The combination of profitability, efficiency and risk management makes the Nordic banks like no other group of banks in the world. Whether they are the best is open to debate, but the strong financial performance could indicate Nordic banks1 are, probably, the best-balanced banks in the world. In Q4/2022 the eight largest Nordic banks delivered an average return on equity (ROE) of 13.4%, cost-to-income ratio (C/I) of 42% with a Core Equity Tier 1 ratio (CET1) of 18.2%. These are remarkable figures boosted by rapidly rising interest rates in all Nordic countries. For the full year 2022 the numbers were (excl. Danske2) 11.8%, 44% and 18.2%.
Chart 1: Key financial figures for Q4/2022, incl. items affecting comparability.
Source: The sample banks’ Q4/2022 interim reports.FX rates as of 31 December 2022.
Most of the improved performance can be explained by rising interest rates that drove significant increases in the banks’ net interest income (NII). This was especially the case in Q4/2022 as evidenced by +30% increases in NII by Nordea, SEB and SHB. Falling equity prices and high market volatility adversely impacted the banks’ fee income during the year, especially decreasing their savings and investments and capital markets related fees.
Finally, we note that most of the banks increased their loan loss provisions in 2022 in anticipation of more difficult times ahead due to weaker macroeconomic conditions. Actual credit risk write-offs and non-performing balances, though, remained at very low levels.
We cannot help but raise a red flag for Handelsbanken
As mentioned above, most of the banks we observed started to prepare for worse macroeconomic conditions ahead by increasing their loan loss provisions in 2022, consistent with the forward economic guidance principles of IFRS 9. For example, in Q4/2022 alone Nordea booked EUR 20 m and Swedbank 207 m Swedish kronor (SEK) as loan loss provisions as a result of forward-looking risk expectations and SEB added SEK 300 m as a result of a review of expected risks in its real estate portfolio.
Especially against this backdrop it is difficult to comprehend SHB’s actions as it seems completely unconcerned about the deteriorating macroeconomic environment in Sweden. The bank reported a loan loss ratio of 0.00% in 2022 and booked virtually no additional loan loss provisions in Q4/2022. This looks quite strange as SHB’s total property management loan portfolio of SEK 706 bn is larger than that of the two other major Swedish banks, SEB’s and Swedbank’s, combined3 and given that the Swedish property prices kept falling throughout 20224 !
When we also factor in the fact that SHB is still in progress of selling its Finnish business, after almost 1.5 years from the public announcement of this intention, we cannot help but raise a red flag for SHB due to questions about some of its key business decisions and preparedness for potential future shocks. We hope to be wrong on this one but cannot avoid calling out these issues.
The banking sector will play a pivotal role in the transition to a more sustainable future as the intermediary of financial flows
We observed four main cross-cutting investment themes among the banks we analysed as their key focus areas in 2023 i.e. digital services, financial crime prevention, sustainability and cyber resiliency.
There is nothing new in the digital transformation of the banking industry, but we are beginning to see divergence between the maturity of banks in this space. For example, in February 2023 D-Rating acknowledged Nordea as the best digital performer among European retail banks5 while SHB and Swedbank are still improving the basic functionalities of their digital channels. This is a result of the banks’ long-term strategic choices that in SHB’s and Swedbank’s cases have emphasised the importance of their physical branch network while Nordea has pursued an omni-channel approach putting digital development at the center of its efforts.
As regards to financial crime prevention we will simply note that the regulatory pressures are not going away and consequently the banks will keep this topic front and center of their compliance (and cost of compliance) efforts for the foreseeable future. The importance of this topic is well illustrated by Danske’s personnel composition that at the end of 2022 included 20% of all staff working for it6.
Sustainability is a megatrend that impacts all people, industries and societies. The banking sector will play a pivotal role in the transition to a more sustainable future as the intermediary of financial flows. This will play out in three main ways i.e. sustainable investments, sustainable finance and regulatory compliance. Banks and other asset management companies have already for quite some time facilitated more and more green investment opportunities to corporations, private individuals and government entities. Increasingly, we are observing concrete steps taken by the large Nordic banks in their lending activities. E.g. Danske’s sustainable financing amounted to DKK 273 bn at the end of 2022. In addition, the pressures from regulators to disclose more details regarding their assets, and separately prepare stress testing with climate change in mind, are increasing. All the banks in our sample group have put sustainability at the core of their strategies so this trend will continue and accelerate in 2023.
Finally, we note a new theme emerging in the spotlight i.e. cyber resilience. Nordea, SEB and Swedbank highlighted in Q4/2022 increased investments and focus in this area. This seems logical as the digitisation of banking makes banks more vulnerable to increased operational risks including potential cyber-attacks which need to be proactively managed. At the same time, none of the large Nordic banks reported major cyber incidents in 2022 so this forward-leaning activity, if managed effectively, should help the banks to stay ahead of the risks.
The year 2022 will go down in history for the Nordic banking sector because of Danske’s EUR 2 bn fine for past mistakes – although the share price impact indicates the market had feared it could have been worse. We are certain that this will be a lesson the region will never forget, in terms of establishing a strong risk management culture. But as Danske turns a corner for a brighter future, the large Nordic banks are anticipated to continue running as well, on balance, as any in the world. The current performance and future competitiveness, operating on a profitable and efficient foundation, managing risks carefully and investing in future-proofing themselves further, should enable that position to be maintained, in uncertain times.
Obviously, the balance between short- and long-term focus will become increasingly important if and when the Nordic economies cool down and the banks begin to observe larger challenges with their customers’ finances. In such circumstances we encourage bank management teams to emphasise their long-term competitiveness while going into hypercare with their short-term challenges keeping their customers at the center at all times. SHB continues to have questions marks regarding the preparedness for worse economic conditions, especially in the Swedish property market, and what is preventing the management team from finding a buyer for their Finnish business.
All this makes for an intriguing preface for the rest of 2023 and we will certainly keep watching the developments in this sector.
 Nordea Bank, Danske Bank, Skandinaviska Enskilda Banken (SEB), Svenska Handelsbanken (SHB), Swedbank, DNB, Nykredit, OP Financial Group (OP).
 Danske booked a 14 bn Danish kronor (DKK) provision in Q3/2022 for a fine resulting from its Estonian money-laundering scandal. This massive one-off item makes Danske’s results in 2022 completely incomparable, and hence, they are excluded here.
 SEB’s property management loan portfolio was SEK 355 bn at the end of 2022 and Swedbank’s was SEK 293 bn.
 3.6 thousand out of 17.4 thousand total staff. Source: Danske’s Q4/2022 interim result presentation.
Mikko is a Partner and leader of Deloitte’s Banking Consulting practice in Finland. Mikko has +15 of experience in the Nordic banking sector as a leader and business advisor. He is specialised in people, business and technology transformations, including e.g., organisational change, new technology implementations and strategy design. Mikko has deep knowledge of the end-to-end operations of universal banks ranging from the back-end technologies to the front-end customer solutions. Mikko toimii partnerina johtaen Deloitten pankkialan konsultointipalveluita Suomessa. Hänellä on yli 15 vuoden kokemus Pohjoismaisesta pankkisektorista johtavana asiantuntijana ja yritysneuvojana. Mikko on erikoistunut ihmisten, liiketoiminnan ja teknologian muutoksiin, mukaan lukien organisaatiomuutokset, uuden teknologian toteutukset ja strateginen suunnittelu. Hänellä on syvä, kokonaisvaltainen tuntemus yleispankkien toiminnasta aina taustateknologioista asiakasratkaisuihin asti.