As long-term negative interest rates reshape life in the Nordic region, its biggest bank is trying to reinvent one of its most important business areas.
Nordea Bank Abp says it’s rethinking how it does market making — a service that helps investors carry out securities trades and ensures liquidity — in an effort to adapt to long-term negative rates. The decision, which is also a reaction to bigger capital requirements, means Nordea will cull its inventory of securities needed to execute trades. Keeping those products on its shelf has simply become too costly.
Martin Persson, head of wholesale banking at Nordea, says the goal is to free up capital and redirect it to more profitable corners of Nordea.
For 20 years we’ve had a positive carry on holding bonds,” he said in an interview. “It’s been a pretty good business. But when we have a negative carry now, and we still take on a lot of volume, then we just need to change.”
From now on, Nordea will be a lot more selective about what it holds in its fixed-income trading book, and how long products sit there, Persson said. The more stringent approach comes as Nordea struggles to steady itself after years of faltering profits. It’s cut thousands of jobs, thrown vast sums of money into upgrading its technology platform and sold off riskier businesses. But investors have complained that the measures failed to revive revenue and didn’t do enough to rein in costs.
Last month, a new chief executive officer was brought in to fix things. Frank Vang-Jensen, a 52-year-old who’s held numerous top jobs at the biggest Nordic banks, has made clear he wants to go through “every single cost” at Nordea. Watching his every move will be an activist investor that bought its way into Nordea a little under a year ago, Cevian Capital.
Since taking over, Vang-Jensen has targeted Nordea’s wholesale banking business, which is home to some of the bank’s best-paid employees. He’s announced dramatic cuts to the amount of capital he’ll allocate to the unit. There have been high-profile departures, and complaints that morale has taken a severe hit as the retrenchment plan unfolds.
But Vang-Jensen is responding to investor demands. Cevian says the revamp of Nordea’s wholesale unit is long overdue. It was the only corner of the bank to report falling profits in the third quarter.
Persson acknowledges that other banks in the Nordic region have been faster to respond to the tough environment. He also says Nordea has faced a “perfect negative storm.”
When it comes to negative rates, Persson says the inversion of the yield curve that hit earlier this year was “horrendous” for business. Then there are the higher capital demands for the bank’s trading and lending books. This year alone, those demands are up about 15%, Persson said. And finally there’s Nordea’s decision to exit risky markets, such as Russia, leveraged buyouts and shipping loans. While it fits with the bank’s broader goals, the move has dented revenue.