Bank to basics | The Economist

TWO years ago Swedbank, Sweden’s biggest retail bank, moved from its offices in the centre of Stockholm to a drab business park outside the city. Employees fretted about leaving their prime location, a few doors from the Riksbank, the central bank, and a stone’s throw from Parliament. The move, which has saved $25m-odd a year, was symbolic not only of the bank’s thrift, but also of its desire to retreat from the exciting but risky end of banking. Instead, much like the Scandinavian furniture in its office, it is returning to something simpler and more straightforward. That strategy has made Swedbank not only one of the safest in Europe, as judged by the thickness of its cushion of capital, but also one of the most profitable.

European banks are struggling. Economic growth is low; regulators demand ever more capital, and negative interest rates, which most banks do not dare to pass on to depositors, squeeze margins. All this, bankers tell aggrieved shareholders, has inevitably pushed returns far below their pre-crisis levels. Yet Swedbank has defied the inevitable. It is nearly twice as profitable as the average European bank, despite holding twice as much capital on a risk-weighted basis (see chart). Last month it announced profits for the first quarter of SKr4.31 billion ($510m), well above market expectations and virtually the same as last year (SKr4.32 billion), before Sweden and the euro zone adopted negative rates. This was doubly unexpected given the sudden departure of the bank’s CEO in February, amid criticism of his policing of suspected conflicts of interest among the staff.

Underlying the bank’s success is the idea that in the post-crisis world, running a retail bank is not that different from running a utility. The business strategy is simple: sell lots of dull, low-risk products while keeping operating costs as low as possible. Of its 8m customers, 7m are households. Mortgages make up 60% of its loan book. Although there is plenty that banks cannot control, Swedbank focuses relentlessly on what it can: cost and risk.

“Hard and sweaty work” is the only way forward, says Goran Bronner, the bank’s CFO. Swedbank has cut its staff by a third since 2009; slashed the number of branches in Sweden (it also operates in the Baltic states) from over 1,000 in 1997 to 275 today, and made all but eight of those completely cashless. Discipline on spending pervades the bank, from procurement (switching phone companies recently reduced its telecom bills by 58%) to staffing (it is moving part of the workforce to the Baltics, where wages are up to 70% lower). It is over halfway through a two-year plan to reduce group expenditure by SKr1.4 billion. The $1.6m salary of the new CEO, Birgitte Bonnesen, is modest for the industry.

As a result of this frugality, Swedbank has a cost-to-income ratio of 43%, meaning that 57% of the money it takes in can be distributed to shareholders or reinvested. This is over 16 percentage points more than the average for the EU as a whole. The Baltic branches are even more efficient, thanks in part to even greater use of digital banking than in Sweden.

The bank’s efforts to move customers from branches and phones to websites and apps are crucial to its success. In the future people may well only visit a branch once every five years, suggests Ms Bonnesen, who believes “extreme efficiency”, abetted by , is the nub of retail banking. Across the road from Swedbank’s headquarters, in a converted warehouse, 200 developers and business managers flit from breakout areas to meeting pods, planning this lean but customer-pleasing future. One of their most popular creations is the “shake for balance” function on Swedbank’s app, which allows users to shake their phones to find out how much money they have in their account. It is used 30m times a month.