Scenarios for the Nordic Financial Industry 2009


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The success of Nordic financial companies will depend on finding corporate structures suitable to meet future market conditions. As these market conditions are hard to predict, PA Consulting Group has developed scenarios to explore possible future conditions and structures. Preparing a robust, jet flexible strategy for each of these will help Nordic organisations through the current crisis.

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Scenarios for the Nordic Financial Industry 2009

  1. 1. Pray or predate Scenarios for the Nordic Financial Industry February 2009 Alexander Huun Please find article at: ons/perspectives/industry_scenarios.htm
  2. 2. The world seen from the outskirts of the financial crisis The year it all happened: • In October 2007 the Norwegian “Terra scandal” introduced the Nordic audience to the fact that there were some highly speculative US securities in circulation • February 17, 2008 the nationalisation of Northern Rock was the first evidence that the US subprime issue had a wider geographic relevance • August 25, the collapse of Roskilde Bank introduced the Nordics to this new agenda • The financial crisis was however at large deemed as a US problem till the September 14 collapse of Lehman Brothers. This collapse brought the financial crisis across the Atlantic overnight For the Nordic countries the crisis has till now primarily been a liquidity crisis for the banking sector, which in turn is slowing down the economy at large. The one exception is Iceland where the October nationalisation of the three major banks and the immediate economic collapse, position Iceland in a category of its own. For this reason, Icelandic issues are not included in this presentation. © PA Knowledge Limited 2009. Pray or Predate - Scenarios for the Nordic Financial Industry 2009.ppt Page 2
  3. 3. Beyond the gloom of the financial crisis The financial crisis has raised a number of policy issues: • Have interest rates been held artificially low for a decade or more? • Should we allow securitisation of mortgage portfolios (subprime)? • How should we deal with the lack of transparency and risk management of financial institutions? • Is nationalisation of banks the best approach? These questions, and many more, has made the future political and regulatory environment difficult to assess. The effect of the financial crisis on the economy is equally uncertain: • Will the “liquidity trap” close on us as real interest rates head for negative values? • Is a credit growth that has outnumbered the economy three times in three decades sustainable? • What is the consequence if the Asian economy crumble? Looking beyond the immediate visible effects of the financial crisis to be able to choose appropriate strategies has not been this difficult in our lifetime – and is therefore Scenario Modelling material. © PA Knowledge Limited 2009. Pray or Predate - Scenarios for the Nordic Financial Industry 2009.ppt Page 3
  4. 4. Finding the right business model will be imperative to future success The cause and effect rationale Modelling strategic environments • International and Nordic finance and economy can develop in very different The unspoiled directions Economy Nordic • International and Nordic policy makers can react in several ways to different economic From recession developments to depression • The combination of possible economic International National solutions agendas developments and possible political and regulatory reactions defines a set of strategic environments • Different strategic environments will favour Political and regulatory different corporate structures for the Nordic Financial Industry © PA Knowledge Limited 2009. Pray or Predate - Scenarios for the Nordic Financial Industry 2009.ppt Page 4
  5. 5. The macroeconomic development is highly unpredictable The unspoiled Nordic From recession to depression Expansion of public sector and extended Recession in private industry and service Unemployment education reduce unemployment sector creates massive unemployment Social security and pension systems Vastly reduced asset values combined with Purchasing power maintain purchasing power of unemployed unemployment reduce purchasing power Relative stabile economy strengthens the High volatility of SEK and DKK forces the Currencies currency and gives room for interest cuts Nordics into the Euro zone Cheap import prices and strong currency Interests hit the “liquidity trap” as Inflation and interest reduce inflation and interest rates economies decline and deflation grows Stable demand in densely populated areas Massive defaulting of mortgage loans Real estate cushions the fall in real estate prices sends real estate prices through the floor Longer education and less jobs for young Collapse of asset and house prices create Allocation of wealth people reinforce trend of “wealthy elders” a massive shift of wealth to younger people Tax based pension funding and good Cuts in public spending hit pension rights Pensions and saving public sector pensions maintained and end government “pay-as-you-go” © PA Knowledge Limited 2009. Pray or Predate - Scenarios for the Nordic Financial Industry 2009.ppt Page 5
