bank groups have a well-known brand, treated as reputable
internationally active banks, financially strong, and their shares are listed on the Stock exchanges.
27
Since 2009 Swedbank share price have been increasing more rapidly than SEB (Figure 8). Share
price of Handelsbanken, as the competitor of SEB and Swedbank, is the highest and growing;
nevertheless, this bank has been using different business model (decentralised business model,
beyond budget approach, etc.) (Kroner N., 2011).
Figure 8. Stock prices of major 4 Sweden banks, 2006-2015
Source: Bloomberg; formed by the author.
More information about parent bank groups is presented in Annex 6. It was mentioned in the Annual Reports
of the banks that Baltic subsidiaries are treated as their home markets by Scandinavian banks. In DNB group,
Baltic subsidiaries have the smallest share of assets and generate the lowest share of the operating profit
(Table 9). For Swedbank group, Baltic subsidiaries are more significant (in 2014, having 9.2 % of parent
group assets they generated quite large pre-tax profit of the parent group (17.9 %).
Table 9
Share of Baltic subsidiaries in parent groups, 2014
Ratio
3 SEB Baltic banks/ Parent group, %
3 SW Baltic banks/Parent group, %
3 DNB Baltic banks/Parent group, %
Assets
5.6
9.2
2.3
Pre-tax profit
7.1
17.9
1.4
Source: Banks Annual Reports, 2014; formed by the author.
Having analysed the information provided on the websites, it was determined that all the subsidiaries use
Mission, Vision and Core values of the parent banks (they are not adapted to local markets) (Annex 7).
It may be noted that all the banks are creating a customer-centric culture. However, as all the banks are
divers, their visions are quite different: SEB as the leading Nordic corporate bank, focuses more on the
trusted partnership with customers; Swedbank having its roots in the saving bank, gives a priority to creating
the ability to grow; and DNB as the largest financial services group of Norway, concentrates on creating
value through the art of serving the customers. Core values also differ among the groups: SEB and DNB
focus more on professionalism, experience and commitment, while core values of Swedbank are oriented on
simplicity, openness and caring. These differences can be seen in each banking group and are essential to
understanding their organisational culture.
Strategic priorities and financial targets of the parent banks (Table 10) were analysed.
28
Table 10
Strategic priorities and financial targets of the parent bank groups
Bank
Strategic priorities
SEB group
1. Long-term customer relationships
2. Growth in areas of strength
o Large corporate and industrial business in the Nordic
countries and Germany
o Small and medium- sized enterprises in Sweden (also
in the Baltics)
o Savings offering to private individuals and
institutions
1. Resilience and flexibility
Strategy:
1. Accessible full-service bank
2. Decision making close to our customers
3. Low risk
4. High cost efficiency
Priorities:
o Improve customer value
o Increase efficiency
o Integrate one structural unit
2. Capital
o achieve financial targets
o remain among the most cost-effective banks
3. Customers
o improve its corporate reputation and ensure better
customer experiences
o cover a broader range of customer needs increase the
degree of self-service
o meet customers with a common brand image
4. Culture
o become the best among Nordic banks in terms of
leadership communication and employee
engagement
o ensure adaptability and change capacity
o cultivate an improvement culture
Swedbank
Group
DNB
Group
Financial targets
Return on equity: 15 %
Capital adequacy: CET1 13 %
Dividend payout ratio: >40 %
Return on equity: 15 %
Cost efficiency: market –leading
Capitalisation: solid.
Return on equity: >12 % Capital
adequacy: CET1 14 %
Dividend payout ratio: >50 %
Sources: SEB group, 2015; Swedbank group, 2015; DnB group 2015; formed by the author.
The compared financial targets of parent banks reflect their long-term ambitions to generate high
profitability (SEB and Swedbank targets of return on equity are 15 %, and DNB target is more than 12 %)
and to meet the regulatory requirements for the size of capital with reserves (DNB set the highest target ratio
CET1 14 %, SEB set CET1 13 %, and Swedbank did not set the exact quantitative target). In 2014, parent
bank groups complied with the set financial targets and had ambitions to achieve high return on equity, to
maintain CET1 capital ratio above regulatory requirements and to achieve long-term dividend growth. It
should be noted that returns on equity of subsidiaries is considerably lower than of their parent banks.
29
One of strategic targets of SEB group, declared in Annual Report 2014, is growth in the small and mediumsized enterprises (SMEs) segment in Sweden (in the Baltics as well). SEB set a goal to adapt the bank’s
services and advice for large corporates to the needs of SMEs. SEB started focusing more on understanding
challenges and needs of SMEs in parallel with its efforts to build long-term partnerships. The strategic target
of SEB group is very relevant for the Baltic countries (especially to increase lending to SMEs); however, this
target is no emphasized in Annual reports and websites of the subsidiaries.
Swedbank group evidently presented that their strategy is low risk and high cost efficiency. It is obvious that
recently Swedbank subsidiaries have been focusing on their efficiency improvement, increasing low risk
clients base, cost cutting and e-banking development.
As Baltic subsidiaries are part of the big international Scandinavian banking groups, the decisions regarding
the strategy and the business model are made at the parent banks level. These decisions during the period of
the Baltic economies upturn (when an aggressive lending was implemented) as well as during the period of
the Baltic economy downturn (when a significant decrease in lending volumes, unduly conservative
approach to the credit risk assessment and to formation of special provisions were done) were insufficiently
consistent and adequate in the environment of the banks operating in the Baltic market. These two types of
approaches increased the reputation risk of the subsidiaries in the Baltics. Former Latvian Prime Minister V.
Dombrovskis commented on Latvian ties with Swedish banks: “We have a mixed history with the Swedish
banks. Before the crisis, Swedish banks were more part of the problem than part of the solution because it
was a very easy lending spree that they created helping to overheat our economy and helping a real estate
bubble develop. With the global financial crisis they suddenly cut our countries off and we had a hard
landing” (Magnusson N. and Eglitis A., 2013).
As subsidiaries suffered a record net loss in 2009, Scandinavian parent banks covered a large portion of the
financial losses by additional contributions or increasing capital to ensure business continuity. One of the
reasons for these actions was a powerful position of the Sweden Government.
In summary, the strategic role of parent banks in the activity of subsidiaries is key. Because of strong
presence of Scandinavian banks in the market as well as their well-known brands, it is good for Baltic
subsidiaries to be a part of the internationally reputable bank groups. This ensures Baltic banks capital and
liquidity needs (especially in unexpected shock situations). Moreover, strong dependence on the decisions of
parent banks can also have negative consequences on the countries financial stability (if the parent bank is
not able to support its subsidiary) and on the economy (if the parent banks make inadequate decisions that
are not beneficial for the situation of the country).
2.4. Analysis of the Baltics market factors
2.4.1. Macroeconomic environment
Macroeconomic environment in which Baltic subsidiaries operate and seek to generate profits has a major
impact on banks business; therefore, key developments in the forward-looking banking business environment
and key macroeconomic variables in the Baltics were analysed.
30
As the sovereign credit rating indicates the risk level and financial strength of a country best, all the Baltic
countries have relatively high evaluation from all rating agencies (Table 11).
Table 11
Sovereign credit ratings of the Baltic countries, 09/05/2015
Country
Moody‘s
Standard&Poor‘s
Fitch Ratings
Foreign Currency
Long-term
Lithuania
A3
AALatvia
A3
AAEstonia
A1
AAA+
Sources: Moody’s, 2015; Standart&Poors, 2015; Fitch Ratings, 2015; formed by the author.
Majority of the Baltic countries have Upper Medium Grade ratings, only Standard&Poor‘s gave a higher
rating to Estonia (High Grade High Quality). All rating agencies upgraded countries ratings after the
adoption of the euro in all the Baltic countries and due to positive recovery of economies (Moody’s changed
Lithuania’s rating from Lower Medium Grade to Upper Medium only 8 May 2015).
Having analysed the external factors, which could mostly affect the activities of the Baltic banks, the main
external factors and impact areas were identified (Table 12).
Table 12
The main external factors impacting Baltics subsidiaries business
Factor
High geopolitical risk from events in
Russia and Ukraine
Impact
Strategic decisions of parent banks on limited subsidiary activity
(to finance only low risk customers, subsidiaries growth should be
moderate) in this uncertain and challenging macroeconomic
situation.
Subsidiaries proved that they have not yet seen a significant effect
on the banks’ credit quality; they have been working proactively
and closely with customers whose business was sensible to this
geopolitical situation.
Lower Capital expenditure and credit demand in the Baltics.
Record-low interest rates environment
Significantly affect the income base of banks.
ECB‘s stimulus measures to increase
opportunity for credit growth in
Eurozone by pumping enormous
amounts of liquidity into the economy
As Baltic countries are Eurozone countries, strong alignment in
the Baltics with monetary environment with the Eurozone.
Uncertainty on effect of the stimulatory efforts for Baltic
countries and banks.
Sources: Bank of Lithuania, 2015b; Bank of Latvia, 2015; Bank of Estonia, 2015, formed by the author.
Having examined key macroeconomic indicators (Annex 8), which may impact business of Baltic
subsidiaries, it was identified that economic development of the Baltic countries has a strong macroeconomic
platform for the banks activities.
31
In 2014, the World economy showed signs of stabilisation; however, the recovery has been slow. The global
recovery was unbalanced. The US continued to grow, while the Eurozone was threatened by slower activity
and deflation. Growth rates of the Baltic countries economies has been among the strongest ones in the EU.
During the last mission in the Lithuania, International Monetary Fund (2015) concluded that “comeback of
economy of Lithuania over the last five years has been impressive”. Baltic banks are benefiting from
strengthening economic fundamentals.
As household financing (lending) is very important for banks, household finance and the determining factors
are of key importance for them. Recently, the factors affecting household finance have been improving in all
three Baltic countries: declining unemployment (but still high unemployment level remains in Lithuania and
Latvia), gradually increasing wages, and very low inflation (deflation). The increase in wages in Estonia has
been especially significant (after the introduction of the euro since 2011, wages have been growing by 6 %
each year) (Annex 9). In addition, due to record low interest rates, the financial burden of households to
repay loans has decreased; moreover, conditions to borrow have become favourable.
IMF highlighted that “the experience from the boom-bust cycle has left companies and banks averse to risk
and external uncertainty weighs on the willingness to invest in the near term” (International Monetary Fund,
2015).
Low demand for companies’ investments impacts credits negatively. The latest Bank of Lithuania Survey of
non-financial enterprises on business financing (Bank of Lithuania, 2015c) showed that the greater part of
companies to finance their activities used only internal resources, but in the future they plan to borrow more
actively. These loans should be mainly used to purchase equipment, machinery, vehicles, raw materials, and
to construct buildings. There are signs that companies are preparing for making investments more actively to
develop their activity.
For large companies, access to financing is not an issue. All banks want to credit large low risk companies.
The harder time is for SMEs in the climate of risk aversion. Scandinavian subsidiaries need to play a bigger
role in the Baltics regarding SMEs financing. The ECB in the euro area bank lending survey presented that
“changes in lending conditions (easing of credit standards and better banks’ risk tolerance) continue to
support a further recovery in loan growth, in particular for enterprises” (European Central Bank, 2015c).
Innovation by firms is an important driver of long-term economic growth. European Union Innovation Union
Scoreboard 2014 (European Commission, 2014b) demonstrated that Lithuania and Latvia are the weakest
ones in innovations among the EU Members States, whereas Estonia is among innovation followers (Annex
10).
A lack of critical size in implementation and oversight of innovation promotion remain important challenges
for the Baltic countries. As Scandinavian countries are innovation leaders, the Baltic countries should follow
them (Estonia is doing that). European Bank for Reconstruction and Development (2014) emphasized that
banks can play a significant role in financing innovative companies.
32
Currently, there are about 280 thousand SMEs in the Baltic countries (Statistics Lithuania, Estonia, 2014;
European Commission, 2014c). This sector has a huge potential for developing and applying business
innovation. If the innovative SMEs receive financing from banks, they can increase productivity, recover the
slowdown in exports, especially now, when companies are looking for new markets after the introduction of
the EU sanctions against Russia.
2.4.2. Regulatory and supervisory changes
As large influx of new regulations and significant changes in supervision create new conditions for banks
and impact banks business models, their analysis was performed.
The aim of a large volume of new regulations is to strengthen stability in the financial market and in every
individual financial institution, to protect society against the costs of another financial crisis. Banks argue
that the costs for running a bank are considerably higher now than before the financial crisis. Banks need to
implement the changes in customer services, processes and systems. These new requirements will increase
operating costs for banks (especially for compliance, risk functions and IT). At the same time the Regulatory
authorities are adopting measures for improved functionality and infrastructure in the financial markets while
enhancing consumer protection.
Having analysed the relevant EU regulations, the main regulations that will have impact on Baltic banks are
presented in Annex 11.
The new regulatory framework (CRDIV/CRR) requires that banks work with higher capital and liquidity
reserves. Implementing these new regulations the Baltic regulatory authorities have already set additional
capital buffers for banks:
 Estonia - capital conservation buffer of 2.5 %, implemented since May 2014, and systemic risk buffer of
2 %, implemented since August 2014 (FSA (Estonia), 2014);
 Latvia - capital conservation buffer of 2.5 % as of May, 2014 (FCTC (Latvia), 2014b);
 Lithuania – capital conservation buffer of 2.5 % June, 2015 (Bank of Lithuania, 2015).
As all the analysed banks comply with the new regulations on capital adequacy, these regulation can impact
bank business models in the future (cost of capital and liquidity will increase).
The EU has also started to focus more on strengthening consumer rights by proposing bigger choice and
increasing transparency requirements. This is opening up opportunities for new players to enter parts of the
banking market and will make price, service and availability even more important competitive factors in the
future. Other initiatives in the EU (Capital market union, payment institutions, SEPA) increase the
competition for banks as well. Regulation on Interchange Fees (MIFs) and Directive on comparability of
payment account fees, payment account switching and access to a basic payment account (PAD) encourage
banks to ensure transparency on fees for electronic payments and to reduce fees.
33
In summary, the large influx of new regulations has a positive effect on strengthening stability of the
financial markets but, on the other hand, implementation of these regulations increases operating costs and
costs of capital. New EU initiatives also put pressure on decreasing fees for financial services.
Significant supervisory changes can have impact on bank activity and legal form change. As all the Baltic
countries are the euro area countries and participate in the Single Supervisory Mechanism, all these banks are
subject to supervision by the European Central Bank (ECB) in cooperation with national financial
supervisory authority.
DNB LV and DNB EE were identified by the ECB as less significant institutions. The supervision of these
two institutions will further be the responsibility of national financial supervisory authorities (Latvian and
Estonian), while the participation of the ECB in the supervision of these banks will be indirect and
proportionate to the size of the bank and the levels of risk exposure (the ECB has the right to take over the
direct supervision of them under certain circumstances). What is specific for DNB group (Norway) is that
only DNB bankas (Lithuania) is under direct supervision of the ECB. For example, in the ECB Join
Supervisory Team (JST) for every significant banking group was established; however, in case of DNB, this
team was established only for DNB Bankas (Lithuania), and the JST coordinator is the same person for DNB
bankas (Lithuania) and SEB Baltic.
Other Scandinavian bank subsidiaries in the Baltics are identified as significant supervised entities under
direct supervision by the ECB. In SSM the Baltics significant bank supervision is organised differently from
other euro zone significant banking groups (the idea of SSM was to create JST for every significant banking
group). As parent banks are outside the eurozone, JSTs were created for SEB and Swedbank Baltic banks.
Some vulnerabilities can arise, and the ECB supervision can be less efficient due to the specifics of these
subsidiaries (Annex 12).
2.4.3. Technological development
As the banks business landscape is changing due to digitalisation, a short overview of their impact on bank
business models was done. Rapid digital development is giving rise to new demands on services,
accessibility, and efficiency. Banks need to develop and improve their technical solutions, simplify services
for customers. New IT technologies should develop online services, mobile payments, electronic signature
technology, and cards. Digital developments in the banking sector are being driven by customer expectations
and growing demands. Everyday banking services are handled almost in digital channels, increase interaction
with customers while at the same time creating economies of scale. New opportunities are opening up for the
banks, which quickly adapt to changes in the market.
In the payments area, a lot of new solutions are done among competitors. This is creating opportunities to
improve services and accessibility in costumer offering, simplify and improve the efficiency of bank
processes. Ongoing changes also affect customers. Banking is becoming more of a digital service, making it
for customers both more convenient and less costly. Customers want to do increasingly more of their
banking via mobile devices bank (apps (mobile applications) for smartphones and tablets) and through
34
seamless and integrated interfaces with them. Digitisation is creating new, more cost-effective ways to
automate and distribute products and services.
Increased digitalisation is structural and requires that business models are evaluated and adapted if banks can
stay competitive and profitable and manage the risks associated with the new environment.
In summary, the macroeconomic, regulatory changes and technological developments, on one hand, continue
to challenge the banks but, on the other hand, create new opportunities. This creates the need for constant
change. Profitability is pressured in certain areas, but new revenue sources are opening up in others.
Understanding the need to adapt to the changing expectations and demands of customers, ability to quickly
adapt an organisation and innovative thinking will be even more important in the future.
2.5. Quantitative analysis of bank business models
Quantitative analysis allowed to identify and evaluate the applied business models with certified (by external
auditors) data.
2.5.1 Analysis of the main business model components
2.5.1.1 Size and performance
A large balance sheet (Assets volume) is a key indicator of systemic importance, influencing banks business
models. Scandinavian banks operating in the Baltics have different positions in these countries based on their
size (Figure 9). The SW EE takes the leading position in the Baltics, which stands out compared to other
subsidiaries. SW has the leading positions in Estonia and Latvia and holds the second position in Lithuania.
SEB is the largest bank in Lithuania; however, it has the second position in Latvia and Estonia. DNB LT has
the third position in Lithuania (the gap between them and SEB LT and SW LT is quite large). In Latvia and
in Estonia, DNB subsidiaries are less significant institutions (according to the ECB identification). DNB EE
is one of the smallest banks in the Baltics, operating only for 4 years as a subsidiary.
Figure 9. Size of Scandinavian bank subsidiaries in the Baltics (31/12/2014)
35
SEB and SW subsidiaries in all the three Baltic countries are the largest banks, playing a leading role and
benefiting from being the largest in the countries; however, they pose a systemic risk in each country they
operate in.
Profitability of Scandinavian banks operating in the Baltics has varied markedly across banks (Figure 10) as
well as over time (Annex 15). Since the crisis in 2009, when all operating banks suffered losses (all banks
experienced very large losses in 2009 and modest losses in 2010), gaining a relevant level of profit, and ROE
became a big challenge.
Figure 10. Profit drivers of Scandinavian bank subsidiaries in the Baltics (2014)
Since 2011, the banks carried out their activities in two different ways seeking to increase income and at the
same time to reduce costs. One of the strategic priorities for all the banks became the improvement of the
operating efficiency. In fact, moderate results were achieved by increasing non-interest income and
escalating operational expenses. Before the crisis, banks focused more on traditional banking business
deriving profits from the interest income.
36
Figure 11. ROAE ratios, 2014
Sources: Banks Annual Reports, 2014; European Banking Authority, 2014c; formed by the author.
Comparing the performance results across the banks analysed (Figures 11 and Annex 13), the highest ROAE
and ROAA were reported by all SW subsidiaries. SEB LT and SEB EE fell behind slightly from SW
subsidiaries; however, SEB LV fell behind even more sharply. SW subsidiaries and SEB LT and SEB EE
had ROAE higher than the EU average, however, with a decrease in 2014 (except for SEB LT). The lowest
ROAE and ROAA were fixed in all DNB subsidiaries (lower than the EU average). This shows that major
differences exist between banking groups which policies have more influence on bank performance than the
country specific factors.
