The analysis and review of the external and internal factors of the Nordic, Baltic and Polish banking market is summarized in the SWOT analysis, see Table 7. This is done to get an overview of Nordea.
Table 7. SWOT Analysis
Internal Origin
Strengths:
Market leader in some segments Broad variety of products Customer segmentation
Closeness to the market through branches Nordea‟s “Prudent Growth”
Nordea‟s “People Strategy”
Employee satisfaction
High Service & Loyalty score – B2B Technological development
Weaknesses:
Low Service & Loyalty score – B2C Too big – Not personal
High exposure to the Nordic and Baltic regions Bureaucracy
Technological development
External Origin
Opportunities:
Government induced stability measures Economic recovery in 2010
Fiscal stimuli from governments Increasing market sizes
Increase in wealth
Significant market share in all markets Largest bank in Scandinavia
Basel III
High Level of education High credit rating
Threats:
Political, economical, and social instability in Latvia Prolonging of economical downturn
Reversal of fiscal stimuli Double-dip
Highly competitive environment Basel III
Loan losses
Interbank markets – Risk premiums
Decreasing market size in the Baltic area and Poland
Source: Own creation
Internal Origin (Strengths and Weaknesses) Market Dominance
Through a broad variety of products and a customer segmentation strategy which meets the demands of the customers, Nordea has been able to establish a dominant position in the Scandinavian and Eastern European market. Furthermore, a high employee satisfaction has been accomplished through the People Strategy. Nordea‟s people strategy is a strength as it assures that Nordea has motivated and educated employees to support all of the operations Nordea
performs. Nordea‟s service and loyalty score with B2B customers has been increasing the last couple of years and is expected to do so through the high focus Nordea pays to this area. The largest weakness for Nordea is the B2C service and loyalty score compared to is closest competitors. Nordea has a lot of focus on the B2C area but this focus does not shine through on the ranking in B2C service and loyalty scores relative to its competitors. We assume this is due to Nordea‟s size, which has led the bank to become more impersonal. However, overall, Nordea‟s dominant position is expected to be maintained in the future and further market share is expected to be gained.
The current market share and dominant position has especially been reached through the prudent growth strategy. The strategy is expected to continue giving Nordea a competitive advantage compared to its closest competitors. Nordea is expected to focus on new initiatives to support the prudent growth strategy. Most noticeably: growth in Finland, growth in the corporate market in Sweden, and growth in Poland176. We find this realistic as the financial crisis, as seen in the economical analysis under PESTL, has not impacted Finland and Poland so heavily. Thus overall Nordea‟s strategy is in line with our findings. However, regarding the expansion plans in Sweden, we associate this with some risk and uncertainty due to the strong influence from the Baltic region, especially Latvia, on the Swedish economy.
A weakness for Nordea is the concentration in the Nordic and Eastern European regions. Nordea is highly exposed to risk in specific regions and if one country defaults, this will result in other countries in the region having difficulties, which in turn will impact Nordea harder.
In theory, Nordea could have huge opportunities for growth in the emerging economies of Africa and the Asia Pacific region. The sustained dynamism in the Asia Pacific economies presents a huge opportunity for the bank‟s business to gain momentum. In Africa approximately 90% of the population is believed to have no access to banking. In Asia, the market potential in countries like India and China provides huge opportunity for the bank to expand its operations. Both countries‟
economies are growing at significant levels and there is still huge unmet demand for banking
176 DnB NOR
services. According to estimates177, the average growth for major Asian economies will be 4% in 2010. There is significant growth in the middle class population in India bringing the total of 22 million new customers in the market per year and will reach 250 million by 2010. Similarly, China‟s credit-card market will reach 75 million by 2010. Thus, the bank could continue its growth and expansions in the African and Asia-Pacific markets, in order to become less exposed to a single region.
External Origin (Opportunities and Threats) Market concentration
An opportunity for Nordea is to gain further market share in all markets and substantiate its position as the largest bank in Scandinavia. A threat for Nordea is the highly competitive market.
