A $1 Trillion Asset Management Boom Is a Guide to Nordic Banking

(Bloomberg) -- After years of world-record-setting negative rates and some of the planet's toughest capital requirements, Nordic banks are doing less traditional lending and a lot more asset management.

The question is whether that's the outcome the authorities setting the regulatory and monetary environment had hoped for.

At Nordea Bank AB, the Nordic region's largest financial conglomerate and a global systemically important bank, its $360 billion in assets under management now exceed lending assets. The six biggest Nordic banks managed a total of $1.07 trillion at the end of March, about 11.5 percent more than a year earlier, according to quarterly figures (including pension savings) published by the lenders in the final week of April.

Read more: Nordea rebels against Sweden's regulatory environment

For DNB ASA, Norway's biggest bank, “wealth management is becoming more and more important because assets under management will grow,” Chief Executive Officer Rune Bjerke said in an interview. Part of this relates to recent changes in Norway's pension system, with guarantees being replaced by a model in which savers bear more risk.

‘Capital Light'

The overarching theme is one of finding a business model that the industry has dubbed “capital light.” Managing other people's money doesn't generate the same capital requirement as lending, and assets under management don't enjoy the same protections as deposits. Managing assets simply costs less than traditional banking, especially as negative rates make a mockery of the business of generating an income from lending.

Meanwhile, the lending environment remains challenging amid a lack of demand. Corporate clients (which, unlike retail customers, get the cost of negative rates passed on to them) are proving harder to attract. The Danish central bank said on Tuesday that demand for loans among businesses remains weak and competition to provide credit is prompting banks to ease their standards.

But the beauty of wealth management is that it “is first and foremost a capital-light business,” Bjerke said. And with demand for lending outside mortgages comparatively weak, there's every reason to look for alternative revenue streams. “We are gradually trying to become less dependent on net interest income and have a better mix on the revenue streams in the future banking model,” Bjerke said.

Inevitably, as the industry decides that wealth management is the new cash cow, competition will intensify. But Bjerke says he's confident profitability will still be attractive. That “will be gradually more and more visible,” he said.

Feeding Revenue

At Danske Bank A/S, the second-largest Nordic bank and the biggest lender in Denmark, assets under management at its wealth unit grew about 8 percent last quarter to 1.46 trillion kroner ($214 billion). Jacob Aarup-Andersen, Danske's chief financial officer, says management is less concerned about keeping costs down at its wealth unit than elsewhere in the bank. Nordea is taking a similar approach, with annual costs at the wealth units of both banks climbing 11 percent last quarter.

“Wealth is not a cost game for us,” Aarup-Andersen said on a conference call. “Wealth is very much a top-line and scale game.”

Smaller institutions are also altering their business models. Jyske Bank A/S, Denmark's second-largest listed lender, said on Tuesday that an acquisition of an affiliated fund manager in February will ensure it can become a “significant asset manager.”

To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at fschwartzko1@bloomberg.net.

To contact the editor responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net.