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Prepare for a smaller, leaner financial sector

With the big three Swedish banks having now reported, it’s clear that, despite the relative health of the Scandinavian economies compared with many parts of Europe, we’re in for a prolonged period of cost-cutting and downsizing.

In its Q3 results, SEB president Annika Falkengren announced that the bank’s ambition to cap costs, at SEK24bn for this year, would be extended to 2014, with a further SEK3bn of costs set to be taken out.

“The gross savings are focused on more effective procurement, IT development, loan operations, staff functions as well as overall simplified processes,” she said.

She echoed her respective Nordea and Swedbank counterparts Christian Clausen and Michael Wolf in predicting a more expensive regulatory environment and greater requirements to hold capital and liquidity would compound the tough economic climate and put banks’ earning potential under pressure.

“Rarely in modern times has the economic landscape and the requirements on the financial markets – and the banking industry in particular – been more uncertain,” Falkengren warned.

Nevertheless, in the short term, investment in SEB’s Nordic and German operations had increased full-time staff numbers by 359 to 17,403 since the third quarter of last year, meaning staff costs increased to SEK10.565bn, from SEK10.456bn, she added.

Longer term, Nordic banks, much like banks across Europe, are looking at a future where they will have to be smaller and leaner – and where hiring will be, at best, constrained – predicts Espen Furnes, an Oslo-based fund manager at Storebrand Asset Management.

“It is obvious we are in an environment where banks are going to have to be prepared for low growth for quite a number of years,” he says.

“I think, to an extent, the corporate divisions of most banks are now pretty streamlined so the pressure there is not going to be as great. The pressure will more be on retail banking where it is much harder to pass extra costs on. So I do think we while see more branches being taken out.

“I suspect that over the next two to three years we will see more job reduction programmes, more layoffs, but it will not be massive numbers, just a gradual progression.

“Within investment banking, some banks inevitably are going to fare better than others, and some may look to scale down. So I think people are going to have to be very conscious of where it is they are working, there is not going to be any big hiring going on,” he adds.

“It’s not just about Nordic banks, it is a sector-wide theme. All banks are going to need to become smaller,” agrees Nick Anderson, an analyst with Berenberg Bank.

“Having said that, it’s too early to be talking about details of where cuts will need to be made. But cost-cutting and restructuring is the direction they will be having to go in,” he adds.

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