Comparing the profitability ratios of the subsidiaries in 2014 with the parent bank group ratios, the
generation of returns on equity in subsidiaries was markedly worse. Moreover, the parent bank target ROAEs
are significantly higher (SEB and SW – 15 %, DNB >12 %) than their subsidiaries. These subsidiaries
generate sharply lower returns compared to their historic performance before the crisis in 2009 (Figure 12).
SEB
SW
DNB
Figure 12. ROAE ratios, 2006-2014
Source: Bankscope, Banks Annual Reports; formed by the author.
37
Before the crisis, all the banks generated strong returns (from 15 to 36 %). In 2008, there was a sharp fall of
ROAE (the biggest fall was fixed in SEB LT: minus 85 %). From 2012, the banks started to generate
moderate returns.
In summary, Scandinavian banks subsidiaries in the Baltics are medium profitable, ROAE is higher than the
EU average, but markedly worse than in a parent bank group and at the pre-crisis level.
2.5.1.2 Key activities
The main elements of bank asset structure (Loans, Securities and Due from banks) were analysed.
From 2006 to 2014, all the banks analysed went through the business cycle. Before the crisis in 2009, assets
grew rapidly (on average 40 % each year), during the crisis the volume of assets shrank, and from 2011 only
some banks showed a growth trend (Estonian subsidiaries and Lithuanian SW and DNB subsidiaries). In
2014, there was a positive trend for all Estonian subsidiaries, but declining trend was for Latvian subsidiaries
(Annexes 14 and 15).
It might be noted that there is some diversity among SEB subsidiaries in the three Baltic countries. There
was no growth trend in Lithuania from 2012. In 2011, there was sharp growth due to selection of the SEB LT
for payments of the deposit insurance compensation to depositors of bankrupted Bank Snoras AB. In Latvia
SEB LV the volume of assets in 2014 drastically decreased (after some increase in 2013 before the adoption
of the euro). In Estonia, SEB EE showed consistent growth from 2012.
Having analysed the bank assets growth country by country, a negative trend is evident in Latvia. One of the
reasons was that Latvia experienced stronger impact of the geopolitical risk factors related to Russia. In
Lithuania, the growth in 2014 was driven by the significant amount of deposits which came into banks
together with the approaching adoption of the euro. It showed that country specific factors had more
influence on bank assets growth than the bank group policy.
In Annual reports the analysed banks declared that they have opportunities to finance companies and private
individuals due to recovering economies, at the same time they want to ensure sustainable growth. To
achieve this task, banks need to work consistently to reach new and maintain the already existing customers
due to high amortisation of loans portfolios.
Having analysed the composition of each bank‘s assets (Figure 13), some similarities and some differences
influenced by groups or specific aspects of the country were established.
38
Figure 13. Composition of bank assets of subsidiaries in the Baltics, 31/12/2014
The great majority of all banks‘ assets consist of a loan and leasing portfolio (65 – 88.9 %), while the
remaining assets are funds held within parent banks, within central banks and also held in debt bonds. All
DNB subsidiaries and SEB subsidiaries (SEB EE and SEB LV) have the highest share of loans in total assets
(more than 70 %), whereas SW subsidiaries have the lowest share. In 2014, the lending portfolio grew
slightly in all Estonian subsidiaries, and Swedbank and DNB subsidiaries in Latvia and Lithuania.
Subsidiaries held securities for liquidity purpose more (2-8 % of assets) as income from the trading activity
and interest income decreased significantly. These securities (as all the Baltic countries are members of the
Eurozone) provide to banks direct access to the ECB’s open market operations (these securities can be used
as collateral).
Parent banks determine the common policy for securities for their Baltic subsidiaries. SEB and DNB
subsidiaries invested only in the Government bonds of the operating countries. Swedbank group policy
allows to invest in highly liquid graded securities (Government bonds and debt securities). SW subsidiaries
debt securities portfolio is quite well diversified. SW is not allowed to invest in the Government bonds of the
operating jurisdiction.
As the Estonian Government bonds market is very limited, SEB EE investments in Government bonds were
very low (some increase was only in 2013), DNB EE did not invest in bonds.
Recently, some subsidiaries have had slight increase in debt securities (Annexes 14 and 15). However, parent
banks (SEB and DNB) investment policies allowing subsidiaries to invest only in the Government bonds of
the operating countries can have two negative effects: firstly, banks have limited possibilities to increase
their portfolio due to insufficient supply of the countries’ Government bonds in auctions, and, secondly, this
policy results in high concentration of bond portfolios booked within the bank.
39
After the financial crisis, banks began to hold significant funds within the parent bank (10-15 % of assets).
As loan portfolio showed moderate growth, a local deposits increase was transferred to parent banks (Annex
16). It was observed that at the end of 2013 and 2014, big amounts were temporarily transferred from parent
banks to central banks (in Lithuania these actions were related to the adoption of the euro) (Annex 17).
This parent bank policy – holding large amounts of very low interest bearing assets in parent banks – has a
negative effect on the results of subsidiaries: these assets generating very low income for subsidiaries, high
concentration of these assets increase dependence on parent banks. Therefore, for the more sustainable
business model of the subsidiary, which is operating in their own jurisdiction, it would be better to find
opportunities to invest local deposits in local assets (to increase loan portfolios).
Having analysed Loans and leasing portfolio composition, it was determined that SEB subsidiaries focus
more on Corporate financing than Households financing (Annex 18). SEB subsidiaries are usually positioned
as corporate client banks. The parent bank strength is Large corporate and institutional business financing.
Almost half of net lending in Swedbank and DNB (except DNB EE) subsidiaries is households financing,
mainly in the form of mortgages. It is also related to the particularities of Swedbank subsidiaries: their roots
in the Baltics are from saving banks, which usually work with individuals. Banks argue that Residential
mortgage financing remains as a very important product for banks: this product allows to provide the
customer with many other related services; mortgage provides for banks long-term employment opportunity
of banks resources; and even in the crisis situation the quality of mortgage loans is usually better than of any
other loans (G. Nausėda, 2014).
In terms of economic sector concentration, the bank’s corporate portfolio remains rather concentrated within
construction and real estate sectors (Annex 19). Over past few years the decrease of this sector was observed
(as a result of the finishing workouts and of high amortisation), but not significant (banks continue to finance
new commercial real estate projects). Banks’ addiction to prioritize real estate lending was explained by
several factors (S. Krėpšta, 2015): real estate serves a special type of collateral, which has an important
income-generating capacity; much safer compared to lending for specific R&D investments. Academic
papers have already determined that the episodes of decreasing real estate prices are relatively rare, mostly
related to systemic and large-scale financial crisis (A. Turner, 2014). In addition, the real estate lending bias
may potentially lead to self-reinforcing credit and housing cycles, which eventually have very adverse effects
on the real economic growth, as it was in the Baltic countries in 2005-2009.
In the Baltic countries around more than 50 % of net lending (mortgage loans, real estate& construction
sector financing) is directed into the real estate sector (Annex 20). Scandinavian countries (Sweden, Norway)
have also high real estate sector financing ratios (Annex 21).
Banks further express interest in financing the real estate sector “Business confidence has been gradually
improving and the optimism in the construction and real estate market is rising” (SEB LT, 2015). However,
some investors express that banks need to introduce innovations for financing real estate. The traditional real
estate financing products parameters are often inadequate and archaic (term, periodical cash flow
40
requirements, and covenants). Loan for financing real estate as a financial product should comply with the
reality, be adequate investment projects (A. Anskaitis, 2015).
In the last couple of years, banks increased the loan portfolios to public authorities and entities. For example,
public entities lending portfolio at Lithuanian banks DNB LT and SW LT comprise 23 % of the Corporate
portfolio. These loans are usually large and less risky (usually banks receive state guaranties). For banks this
sector became very attractive. All the analysed banks compete for financing public entities; therefore, this
competition influences interest margin (less risky, but less profitable loans).
Corporate lending to the “productive” sector is quite low. Retail&Wholesale trade and manufacturing
industries are prevailing. Recently, banks have significantly increased exposure in energy and water supply
segment. DNB LT priority is to finance the agriculture, forest sector, and other banks are willing to finance
the agriculture sector as well. The transport sector was influenced by the geopolitical situation.
The growth of credits towards “productive” sectors, innovations financing should became one of the
priorities of the Baltic banks and add value more significantly to the economic capacity and growth potential.
In the current low interest rate environment, there is a source of future income: focusing on these sectors,
they can increase the volume of the loan portfolio.
Competition for large corporate clients with low to medium risk profiles (target market of all the
Scandinavian banks) is extremely tight. Loans to SMEs often pose a great challenge in managing credit risks;
therefore, banks need to take much effort to find flexible SMEs financing solutions.
SEB finances more Large corporates (also public, infrastructure) but also wants to finance SMEs; whereas
Swedbank and DNB finance more SMEs but would also like to have large low risk clients, and public
entities.
One of the strategic priorities of the SEB parent bank is to develop and expand SEB’s offering to SMEs
through building on SEB’s reputation as the leading corporate bank in Sweden. The parent bank emphasizes
how many new SME clients should be attracted and what lending volume to SMEs should be achieved.
However, in SEB LT website there is no information about this target. Moreover, in Annual Report 2014
there is no information about this target as well when SEB LT activity plans and forecast were presented.
Banks policy to finance low risk clients, which meet bank’s conservative lending standards, is proved by the
European Commission survey (Annex 22). High rejection rates were reported in Lithuania (24 %). It means
that about ¼ of SMEs had their application rejected. One of the problems can be is that banks focus more on
the historical financial situation of the client and a suitable collateral rather than on the value of the future
project.
To sum up, recently in subsidiaries loan portfolio share in assets has shrunk, growth of loan portfolio has been
modest, subsidiaries have become averse to credit risk, they have been focusing on household financing,
corporate portfolio involves significant real estate& construction financing, public entities and large
low risk clients.
41
2.5.1.3 Key financial resources
The purpose of key resources analysis was to find out the charges that took place in the structure, dynamic
and their influence on banks income.
Scandinavian bank subsidiaries use two sources of funding: local customer deposits and funding coming
from parent banks. The funding structure has undergone significant change in recent years.
Figure 14. Liabilities of Scandinavian bank subsidiaries in the Baltics (31/12/2014)
Source: Banks Annual Reports, 2014, formed by the author.
Most of banks liabilities consisted of the attracted customer deposits.
Figure 15. Composition of bank liabilities of Scandinavian bank subsidiaries in the Baltics (31/12/2014)
42
For several years now, the customer deposit portfolio in banks has shown a growth trend – the volumes of
deposits have reached record heights (especially in Latvia and Lithuania, where the adoption of the euro
worked as a positive impetus for the growth of deposits). As loan portfolio growth was modest, this
prompted some banks to reduce liabilities to parent banks (SW subsidiaries) or some banks to increase
volume of the funds within parent banks (SEB and DNB subsidiaries).
SW subsidiaries have reduced funding from parent bank up to negligible amount. Still the funding coming
from parent bank is essential for DNB subsidiaries (DNB LV – 43 %, DNB LT and DNB EE – 36 %). SEB
LT and SEB EE also has significant due to parent banks (21 % and 24 %).
Different funding structures determine different funding costs. As funding from the parent bank is more
expensive (and longer term) SEB and DNB subsidiaries have much higher funding costs compared to
Swedbank subsidiaries that rely mostly on local deposits (mainly demand deposits) (Annex 23).
A considerable share in interest expenses was from deposit insurance fund payments, which vary in the
Baltic countries. According to the current requirement of Deposit Insurance Fund, all the banks in Lithuania
have to make annual deposit insurance fund payments of 0.45 % for deposits of private individuals and
corporate customers (this rate should decrease together with the new EU directive implementation), in Latvia
– 0.2 %, in Estonia – 0.12 %.
With interest rates being exceptionally low, the depositors tended to replace term deposits with non-maturity
deposits (money transferred to a current account upon expiry of the term deposit period). Transformation
from term to current deposits is evident in majority of analysed banks (higher share of term deposits left in
DNB EE and DNB LV).
Although the deposits held in banks are short-term (or demand deposits), they still comprise a sustainable
financial resource (it was proved by several shocks in the Baltics during the last decade). Nonetheless,
funding sustainability risk exists. Predominance of retail deposits associate with deposits run-off risk in
shock situations (geopolitical issues, rumours about one bank (local or parent), deposits may become more
volatile with growing competition on interest rate between credit institutions, also alternative investment
possibilities for depositors can increase (EU initiatives to create Capital Market Union). However, nondiversified source of funding raises a concentration risk. Banks should not over-rely on one funding source.
Well-diversified funding structure is essential in guaranteeing banks capacity to overcome stress events.
Some banks (SEB, SW subsidiaries) issued long-term bonds. The amount of these bonds has been very low
yet.
The importance of the long-term bonds in the future should grow significantly. They will facilitate the
balance of the funding term structure for banks with a high demand deposits share in total deposits.
Therefore, EU initiatives to create the Capital Market Union, to have liabilities (MREL) capable of being
43
bailed (Recovery and Resolution Directive requirement) will encourage banks to diversify liabilities in the
future.
Secured funding is another alternative funding source for the Baltic banks, which may become popular in the
future. In some EU countries, secured funding has proven to be a lifeline during the period of stress, as it
allows for diversification of funding sources and decreases counterparty risk (ECB Bank funding).
Summing up the key resources components of banks, it is important to highlight that currently low interest
rate environment and the funding structure based on demand deposits allow banks to work with very cheap
resources. Banks benefit from this favourable situation, but it will not last for a very long time. Banks need
to prepare their business models for funding source diversification in local markets, introducing new funding
products.
SEB and DNB subsidiaries have a possibility to increase profitability netting assets due and liabilities from
parent banks.
In summary, customer deposits were the main sources of financing, transformation from term to current
retail deposits was performed (interest expenses were decreased). Banks have been reducing funding from
parent banks (this funding is more expensive than deposits of local customers).
2.5.1.4 Revenues streams
Banks have two revenue streams: the first one is the interest income from lenders; and the second one is the
fees and commissions that they charge for different kinds of operations. These two revenue streams were
analysed.
Net interest income is the main source of income, but from 2011 the share of non- interest income increased
significantly (Annex 24). In 2014, all banks (except DNB EE) have substantial non-interest earnings, most
from fees, commissions, and other earnings (Figure 16).
Figure 16. Composition of Income of Scandinavian bank subsidiaries in the Baltics (2014)
44
In recent three years, Net interest income level stayed on average the same (with modest growth or slight
decrease) in majority of banks (an increase was in DNB LV and DNB EE) (Annex 25).
The volume of Interest income, especially comparing pre-crisis income level, shrank significantly. Recently,
banks have received more than 90 % of the interest income from loans and advances to customers and on
finance lease receivables, and very small part from other assets (due from banks, securities).
Moderate growth of the loan portfolios and the currently low interest rate environment makes pressure on the
interest income generating capacity.
Banks can increase their interest rate by increasing the volume of the loan portfolio or by increasing an
interest rate (margin). Without usual attempts to increase loan portfolio, some banks did special activities,
which had influence on the interest income. SW LT actively did loan portfolio reprising which resulted in
slight increase of the interest income. In low interest environment, banks have a limited possibility to an
increase interest rate (margin) for loans.
As DNB EE works as a subsidiary only for four years, the total income in 2014 increased by 10 %, which
was supported by 9 % increase in net interest income (lending volume increased by 3.4 %, this growth was
mainly delivered by corporate lending and leasing).
In 2012 and 2013, banks reduced interest expenses significantly. Different funding structures determine
different funding cost in banks. These transformations (from the parent bank funding to local deposits, from
term to current deposits) allowed to reduce interest expenses significantly.
In summary, the decreasing funding cost was the main driver of the quite stable Net interest income level.
Without significant growth in the loan portfolio and amid the prevailing low interest rates environment, the
possibilities for banks to increase their income is limited.
The stable (decreasing) level of net interest income has been accompanied by growth in net fee and
commission income (Annex 26). Especially steady growth was in Latvia before the adoption of the euro in
2013, and in Lithuania in 2014. The growth of net income from commissions and services was mainly
influenced by higher activity of the Bank‘s customers, which stimulated the quantitative growth of the
performed bank operations.
After the adoption of the euro, Net Fees and Commissions in Latvians banks decreased slightly due to the
reduced payment transfer fees. More negative impact was on the operating income in 2014 (Annex 27). In
Latvian banks, Operating income in 2014 decreased by 10-17 % compared to 2013 operating income,
payment transfer fee – by 15-26 %. The biggest impact was for profit from FX exchange – it decreased by
62-82 %. Banks can be expected similar impact in Lithuania in 2015 and later. Banks will lose profit from
FX exchange and commission income from payment transfers.
Composition of Net Fees and Commissions shows that in Lithuania Net Fees from Payment transfer is a
significant source for all subsidiaries. However, this income source can shrink considerably in Lithuania in
2015 (after the adoption of the euro) and in all subsidiaries after SEPA launch in 2016.
45
The customers were more active in using our bank’s services, and the number of e-transactions was
increasing. Like every year, in 2014 alongside with an increase in the number of our customers who prefer
more transparent and safer electronic payments and discover advantages of payment by card, we saw a
consistent decline in the number of cash transactions. customers were more active in using our bank’s
services and the number of e-transactions was increasing. Like every year, in 2014 alongside with an
increase in the number of our customers who prefer more transparent and safer electronic payments and
discover advantages of payment by card, we saw a consistent decline in the number of cash
transactions.customers were more active in using our bank’s services and the number of e-transactions was
increasing. Like every year, in 2014 alongside with an increase in the number of our customers who prefer
more transparent and safer electronic payments and discover advantages of payment by card, we saw a
consistent decline in the number of cash transactions.customers were more active in using our bank’s
services and the number of e-transactions was increasing. Like every year, in 2014 alongside with an
increase in the number of our customers who prefer more transparent and safer electronic payments and
discover advantages of payment by card, we saw a consistent decline in the number of cash transactions.
Figure 17. Composition of Net Fees and Commissions, 2014
Sources: Banks Annual Reports, 2014; formed by the author. SW EE did not separate Net payment Cards
services fees.
Another significant income source is Net Fees from Payment Cards Service in SEB and SW subsidiaries.
These subsidiaries were active in encouraging clients to use more payment cards with their brand
(Annex 28).
In absolute value, DNB LV and EE net fees income from the payment card services are moderate compared
to SEB and SW subsidiaries. DNB LT declared that in 2014 it granted over 180 thousand new payment cards
to its individual and business customers (DNB Lt payment cards topped 520 thousand), the turnover of cards
rose by 25 % year-on-year due to the increased number of active payment users and higher average
spending).
46
EU initiatives and regulations will also influence some fees and commissions rates and will have a negative
impact on the volume on this income. EU Regulation on Multilateral Interchange Fees (MIFs) set the cap on
interchange fees at 0.2 % and 0.3 % for debit and credit card transactions respectively. In the Baltic countries
where the current level of interchange fees is well above the caps, the Regulation should have a substantial
impact on banks (Annex 29).
Also, majority of the banks (SEB LT, SW LT, DNB LT, DNB LV, SW EE) reported a significant share of
other income (net gain on operations with securities and financial derivatives, net FX result, net gain on sale
of property). However, this income is not sustainable (for example, DNB LT in 2014 received net gain from
financial derivatives 4.6 mln. Euro, but the same amount was showed as loss from financial derivatives in
2013; SEB LV also had 6.4 mln. Euro profit from trading with financial instruments, but in 2014 it
