That's why the banks are merging – E24

There are at least three reasons behind the marriage rush in the banking and financial sector, according to experts.

DNB swallowed Sbanken. Fremtind swallows Eika Insurance, while SR-Bank swallows Sparebanken Sørøst and becomes Sparebank 1 Sør-Norge.

On Wednesday, Sparebank 1 Østlandet and Totens Sparebank announced their merger.

The merger will not go unnoticed by DNB CEO Harald Sirk Hansen, who heads the bank's corporate division, which has more than 240,000 clients.

– There is beautiful music in the financial industry, Sirk Hansen tells E24.

He believes this is because players see synergies.

– You can also see that the need to invest in IT, digital solutions and regulatory monitoring makes it difficult for small units to operate cost-effectively, he says.

Strong capital

The largest bank believes that the development dates back to the financial crisis of 2008-2010, and that the financial industry has since built up more and more capital to meet more stringent requirements for strength.

“Many financial institutions now have good underlying capital coverage, and this enables them to carry out such transactions,” says Sirk Hansen.

Change of capital

Portfolio manager Magnus Vie Sundal at Borea Asset Management sees three reasons for this development.

First of all, there is the capital part, where the largest banks have their own risk models that give them lower capital weights than the 80 smallest banks, which have the so-called standard model with higher capital weights.

Capital weights are set by the Ministry of Finance, and in practice this means that large banks can have less capital behind each krone they lend than smaller banks.

Just before Christmas, on December 13, The Ministry of Finance announced a reduction in capital weights In the standard model, where smaller banks receive a slightly lower disadvantage as of January 1, 2025, the official notes.

“This means the beneficiary bank gets a capital advantage, and it can be so large that you can offer an offering premium and it still pays off,” says Sandall.

He points to SR-Bank's acquisition of Sparebank Sørøst-Norge as one example.

– If you can keep less capital behind each loan, you can, all other things being equal, make more loans, gain market shares, and/or get a higher return on equity, says Sandall.

Growth and synergy

Another motivation for the merger may be to increase income, he said.

– As we enter a period of lower credit growth, growing organically may be more difficult than growing through acquisition. At the local level, removing a competitor and reducing price competition can also be a factor, Sandall says.

The third element could be cost savings through merging two units.

SR-Bank and Sparebanken Sørøst-Norge have announced NOK 150 million in annual synergies related to operations and financing, while Sparebank 1 Østlandet and Totens Sparebank have not announced anything, the official notes.

– Those are the three motivators. We can also say that the costs of orders and regulations imposed by authorities are increasing in a long-term trend, and in this sense banks have an incentive to consider mergers. This applies at least to money laundering and the threat associated with it. With fraud, which means it can be beneficial to have slightly larger units, Sandall says.

– It was impossible

Investment manager Robert Ness at Nordea Investment Management believes the plug has become loose.

This makes the mergers we see now possible, according to him.

– Previously, it was impossible to make acquisitions because the prices of major banks were very low. Now that it has been priced out for a while Price/bookPrice/bookThe market value of securities compared to the book value of shares. Much higher than 1, they can buy other products at book value. Now it's possible, Ness tells E24.

He also points out that many of the banks that merged were in the same banking alliance, with identical IT systems.

This is believed to make the integration process easier.

– I also think that small banks want this because of the complexity of the regulations, and there are increasing requirements for regulation. “I think now we're approaching a threshold where it becomes too cumbersome for small banks,” says the investment manager.

-The show is still on

DNB's Cirk Hansen is not concerned that competition will be weakened by the development.

– We probably have more than 130 banks in Norway, so there is still a lot of breadth.

– But again, there is something wrong with the current service model, where you have to develop good digital solutions for customers. The DNB director says it takes banks to have a certain size to be able to make these investments.