Pandemic-driven cash hoarding by households and businesses has been evident on Nordic banks' balance sheets since they released first-quarter 2020 results. A boom in deposit inflows this year is causing an oversupply of liquidity for the banks, and while this comes with immediate net interest income headwinds, some lenders see it as a longer-term opportunity to reduce their reliance on wholesale funding.
The sudden rise in deposits is not a Nordic phenomenon only. In fact, banks all across Europe saw "remarkable" deposit growth as the coronavirus pandemic hit the continent, recording an average increase of 9% in the first three quarters of 2020, according to Vitaline Yeterian, senior vice president for DBRS Morningstar's global financial institutions group, speaking at a webinar Nov. 17.
But Nordic banks have found themselves significantly above this average, with lenders in Sweden seeing deposit growth of 20%, those in Denmark 17% and those in Norway and Finland 13%, according to DBRS Morningstar.
There are multiple drivers of this trend, but all are an effect of the global crisis. On the retail side, customers have been "cautious in their spending behavior," said Salla von Steinaecker, director and lead analyst for Nordic banks at S&P Global Ratings.
On the corporate side, many businesses have drawn on the committed credit lines "as a precaution" and redeposited the cash with their banks, she said in an interview.
Central banks' funding programs and government packages to corporates and small and medium-sized enterprises have contributed to the "oversupply of liquidity," Yeterian told S&P Global Market Intelligence. Nordic governments' support relative to GDP has been "particularly high," she said, which explains why the region stands out on deposit growth.
Furthermore, preexisting levels of wealth were already high in the Nordics, with some customers there having sold equities in order to have access to cash during the crisis, she said.
Outgrowing lending
Banks, flooded with cash, have not been able to grow their lending at the same pace. In Sweden, for example, Skandinaviska Enskilda Banken AB and Swedbank AB (publ) recorded 23.3% and 21.2% deposit growth, respectively, in the first three quarters of the year, while lending for the two banks grew at only 1.2% and 1.9%, S&P Global Market Intelligence data shows. Norway's largest lender, DNB ASA, saw deposits rise 13.4% in the same period, while loans grew 2.3%.
Loan-to-deposit ratios for the largest Nordic banks have fallen in 2020 as a result.
This has had "a negative drag on some banks' net interest income," said Steinaecker. The trend is particularly profound in Norway, where the central bank lowered its key policy interest rate from 1.5% to 0% between March and May, while banks have not been able to adjust the deposit rates as quickly, she said.
DNB, for one, has said the negative effect of the rate cut on its net interest income is approximately 5 billion kroner annually, effective from the second quarter of 2020. The Norwegian lender has seen the largest drop in net interest income and margin this year among Nordic peers.
Wholesale funding
European banks will need to monitor whether the deposit growth is of a temporary or more permanent nature, Yeterian said. To the extent that deposits are sticky, there could now be a case for lenders to replace some of their wholesale funds by deposits, she added.
Swedbank has already said it will do this, but other Nordic banks could follow the same approach as long as those deposits consistently outgrow lending, she said.
Presenting Swedbank's third-quarter results, CFO Anders Karlsson said the Swedish lender had changed its funding plan "dramatically during this year," with volume trends leading to a "structural shift in our funding composition." Although deposit inflows had prompted "a small headwind in our [net interest income] due to excess liquidity being placed at central banks at the cost," this would only be temporary until the bank's wholesale funding matures down the line, he said.
For Finland-headquartered Nordea Bank Abp, a "very strong" net stable funding ratio has given it "the possibility to issue in the lower end of our guidance for the year," according to acting CFO Mark Kandborg. Going into 2021, the pan-Nordic lender could further lower its expected issuance, with the deposit inflow supporting funding costs, he said during a third-quarter earnings call.
While funding costs can benefit from low-rate deposits replacing more expensive maturing covered bonds, according to Yeterian, she said DBRS Morningstar expects the potential profit and loss impact will be small at this stage as deposits and new covered bond issuances are currently priced at similar levels.
She said the need for capital market funding has also been temporarily reduced because some Nordic lenders have used cheap central bank funding during the pandemic.
"In our view, the capital market funding will remain an important part of the Nordic banks' funding profile," she said.
Among the reasons behind this statement is the fact that banks across the Nordics will need to issue more and more senior nonpreferred debt to comply with regulatory capital requirements, such as MREL, Steinaecker said.
Covered bonds
Furthermore, covered bonds are today an important funding tool for Nordic banks' mortgage books, which Steinaecker said is unlikely to change. Denmark and Sweden are among the five largest covered bond markets in the world, according to S&P Global Ratings.
In Denmark, the mortgage system is generally based on a match-funding principle, under which mortgage loans are matched with specific covered bonds, meaning that Danish financial institutions would not be able to reduce their reliance on wholesale funding for this part of their books, said Pierre-Brice Béguinet-Hellsing, associate director covering Nordic banks at S&P Global Ratings.
The country's largest bank, Danske Bank A/S, also does not have any plans to change its funding patterns, said CFO Stephan Engels while presenting the bank's third-quarter results, adding that most of the deposit increases would not be permanent. Rather, in order to address potential headwinds from the deposit boom in a continuous negative interest rate environment, Danske has gone for a strategy of repricing deposits through an expansion of its negative rate regime on both retail and corporate customers.
As of Dec. 4, US$1 was equivalent to 8.79 Norwegian kroner.