experienced 0.5 mln. Euro loss).
Summing up the key revenues streams, it is important to highlight that as loans portfolio growth is moderate,
from 2011 banks started to focus more and more on non-interest income activities. Non-interest income is
more sensitive to the market and regulatory changes and has a limited growth possibility. Moreover, in the
race towards higher profits, banks can unbalance their business base by paying too much attention to noninterest income activities, not focus on traditional banking business, deriving profits from interest income.
2.5.1.5 Cost structure
The cost structure for subsidiaries was analyzed. Since the crisis in 2009, all banks have given particular
attention to the improvement of their operating performance by using the same cost cutting policy (banks
strictly limited their expenses). To improve operating efficiency, the banks have been reducing operating
costs through the promotion of e-banking development. At the same time banks have been reducing the
number of customer service units and putting self-service centres in place, shifting more operations to
Internet and to mobile phones use. In this way banks seek to optimise retail network and the related costs.
Figure 18. Composition of costs of Scandinavian bank subsidiaries in the Baltics 2014
47
Most banks decreased the number of their employees (especially SW subsidiaries); however, personnel
expenses were not significantly reduced (Annex 30). To solve profitability problems, the banks also focused
on the optimisation of the branch network. Seeking to cut costs, many banks closed some of their branches
(customer service units) and reduced the number of employees (Annex 31).
As banks significantly reduced physical meeting places for customers, they started to move actively to digital
banking services. The Baltic countries are advanced in the use of information technology and
telecommunications innovations, but according to the Survey performed by Social Information Centre in
Lithuania (at the end of 2014) in the field of banking services is still a beginner level (Association of
Lithuanian banks, 2015b). Lithuanian banking association commented that the Survey showed that a large
part of the population relationship with the banks is quite superficial. Most of the respondents (83 %) have a
current account, a debit card (72 %); bank transfers carried out by 43 % population; only a tenth of the
population uses credit cards. It means that banks need to invest in the clients’ financial education in order to
promote the use of digital services proposed by the bank.
Scandinavian banks are more oriented towards the advanced Customer‘s habit of doing their day-to -day
banking digitally which is gaining foothold. Banks have been investing in the improvement of the digital
accessibility: IT systems, online banking smart phones, ATMs.
The shift from branches to mobile and internet banking places higher demands on protection against external
threats. Banks need to implement a wide range of measures, from electronic securities and active shutdown
of fictitious and infected websites to providing information directly to customers. Its banks long term work to
modernise, consolidate and improve efficiencies in the IT infrastructure, which limit operational risks.
Preparation for the euro introduction in Latvia in 2013 and in Lithuania in 2014 increased costs for IT
systems. Some banks (SEB LT, DNB LT) introduced new core banking platforms, which provide a solid
technological basis for sustainable growth of the banks in the long-term perspective but increased costs.
There are plans to introduce new core banking platforms in all SEB and DNB subsidiaries. Due to these
projects, the costs will increase in the future.
To sum up on what was outlined, search for cost-effectiveness changed bank business models – they changed
focus from physical meeting places to Digital. In this stage banks need to invest more (cost will increase) in
other areas like IT and security, new digitals support, customers education to us new types of services.
2.5.1.6 Risk appetite and prudential requirements
The analysis of banks performance in the context of their risk appetite was performed. Banks did not clearly
disclose overall risk appetite and risk tolerance in their Annual Reports, but they only declared that they
concentrate on new lending to low risk clients. In this paper not all types of risk (level and management)
were analysed due to the lack of publicly available data. Therefore, it was focused on how the analysed
banks comply with prudential requirements and on assets quality ratios.
48
The most significant prudential requirement is capital adequacy. Banks need to have an adequate level of
capital against the risks associated with their activities and to cover unexpected losses, especially in shock
situations. Capital adequacy ratios of all the analysed banks are well above the minimum level (Figure 19).
Figure 19. Capital adequacy ratios, 31/12/2014
Sources: Banks Annual Reports, 2014; European Banking Authority 2014c; formed by the author.
SW subsidiaries hold the highest capital adequacy ratios, whereas DNB subsidiaries hold the lowest ones. It
could be noted that DNB LV is below the EU average.
The high-level quality of capital in all the analysed banks has been maintained by the key element of bank
equity. CET1 capital currently corresponds with the Tier 1 capital in all banks. The actual level of
capitalisation of banks currently implies that they do not have any difficulties in complying with new CRD
IV/CRR requirement (regulatory authorities have a possibility to introduce additional capital buffers4 for
banks, in addition to the minimum capital adequacy ratio). From 2006, banks used annual profit to strengthen
their capital. Only from 2013, some banks decided to distribute half of its profit as dividends (Annex 32).
Scandinavian subsidiaries in the Baltics are well-capitalised and can contribute to economic growth of the
countries by providing the needed financing to corporations and households. Since Scandinavian banks
subsidiaries in the Baltics are averse to risk, they should change into more risk tolerant banks, more adaptive
to local countries environment and contribute more to the economic recovery.
High capitalisation of the analysed banks demonstrates that the newly introduced leverage ratio is well
exceeded. In Annex 33, leverage ratios for 31/12/2013 are presented when banks reported the data to the
ECB for Comprehensive Assessment. Now the EU has an indicative requirement at 3 %, which has not been
established officially. It may be noted that all banks comply with this indicative ratio with large reserves.
In Annual Reports banks declared that they met the new liquidity coverage ratio requirement (in all the
Baltic countries LCR ratio requirement is 100 %), but majority of banks did not disclose this ratio. The Net
4
Capital conservation buffer 2.5 %, Countercyclical capital buffer (CCB) 0-2.5 %, buffer for Other Systemically Important
institutions (O-SIIs) 0-2 %, Systemic risk buffer 0-5 %
49
Stable Funding Ratio (NSFR) requirement is scheduled to be implemented in 2018, which will give banks
sufficient time to adjust the structure of their assets and liabilities to ensure compliance with this
requirement. National liquidity requirements were established in Latvia and Lithuania (liquid assets/current
liabilities >30 %).
Loan to deposit ratios have improved (Annex 34). The loans being issued by the local banking system are
increasingly financed through local deposits. In the long term, this should ensure sustained development in
the Baltic banking sectors, which should be based on fundamental factors. The highest ratios were in DNB
subsidiaries because of having a high share of funding from their parent bank. SEB LV and EE loans to
deposits ratios also remain high enough (higher than EU average).
Another important factor is to maintain high quality of assets. Recently assets quality indicators of the loan
portfolio have continued to improve (Annex 14). The main reasons are that banks have written-off a lot of
bad loans, the financial standing of borrowers continues to improve, and new lending is focused on clients
with low risk profile. After reaching the peak in 2010, the non-performing loan ratios decreased
significantly. Banks were finishing clearing their balance sheets of illiquid and no income generating
financial assets.
In 2014, the national supervisory authorities of the Baltics in cooperation with the ECB (prior to becoming
the supervisor of the Eurozone banks) completed an in-depth assets quality review of all the analysed banks
(except DNB LV) and stress tested their resilience to likely shocks (called Comprehensive Assessment). This
review was carried out according to the ECB’s quite stringent methodology. Once it was carried out, no
significant change in loan value was established for all the analysed banks. This means that accounting at the
banks is done conservatively; risk is assessed comprehensively and accurately. In addition, the preparedness
of these banks to act in the event of an adverse scenario of three year duration was assessed according to the
common methodology of the Eurozone countries. Stress testing also revealed that these banks would be able
to withstand a significant shock. Even in the adverse scenario the banks’ capital adequacy ratios would
exceed the required minimum capital adequacy ratio by more than two times. The results of the ECB
Comprehensive Assessment confirmed the capital strength and asset quality transparency of the analysed
banks (Annex 35).
Decrease of risk weighted assets shows that banks have become averse to risk (Annex 36). The clearest risk
weighted assets declining trend was in all SW subsidiaries and SEB LT. DNB LT situation was quite
controversial, in 2011-2013 risk weighted assets and assets grew similarly, but in 2014 risk weighted assets
decreased significantly.
2.5.2 Correlation Analysis
As the data available (annual data for the period 2006–2014) is not sufficient to perform accurate and
comprehensive regression analysis, correlation among subsidiaries in each bank group was chosen for
analysis (SEB, Swedbank, and DNB) to identify whether subsidiaries in each bank Baltic group acted in the
similar way or not. The analysis was performed in two stages.
50
Figures 20 and 21 present pairwise correlation coefficients of the five selected growth indicators among
subsidiaries of one bank group operating in Lithuania, Latvia and Estonia. The red line in all the three graphs
demonstrates the area where r = 0, i. e. there is no correlation between the variables. Therefore, the values
that are inside the red pentagon show a negative correlation between the variables, and the values outside the
pentagon indicate the positive one.
Stage 1. Figure 20 demonstrates the results of correlation analysis of the five selected growth indicators from
balance sheets.
Figure 20. Correlation of the selected indicators of growth (Balance sheet) in bank groups.
Source: Bankscope, Banks Annual Reports, 2006-2014; calculated and formed by the author.
Having analysed SEB Baltic Group, it was established that there is quite a strong positive relationship among
SEB subsidiaries of all the three countries in four of five dimensions. Differences exist only in correlation
among the growth of securities between SEB LV and SEB EE. The main reason is that for a long time SEB
EE had acquired a very small quantity of securities. This was due to the SEB policy encouraging the
subsidiaries to invest in the securities of the country that they operate in. As Estonia issued Government
bonds in limited volumes, only from 2013 SEB EE slightly increased the volume of the bonds (up to 136
million euros). The volumes of SEB LV securities were also not large and were continuously decreasing,
51
whereas SEB LT has always maintained a relatively large volume of Lithuanian Government bonds portfolio
(as of 31 December 2014, it was 423 million euros). Therefore, it may be stated that SEB subsidiaries of all
the three countries implement similar policy regarding Loans and advances, Due from parent banks and Due
to them as well as management of Customer Deposits. For example, before the crisis all three SEB
subsidiaries operating in the Baltic countries borrowed a lot from their parent bank, and after the crisis they
gradually reduced their debts; however, these debts are still quite significant in all three subsidiaries. The
situation is the same regarding the growth of the loan portfolio: before the crisis the growth of loan portfolio
was quite significant in all subsidiaries, during the crisis the loan portfolios shrank, and there is not any
significant growth in SEB Baltic group (small increase is observed in SEB EE). The lowest but positive
correlation was observed between SEB LT and SEB EE.
Having analysed Swedbank Baltic group, it was established that the strongest positive correlation among
subsidiaries is of two indicators: growth of Loans and Advances and growth of Due to banks. This
demonstrates that in these areas subsidiaries implement a very similar policy. Growth of Customer Deposits
shows a positive correlation between subsidiaries as well. However, change of volumes of SW LV Customer
Deposits in separate years differs from SW EE and SW LT. For example, in 2009 a volume of SW LV
deposits had reduced (in by 6.3 %) while in SW LT and SW EE it had increased by a similar amount; a very
significant growth in deposits in SW LV before the introduction of the euro in 2012 and 2013 was observed.
This indicates that banks implement a similar policy in the field of attracting deposits; however, events
taking place in the respective country make some influence, too. A positive correlation was also established
in Growth of Due from Banks, but the strongest was between SW LT and SW LV which was caused by the
nuances of the introduction of the euro (big amounts were temporary transferred from parents banks to
central banks). Differences exist in the investment in securities: a small positive correlation between SW LT
and SW EE is observed, whereas in other pairs of banks correlation is negative (there are differences among
countries according to volumes (SW LT invested most), and large volatilities of volumes are evident because
these securities are obtained for liquidity purposes and are sold on demand. In summary, operations of
Swedbank Baltic group are very similar in four of the five dimensions analysed in all the Baltic countries,
and this demonstrates that a similar business model of Swedbank is applied to all three countries.
In DNB Baltic Group, a weaker correlation between the selected indicators was established in most cases,
especially correlation with DNB EE. Such results of correlation analysis could have been determined by a
too short time series of DNB operating in Estonia as the bank was set up in 2011 only (the structure of its
assets and liabilities and growth trends differ from banks operating for a long time as well as the peculiarities
of their operations in the post-crisis period). A positive correlation was established between DNB LT and
DNB LV in four indicators, the strongest of which is correlation between Growth of Loans and Advances
and Growth Due to Banks. A negative correlation was identified in Growth of Customer deposits. However,
a positive correlation is seen among growth in securities and Growth of Due from banks of all the countries.
A weaker correlation among subsidiaries operating in separate countries can be influenced by such factors as
the absence of a separate Baltic division in the group (SEB and SW groups have such divisions and strongly
coordinate activities at the level of the Baltic countries), the size of the banks in the market (smaller banks
52
are impacted by the country specifics much more). Therefore, it can be stated that DNB subsidiaries in
Lithuania and Estonia operate according to a similar business model, but because of their smaller size in the
market they are more sensitive to the country specifics, and DNB EE is at the stage of the entrance to the
market.
In summary, the identified positive correlation in four of the five dimensions in SEB and SW Baltic groups
indicated the areas in which subsidiaries acted in the similar way. The strongest correlation was in Growth of
Loans and Advances. In SEB, more coordinated actions were in Growth of Due from Banks, and in SW was
Growth of Due to Banks. Growth of securities correlated weakly or negatively among the subsidiaries in
both bank groups. In DNB Baltic group, a weaker correlation between the selected indicators was established
in most cases.
Stage 2. Figure 21 shows the results of correlation analysis of the four selected growth indicators from P&L.
Having analyzed the relationship among SEB subsidiaries operating Lithuania, Latvia and Estonia, it was
established that there is a positive correlation according to all the selected variables (the strongest correlation
is in Growth of Net Interest Income, while the weakest correlation is in Growth of Administrative expenses).
A strong correlations in the income area shows that the subsidiaries operate very similarly in earning income
(as Net Interest Income decreases, Net Fees and Commissions Income increases).
Figure 21. Correlation of the selected indicators of growth (P&L) in bank groups.
Source: Bankscope, Banks Annual Reports, 2006-2014; calculated and formed by the author.
53
In Growth of Impairment, the largest correlation was established between SEB LT and SEB LV (in 2009
subsidiaries too conservatively assessed credit risk and made high impairments, later they profited from
impairment reversals). SEB EE Growth of Impairment was less volatile (during the crisis the impairment
was lower), while correlation between SEB LT and SEB LV in this area is weaker.
Swedbank operates very similarly in three of the four analyzed dimensions in all Baltic countries (a positive
correlation). The strongest correlation established in Growth of Administrative Expenses shows that all
subsidiaries were purposefully reducing operating costs. Greater differences (a negative relationship) are
only between SW LT and SW LV in Growth of Impairment. The strongest correlation in Growth of Net Fees
and Commissions was established between SW EE and SW LV, but the weakest one with SW LT. This was
determined by the fact that in SW LT income was growing during the entire period (decrease in income was
only in 2010), whereas growth was more volatile in other countries.
Similarly to the Stage 1 of correlation analysis, a weaker correlation was established in DNB Baltic group
compared to the above analyzed groups. A strong positive correlation was observed among DNB subsidiaries
in Growth of Administrative Expenses. A strong correlation was found between DNB LT and DNB LV in
two dimensions: the already mentioned Growth of Administrative Expenses and Growth in Net Interest
Income.
In summary, a set positive correlation according to all the selected variables in SEB group and in three of
four dimensions in SW group showed that subsidiaries acted in the similar way. The strongest correlation
was in Growth of Net Interest Income. In DNB Baltic group, a weaker correlation between the indicators
selected for analysis was established in most cases.
Correlation analysis among subsidiaries in each bank group demonstrated that subsidiaries in SEB and
Swedbank groups implement very similar policies in three Baltic countries. Each group has a separate Baltic
banking division, which strongly coordinates activities at the level of the Baltic countries. Banks in
Lithuania, Latvia and Estonia are strongly dependent on the decisions of parent banks for Baltic region. The
implication of this policy to the bank of the country can be positive if the group innovations are implemented
in the Baltic region. However, the implication can also be negative if the parent bank makes inadequate
decisions to the situation of the country and does not take into account the needs of the country or the local
bank.
54
III. Managerial solutions on the identified business model challenges
Having completed the literature review, qualitative analysis of market factors and quantitative analysis of
key business model components of Scandinavian banks subsidiaries in the Baltics and considering the
findings derived from both previous parts, business models challenges as well as the need for some changes
to ensure their sustainability were identified.
3.1 Business Model Canvas for Scandinavian banks subsidiaries in the Baltics
A summary of the key analysed components of bank business models, which shows common features of
business models and different approaches in some banks, banking groups, countries is presented (Annex 37).
Business models of all the analysed banks can be classified in one group. The summarized results of the
Baltics banks business model are presented in Business Model Canvas Figure 23.
Key Partners
Many partners:
Suppliers and
business partners
(as technology
and
telecommunicatio
n vendors, cash
and safeguard
services
providers, etc.)
Clearing
institutions, stock
markets
Financial
regulators, ECB
Government
institutions
Other banks
Associations,
Institutes,
Universities
Key Activities
Loans
 Modest growth recently
 Averse to risk
Securities
 Hold for liquidity purpose
 Invest in the country’
Government bonds
Due from banks
 Hold large amounts within
parent banks
Other financial services
Key Resources
Financial:
 Customer deposits
- Main source of financing
- Transformation from term to
current retail deposits
 Due to banks
- Reducing funding from parent
banks
- More expensive than local
deposits
 Capital
- Are well-capitalised
- Strengthened capital by annual
profit
Other (employees, IT systems,
branch offices)
Cost Structure
Personnel Expenses, Other administrative expenses
Focus on higher operating efficiency:
 cost cutting (decreased number of employees,
branches)
 e-banking increased
Limited possibility for further cost cutting, need for
higher investments in digital security
Impairment charges
Banks still benefit from impairment reversals
Value
Propositions
Offering to
customers:
Loans
Savings
Investments
Payments
Securities
Insurance
Other financial
services&
advisory
Relationships
Long term
relationship
Automation
where possible,
online (virtual)
Personal
assistance (Face
to face, more
focus on
advisory)
Channels
Branch offices
ATMs,
Internet
Mobile Devices
Call centres
Customer
Segments
Households
Enterprises
Large
corporates
and
institutions,
SMEs
Revenue Streams
Net interest income
 Main source of income, share decreased
 Stable in absolute value
 In low interest environment there are indications
to decrease
Net Fees and Commission and other income
 Non-interest income share increased
 Have limited possibility to grow and have
indications to decrease
Figure 24. Business Model Canvas of Scandinavian banks subsidiaries in the Baltics
Source: formed by the author
55
If R. Ayadi et al. (2014) cluster analysis of six components (Loans to banks, Trading assets, Bank liabilities,
Customer deposits, Debt liabilities, Derivative exposures) was used for classifying Scandinavian banks
subsidiaries in the Baltics, it would be clear that all these subsidiaries were classified as focused retail banks
(Table 13).
Table 13
Comparison of business models
Main observations on bank business models
Main
indicators
Ownership
Financial
activities
R. Ayadi et al.(2014) focused retail
business model
All ownership indicators around
sample average:
- 50 % of small domestically oriented
institutions are shareholder-value
(SHV) banks;
- 20 % are cooperative banks;
- 25 % are savings banks.
Among the smallest banks.
Primarily providing customer
loans funded by customer
deposits.
Domestically oriented.
Financial and The least profitable and decline in
customer loans during the euro crisis.
economic
Trading income
performance
Relatively unimportant
Average efficiency
Limited distance to default
Highest risk-weight
Low leverage