  6. 6. The political and regulatory future is highly unpredictable National agendas International solutions Restrictions on government funds and No restrictions on deployment of Rescue packages financing to be used domestically government funds and financing Governments will choose to nationalise Governments will choose to let financial Ownership financial institutions becoming insolvent institutions be acquired or go bankrupt Government taking over defaulted loans Governments guaranteeing all deposits Financial assets owed by citizens and national businesses made in banks operating within its borders National authorities will make political Basel II and Solvency II will establish Solvency judgements of capital requirement needs uniform international capital requirements National restrictions to what assets International regulation on what assets Financial instruments financial institutions can own and issue financial institutions can own and issue National restrictions to legal structure, Free competition across boarders through Competition customer data, marketing, selling etc. international standards and regulations National legislation creates distinctly local International legislation creates Products products and distribution international products and distribution © PA Knowledge Limited 2009. Pray or Predate - Scenarios for the Nordic Financial Industry 2009.ppt Page 6
  7. 7. Using scenario modelling to structure the uncertainty The ocean of uncertainty • Scenarios can best be described as lighthouses helping us to navigate on the ocean of uncertainty • Scenario modelling is a framework for capturing the main uncertainties about the Scenario 1 future into a decision support tool. Typically Scenario 2 this results in four distinctly different descriptions of the future • Strategic options can then be tested against Future in scope the different scenarios to evaluate their robustness • Scenario modelling is distinctly different from prognosis making, as the aim is to identify extreme but probable futures. The analysis is primarily qualitative but can to some extent be Scenario 4 quantified Scenario 3 © PA Knowledge Limited 2009. Pray or Predate - Scenarios for the Nordic Financial Industry 2009.ppt Page 7
  8. 8. The key uncertainties map out different strategic environments Political and regulatory development National agendas International solutions The National agendas where The International solutions Nordic policies create where Europe achieves a economic islands aiming soft landing will be a drive to Macroeconomic development The unspoiled Nordic for ‘newer again’ through make uniform EU regulations improved transparency, per sub-industry starting the customer rights and privacy, scale game with the Nordic capital requirements etc. players in pole position The International solutions to The National agendas in a a recessive crash in assets global recession will be a values will be to ‘aid survival’ political agenda of stability From recession to depression through eased capital and control, predominantly requirements and structure nationalisation of the finance regulations favouring risk sector diversification © PA Knowledge Limited 2009. Pray or Predate - Scenarios for the Nordic Financial Industry 2009.ppt Page 8
  9. 9. Different strategic environments benefit different corporate structures The unspoiled Nordic Economic island Pole position Industry re-bundling Sub-industry specialists The scale game Transparency Regulations take the scale advantage out of Common regulations within EU per sub- complex organisations and scope advantage industry intermediaries, banks, life and development out of financial conglomerates: single focus general insurance encourage a race for scale International solutions companies within asset management, advantage: the Nordic players take the lead National agendas transaction processing, risk insurance, broker towards sub-industry specialisation and business, ATM operations, etc. outgrow geographic expansion. The financial traditional Nordic financial conglomerates conglomerates break apart Political and regulatory development Stability and control Survival of niche players European conglomerates Risk diversification Macroeconomic A large number of banks and insurers break European governments ease requirements their solvency requirements and the Nordic on the industry to help its survival and governments nationalise their respective proactively support acquisitions of distressed corporations rather than letting them be companies: massive industry consolidations bought by foreign competitors: Niche players commence to gain better risk diversification like local savings and loan banks and and economies of scope across the sub- specialist insurers will be the survivors industries and geographies of Europe Global recession Crash in asset values From recession to depression © PA Knowledge Limited 2009. Pray or Predate - Scenarios for the Nordic Financial Industry 2009.ppt Page 9
  10. 10. Main conclusion: structure is key strategic imperative • Most critical uncertainties relate to macroeconomic development and political and regulatory development • Other important uncertainties like customer preferences, new sales and marketing channels, technological developments and industry convergence with non-financial organisations will either correlate or be an indirect product of the above • Key strategic imperatives will be to aim for the right corporate structure: – Nordic models 1) De-bundle into Nordic single vertical focus companies 2) Demerge into local niche players – European models 3) Become large vertically integrated sub-industry specialists 4) Merge into European conglomerates • Taking the right strategic decisions requires: – Development of a company specific scenario model – Development of a scenario based strategy – Monitoring actual market development against the scenarios © PA Knowledge Limited 2009. Pray or Predate - Scenarios for the Nordic Financial Industry 2009.ppt Page 10
  11. 11. For further information, please contact… Alexander Huun Alexander Huun has supported clients across 16 countries, in developing and implementing +47 47 89 88 09 successful strategies including new business development and mergers and acquisitions. His main consulting experience is from the financial, retail and manufacturing sectors. Prior to joining PA, Alexander has had management positions in the automotive and pharmaceutical industry. Alexander holds an MBA from Edinburgh Business School. © PA Knowledge Limited 2009. Pray or Predate - Scenarios for the Nordic Financial Industry 2009.ppt Page 11