Intensity of Rivalry

This section is to understand the competition of Danske Bank and to determine if the competition is sparse, gentle, intense or warlike. In Denmark the financial service industry comprises banks, mortgage credit institutions, investment associations, investment companies, the Danish Ship Finance, insurance companies, pensions funds and others financial institutions (finanstilsynet.dk).

This section focuses on banking and the insurance sector, that can be categorize into commercial banks, wholesale banks, wealth management, mortgage banks, and insurance companies. The Danske Bank group operates in all these areas as it offers its products to specific customer segments.

In Europe banks are allowed to freely establish subsidiaries in member countries of the EU. Moreover there is free movement of capital and goods across the borders according to Articles 63 to 66 of the Treaty on the Functioning of the European Union (TFEU), supplemented by Articles 75 and 215 TFEU for sanctions. This allows foreign banks to easily establish subsidiaries in any country Danske Bank operates in. This freedom may increase the competition for Danske Bank in the future, especially if more large scale banks enter the market to serve internationally oriented customers.

The competition in Denmark is regulated by the Danish competition act that applies to all industries.

Similarly Sweden, Finland and Norway have competition acts that assimilate each other. In addition to the competition act the Danmarks Nationalbank, the DFSA, and the ministry of finance interacts in case of banking mergers in order to ensure stability, safety and soundness of the institutions (IMF, 2007). According to IMF (2007) the separation of institutions that deal with either competition or stability concerns, is common practice among most countries.

In Denmark the financial service industry is characterized by a large amount of banks. According to the Danish Supervisory Authority (FSA) and the ECB (2014) there were 338 financial entities

34 Others include: United Kingdom, Luxembourg, Ireland, Estonia, Lithuania, Germany, USA, Russia, Poland and Latvia

2015 Income % of total income

Denmark 55,259 69%

Finland 6,226 8%

Sweden 6,180 8%

Norway 7,522 9%

Others 5321 7%

Total 80,507 100%

53 operating and 1,186 branches in Denmark in 2014. This ranks Denmark as one of the countries with the highest concentration of banks per capita.

Number of undertakings 2010 2011 2012 2013 2014

Commercial banks and savings banks 123 113 96 88 84

Mortgage-credit institutions 8 8 8 7 7

The Danish Ship Finance 1 1 1 1 1

Investment companies 44 43 40 43 41

Investment, special purpose, restricted and hedge

associations 94 91 85 84 49

Investment management companies (large) 3 3 4 4 4

Investment management companies (small) 12 11 10 11 10

Non-life insurance companies 97 94 85 76 75

Life-insurance companies 31 29 27 21 19

Lateral pension funds 24 21 20 18 16

Company pension funds 30 29 27 23 19

ATP, LD and AES 4 4 4 3 3

Authorized Alternative Investment Funds Managers - - - - 10

Total 471 447 407 379 338

Source: www.finanstilsynet.dk (2014)

However the figures illustrate a decreasing trend in the number of financial service institutions, except for the category authorized alternative investment funds managers. Consequently, all things being equal, capital becomes available that has to be distributed among a smaller amount of institutions.

The trend can be explained by a demanding business environment that was caused by the financial crisis and subsequent economic fluctuations. Consequently several financial institutions went out of business due to diminishing earnings (Horwitz, 2014) and due to troubles to recover after the financial crisis, as negative interest rates established a though business environment (EBF, 2012). But also recent M&As lowered the total number of financial institutions (Horwitz, 2014).

Despite the trend in declining numbers of registered banks, the number of banks is comparably high in Denmark in terms of banks per capita. In addition there is a high concentration in the financial service industry. The group 1 of Denmark’s five largest financial institutions comprises Nordea Bank Danmark A/S, Danske Bank A/S, Jyske Bank A/S, Sydbank A/S and Nykredit Bank A/S.

54 Source: http://www.finansraadet.dk/

As the table shows, the five largest banks hold 81.4% of the total deposits in the market and their balance equal 88.5% of the total assets in the sector. The high concentration indicates an oligopoly in the financial sector in Denmark.