Highest loan losses and market risk
(i.e. CDS), especially during Euro
crisis.
Stable funding.
Source: R. Aydi et al., 2014; formed by the author.
Baltics foreign-owned bank business model
Foreign-owned banks.
Dependent on parent banks (capital, liquidity,
group strategy and decisions)
Among the largest banks in the country.
Use local customer deposits for providing loans
to low risk clients, invest in local Government
bonds, hold large amounts within parent banks.
Domestically oriented (provide financial
services in one jurisdiction)
Medium profitable, to generate acceptable
returns in future are in concern
Decline in loans portfolio during the crisis,
recently modest growth
Trading income is relatively unimportant
Focus on higher efficiency (cost cutting, ebanking).
Probable large distance to default (can receive
financial support from parent banks)
Focus on low average risk-weight.
Low leverage
High loan losses during the crises, recently
reversal impairment
Recently stable funding (focus on local
deposits), but before the crisis significant
funding from parent banks were received
However, only a deeper analysis of each subsidiary business model components allowed for understanding
of these business models and identifying the main features and challenges related to them.
Having analysed the research of R. Ayadi et al. (2014) on focused retail business model and the Baltics
foreign-owned banks business model, a great number of similarities were identified in financial activities.
For example, both types of banks are domestically oriented; they use local deposits to provide customer
loans; customer loan portfolios declined during the crisis; and trading income is relatively unimportant. The
biggest differences exist in risk taking and financial performance. Baltic foreign-owned banks are risk
56
averse, they focus on high efficiency (cost cutting and e-banking), they are well-capitalised and liquid, but
medium profitable with a negative trend to generate acceptable returns in the future.
In summary, the Baltic foreign-owned banks business model is mainly focused on banking safety, and
capability of withstanding future shocks (banks meet prudential requirements with large reserves). Banks are
well-capitalised, liquid and can successfully provide financial services (including lending) to enterprises and
households according to their needs. Due to being risk averse, banks do not play a key role in financing the
economies of the Baltic countries as they should, especially small and medium enterprises. European Union
initiatives (Quantitative Easing, Single Capital market, “Junker plan”) promote and activate credit activity,
and banks need not remain aloof towards the common goal. As banks are medium profitable with a negative
trend to generate acceptable returns in the future, banks need to refocus their business models so that income
bearing assets generate higher returns or find other profitability drivers.
3.2 Potential key profitability drivers for foreign-owned banks in the Baltics
As Scandinavian banks subsidiaries in the Baltics are medium profitable in the context of the economic
landscape, current regulatory changes and technological developments, to generate acceptable returns in the
future are of concern. Today’s acceptable financial performance is no guarantee of tomorrow’s performance.
A negative trend has already been observed. A significant challenge therefore is to understand what actually
drives future profitability, not just what worked well in the past. All banks need to find suitable key
profitability drivers and review their business models. Based on the results of the performed quantitative
analysis of business models components, key profitability drivers were summarised in Table 14.
Having analysed opportunities and vulnerabilities of key profitability drivers, it was determined that banks
have the possibility to increase the volume of financial services or their price. As it was presented in Table
14, a price increase for financial services can negatively impact bank business: 1) in a low interest rate
environment, a price increase can be unacceptable by customers and enhance reputational risk; 2) new EU
initiatives focus on the decrease of financial service rates, and banks must comply with these regulations; 3)
banks provide more and more financial services in a digital way, and this trend towards further digitalisation
is increasing; customers expect lower prices due to digitalisation; 5) competitors from the non-banking sector
provide financial services at lower prices; and 4) after the adoption of the Euro, the rate of payment transfer
fees decreased.
57
Table 14
Key possible profitability drivers for Scandinavian banks subsidiaries in the Baltics
Key Profitability
Drivers
Net
Interest
Income
Volume
Opportunities
Increase the volume of loan
portfolio, focus on SMEs
financing (productive sectors,
innovative companies)
In line with EU initiatives
Price
Volume
Net Fees
and
Commiss
ions
Vulnerabilities
Possible bigger credit losses
Rate of
importance
Higher operational expenses due to
costly customer (project) risk
assessment using more flexible
approach
Increase interest rate (margin)
for new loans, reprising
previously issued loans
Interest rate (margin) increase in the
low interest rate environment can
enhance bank reputation risk
Increase penetration rate
(payment cards, payment
transfer, other financial
services)
Limited possibility to increase the
volume of financial service
operations due to operating only in
one jurisdiction.
Banks need to invest in the
customer financial education
Increase fees and commissions
rates for financial services
Fees and commissions rates increase
can enhance reputational risk;
Pressure of new EU regulation and
initiatives to decrease these rates
Price
After adoption of the euro payment
transfer fees decreased
Other income
Focus on non-traditional
banking – trading activities,
derivatives
Cost cutting (further decrease
of employees, branch offices,
buildings)
Cost Efficiency
Automation where possible
Increase a risk tolerance level
Risk-taking (credit,
operational)
After adoption of the euro profit from
FX exchange decreased
Limited possibility in the low interest
rate environment to increase income
from securities, derivatives
Limited possibility to cost cutting
due to unbalance business base
Need higher investments in digital
security, IT, against cyber criminality
Need higher investments to comply
with regulatory requirements, risk
management, internal control and
governance
Banks capital allows to increase risk
tolerance only in the areas where
banks can generate higher returns
and create value for society (as
lending to economy)
Source: based on results of the Research, formed by the author.
58
A price increase can be successful if the bank’s competitive advantage is differentiation (banks invest money
in their brand and the ability to differentiate). Subsidiaries benefit from bank group brands, but they do not
focus enough on differentiation of products and services. They focus more on cost efficiency (leadership).
Another possibility to increase profitability is to increase the volume of their loan portfolio or the quantity of
bank financial operations. The peak of growth of performed financial operations in Latvia and Lithuania was
before the adoption of the Euro (in 2013 and 2014, respectively). As it has already been mentioned, the
survey done on the use of bank financial services showed that a large part of the population in relationship
with banks is quite superficial; therefore, it is necessary to invest in customer financial education in order to
increase financial service penetration rate. Banks have the possibility to increase their volume of operations
and increase fees and commissions rate, but there are some limitations when the bank operates only in one
jurisdiction (limited number of population and companies).
In summary, the key profitability driver and the biggest opportunity for banks is the increase of the volume
of their loan portfolio.
3.3. Ensuring sustainability of the business model through financing SMEs
Banks have an opportunity to focus on SMEs financing, especially on more productive sectors and
innovative companies. According to EUROFI (2015) document on EU policy, “traditional banks will
undoubtedly remain an important financing partner for industry in the future. SME relationship is among the
highest priorities for banks. Financing industry and trade lies the origin of the banking industry and is central
to banks’ role in fuelling economic growth” This statement only confirms that banks should play a leading
role in funding SMEs and should not leave room for the initiated Single Capital Market. On the other hand,
the EU initiative regarding Single Capital Market may encourage banks to start financing SME projects
much more actively. The lack of available access to finance SMEs is a widely discussed topic.
In order to increase loan portfolios, the banks should make fundamental changes in their lending strategy and
increase risk tolerance. The EU and local governments should give financial support to SMEs to strengthen
this sector and encourage banks to finance SMEs more actively.
3.3.1. Financing of SMEs should be a strategic priority of banks
As Scandinavian bank subsidiaries in the Baltics have a risk-averse approach for financing companies, banks
can choose a less risky and a more in line with risk appetites approach for two or more segments of SMEs
financing.
Working with start-ups, banks can start building long-term relationships. When the company opens its bank
account for payments, banks start to collect information on the profile of the company and try to understand
its business and needs. Moreover, banks can offer advice on financial risk and other issues. For example,
they can stimulate innovation on the company level for two years without financing projects. Banks can also
benefit from establishing partnerships with venture capital funds, which finance start-ups projects, and
continue cooperating in the future. During this period, banks can provide short term loans or overdrafts.
59
Working with mature SMEs, banks can finance innovation on the company level by adapting the existing
products and processes that are new for a particular company, but not worldwide. Innovation is not just
R&D, it can take on many different forms, for examples, new services, new distribution channels, new brand
image, new marketing schemes, new systems, new ways of operating, etc. Banks are too conservative on
using new technologies and other intangible assets as collateral. Therefore, they should become more
adaptive to the changing environment and to digitalisation.
Setting SME financing as a strategic priority should allow for banks to focus on this area, allocate adequate
resources, adapt their organisational structure, processes, products and hire the right people. The main
changes that banks should make are presented in Table 15.
Table 15
The main changes needed in banks for more active SMEs financing
Infrastructure
Policies
Main changes
 Risk tolerance level should be increased (without a negative impact on capital adequacy
targets).
 Customer segments should be defined (for example, start-ups, mature small enterprises,
and mature medium-sized enterprises).
 Acceptable productive economic sectors should be defined and the limit reviewed.
 Acceptable innovative company profile should be defined.
Organisational
 Organisation structure should be adapted to the strategic priority (necessary structural
structure
units for implementation of this strategic priority should be established).
Processes
 Risk assessment system should be based on information analysis and more forwardlooking (focus on customer profile received from digital financial services, important
long-term relationship, which allows to deeper understand a borrower, the business plan
and new technologies).
Products
 More flexible products should be introduced:
- With flexible repayment schedules of loans (for companies which generate volatile
cash flows, at least initially);
- With a possibility to collateralise intangible assets, new technologies (not only real
estate).
 More active advisory services should be introduced.
People
 Employees should have skills needed to assess early-stage technologies and other
innovation projects, evaluate intangible assets, and recognise value added projects.
 Complex assessment services can be outsourced (for example, technical expertise).
Source: Formed by the author.
The communication of the strategic priority is also very important for SMEs in order to learn about the
willingness of banks to lend to them. The main performance measures can be newly attracted SMEs and
increased lending volume to them.
3.3.2. EU and local governments risk sharing with banks for financing SMEs
As SMEs dominate in the Baltics, they play an important role in the economic development of the country:
ensure economic growth, decrease unemployment, increase export levels, and is a source of competitiveness.
The most important role of SMEs is their contribution to innovation as well as to the development of the high
value-added based economy. Banking, as an independent business, generating value added, could do without
state support in financing SMEs. Banks in the Baltic countries have the resources; they are sound and
60
financially capable of lending money to SMEs, which create jobs and value added. However, the policy of
parent banks encourages the subsidiaries to stay risk averse and to finance low risk SMEs or the SMEs that
have state guarantees. There are frequently raised questions regarding the role of the state in financing
SMEs: why should the state assume a part of the credit risk of SMEs, why do banks not assume all the risk?
The answer may be that SMEs can make a significant contribution to the country's economic growth and
prosperity as well as creating jobs. Therefore, it is useful for both the EU and local governments to
strengthen this sector (especially innovative SMEs) and to share the assumed credit risk together with the
banks seeking consistent and steady growth of long-term entrepreneurial level through SMEs. Thus, one of
the current priorities for the EU and local governments is to provide the necessary funding (guarantees) to
SMEs, and this situation is very useful for banks as regards risk sharing with the state.
In 2014, a new EU programme for the Competitiveness of Enterprises and SMEs (COSME) for 2014–2020
was launched with a planned budget of 2.3 billion Euro (European Commission, 2015c). In the Baltic
countries, more active distribution of money will start from 2016. This money will be provided for funding
through risk capital or loan guarantees for SMEs using financial engineering instruments. COSME, together
with Horizon 2020 research programme, will replace the current Competitiveness and Innovation Framework
programme (CIP). The Association of Lithuanian Banks urged the Government institutions to provide a more
significant role of banks in SMEs financing. The Association noted that allocation plans of EU structural
funds for 2014–2020 possibilities of banks to participate in financing such programmes are unjustly
underestimated, regardless of the financial capabilities of the banking system and currently very favourable
lending conditions on the market as well as. It was emphasized that it is necessary that new rules would
allow, if needed, to increase the share of loan guarantees (Association of Lithuanian banks, 2015c).
Many institutions have emphasized (Ministry of Finance of the Republic of Lithuania, 2015) that experience
of the previous 2007–2013 EU funding period demonstrated that financial engineering instruments in the
form of loans and guarantees were popular and used efficiently, and the borrowed funds were returned
successfully. There were two main models of business funding: Funded Risk Sharing Product (FRSP), in
which banks finance half of the amount needed, and the First Loss Portfolio Guarantee (FLPG), when the
state guarantees up to 80 % of the loan amount. Loan guarantees helped SMEs to receive needed financing
from banks (having only 10 % of own money) for acquiring tangible and intangible assets, financing
working capital needs.
The Governments are preparing for the implementation of Investment Plan for Europe (called as “Junker
Plan”), which is designed to spur private investments through risk sharing with the public sector at the
European level (European Commission, 2015b).
In summary, The EU and local governments financially support SMEs to strengthen this sector, and that
should encourage banks to finance SMEs more actively as well. Banks should be the leaders in financing
SMEs. Risk sharing with the public sector using EU Structural Funds, loan guarantees using financial
engineering instruments in the COSME programme and “Juncker Plan” resources should encourage them to
do that.
61
CONCLUSIONS
The current Baltic banking systems are the result of twenty-five years of their development. After the
privatisation of the state-owned banks and acquisitions of other major local banks, the Baltic banking sectors
are dominated by the subsidiaries of Scandinavian banks. The strategic role of parent bank groups in shaping
the business model of subsidiaries is key. Because of the strong presence of Scandinavian banks in the
market as well as their well-known brands, it is good for Baltic subsidiaries to be a part of internationally
reputable bank groups. This ensures Baltic banks capital and liquidity needs (especially in unexpected shock
situations). Moreover, strong dependence on the decisions of parent banks can also have negative
consequences on the financial stability (if the parent bank is not able to support its subsidiary) and economy
(if the parent bank makes inadequate decisions that are not favourable for the country’s situation) of the
country.
The analysis of market factors revealed that the macroeconomic environment, regulatory and supervisory
changes, and technological development have strongly affected business models of Baltic subsidiaries. The
current economic development of the Baltic countries is a strong macroeconomic platform for the banks
activities; nevertheless, there are some weak points such as a high geopolitical risk related to the events in
Russia and Ukraine and certain internal factors (e. g. insufficient development of small and medium-sized
enterprises (SMEs) in value-added sectors, weakness in innovations). The large influx of new regulations has
a positive effect on strengthening stability of the financial markets; however, on the other hand, the
implementation of these regulations increases operating costs and costs of capital, and new EU initiatives put
pressure on decreasing fees for financial services. Supervisory changes (the ECB involvement, parent banks
outside the SSM) can also accelerate the business model changes (e. g. transformation of subsidiaries into
branches). The increased digitalisation requires that business models should be evaluated and adopted for
banks to remain competitive and profitable and manage the risks associated with the new environment.
Using the system of key business model indicators, complex analysis of business model components of each
Scandinavian bank subsidiary operating in the Baltics was performed. The main conclusions of this analysis
are the following:
Majority of the analyzed banks are significant banks in each country and pose a systemic risk;
Recently, medium profitability was achieved by increasing non-interest income and escalating
operational expenses. Subsidiaries ROAE is higher than the EU average, but markedly worse than in a
parent bank group and at the pre-crisis level. A negative trend of profitability was established for the
future;
Loan portfolio growth was modest, and loan portfolio share in assets shrank. Sharp decrease of riskweighted assets, the loan portfolios increase to public entities, high rejection rate of credit applications,
banks declarations that they are low risk banks showed that banks became averse to risk. More than
50 % of net lending is directed into the real estate sector (Mortgage loans, Real estate& Construction
sector financing); however, corporate lending to the productive sectors and innovative companies is
62
quite low. Banks hold a large amount within parent banks, which did not generate adequate income for
subsidiaries;
Banks have been reducing funding from parent banks (this funding is more expensive than deposits of
local customers). Customer deposits became the main source of financing, transformation from term to
current retail deposits was done (interest expenses were decreased). Banks are well-capitalized, and
each year banks strengthen their capital by profit;
Net interest income (NII) was not growing, and a share of NII in income was decreasing. From 2011
banks started to focus more on non-interest income activities, the income is more sensitive to the market
and regulatory changes and has a limited growth possibility;
Banks focus on higher operating efficiency. Due to cost cutting, the number of employees and branches
decreased. Banks reduced operating costs through the promotion of digital banking services. In this
stage banks need to invest more in IT security;
Banks have low risk appetite, meet prudential requirements with large reserves, loan to deposit ratio is
improving, NPL ratio decreased, and assets quality was tested by the ECB.
The research showed that subsidiaries business models are more oriented towards banks safety, but their
sustainability perspective on acceptable return generating capacity is on concern.
Correlation analysis among subsidiaries in each bank group demonstrated that subsidiaries in the SEB and
Swedbank groups for the most part behaved in a similar way. However, in the DNB group a weaker
correlation was established.
Summarizing the analysed key components of bank business models, the main characteristics of the business
model of Scandinavian banks subsidiaries in the Baltics were established: retail banks operating in one
jurisdiction, dependency on parent bank decisions, aversion to risk, stronger focus on non-interest income
and high efficiency, orientation towards safety, medium profitability with a negative trend for the future.
Comparing the identified Baltic foreign-owned banks business model with R. Ayadi’s et al. (2014) identified
focused retail business model, the biggest differences are observed in risk taking and financial performance.
Having analysed opportunities and vulnerabilities of key profitability drivers, it was determined that the
biggest opportunity for banks in a low interest rate environment is to focus on increasing the volume of
interest bearing assets. Financing SMEs, especially in productive sectors and innovative companies, could be
the best outcome for banks and Lithuania’s economy. To achieve this goal, banks need to set SMEs
financing as a strategic priority, and make fundamental changes in their lending policy. The EU and local
governments should give financial support for SMEs to strengthen this sector, and that should encourage
banks to finance SMEs more actively as well.
Further research should consider the limitations of this study. It is the first attempt to empirically examine
Baltic bank business models for identification and sustainability. Deeper empirical analysis of each bank
business model component would be very useful in the future. Moreover, recommendations require further
63
deeper analysis of the role of banks and local governments in financing SMEs. Transparency and public
disclosure practices remain an important concern. Disclosure practices of banks, which are of the utmost
importance to comparing banks, were incomparable and incomplete. Many researchers have already raised
this problem; however, the situation has not changed significantly.
64
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68
ANNEXES
ANNEX 1. Composition of subsidiaries groups
Name of
subsidiary
group
SEB LT Group
Group companies 2014-12-31



