Trust is everything to a bank. With a strong local presence and a long history as society-serving institutions, the Norwegian savings banks (“sparebanker”) enjoy a high degree of trust in their local communities.
– Parts of their profit is injected back into various causes and activities within their own local communities, which is quite unique, Tilley points out.
"The savings banks are more than just providers of regular banking services."
These factors affect the savings bank right now
Tilley mentions three key factors – interest rates, uncertainty, and consolidation:
– First of all, increasing interest rates have lifted the banks’ profitability. At the same time, we see that lending growth is falling, pointing towards fiercer competition going forward. Secondly, there is uncertainty about the economic development and the risk of increased losses. Thirdly, we already see increased consolidation in the sector, and I expect that development to continue in the coming years.
More than 100 banks are competing for Norwegian customers. The competition, especially on the lending side, is fierce.
– At the same time, many of the large banks have been increasingly clear about prioritizing profitable growth. Fewer banks are chasing growth on obviously unprofitable price levels, Tilley says.
"They have become more disciplined."
Joining forces in Norway’s largest savings bank
Recently, it became known that Sparebank 1 SR-Bank and Sparebank 1 Sørøst-Norge will merge into Norway’s largest savings bank – and the third largest bank overall. The new savings bank will be named SpareBank 1 Sør-Norge.
– We have seen many mergers between smaller banks the past few years, but this one stands out as it is two large banks without overlapping market areas that are merging. The SpareBank 1 customers will probably not experience too many changes, but SpareBank 1 Sør-Norge will become stronger within their markets, he says.
SpareBank 1 Sør-Norge will serve a market area covering large parts of Southern Norway. Local competitors will probably also look at structural options, according to Tilley:
– I would not be surprised if this creates further incentives for other banks in the area to investigate structural possibilities.
– Efficient and profitable banks are good for society. The savings banks foundations (“sparebankstiftelsene”), which are among the owners, gets more money over time to spend on positive efforts to strengthen their surrounding areas.
The heart beats for the local community
The savings banks are good at long-term thinking and understanding the communities in which they operate, Tilley claims:
– This means that they are there for their customers, in good times and bad, to a greater extent than large, Nordic banks. This is mostly positive, but sometimes individual banks take surprising losses, seemingly because they have been too eager to to support local projects. Investors may also feel that they have less impact in a savings bank due to their capital and governance structure, andmany of the listed banks also have relatively low liquidity.
– We sometimes get the impression that Norwegian savings banks are money machines overflowing with cash. Is there some truth to that?
– There are several factors explaining their solid earnings these days. Deposits grew significantly during the pandemic. Much of the growth came in transaction accounts, where banks generally do not pay interest. The savings banks’ interest income now rises faster than the costs, mainly because the interest rates on savings and current accounts rise lesser than lending rates. Also, these banks have solid balance sheets with lots of equity that they can now get a better return on, when rates are at 4%.
"These factors, combined with low loan losses, results in a period of higher profitability than normal."
Looking into the crystal ball, Tilley predicts increased consolidation resulting in fewer, but larger savings banks during the next few years.
– Not because there is anything wrong with Norwegian savings banks – on the contrary, as they are extremely well run on an international scale. However, larger players will be better equipped to tackle increasing costs and the need for competence within digitalization, ESG and compliance.
– Do you have any recommendations?
– Going forward, our view on the sector is generally positive. Especially towards the banks along the coastline, as we believe that the economic activity will hold up better in those areas. Sparebanken Møre (MORG) and SpareBank 1 SMN (MING) are among our favorites, Tilley concludes.
Please note that Arctic Securities AS acted as financial advisor to Sparebank 1 SR-Bank ASA in connection with the merger and in connection with the recent private placement.