Nordea Culls Securities From Market Unit Amid Negative Rates

(Bloomberg) -- 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 buy-and-hold culture needs to be reduced,” and Nordea needs instead to operate more like a broker, he said. The bank also needs to invest, since the currencies and equities markets are heavily driven by technology, and “fixed income is now also getting into the digital and execution game, big time, starting in the U.S. and then hitting us.”

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.

Other Nordic banks, which have lived with negative interest rates longer than many of their peers, are also struggling to adapt to the monetary climate. At Danske Bank A/S, interim chief financial officer, Jacob Aarup-Andersen, says the “difficult” rate environment is the main reason the bank is cutting 15% of its staff costs at its fixed income and currencies unit.

“It has not been a great trading quarter for anyone,” Aarup-Andersen said in an interview last week. “It’s been both illiquid and volatile in the quarter, and has been for a while.”

Persson at Nordea 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.

Persson says Nordea’s inventory of securities denominated in euros and Danish kroner has been troublesome. Much of the pain has come via Nordea’s government and mortgage books, “and the euro exposure where we have had a very large fixed-income business,” Persson said.

Nordea isn’t considering a total exit from market making, Persson said. That’s “not least” because it’s not feasible to be in Denmark and not be part of the mortgage business, he said. Nordea will also continue to do market making in government bonds, “but maybe not at all sizes and all costs,” he said.

Nordea will try to invest in technologies to speed up the turn-around time on transactions. But in areas where it can’t compete with the global banks that dominate the markets, Nordea will look for partnerships, Persson said.

The notion that a market maker could expect a “very positive carry on our fixed income, and wide spreads” belongs to the past, he said. “In the new environment, it doesn’t work.”

Nordea is languishing behind peers. Its stock is down more than 4% this year, compared with a gain of almost 4% by the Bloomberg Europe Banks and Financial Services Index.

To contact the reporters on this story: Frances Schwartzkopff in Copenhagen at fschwartzko1@bloomberg.net;Rafaela Lindeberg in Stockholm at rlindeberg@bloomberg.net

To contact the editor responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net

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