SW LT Group


Lithuania

DNB LT Group






SEB LV Group








SW LV Group


Latvia

5


AB SEB bankas5
UAB “SEB investicijų valdymas“
Core activities: various investment management services, consultancy services.
UAB „SEB Venture Capital“
Core activities: own asset investment into other companies equity and asset
management on trust basis.
Swedbank, AB
Swedbank lizingas, UAB
Core activities: Leasing (financial and operating lease) and factoring services.
Swedbank Valda, UAB
Core activities: Real estate rental and maintenance services.
AB DNB bankas
UAB „DNB investicijų valdymas“
Core activities: management of pension and investment funds.
AB „DNB lizingas“
Core activities: provides vehicle, agriculture machinery, equipment and real estate
leasing services to corporates and private individuals.
UAB „DNB būstas“
Core activities: provides brokerage services in the country’s real estate market.
UAB „Industrius“
Core activities: management of foreclosed real estate assets marked not for further
development status.
UAB „Intractus“, ji turi patronuojamąją įmonę UAB „Gėlužės projektai“
Core activities: management of foreclosed real estate assets.
JSC SEB banka
SEB atklātais pensiju fonds
Core activities: provide additional retirement pension capital investing the
contributions made by and on behalf of the pension plan participants.
SEB Wealth Management
Core activities: investment management
SEB līzings
Core activities: leasing and factoring services
SEB Dzīvības apdrošināšana
Core activities: life insurance services.
Latectus
Core activities: acquire properties which have been used as collateral for SEB loans.
SEB Trygg Liv Holding AB, Riga branch
Core activities:
“Swedbank” JSC
SIA “Swedbank Līzings”
Core activities: leasing services
AS “Swedbank Atklātais Pensiju Fonds”
Core activities: pension funds
SIA“Swedbank Īpašumi”
SIA “HL Līzings”
November 23, 2013, AB „SEB lizingas“ was merged to AB SEB bank
69
DNB LV Group