In economics there is the Panzar and Rosse (1987) H-Statistic that is used to discriminate the competition in the banking sector. According to Claessens and Laeven (2004) the H-Statistic is the more appropriate measure of degree of competition than other conducts of measurements. Also Shaffer (2004) supports that view, by arguing that the H-Statistic is derived from the profit-maximizing equilibrium conditions. Cetorelli (1999) approves the H-Statistic as he argues that concentration measures are weak indicators when markets are contestable or undergo a major restructuring like in the financial crisis. Consequently competition can only be observed by elaborating on data of bank-level. This is done by the model by two steps. The first step is to run a regression for the gross total revenues and the measures of banks’ input prices. Then, the estimated coefficients for each input price are added. Input prices include the price of deposits, the price of personnel and the price of equipment and fixed capital³⁵. Given the theoretical appeal, the H-Statistic is also applied by major financial organizations such as the international monetary fund (Schaeck & Čihák, 2007). The H-Statistic ranges from minus infinity to plus one, whereas a higher value indicates higher competition.

In 2013 Denmark reached a score of 0.50, the EU area of 0.74 and Sweden of 0.95. That indicates that Denmark has less competition than the average in the EU. This result indicates an oligopoly.

35http://econ.worldbank.org/ Category: Key Terms Explained.

Group 1 Working

capital Total

equity Total

deposits Balance

Danske Bank 1,305,391 153,921 842,434 2,276,448

Nordea Bank Danmark 386,849 44,677 327,653 584,490

Jyske Bank 208,426 27,562 142,828 316,258

Nykredit Bank 103,996 12,576 65,440 228,920

Sydbank 101,457 11,311 85,020 152,839

Total Group 1 2,106,119 250,047 1,463,374 3,558,956 Total Group 1-2 2,350,559 285,132 1,665,113 3,851,184 Total Sector (1-3) 2,508,036 305,569 1,798,586 4,019,460 Percentage Group 1 of total 84 81.8 81.4 88.5 Percentage Group 1-2 of total 93.7 93.3 92.6 95.8

55 An oligopoly challenges Danske Bank to take the right strategic decision and conduct sound competitor analysis. Moreover the Danish financial market assimilates a pure oligopoly, as the financial institutions basically offer the same products (Markiewicz, 2013). This fact makes it even more difficult to distinguish Danske Bank from other competitors. Danske Bank’s approach focuses for instance on individualized products for customers, ease of use of e-banking, value creation through benefit programs, cooperation with large-scale companies or investments solutions in sustainable companies and products. As financial products are similar throughout the market, Danske Bank’s strategy has to emphasis the improvements of the customer experience and the value added for the customers.

However Danske Bank is the largest financial institution in Denmark according to the balance sheet, total equity, total deposits and customer base. This gives Danske Banks an advantage in terms of economy of scale that allows for more efficient operations compared to smaller financial institutions in Denmark. In turn, higher profits are generated that allow for investments in upgrades and innovation such as Danske Bank’s mobile banking platforms and MobilePay. Smaller financial institutions face difficulties to come up with innovations, as capital for investments in R&D is limited. As Danske Bank continuously focuses on improvements, especially commercial customers choose Danske Bank in order to be on top of the novelties in the Danish financial sector. Thus the economy of scale allows Danske Bank to maintain the leading market position in Denmark and expand its market penetration in Scandinavia.

Other customer segments however face different demands and needs than local customers and clients. For instance, internationally oriented customers request local services in all countries they operate in. As Danske Banks majorly operates in Scandinavia, banks like CitiBank supports international clients entering or operating in Denmark. Activities entail IPOs and all kinds of advisory services. As a consequence Danske Bank may encounter a loss of large corporate clients in the long run, as the globalization proceeds and larger clients demand local services in foreign countries they enter. In contrast to most companies which focus on international expansion, Danske Bank’s strategy is to narrow down the core market.