Finnish Banks are Relatively Small but Indicative of Trouble in Europe

Finland – may be a small country; but their problems are indicative of much larger general banking problem in the European Union.

The players are (loans and deposit give much the same result):

1)      Pohjola Bank plc (HEL:POH1S) 1/3

2)      Nordea Bank AB (STO:NDA-SEK) 1/3

3)      Danske Bank A/S (CPH:DANSKE) Bank 1/8

4)      Swedbank AB (STO:SWED-A) 1/20

5)      Others (a lot of them):  1/6

Total bank loans for the county: 170 bio. EUR.

What is immediately apparent is that half of the banking sector isn’t even Finnish!

It involves banks headquarted in two other currencies than the EUR. To make things even more complicated: F.i. Danske Bank not only owns Sampo but also has downright Danske Bank A/S (CPH:DANSKE) branches in Finland. Normally footnotes is something you – at best – glance over briefly; but in the case of the finnish banking sector footnotes and their clarification (if that is the right word) are so copious that they in themselves indicate a terrible mess.

One can imagine the task for the Finnish CB CEO keeping the right supply of money in the country! Not to mention the political task of creating a balanced growth. Naturally the Finnish housing market is dead, as it is in all other countries. But I would bet it safe to say that the finance sector is a much larger problem in reality than the Finnish economy.

Of course the position is untenable in the longer term; but the problem is how to clean up.

On an apparently other tack Nordea Bank AB (STO:NDA-SEK) is approximately 20% of the Danish financial sector.

This last fortnight there has been a lot of drama centred on the Airline SAS. True the staff is overpaid and union wise over-organised and falling over its own feet. True that SAS is a waste disposal grinder for money with antique airliners in their fleet; but so they have been for years – aye decades. What makes now so special that economic responsibility suddenly enters into the banks and boardroom?

I think the problem is to be found elsewhere and is much more down to earth – if you forgive the bad pun.

This must remain speculation, as no one – for obvious reasons – has found it appropriate to divulge the ultimate truth – not to me at least:

The real problem is Nordea (and has not anything to do with Finland) and its involvement with Danish banking and real estate mortgage. I think the real estate mortgage is the current headache:

I deduce that from a number of other events:

1)      The peculiar bankruptcy of Tønder Bank and the decidedly weird behaviour of Sydbank’s CEO. What has totally escaped the public eye is that simultaneously there have been two or three other bank mergers (I keep losing count) where small agricultural banks have merged with slightly larger agricultural bank or with each other. Generally involving some rather nasty impairments.

If homeowners are heavily in debt with flexible interest no service on principal loans, then farmers are absolutely rabid.

2)      House prices have “stabilised”; but figures from Q3 have yet to be released. One reason might be, that the heavily debt ridden, grotesquely overvalued condominium market in the capital is so absurd that the statistical office as a matter of course reject ¼ of all deals as – definitely NOT indicative of a market price – whatever that might be. But this “stability” offers a platform for the calculation of consequences that precedes any larger government initiative. Notably enough there has been some utterances of purpose optimism from the local assembly of deranged real estate agents; but none too bad.

3)      There has been some  movement – very recently – in small and medium business financing where access to issue bonds is opened up for these firms – thus lifting them out of the credit squeeze of the banks – and the grip of the real estate mortgage that has provided these firms with longer term investment credit.

Getting back to the point with Nordea:

The Danish CB can extend credit to Danish banks on the basis of “good loans”. True and it does it. BUT what about Nordea? It is a Swedish (partially) state owned bank. The Danish CB extending loans that the Swedish CB should? NO WAY. But the odd 5 bio. EUR in funds sloshing to and fro Sweden and their currency to the DKK is NOT conductive to financial stability.

Now apparently the only way to make Nordea behave (asking nicely brings nothing but insolent and snotty remarks) was to hammer them with a nasty major loss – here SAS was an appropriate anvil. The Danish state would lose their shares; but realistically that happened a long time ago, and a bankruptcy sale of SAS would enable a new Danish airline to emerge with debt free planes (there are lots of well maintained cheap planes on the market – Spanish Airlines to mention one downsizing), adjusted wage and salary staff plus all the interesting landing slots and terminal positions in CHP (Kastrup Airport) up for grabs.

Nordea is the major creditor in SAS with apparently SEB and Wallenberg running second. Significantly SAS has all week been flying with fully loaded tanks and their newest Airbus planes – financed by French banks – have been reregistered to Norway (that has other credit default rules – they are not in the EU!). The PM was a real bitch when confronted with the unions whining – sending the Finance Minister on a disciplining mission to the unions making it perfectly clear, that if they did not toe the line a bankruptcy WOULD result).

Let’s put this way: The Danish government was really, really out to hurt somebody.

Now Nordea got a chance to fold SAS in an orderly way and thus minimizing losses. But what to the Danish real estate mortgages. Well we will have to wait and see how the possessions of the real estate mortgage bonds play out. There has up to now been 5-8 bio. DKK of them (variable interest no service almost all of them) “abroad” –and as no one in their right mind would invest in them overprices and under-secured as they are – there is really only one possibility: Sweden! It roughly fits Nordea’s market share on the junk real estate mortgage market. Danske Bank has apparently half a year ago been kept out of other countries by extending all together (Danish CB and ECB) 10 bio. EUR in credit.

We do however have current indicators:

1)      After the first “auction” of the season Nordea announced a “surprisingly” low variable interest mortgage rate. Buying yourself is NOT cheap, when your product is trash.

2)      At the beginning of the week CB deposits dropped from 288 bio. DKK to 248 bio. DKK. The 40 bio. DKK raises it head again.

Now two questions:

A)     Why enter into such wild speculation? Well if you are satisfied with the Walt Disney version of politics and banking – be my guest – it is (or rather was) your money, not mine.

B)       Why this twisted and at times incoherent account?

The answer to the latter is: The described events and problems are totally in line with policies that have crystallised over the past year or two all over Europe: Banks are being split up and de-globalised. Each country in the EU has its own set of problems to deal with; but none of them are to be offloaded on your neighbours – the EUR will be defended with any means preferably ones “unfair” to banks.

Now compared to the Finnish problem this is small potatoes and the question is how Danske Bank will make a similar retreat from Sweden and Finland. Nordea seems to be in for a severe and painful future. Getting out of 50 bio. EUR in loans is going to be expensive.