SEB EE Group



Estonia

SW EE Group





DNB EE Group


JSC DNB banka
SIA DNB līzings
Core activities: lease of motor cars, commercial vehicles and industrial equipment as
well as factoring services.
IPAS DNB Asset Management
Core activities: manage of the 2nd pillar pension funds, taking care about stable
growth of the pension capital of its clients, as well as provides investment fund
management services.
AS SEB PANK
AS SEB Varahandus
Core activities: investment management and distribution of investment funds and
investment management of institutional portfolios.
AS SEB Liising
Core activities: car and home leasing to private individuals and a wide range of
leasing services and factoring to business customers.
AS SEB Elu ja Pensionikindlustus
Core activities: life and pension insurance
Swedbank AS
AS Swedbank Liising
Core activities: leasing services
AS Swedbank P&C Insurance
Core activities: property insurance services (comprehensive insurance, home,
apartment building, traffic, travel insurance products)
SE Swedbank Life Insurance
Core activities: life insurance services
OU Swedbank Support
Core activities: computer software
AS DNB Pank
OÜ DNB Kindlustusmaakler
Core activities: insurance services
Source: Banks Annual Reports 2014, formed by the author.
70
ANNEX 2. Key business model indicators
Business model
elements
Size
Key activities
(assets structure)
Key resources
(capital and
structure of
funding)
Revenues streams
(structure of
income)
Cost structure
Risk appetite and
performance
Key business models indicators
Share of total assets (% total assets banking sector)
Share of net loans (% net loans banking sector)
Share of Customer deposits (% Customer deposits banking sector)
Share of loans net, due from banks, securities, cash and balances with the central bank,
other assets (% total assets).
Share of loans by counterpart (Households/Private legal entities/Public entities (% net
loans).
Corporate loans by sector exposures (Construction &Real estate, Trade, Manufacturing,
Agriculture, Transport and storage, Public entities, Other (% Corporate loans (including
public entities)
Corporate loans by segment (Large corporate vs SME (% Corporate loans (including public
entities)
Loans for real estate (mortgage loans, Construction &Real estate) (% net loans)
Level of equity (% total assets); share of subordinated debt (% equity).
Share of deposits from banks/Customer deposits (% total liabilities); Share of Customer
deposits (% total assets)
Share of customer current deposits/ term deposits (% total liabilities)
Debt securities issued (% total liabilities)
Share of insured/uninsured customer deposits (% customer deposits)
Share of interest income/non-interest income (% total operating income)
Share and source of net interest income (% total operating income) (Source of interest
income: on due from banks; on loans; on securities)(Interest expense: on due to banks, on
customer deposits, on debt securities issued, payments to Deposit Insurance Guarantee
Fund)
Share and source of net commission and fees income (% total operating income) (Source:
Net Payment transfer services, Net payment cards services, other income)
Share and source of other income (% total operating income) (Source: net gain on sale
property, rent of property; operations with securities and derivatives, etc.)
Share of Reversal of Impairment (% total operating income)
Net Interest Margin %
Share of Staff expenses (% Total Non-Interest Expenses (administrative expenses)
Other administrative expenses ((% Total Non-Interest Expenses (administrative expenses))
Share of Cost related with office facilities, IT (technology) cost, Consulting and
professional fees (% Other administrative expenses)
Loan impairment charges (% Total GOP (gross operating profit))
CAPITAL: Capital adequacy ratio, CET 1 ratio, Leverage ratio
LIQUIDITY: Loan to deposit ratio, LCR, NSFR.
PERFORMANCE: ROAE, ROAA; Cost to Income ratio;
QUALITY AND RISKINESS OF ASSETS: Risk-weighted assets (% total assets), Nonperforming loans (NPL)/net loans; Net allowances for credit losses/net loans; NPL
impairment Coverage ratio (specific allowances for loans (% total gross impaired loans).
THE NATURE AND SPLIT OF RWAS: RWA/Assets, RWA Credit risk /RWA;
GROWTH: Annual market share growth: annual growth rates of assets, total loans,
customer deposits.
71
ANNEX 3. Development of banking systems in the Baltics in 1989-2014
Year
Lithuania
Latvia
Estonia
3 banks evolved from the
Soviet Union (State
Agricultural Bank, State
Commercial Bank, and
State Saving Bank) were
reorganized into state
commercial banks.
1991-1993 during 3 years
Bank of Latvia (BoL)
granted licences to 66 banks
(1991-14 banks, 1992- 36,
1993-16).
1993
At the end of the year
there were 27 licenced
banks.
1994
Lithuanian Development
Bank founded by
Government and EBRD.
In 1993 9 branches of BoL
were sold to private banks,
15 branches were
consolidated into 8
independent banks, and
remaining 21 branches were
formed into the state-owned
Latvijas Unibanka.
At the end of the year 66
banks had licences.
At the end of 1994, 55
banks had licences.
1989 Tartu Commercial Bank, formed by co-operatives
and state firms, became the first commercial bank.
From State bank (Gosbank) 5 specialized banks (Bank of
Industry and Construction, Agricultural Bank, Housing
and Social Bank, Saving Bank and Foreign Trade Bank
(later Vneshekonombank)) were transformed into state
commercial banks.
At the end 1990, 12 banks had licences.
At the end 1992, 42 banks had licenses.
Banking crisis. Many banks were forced to close:
In November 1992 BoE intervened into 3 largest banks
(it was announced a moratorium) – Tartu Commercial
Bank was closed and liquidated, the other two banks
were merged, recapitalized and new state bank Northern
Estonian Bank was created; 10 smaller banks merged to
Eesti Uhispank; 8 banks lose their licenses; 2 smaller
banks went to bankruptcy with no bail-out of depositors.
The number of banks decreased from 42 (end 1992) to
22.
Privatization/sale of a third of state Savings Bank to
Hansapank; later EBRD acquired another 30 %.
1995
Banking crisis
Moratorium was
announced on two of the
larger private banks
(Lithuanian Innovation
Bank and Litimpeks
Bank).
Withdrawal of licences
from a number (smaller
private) banks.
Restoration of operations
of Litimpeks Bank.
Recapitalization of three
state-owned banks
launched.
19891991
1992
1996
1997
Privatization of statecontrolled banks (State
Agricultural Bank, State
Commercial Bank, State
Saving Bank) launched.
State Commercial Bank
was merged with State
Saving Bank.
Banking crisis BoL revoked
the licences of 15 banks,
including largest bank,
Banka Baltija. First foreign
bank Societe Generale,
opened a branch.
Unibanka (largest stateowned bank) privatized by
foreign investors (including
EBRD);
Hansabank (Estonia)
acquired Deutsh-Lettishe
Bank (third-largest in
Latvia) – became
Hansabanka (Latvia).
Privatisation of Latvijas
Krajbanka (Savings Bank)
launched
Eesti Houipank (Savings
bank, Estonia) acquired
controlling stake in Latvijas
Žemes Bank (Latvian Land
Bank)
First licences to foreign banks KOP and SYP of Finland
and INKO Baltic Bank of Ukraine;
First bank (Hansabank) listed on foreign stock markets
(share issue to US and British investment funds);
Eesti Pank acquired state Social Bank.
State Social bank license withdrawn (remaining asset
recovery agency), transfer of its deposits and part of its
assets to North Estonia Bank (4th largest). Social bank
was Estonia’s largest bank at that time.
-
Eesti Uhispank (Union bank of Estonia) acquired the
North Estonian Bank and become the second largest bank
in the country.
72
1998
Sweden SEB purchased
42 % of Vilniaus bankas
(second largest bank)
As direct consequence of
the Russian financial crisis,
two smaller banks were
closed, while the 5th largest
bank (Rigas Komercbanka)
was declared insolvent, but
in 1999 was reopened under
the new name Pirma
Latvijas Komercbanka.
Sweden SEB takes 32 %
stake (subsequently raised
to 44 %) in Unibanka
(Latvia).
Latvijas Investiiju Banka
purchased by Nordea
Government sells its
controlling stake in Latvijas
Krajbanka.
90 % of Pirma Latvijas
Komercbanka sold to
Norddeutsche Landesbank
Girozentrale;
Sweden SEB acquired the
left shares in Unibanka.
Mid-year – Estonian Rural Bank, known as Maapank,
collapsed, Central bank withdrawn licences from
medium-sized and small banks;
July: Consolidation in banking sector: the merger of
Hansapank and Eesti Hoiupank created the largest bank
in the Baltics; the merger of Eesti Uhispank and Tallinna
Pank created the second largest bank in Estonia.
Leading banks of Sweden acquired controlling stakes in
Estonian banks - Swedbank in Hansapank (September),
SEB in Uhispank (December).
Central bank recapitalized Forekspank, merged with
other credit institution, and renamed into Optiva Bank.
1999
Withdrawal of licence of
Litimpeks bankas
2000
Vilniaus bankas and
Bankas Hermis merge;
Government sold majority
stake in Lithuanian
Development Bank to
Sampo Finance
2001
State Lithuanian Savings
Bank (second-largest
bank) sold (90 %) to
Hansapank (Estonia)
State Agricultural Bank
(third-largest bank) sold
(76 %) to Norddeutsche
Landesbank Girozentrale
New bank AB bankas
Finasta was established.
Nationalisation of
Subsidiary of Parex bank
systemically important
operated in Lithuania.
Parex banka.
Crisis in the Baltic countries. Scandinavian banks subsidiaries in the Baltics suffered significant losses which were
covered by parent banks.
After Parex banka
restructuring, new bank
licence was granted to JSC
Citadele, which took over a
substantial part of Parex
Banka’s good assets and
liabilities.
AB bankas Snoras went
Subsidiary of AB bankas
A small branch of AB bankas Snoras was closed.
bankrupt.
Snoras Latvijas Krajbanka
went bankrupt.
AB Ūkio bankas went
bankrupt, good assets and
liabilities were transferred
to AB Šiaulių bankas;
AS UniCredit Bank
Lithuania branch was
AS UniCredit Bank Latvia
AS UniCredit Bank Estonia branch was closed.
closed;
branch was closed.
Pohjola Bank Plc
Lithuania branch started
operating.
Finasta group was
Latvian Government sold
acquired by Lithuanian
AS banka Citadele to
company Invalda LT AB.
private investors USA
based Ripplewood
Holdings.
2002
2008
2009
2010
2011
2013
24
1999 – Preatoni bank, owned by Estonian capital, was
established.
Central bank sells its 58 % in Optiva Pank to Sampo
Finance (Finland).
Sources: Bank of Lithuania, Bank of Latvia, Bank of Estonia, Estonian Financial Supervision
Authority, Financial and Capital Market Commission (Latvia) Annual Reports; Kim T., 1998;
Fleming A. et al., 1997; formed by the author.
73
ANNEX 4. Evolution of bank supervision authorities in the Baltics
Authority
responsible
for banking
supervision
Short
history of
the national
supervisor
Lithuania
Latvia
Estonia
National supervisors:
The Bank of Lithuania
(the central bank) – micro
and macro prudential
supervision.
Financial and Capital Market
Commission (an autonomous
public institution) – micro
prudential supervision.
The Bank of Latvia (the
central bank) macroprudential supervision.
Financial Supervision
Authority (an autonomous
public institution) micro
prudential supervision.
Eesti Pank (the central
bank) - macroprudential
supervision.
European supervisor:
ECB SSM.
European supervisor: ECB
SSM.
European supervisor:
ECB SSM.
From 1991 – The Bank of
Lithuania (Credit
Institutions Supervision
Department) was
responsible for prudential
supervision of banks.
From 1991 The Bank of
Latvia (Credit Institutions
Supervision Department) was
From 1991 Eesti Pank
(Banking Supervision
Authority) was
In 2012 the new
Supervision Service at the
Bank of Lithuania was
established after the
merger of Securities
Commission and
Insurance Supervisory
Commission, as well as
the Credit Institutions
Supervision Department
of the Bank of Lithuania.
Since January 2015 –
ECB SSM. 3 banks have
been supervised directly
by ECB: Swedbank, SEB
and DNB.
In 2001 the Financial and
Capital Market Commission
started its activities as a joint
supervisor after the merger of
Credit Institutions
Supervision Department of
the Bank of Latvia, Latvia
Insurance Supervision
Inspectorate and Securities
Market Commission of
Latvia.
Since November 2014 – ECB
SSM.
3 banks have been supervised
directly by ECB: Swedbank,
SEB banka and ABLV Bank.
In
2002
Financial
Supervision
Authority
was launched, joined the
functions of Eesti Pank's
Banking
Supervision
Authority
and
the
Ministry of Finance's
Insurance
Supervision
Authority and Securities
Inspectorate.
Since November 2014 –
ECB SSM.
2 banks have been
supervised directly by
ECB: Swedbank and
SEB.
Sources: Bank of Lithuania, 2014b; Financial and Capital Market Commision (Latvia), 2014b; Estonian
Financial Supervisry Authority , 2014; formed by the author.
74
ANNEX 5. Subsidiaries history
Name of
subsidiary
SEB LT
Lithuania
SW LT
DNB LT
Latvia
SEB LV
SW LV
DNB LV
SEB EE
Estonia
SW EE
DNB EE
History (major events)
 1990, Spaudos bankas, a commercial bank has been registered that was lately renamed
Vilniaus Bankas AB.
 1998, SEB (Sweden) acquired 42 % of Vilniaus bankas AB shares
 2000, Vilniaus Bankas AB merged with AB Bank Hermis.
 2000, SEB (Sweden) acquired remaining shares of Vilniaus Bankas
 2005, Vilniaus Bankas AB changed its name to SEB Vilniaus Bankas.
 2008, SEB Vilniaus bankas changed its name to AB SEB bankas.
 1996, Hansabank (Estonia) established its presence in Lithuania, by establishing Hansa
Leasing Lithuania.
 1999, Hansabank (Estonia) opened branch in Lithuania.
 2001, an agreement on purchasing 90.7 % of Lietuvos Taupomasis Bankas (LTB) was
concluded between Hansabank (Estonia) and the Lithuanian State Property Fund (LTB was
reorganised, merged with Hansabankas, new name Hansa-LTB introduced).
 2003, the name was changed to Hansabankas.
 2009 Hansabankas in Lithuania changed its name to Swedbank.
 1924, The start of the bank‘s history - Žemės bankas was established.
 1993, The bank reconstituted as Lietuvos žemės ūkio bankas.
 2002, Germany‘s NORD/LB becomes the strategic investor of the bank.
 2006, The bank becomes a member of DNB NORD financial services group jointly owned by
Norway‘s DNB NOR Bank ASA and Germany‘s NORD/LB. DNB NOR Bank ASA becomes
the sole shareholder of the bank.
 2010, Germany‘s NORD/LB sold its 49 % minority stake to majority shareholder Norwegian
Financial Group DNB NOR. All banks that are part of Norway’s largest financial services
group worldwide start operating under the same DNB name sending a clear signal to the
market – one brand, one strategy.
 1993, The AS Latvijas Universālā banka was founded.
 1999 the material consolidation of SEBs Latvijas Unibanka stock holdings.
 2005 Latvijas Unibanka had been rebranded to SEB Unibanka.
 2008, the bank change the name to SEB banka.
 1995, Hansabank started operations in Latvia.
 1996, Hansabank acquired 100% of Deutsche-Lettische Bank in Latvia.
 2009 Hansabankas changed its name to Swedbank.
 2003, Pirma Banka, Riga (Latvia) became NORD/LB Latvija.
 2006, The bank becomes JV DNB NORD jointly owned by Norway‘s DNB NOR Bank ASA
and Germany‘s NORD/LB. DNB NOR Bank ASA becomes the sole shareholder of the bank.
 2010, Germany‘s NORD/LB sold its 49 % minority stake to majority shareholder Norwegian
Financial Group DNB NOR.
 1997, Eesti Uhispank acquired the North Estonian Bank.
 1998, Eesti Uhispank merged with Tallina Pank.
 1998, SEB (Sweden) acquired Eesti Uhispank (Estonia).
 2008, Eesti Uhispank changed its name to SEB Pank.
 1991, Hansabank established in Estonia.
 1998, Hansabank merged with Eesti Hoiupank and since then the new legal name of the bank
has been AS Hansabank.
 1998, Swedbank (Sweden) acquired Hansabank (Estonia).
 2001, Hansabank (Estonia).acquired State Lithuanian Savings Bank
 2009, Hansabank changed its name to Swedbank.
 2006, DNB Pank started its operations in Estonia as a Latvian DNB Banka Estonian branch.
 2008, Estonian DNB Pank branch became a Danish branch with the legal name - Bank DNB
A/S Eesti filiale.
 2012, AS DNB Bank, which belongs to the largest Norwegian financial group, began its
activities in Estonia as a local credit institution (subsidiary).
Source: formed by the author, based on the information provided in banks websites.
75
ANNEX 6. Parent bank groups
Parent bank
group
Assets,
mln.
Euro
SEB Group
278 720
ROE
%
Long
Term
Ratings
31/12/2014
15.3
Standard &
Poor's:
A+
Fitch: A+
Moody's:
A1
Overview on banking groups




