The announcement this week that two Nordic banks, Nordea and DNB, are merging their operations in the Baltic states does not come as a surprise, banking analysts say.
Nordea Baltic chief Inga Skisaker and DNB's Mats Wermelin
© Bendrovės archyvas

Lithuanian analysts say that the deal makes sense from the business point of view, as it will allow the two banks to consolidate their market shares, and may spark a wave of similar consolidations across the market.

For consumers, short-term consequences should be negligible, experts say, although in the longer term they will find there is less choice for them.

Šarūnas Skyrius, partner at the investment banking firm M&A International Baltics, says that it makes sense for Nordea and DNB to join forces, although the firm the banks chose is quite unusual.

"The logic behind the deal is sound enough, it is in everyone's interest. The market shares are relatively small, no banks, save for SEB and Swedbank, enjoy economy of scale in the Baltic states, the market is very competitive. We, the consumers, live in a good region where many banks want to provide us with good and affordable services, which means that some of the banks struggle to make any profit. Unless you achieve scale, you are strangled by your costs, you cannot invest into expansion, new products, IT. Nordea and DNB will try to solve these problems by expanding," Skyrius tells BNS.

However, the unusual aspect of the deal is that the two banks merge rather than buying one another's assets, he adds.

"I was a little surprised by the form of the deal. Joint companies are rare, but let's not forget that DNB was once one. After this merger, we'll have a clear number-three bank in the Baltics," according to Skyrius.

Investment banker Valerijus Judinas of Summa Advisers agrees: "The more usual way would be to hand over assets, the portfolio, whereas in this case they announced a merger. We often joke that each merger is still a buying and selling deal - and time will probably show who is buying whom."

Marius Jurgilas, board member of the Bank of Lithuania, says the central bank will inspect the deal very closely before giving its go-ahead for the merger.

"There's still a ling and complicated way ahead until the merger is realized, and they still need to get clearance from banking oversight and competition institutions. The Bank of Lithuania will look at the deal very closely and will not present its conclusions before it has all the questions answered," Jurgilas tells BNS.

Skyrius, of M&A International Baltics, believes that the Nordea-DNB deal can encourage other small banks to consolidate, too.

"Sometimes such deals can give impetus for similar ones. Other market players may have been considering and discussing it and now this deal will make them push on with the plans. On the other hand, there aren't that many options left - someone may take over what's left of Dankse bank, and what remains are local banks: LHV in Estonia, Citadele in Latvia and Šiaulių Bankas in Lithuania," Skyrius speculates.

Meanwhile Valužis says much depends on the position of the banks themselves.

"[The Nordea-DNB deal] may encourage consolidation of smaller banks, like Medicinos Bankas, Šiaulių Bankas, but who knows what's the stance of the managers of those banks themselves. For instance, Medicinos Bankas would gain by piggybacking on someone stronger, since it's a niche bank, but it remains to be seen if others would want it due to the quality of its assets. Banks that take up bigger market shares have limited opportunities to consolidate," Valužis says.

He notes that the consumers should not feel much difference in the short term, but fewer players will reduce competition in the long run.

"In the long-term perspective, there may be less competition in the banking sector, which may result in the need for tighter regulation of the market. Sure, pressure from other financial institutions will remain and might even grow stronger. The consolidation will not have much effect for business clients. On the other hand, the two banks were only interested in retail banking to the extent that they developed online banking services. Other aspects of retail banking, which require a wide network of servicing centres, was not a priority for either," Valužis says.

Stasys Kropas, president of the Lithuanian Banking Association, agrees that the merger means higher concentration in the market and fewer options for clients.

"Any reduction of the number of banks means less choice for clients, fewer colours and shades. I do not believe the clients will win anything from this. Both banks had their identity, some might have preferred DNB, others Nordea," Kropas tells BNS.

Nordea and DNB announced plans to join their operations in Lithuania, Latvia and Estonia on Thursday. The deal has to be cleared by banking regulation institutions, but the process is expected to be completed by mid-2017.

Nordea and DNB own assets worth €8 billion and €5 billion, respectively, in the Baltic states and employ 1,300 and 1,800 people.

Both banks will have equal voting rights in the new operation, according to the statement, although their economic contribution to the new bank will not be equal.

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