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DNBs bid on Sbanken on Thursday came as a surprise for many, but for bank analysts and others who know the regulations of the banks, it should perhaps not be so surprising.
DNB justifies its offer with the fact that they gain increased market shares and achieve cost synergies. Furthermore, it is emphasized that they will have access to a good technology environment in Sbanken, with experience in developing customer-friendly solutions. The skeptics believe that DNB in this way gets rid of a troublesome competitor that has long challenged the established banks with fee exemption, open price structure and good digital surfaces for customers.
Sindre Noss (Photo: Elin Høyland)
What does not appear in the media is that Sbanken’s mortgages are more valuable to DNB’s shareholders than to Altor and the other shareholders in Sbanken. The reason is that Sbanken must hold more equity behind each mortgage than DNB needs. The so-called risk weights for mortgages in Sbanken are 35 per cent, while the same mortgages in DNB weigh 20 per cent.
The regulatory requirements for banks are thus different. DNB is allowed to use so-called internal models when calculating the risk on its loans. The bank, for its part, must use standard models, and is not allowed by Finanstilsynet to use internal models.
Why is it like that?
You almost have to ask Finanstilsynet about that. It’s not fair.
You almost have to ask Finanstilsynet about that. It’s not fair
Return on equity is the key figure that most bank investors are concerned about. When Sbanken has to keep 75 per cent more equity behind its mortgages than DNB, the return on equity on mortgages is worse.
The bank’s assets are almost exclusively mortgages. Their customers are often well-adults in central areas with good security and a low loan-to-value ratio. These mortgages offer a very low risk of loss in any risk model.
The problem is that for Sbanken under the standard model, they must keep the same amount of capital behind each mortgage – regardless of risk.
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If DNB is allowed to buy Sbanken, their lending will be consolidated in DNB’s balance sheet with a lower risk weight, equity will be released and investors will have a higher return on their capital.
Had Sbanken been allowed to use the same regulations as DNB, I’m not sure Altor had been just as willing to sell at the price DNB is now offering. The bank may be best in class in terms of cost efficiency and customer satisfaction, but they may not be 75 per cent better than the major banks over time.
Finanstilsynet should accept that banks such as Sbanken could also have used internal models for capital calculation. Then perhaps Sbanken could have stood on its own two feet, and competition in the Norwegian banking market had been prevented from weakening.(Terms)Copyright Dagens Næringsliv AS and / or our suppliers. We would like you to share our cases using a link, which leads directly to our pages. Copying or other form of use of all or part of the content, may only take place with written permission or as permitted by law. For additional terms look here.
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