Swedbank
Group
223 852
15.2
Standard &
Poor's:
A+
Fitch: A+
Moody's:
A1


DNB Group
291 862
13.8
Standard &
Poor's:
A+
Fitch: No
rating
Moody's:
A1




Stockholms Enskilda Bank (SEB) was founded in
1856 by André Oscar Wallenberg as the first
private bank in Stockholm.
In 1972, the bank merged with Scandinaviska
Banken and become Scandinaviska Enskilda Bank.
SEB is the leading Nordic bank for large
corporations and financial institutions (a corporate
bank).
Traditionally, SEB’s market position has been
particularly strong in Sweden. In recent years, the
bank has grown significantly in the other Nordic
countries and Germany. Customers are served in
local markets through SEB’s presence in more
than 20 countries around the world. In Sweden and
the Baltic countries SEB is positioned as a
universal bank providing universal banking
services (the Baltics are treated as SEB home
markets). In Denmark, Finland, Norway and
Germany SEB is positioned as a corporate bank
and provides banking services to large corporate
and institutional clients.
Swedbank was founded in 1820 as the first savings
bank in Sweden. Over the years, there have been
many mergers and acquisitions that have resulted
in the bank's current group (significant influence
from cooperative agricultural bank traditions, and a
significant role of Hansabank in the Baltic
countries).
Sweden, Estonia, Latvia and Lithuania are home
markets of Swedbank. To support bank group
customers Swedbank also performs operations
(branches or representative offices) in Norway,
Finland, Denmark, the US, China, Luxemburg and
South Africa.
DNB was established in 1822, and it is the oldest
private bank in Norway.
DNB is the largest Norwegian financial services
group, the largest investment bank, and one of the
largest in the Nordic region in terms of market
capitalisation.
DNB is one of the world’s leading shipping banks,
a major international player within energy finance,
and it also has a strong position in the fisheries and
seafood industry.
DNB has subsidiaries in the Baltics, private
banking in Luxemburg, a number of international
branches and representative offices.
Sources: Bloomberg; SEB group, Swedbank group, DnB group websites; formed by the author.
76
ANNEX 7. Mission, Vision and Core values of the parent bank groups
Bank
SEB
group
Mission
To help people and
businesses thrive by
providing quality advice
and financial resources.
Meaning that we listen,
share our knowledge and
meet our customers’
needs and expectations.
Through our customers’
success, we contribute to
making communities and
societies grow and
flourish – and it makes
our work meaningful.
Vision
To be the trusted
partner for
customers with
aspirations.
Swedbank
Group
We promote a sound and
sustainable financial
situation for the many
households and
enterprises
We enable people,
businesses and
society to grow.
DNB
Group
N/D
Creating value
through the art of
serving the
customer.
DNB will create
value for
customers, owners,
employees and
society.
Meaning that we
believe most
people have
ambitions for their
future. We work to
earn their trust as a
partner every day,
in good times and
bad, and help them
fulfil their
ambitions.
Core values
Continuity - We learn, challenge
and take action based on our long
experience.
Mutual respect - We are open and
always strive to earn the trust of
others as well as from each other.
Professionalism - We make it easy
for people to do business with us by
sharing our knowledge and being
accountable for our actions.
Commitment - We are dedicated
to having everything we do create
stronger customer relations.
Simple
We make banking easier
We make the complex simple
We bring clarity to complexity
Open
We are open up to new ideas and
people
We are honest & straightforward
Caring
We are service-minded, warm and
helpful
We strive to build strong, lasting
relationships
Helpful
Professional
Show initiative
Sources: SEB group, 2015; Swedbank group, 2015; DnB group 2015; formed by the author.
77
ANNEX 8. Key macroeconomic indicators impacting Baltics
subsidiaries business, 31/12/2014
Lithuania
Latvia
Estonia
EU
World
GDP
growth, %
2014 2015
2.9
2.8
2.4
2.3
2.1
2.3
1.4
1.8
3.4
3.5
Unemployment
growth rate, %
2014
2015
10.7
9.9
10.8
10.4
7.4
6.2
10.2
9.6
-
Inflation,
%
2014
2015
0.2
-0.4
0.7
0.7
0.5
0.2
0.6
0.1
-
Government debt
(% GDP)
2014
2015
40.9
41.7
40.0
37.3
10.6
10.3
88.6
88.0
-
Sources: European Commission, 2015a; formed by the author. European Commission Spring
Forecasts for 2015 were presented.
ANNEX 9. Wage Change in the Baltics 2010-2014
Source: Statistics Lithuania, Latvia, Estonia, 2015; formed by the author.
ANNEX 10. EU Member States’ innovation performance
Source: European Commission, 2014b.
78
ANNEX 11. Key EU regulatory measures
Items already adopted or
to be adopted
Capital and Liquidity
Requirements framework
(CRD IV/CRR)
Bank Recovery and
Resolution Directive
(BRRD)
Deposit-Guarantee Schemes
Directive (DGSD)
Anti-Money Laundering
Directive (AMLD)
Mortgage Credit Directive
(MCD)
Market in Financial
Instruments Regulation
(MiFID/MiFIR)
Payment Services Directive
(Single Market Act) (PSD II)
Regulation on Interchange
Fees (MIFs)
Directive on comparability of
payment account fees,
payment account switching
and access to a basic
payment account (PAD)
European Market
Infrastructure Regulation
(EMIR)
Banking Structural Reform
(Post-Liikanen legal
initiative) (BSR)
Adopted
2013
2014
2014
To be
adopted
2015
2014
2014
2013
2015
2014
2012
To be
adopted
2015
Aim of Regulation
To put in place a comprehensive and risk-sensitive
framework and to foster enhanced risk management
amongst financial institutions
To establish a framework for the recovery and
resolution of banks, give complete set of tools for
prevention of bank failure and possible resolution
Update the existing Deposit Guarantee Schemes for
banks, in particular rules on funding across the EU
To strengthen EU rules and ensure consistency with
the approach followed at the international level
(incorporate FATF recommendations)
To create a Union-wide mortgage credit market with a
high level of consumer protection
To strengthen market transparency and bring more
derivatives onto organised trading venues
To update previous Directive and further develop
electronic payment services, raising the bar on
transparency, prudential and security requirements
while fostering innovation
To ensure transparency on fees for electronic
payments, to reduce fees for consumer cards
To establish transparency requirements for fees
charged by payment service providers in relation to
services offered on payment accounts; to guarantee
that bank accounts should accessible to all citizens in
the EU and that consumers have appropriate means
to choose the product which best fits their needs.
To reduce the risks posed to the financial system by
derivatives transactions
To ban proprietary trading in the biggest banks and to
give supervisors the power to require those banks to
separate other risky trading activities from their
deposit-taking business
Items for consideration
Basel IV
Single Capital Union
To be
To raise capital adequacy ratio, revise risk weightings,
adopted
emphases in simpler or standardised models rather
2017
than banks' internal models for calculation of
capital requirements, raise requirements on
disclosure
To be
To create deeper and more integrated capital markets
adopted
in the 28 Member States of the EU; improve access
2019
to finance for businesses, particularly SMEs.
Sources: European Commission, 2015d; formed by the author.
79
ANNEX 12. Baltic subsidiaries under SSM supervision
Banks
SI /
Less
SI*
SEB LT
SEB LV
SEB EE
SI
SI
SI
SW LT
SW LV
SW EE
SI
SI
SI
DNB LT
SI
DNB LV
Less SI
ECB Direct
Supervision/
National
supervision
ECB direct
supervision,
JST for all these
subsidiaries
ECB direct
supervision,
JST for all these
subsidiaries
ECB direct
supervision,
JST only for this
subsidiary
Vulnerabilities
The ECB direct supervision can be less effective due to the
following reasons:
 Parent banks are outside the SSM; absent of deep
understanding of the whole cross-border bank group
business model, strategy, etc.;
 Supervision only of separate group entities does not fully
comply with the main idea of the ECB direct supervision;
 These subsidiaries are too small for the ECB direct
supervision: not enough attention and insufficient
resources can be allocated, ”one-size-fits-all“ approach
increases the reporting burden for subsidiaries.
The ECB direct supervision can accelerate parent banks for
the branching process.
National
supervision
(Latvia)
DNB EE Less SI
National
supervision
(Estonia)
*ECB identification: SI -Significant supervised entity or Less SI - Less significant supervised entity
Source: European Central Bank, 2015d; formed by the author.
ANNEX 13. ROAA ratios, 2014
Sources: Banks Annual Reports 2014; European Banking Authority, 2014a; formed by the author.
80
ANNEX 14. Ratios of key business model indicators
Name
of the
bank
SEB LT
SEB LV
SEB EE
SW LT
SW LV
SW EE
DNB LT
DNB LV
DNB EE
Name
of the
bank
SEB LT
SEB LV
SEB EE
SW LT
SW LV
SW EE
DNB LT
DNB LV
DNB EE
Name
of the
bank
SEB LT
SEB LV
SEB EE
SW LT
SW LV
SW EE
DNB LT
DNB LV
DNB EE
Share of total asset
(% total assets banking
sector)
2013
30.5
14.8
22.6
25.3
17.5
45.4
15.5
8.4
2.9
2014
28.0
11.7
24.4
26.1
16.5
43.9
15.6
7.7
3.1
Share of loans net
(% total asset)
2013
70.3
66.2
85.8
68.4
65.5
68.5
77.9
81.6
80.6
2014
69.5
71.4
76.5
65.7
67.0
66.6
72.7
88.6
88.9
SIZE
Share of net loans
(% net loans banking
sector)
2013
31.7
18.6
25.1
24.8
21.2
39.2
17.9
11.3
3.3
Share of customer deposits
(% customer deposit banking
sector)
2014
31.8
17.5
26.3
28.0
23.2
41.1
18.6
11.0
3.7
2013
27.8
10.9
20.0
31.3
19.0
43.7
13.1
5.6
2.4
2014
27.4
9.4
21.4
30.8
17.3
43.2
12.9
4.9
2.3
KEY ACTIVITIES (ASSET STRUCTURE)
Due from banks
Securities
(% total asset)
(% total asset)
2013
15.6
13.7
7.7
3.2
1.0
3.8
7.0
2.2
5.0
2014
3.6
3.2
1.0
1.8
2.9
2.6
3.8
1.7
1.2
2013
5.2
2.0
2.8
14.5
4.6
10.7
7.3
3.1
0
Other assets
(% total asset)
2014
6.3
2.7
2.6
8.8
8.8
6.9
6.2
2.3
0
2013
3.1
2.1
1.0
3.6
2.4
4.7
3.8
5.1
6.5
2014
3.5
2.8
0.9
0.1
2.3
5.1
7.6
5.1
1.4
SHARE OF LOANS BY COUNTERPART
Households
Private legal entities (% net
Public entities
(% net loans)
loans)
(% net loans)
2013
39.8
35.8
47.9
47.7
48.5
51.3
43.4
67.4
17.3
2014
42.2
36.9
47.0
46.0
49.5
51.4
49.0
66.2
18.7
2013
56.1
63.2
47.6
41.2
46.4
42.7
46.2
29.1
81.6
2014
55.0
62.2
49.6
41.5
50.9
42.2
41.0
30.8
80.3
2013
4.1
1.0
4.6
11.2
2.7
6.0
10.5
3.5
1.1
2014
2.8
0.9
3.5
12.5
1.9
6.4
11.4
3.0
1.0
81
Name
of the
bank
CORPORATE LOANS BY SEGMENT
Large corporate
SME
(% non-financial corporations)
(% non-financial corporations)
2013
2014
2013
2014
SEB LT
NA
NA
NA
NA
SEB LV
NA
NA
NA
NA
SEB EE
NA
NA
NA
NA
SW LT
NA
NA
NA
NA
SW LV
SW EE
DNB LT
NA
NA
59.7
NA
NA
60.5
NA
NA
40.2
NA
NA
39.4
DNB LV
NA
NA
NA
NA
DNB EE
NA
NA
NA
NA
KEY RESOURCES (CAPITAL AND STRUCTURE OF FUNDING)
Level of
Share of
Share of deposits
Share of
Share of
Name of
equity
subordinated
from parent
customer
customer
the bank (% total assets)
debt
banks
deposits
deposits
(% equity)
(% total liabilities) (% total liabilities) (% total assets)
2013 2014 2013 2014
2013
2014
2013
2014
2013
2014
SEB LT
11.0
11.8
0
0
34.2
21.4
63.0
75.1
56.0
66.2
SEB LV
10.2
12.2
0
0
41.8
31.3
55.3
66.2
49.7
58.1
SEB EE
17.4
16.5
0
0
23.1
23.9
74.3
73.7
61.3
61.5
SW LT
16.9
17.0
0
0
3.3
1.3
91.9
95.7
76.4
79.4
SW LV
20.2
22.4
0
0
7.1
0.6
90.6
96.6
72.3
74.9
SW EE
21.2
21.8
0
0
6.8
3.7
84.6
88.2
66.7
69.0
DNB LT
12.1
11.5
0
0
39.7
36.3
59.2
62.9
51.8
55.7
DNB LV
9.7
10.8
0
0
41.1
44.5
50.0
51.3
45.1
45.8
DNB EE
17.3
15.8
0
0
27.5
35.8
70.3
62.2
58.2
52.4
Name
of the
bank
KEY RESOURCES (CAPITAL AND STRUCTURE OF FUNDING)
Share of customer current
Share of customer term
Share of insured customer
deposits
deposits
deposits (% customer
(% total customer deposits)
(% total customer deposits)
deposits)
2013
SEB LT
SEB LV
SEB EE
SW LT
SW LV
SW EE
DNB LT
DNB LV
DNB EE
72.6
76.6
78.9
67.1
70.5
71.8
70.5
57.8
4.4
2014
77.3
78.6
86.2
73.2
77.6
75.6
79.4
63.5
5.1
2013
27.4
23.4
21.1
32.9
29.5
28.2
29.5
42.2
95.5
2014
22.7
21.4
13.8
26.8
22.4
24.4
20.6
36.5
94.8
2013
NA
NA
NA
NA
NA
NA
NA
NA
NA
2014
NA
NA
NA
NA
NA
NA
NA
NA
NA
82
REVENUES STREAMS (STRUCTURE OF INCOME)
Name
of the
bank
Share of net interest
income (% total
operating income)
2013
2014
SEB LT
49.3
51.4
SEB LV
56.0
67.2
SEB EE
63.6
64.0
SW LT
50.8
53.8
SW LV
56.2
54.8
SW EE
52.2
57.5
DNB LT
58.4
56.5
DNB LV
70.8
74.7
DNB EE
87.0
90.6
*including reversal of impairment
Name of
the bank
SEB LT
SEB LV
SEB EE
SW LT
SW LV
SW EE
DNB LT
DNB LV
DNB EE
Name
of the
bank
Share of net commission
and fee income (% total
operating income)
2013
33.7
24.8
32.2
32.8
28.6
18.7
26.0
21.5
7.4
Share of other
income* (% total
operating income)
2014
32.2
28.8
32.1
36.4
30.1
21.2
24.4
20.5
6.9
2013
17.0
19.2
4.2
16.4
15.1
29.1
15.6
7.7
6.3
2014
16.5
4.0
4.0
9.9
15.5
21.3
19.4
4.7
2.5
Net interest margin
%
2013
1.3
2.0
1.9
1.8
2.9
2.2
1.9
2.1
2.3
2014
1.4
1.8
1.8
1.9
2.4
2.3
1.85
2.0
2.0
COST STRUCTURE
Share of
personnel
expenses
(%non-interest
expenses)
2014
Other
administrative
expenses
(%non-interest
expenses)
2014
45.6
34.9
66.4
48.5
51.9
56.7
36.0
53.6
57.5
47.7
38.2
33.6
51.5
48.1
43.3
64.0
46.4
42.5
Impairment
charges (%
noninterest
expenses)
2014
Share of cost
related with office
facilities (% other
administrative
expenses)
2014
IT (technology)
cost (% other
administrative
expenses)
6.7
26.9
0
0
0
0
0
0
0
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
2014
Consulting and
professional
fees (% other
administrative
expenses)
2014
NA
NA
NA
NA
NA
NA
NA
NA
NA
RISK APPETITE AND PERFORMANCE
Capital adequacy ratio
CAPITAL
Core tier 1 ratio
2013
2014
2013*
SEB LT
15.6
20.4
15.4
SEB LV
15.1
18.6
15.3
SEB EE
23.6
25.5
23.3
SW LT
22.5
29.9
22.5
SW LV
28.1
34.3
32.6
SW EE