As Nordea operates all over Scandinavia and in the Baltic region, the bank has a lot of competitors. Some of these competitors only focus on one or two markets and compete with Nordea for the highest market share. It is interesting to note the highly competitive situation in Poland as Nordea is planning on expanding aggressively here. However, with Nordea‟s previous track record in the Baltic countries we believe that Nordea will also succeed here.
Market sizes
The market sizes in Scandinavia are increasing due to population growth. However, there are decreasing market sizes in the Baltic countries and Poland. These are two markets where Nordea is increasing its number of branches, with the main focus on Poland. If the market size decreases significantly, this could, ceteris paribus, result in a lower income than expected for Nordea, and could, in the worst case, turn out to be an expensive decision. This is more relevant in the Baltic countries rather than Poland as Poland has a very large population. There is a slight leaning towards a more deposit oriented market over the next 10 years in Nordea‟s markets, but there is no overwhelming trend in either the loan or deposit segment. Furthermore, from 2000 to 2008 almost all of Nordea‟s markets have seen an increase in wealth. Overall, the total population that Nordea serves will be stable and as wealth increases so will banking potential.
177 Arctic Securities
Basel
Basel III is an opportunity for Nordea. The highly expected new Basel III with new tighter regulations for the whole banking sector has left many banks anticipating what the impacts will be. Nordea is one of the few banks in EU that have given any guidance on the impact of the new regulations. Nordea is ready for the new regulations and a relatively safe haven when it comes to these178. We therefore expect Nordea to be able to increase its markets share as the bank is able to continue is current strategy and will not have to make special changes that will hinder competitiveness, which we predict that other banks will need as a result of Basel III. However, the implementation of Basel III could also be a significant threat for Nordea, if regulations turn out to be harder than expected.
Economic recovery
Economic recovery in 2010 is an opportunity for Nordea as this would bring financial stability and growth to the markets that Nordea operates in. Furthermore, it would reduce loan losses which are a significant negative figure in Nordea‟s annual report 2009. However, this recovery will be uneven in Nordea‟s markets. Growth in Poland is expected to increase significantly and seems less affected by the crisis. Latvia on the other hand has a long recovery period ahead, due to its need to restructure the industrial sectors towards more export orientation; otherwise a quick recovery will lead to a quick current account deficit and to another crisis.
The economic recovery has already been helped on its way by fiscal stimuli from governments all over Europe. Governments, in most of the markets that Nordea operates in, have positively supported the banks both from a consumer perspective and from a financial stability perspective, thus laying the ground work for future growth. In this regard a reversal of fiscal stimuli packages by local governments is a threat for Nordea. There is considerable risk that the reversal of fiscal stimuli caused by the need for fiscal consolidation in major OECD countries could lead to a second double-dip in 2010 or 2011179. A double-dip would lead to further turmoil in the global and local financial markets. This could again impact loan losses and would be a clear threat to Nordea, as Nordea would be hit hard by a further increase in loan losses. Furthermore, the
178 Deutsche Bank, “Nordea”
179 Mayer Brown, “Summary of Government Interventions in Financial Markets: Finland”
interbank markets would most likely once again increase risk premiums and it would be hard for banks and financial institutions to find short-term financing at a reasonable price. The result could be banks collapsing and governments actively bailing the worst banks out. The development of the economies remains very hard to predict, which is why a sensitivity analysis will be done when valuating Nordea.
In any case, the effects on Nordea from the macroeconomic factors is likely to pose challenges for Nordea over the next few years including more subdued loan growth, high non-performing assets, and reserve building. Pressure is also expected on the net interest margin, varied fee income performance and more controlled operating expenses.
Latvia
The largest threat for Nordea in the short-term is the instability in Latvia. The political, economical and social instability in Latvia could get out of hand and send shockwaves throughout the Baltic countries thereby affecting Scandinavia through the high exposure Swedish banks have to the Baltic region. Even though Latvia contributes with a relatively small amount on Nordea‟s income statement, loan losses for the country have significantly increased. We therefore find it necessary to analyze Latvia in order to determine previous, present and future developments in the Latvian economy and how this will affect Nordea.