42.3
51.7
32.6
DNB LT
16.7
16.7
17.1
DNB LV
12.3
13.8
12.3
DNB EE
18.7
20.8
20.0
*ECB Comprehensive assessment data
2014
19.9
18.6
25.5
29.9
34.3
53.2
16.6
13.8
20.8
Leverage ratio
2013*
8.2
8.9
14.0
15.0
18.0
18.7
10.3
13.0
16.0
2014
NA
NA
13.3
NA
NA
NA
NA
NA
NA
83
Name
of the
bank
SEB LT
SEB LV
SEB EE
SW LT
SW LV
SW EE
DNB LT
DNB LV
DNB EE
Loan to deposit ratio
2013
2014
125.5
104.9
133.2
122.6
140.0
124.3
90.1
88.7
76.3
88.7
102.7
96.5
150.1
130.3
156.9
148.3
152.9
154.0
Name
of the
bank
8.5
6.0
11.0
13.1
11.7
20.7
3.1
3.3
4.2
NSFR
2013
NA
NA
NA
NA
NA
NA
NA
NA
NA
2014
NA
NA
NA
NA
NA
NA
NA
NA
NA
PERFORMANCE
ROAA
Cost-to-income
ROAE
2013
SEB LT
SEB LV
SEB EE
SW LT
SW LV
SW EE
DNB LT
DNB LV
DNB EE
LIQUIDITY
LCR
2013
2014
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
2014
9.3
5.3
9.8
10.7
10.8
9.6
3.8
4.5
3.3
2013
2014
0.9
0.6
1.8
2.1
2.3
3.8
0.4
0.3
0.8
1.1
0.6
1.7
1.8
2.3
2.1
0.5
0.4
0.5
2013
51.1
45.7
45.3
46.6
39.8
41.2
NA
65.3
NA
2014
44.2
54.9
41.6
44.3
38.8
37.9
77.9
65. 0
NA
Name
of the
bank
SEB LT
SEB LV
SEB EE
SW LT
SW LV
SW EE
DNB LT
DNB LV
DNB EE
QUALITY AND RISKINESS OF ASSETS
Non-performing
Loan loss
NPL impairment
loans (NPL) / net
provisions /net
coverage ratio (specific
loans
loans
allowances for loans (%
total gross impaired
loans)
2013
6.8
5.4
2.2
3.5
4.3
1.7
15.3
NA
7.2
2014
NA
NA
NA
NA
NA
NA
NA
NA
NA
2013
NA
NA
NA
NA
NA
NA
NA
NA
NA
2014
NA
NA
NA
NA
NA
NA
NA
NA
NA
2013
47.7
39.2
47.7
41.5
64.8
23.8
33.3
NA
36.1
2014
NA
NA
NA
NA
NA
NA
NA
NA
NA
84
Name
of the
bank
SEB LT
SEB LV
SEB EE
SW LT
SW LV
SW EE
DNB LT
DNB LV
DNB EE
THE NATURE AND SPLIT OF RWAS
RWA Credit risk/
RWA
RWA/Assets
2013
64.6
60.1
48.2
62.1
60.5
46.9
67.0
72.6
87.4
2014
50.5
57.2
38.7
48.4
56.8
37.8
103.2
68.7
70.8
2013
NA
NA
94.7
NA
89.3
92.0
NA
91.7
96.9
2014
90.3
91.5
92.2
91.5
88.6
87.6
86.8
91.1
96.1
GROWTH
Annual growth rate
in assets
SEB LT
SEB LV
SEB EE
SW LT
SW LV
SW EE
DNB LT
DNB LV
DNB EE
2013
2.0
12.1
6.2
3.4
4.8
-0.3
3.9
7.9
16.9
2014
-1.2
-15.8
16.7
11.1
0.4
4.3
8.0
-2.6
14
Annual growth rate
in net loans
2013
-3.3
10.2
6.4
4.6
-4.3
1.6
8.0
14.3
13.0
2014
-2.5
-9.2
3.9
6.7
-5.9
1.5
0.8
5.8
3.4
Annual growth rate
in customer deposits
2013
3.2
17.6
3.4
0.7
19.0
6.6
6.1
16.6
45.6
2014
16.7
-1.4
17.1
16.0
3.5
7.9
16.2
-1.2
2.6
Sources: Banks Annual reports 2014, 2013; SNL database; European Central Bank, 2014; Bank of
Lithuania, 2013,2014b; Association of Lithuanian banks, 2013,2014; Association of Commercial
banks of Latvia, 2013,2014; Estonian Financial Supervision Authority, 2013,2014; Financial and
Capital Market Commission 2013, 2014a.
85
ANNEX 15. Subsidiaries assets, liabilities, income and costs in 2006-2014
Assets
SEB LT
SEB LV
SEB EE
SW LT
SW LV
SW EE
86
DNB LT
DNB LV
DNB EE
Liabilities
SEB LT
SEB EE
SEB LV
SW LT
87
SW LV
DNB LT
SW EE
DNB LV
DNB EE
88
Income and Costs
SEB LT
SEB LV
SEB EE
SW LT
SW LV
SW EE
89
DNB LT
DNB LV
DNB EE
Sources: Banks Annual reports; SNL database; Bankscope; Bank of Lithuania, 2012-2014b;
Association of Lithuanian banks, 2006-2014; Association of Commercial banks of Latvia, 20062014; Estonian Financial Supervision Authority2006-2014; Financial and Capital Market
Commission 2013, 2014a.
ANNEX 16. Funds within and from parent banks, 2006-2014
SEB LT
SW LT
DNB LT
SEB LV
SW LV
DNB LV
90
SEB EE
SW EE
DNB EE
Source: Bankscope, Banks Annual Reports, 2006-2014; formed by the author.
ANNEX 17. Due from banks of Lithuanian subsidiaries, 2013-2014
Due from Banks,
Mln. EUR
2013Q1 2013Q2
2013Q3
2013Q4
2014Q1
2014Q2
2014Q3
2014Q4
SEB LT
887
909
1069
1069
1059
1054
1136
241
SW LT
871
706
651
181
748
325
253
110
DNB LT
291
389
299
245
268
403
338
142
SEB LV
NA
NA
NA
584
825
673
NA
115
SW LV
NA
NA
NA
51
238
691
445
146
DNB LV
NA
NA
NA
312
NA
NA
NA
527
SEB EE
330
328
342
343
667
660
599
53
SW EE
938
901
882
339
921
1374
1612
243
DNB EE
NA
NA
NA
6
NA
NA
NA
32
Source: Bank of Lithuania, 2013-14a; SNL database; formed by the author.
ANNEX 18. Share of loans by counterpart, 2013-2014
Name of the
bank
KEY ACTIVITIES (ASSETS STRUCTURE)
SHARE OF LOANS BY COUNTERPART
Households (% net
Corporates* (% net
loans)
loans)
2013
2014
SEB LT
39.8
42.2
SEB LV
35.8
36.9
SEB EE
47.9
47.0
SW LT
47.7
46.0
SW LV
48.5
49.5
SW EE
51.3
51.4
DNB LT
43.4
49.0
DNB LV
67.4
66.2
DNB EE
17.3
18.7
*including public entities
2013
60.2
64.2
52.1
52.3
49.1
48.7
56.6
32.6
82.7
2014
57.8
63.1
53.0
54.0
52.8
48.6
52.4
33.8
81.3
91
ANNEX 19. Loans to corporates by economic sectors, 31/12/2014
*SEB LT did not disclose data by economic sectors
ANNEX 20. Lending for real estate activities in the Baltic banks,
31/12/2014
Source: Banks Annual Reports 2014, formed by the author.
92
ANNEX 21. Lending for real estate related activities
Sources: Jorda O., Schularick M., Taylor A. (2014)
ANNEX 22. Rejected applications for banks loans in the EU
Source: European Commission, 2013.
93
ANNEX 23. Interest expenses on Due to banks and on Customer
deposits (mln. EUR)
Banks
Due to
banks/
Due to
Customers
Liabilities
31/12/2014
Interest
expenses
2014
Average
interest rate
(%)
2014
SEB LT
Due to banks
1272
22.0
1.3
4468
2.4
0.06
SW LT
Due to
Customers
Due to banks
65.6
3.1
4.7
5013
13.5*
0.3
DNB LT
Due to
Customers
Due to banks
1211
7.5
0.6
2101
2.3
0.1
SEB LV
Due to
Customers
Due to banks
986
5.8
0.5
2 093
2.1
0.1
SW LV
Due to
Customers
Due to banks
22
8.6
4,3
3799
11.3
0,3
DNB LV
Due to
Customers
Due to banks
937
6.3
0.7
1082
2.1
0.2
SEB EE
Due to
Customers
Due to banks
1033
7.1
0.7
3189
6.8*
0.2
SW EE
Due to
Customers
Due to banks
273
7.7
2.0
6429
16.1*
0.2
DNB EE
Due to
Customers
Due to banks
195
1.7
0.9
339
1.9
0.6
Due to
Customers
Payments to
Deposit
Insurance
Guarantee
Fund 2014
16,8
NA
8.7
5.2
6.0
2.9
NA
NA
0.3
*as payments to Deposit Insurance Guarantee Fund are not disclosed, this payments can be included in Interest
expenses
94
ANNEX 24. Income structure of Scandinavian banks subsidiaries in
the Baltics, 2006-2014
SEB LT
SW LT
DNB LT
SEB LV
SW LV
DNB LV
SEB EE
SW EE
DNB EE
95
ANNEX 25. Interest income and interest expenses, 2006-2014
SEB LT
SW LT
DNB LT
SEB LV
SW LV
DNB LV
SEB EE
SW EE
DNB EE
Source: Bankscope, Banks Annual Reports, 2014; formed by the author.
ANNEX 26. Net Fees and Commissions, 2012-2014
Source: Banks Annual Reports, 2013, 2014; formed by the author.
96
ANNEX 27. Income decrease in Latvian banks after the adoption of
the euro, 2014/2013
Banks
SW LV
Operating income
10 %
21 mln. Eur
Payment transfer fee
15 %
3 mln. Eur
Profit from FX exchange
67 %
18 mln. Eur
SEB LV
17 %
20 mln. Eur
26 %
2 mln. Eur
82 %
14 mln.EUR
DNB LV
14 %
10 mln. Eur
15 %
1.3 mln. EUR
62 %
3.8 mln.EUR
Source: Banks Annual Reports, 2014; formed by the author
ANNEX 28. Number of Payment cards issued by banks
Bank
SEB LT
SEB LV
SEB EE
SW LT
SW LV
SW EE
DNB LT
DNB LV
DNB EE
Payment cards, 31/12/2014
916,164
557,106
543,000
1,746,574
978,274
1,099,827
519,918
191,144
NA
Sources: Association of Lithuanian Banks, 2015; Banks Annual Reports, 2014; formed by the
author.
ANNEX 29. Domestic MIFs by country
Source: European Commission, 2015d.
97
ANNEX 30. Changes of employees and personnel expenses, 2008/2014
Banks
Number of employees
Personnel expenses (mln.Euro)
2014 12 31
In
2014
38,6
SEB LT
2395
SW LT
DNB LT
SEB LV
SW LV
DNB LV
SEB EE
SW EE
DNB EE
2207
1158
1120
1484
722
1218
2268
111
Change 31/12/2008
%
Number
-0.7
-16
-31.5
-11.7
-29.2
-43.9
-17.8
-22
-23
-
-1015
-154
-463
-1161
-156
-344
-682
-
Change
2008 (%)
44.6
29,8
24.9
38.0
18,7
34,8
67,9
5,3
-9,8
-26.3
+ 9,4
+0.8
-38.9
+8.8
+12.3
+23.5
-
Sources: Association of Lithuanian Banks, Banks Annual Reports 2008, 2014, formed by the
author.
ANNEX 31. Changes of branches, 2008/2014
Banks
Number of branches
(including Customer service units)
2014 12 31
2008 12 31
Change (%)
SEB LT
46
77
-40.3
SW LT
68
120
-56.7
DNB LT
60
84
-28.6
SEB LV
44
63
-30.2
SW LV
49
NA
DNB LV
27
NA
SEB EE
27
61
-55.7
SW EE
47
NA
DNB EE
1
Sources: Association of Lithuanian Banks 2008, 2014; Association of Latvian Banks 2008, 2014;
Banks Annual Reports 2008, 2014; formed by the author.
ANNEX 32. Dividend paid by banks
Bank group
SEB LT
SW LT
DnB LT
SEB LV
SW LV
DnB LV
SEB EE
SW EE
DnB EE
Decision to pay dividends for the year
(mln. EUR)
2013
2014
30.0
-
65.3
64.8
10.0
-
Source: Banks Annual Reports 2014; formed by the author.
98
ANNEX 33. Leverage ratios, 31/12/2013
Source: European Central Bank, 2014; formed by the author.
ANNEX 34. Loan to deposits ratio, 31/12/2014
ANNEX 35. Comprehensive assessment results
B
B1
B2
B3
B4
B5
B6
B7
Main results of the comprehensive
assessment (CA)
CET1 Ratio at year end 2013
including retained earnings / losses
of 2013
Aggregated adjustments due to the
outcome of the AQR
AQR adjusted CET1 Ratio
B3 = B1 + B2
Aggregate adjustments due to the
outcome of the baseline scenario of
the joint EBA ECB Stress Test
to lowest capital level over the 3-year
period
Adjusted CET1 Ratio after Baseline
Scenario
B5 = B3 + B4
Aggregate adjustments due to the
outcome of the adverse scenario of
the joint EBA ECB Stress Test to
lowest capital level over the 3-year
period
Adjusted CET1 Ratio after Adverse
Scenario
B7 = B3 + B6
%
Basis
Points
Change
%
Basis
Points
Change
%
Basis
Points
Change
%
SEB
LT
SEB
LV
SEB
EE
SW
LT
SW
LV
SW
EE
DNB
LT
DNB
EE
15.36
15.31
23.32
22.54
32.61
32.55
17.06
20.02
-49
-202
-61
-15
-19
-70
-72
-580
14.87
13.29
22.71
22.39
32.42
31.85
16.34
14.22
2
-13
90
81
-28
105
-10
-4
14.89
13.16
23.62
23.20
32.13
32.90
16.24
14.18
-154
-139
62
46
-62
110
-369
-239
13.33
11.9
23.34
22.85
31.80
32.95
12.75
11.83
Source: European Central Bank (2014)
99
ANNEX 36. Risk weighted assets 2011-2014
SEB LT
SW LT
DNB LT
SEB LV
SW LV
DNB LV
SEB EE
SW EE
DNB EE
100
ANNEX 37. Main features of the identified business models and
different approaches
Business models elements
Quantitative analysis
Large significant banks in each country
Playing a leading role and benefiting
from being the largest in the country
Size
Performance
Loans
Key activities
(assets structure)
Securities
Due from
banks
Customer
deposits
Key resources
(capital and
structure of
funding)
Due to banks
Capital
Revenues streams
(structure of
income)
Main features of business
model
Net Interest
Income
Net Fees and
Commission,
Other income
Medium profitable
ROAE higher than EU average, but
markedly worse than parent bank
groups and pre-crisis level
ROAE decreased in 2014, and there are
indications to continue decrease in a
three years period
Loan portfolio share in assets shrank
(average 66 %)
Modest growth of loan portfolio
Focus on households (mortgage)
(average 47 % of loan portfolio)
Focus on real estate& construction
companies, public entities (35-52 % of
corporate portfolio) and large low risk
corporates financing. Averse to risk
Hold for liquidity purpose (2-8 % of
assets)
Invested in the country’ Government
bonds
Large amounts are held within parent
banks (average 10-15 % of assets)
Main source of financing
Share in liabilities increased (51-97 %)
Transformation from term to current
retail deposits
Banks are reducing funding from parent
banks (average 3-49 % of liabilities)
Funding from parent banks is more
expensive than local customer deposits
Different approaches in some
banks, banking groups,
countries
Less significant institutions are DNB LV,
DNB EE
In DNB subsidiaries ROAE lower than EU
average
ROAE in SEB LT slightly increased in 2014,
but was lower than SW subsidiaries and SEB
EE.
The highest share is in DNB EE (81 % of
assets)
Slight decrease in SEB LT, SEB LV, SW LV
The lowest share in DNB EE – 18.7 %, SEB
LV – 36.9 %
The lowest investments in Estonian
Government bonds
Swedbank group policy – to invest in highly
liquid graded securities (not in the country’s
Government bonds)
Swedbank subsidiaries have the highest share
in liabilities (88-97 %)
Swedbank subsidiaries reduced funding from
the parent bank up to negligible amount
Funding from the parent bank is still
essential for DNB subsidiaries
Banks are well-capitalised
Each year banks strengthened their
capital by profit
Main source of income
Share in income is decreasing (50-67 %
of operating income)
Stable in absolute value
In low interest environment there are
indications to decrease in three years
period
SEB LT and EE, SW LT distributed part of
their profit as dividends
Increased share of non- interest income
(12-50 % of operating income)
Has limited possibility to grow and has
indications to decrease in a three years
The highest share of non-interest income in
SW LT (50 % of operating income)
The lowest share of non- interest income in
DNB EE (12 % of operating income)
SW LT has only 50 % of operating income,
non- interest income share increasing
DNB EE has 88% of operating income
101
Business models elements
Quantitative analysis
Main features of business
model
period
Personnel
Expenses
Other
Administrative
Expenses
Cost structure
Personnel and other administrative
expenses were reduced
Number of employees decreased
Number of branches decreased
Digitalisation increased (e-banking)
Limited possibility to cost cutting,
higher investments in digital security,
IT, against cyber criminality needed
Banks benefit from impairment
reversals
Impairment
Risk appetite and performance
Low risk appetite
Meet prudential requirements (capital,
liquidity, leverage) with large reserves
Loan to deposits ratio improving
Non- performing loan ratio decreased,
assets quality was tested by ECB
Different approaches in some
banks, banking groups,
countries
In 2014, reversal impairment was higher than
impairment charges in all banks, except SEB
LV and SEB LT
In 2014, SEB LV had high impairment
charges for loans due to Liepajas Metalurgs
problems
DNB subsidiaries have the highest ratio
(DNB EE (154 %) and DNB LV (148 %)
DNB LV did not participate in
Comprehensive assessment performed by
the ECB
102

OCCASIONAL PAPER SERIES No 5 / 2015

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