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Slide 1: Pray or predate Scenarios for the Nordic Financial Industry February 2009 Alexander Huun Please find article at: http://www.paconsulting.com/industries/finance/publicati ons/perspectives/industry_scenarios.htm
Slide 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
Slide 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
Slide 4: Finding the right business model will be imperative to future success The cause and effect rationale • International and Nordic finance and economy can develop in very different directions • International and Nordic policy makers can react in several ways to different economic developments • The combination of possible economic developments and possible political and regulatory reactions defines a set of strategic environments • Different strategic environments will favour different corporate structures for the Nordic Financial Industry Modelling strategic environments Economy The unspoiled Nordic From recession to depression International solutions National agendas Political and regulatory © PA Knowledge Limited 2009. Pray or Predate - Scenarios for the Nordic Financial Industry 2009.ppt Page 4
Slide 5: The macroeconomic development is highly unpredictable The unspoiled Nordic Expansion of public sector and extended education reduce unemployment Social security and pension systems maintain purchasing power of unemployed Relative stabile economy strengthens the currency and gives room for interest cuts Cheap import prices and strong currency reduce inflation and interest rates Stable demand in densely populated areas cushions the fall in real estate prices Longer education and less jobs for young people reinforce trend of “wealthy elders” Tax based pension funding and good public sector pensions maintained © PA Knowledge Limited 2009. Pray or Predate - Scenarios for the Nordic Financial Industry 2009.ppt From recession to depression Unemployment Recession in private industry and service sector creates massive unemployment Vastly reduced asset values combined with unemployment reduce purchasing power High volatility of SEK and DKK forces the Nordics into the Euro zone Interests hit the “liquidity trap” as economies decline and deflation grows Massive defaulting of mortgage loans sends real estate prices through the floor Collapse of asset and house prices create a massive shift of wealth to younger people Cuts in public spending hit pension rights and end government “pay-as-you-go” Purchasing power Currencies Inflation and interest Real estate Allocation of wealth Pensions and saving Page 5
Slide 6: The political and regulatory future is highly unpredictable National agendas Restrictions on government funds and financing to be used domestically Governments will choose to nationalise financial institutions becoming insolvent Government taking over defaulted loans owed by citizens and national businesses National authorities will make political judgements of capital requirement needs National restrictions to what assets financial institutions can own and issue National restrictions to legal structure, customer data, marketing, selling etc. National legislation creates distinctly local products and distribution © PA Knowledge Limited 2009. Pray or Predate - Scenarios for the Nordic Financial Industry 2009.ppt International solutions Rescue packages No restrictions on deployment of government funds and financing Governments will choose to let financial institutions be acquired or go bankrupt Governments guaranteeing all deposits made in banks operating within its borders Basel II and Solvency II will establish uniform international capital requirements International regulation on what assets financial institutions can own and issue Free competition across boarders through international standards and regulations International legislation creates international products and distribution Ownership Financial assets Solvency Financial instruments Competition Products Page 6
Slide 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 Scenario 1 Scenario 2 capturing the main uncertainties about the future into a decision support tool. Typically 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 quantified Scenario 3 Scenario 4 © PA Knowledge Limited 2009. Pray or Predate - Scenarios for the Nordic Financial Industry 2009.ppt Page 7
Slide 8: The key uncertainties map out different strategic environments Political and regulatory development National agendas The National agendas where Nordic policies create economic islands aiming for ‘newer again’ through improved transparency, customer rights and privacy, capital requirements etc. The National agendas in a global recession will be a political agenda of stability and control, predominantly nationalisation of the finance sector International solutions The International solutions where Europe achieves a soft landing will be a drive to make uniform EU regulations per sub-industry starting the scale game with the Nordic players in pole position The International solutions to a recessive crash in assets values will be to ‘aid survival’ through eased capital requirements and structure regulations favouring risk diversification Macroeconomic development The unspoiled Nordic From recession to depression © PA Knowledge Limited 2009. Pray or Predate - Scenarios for the Nordic Financial Industry 2009.ppt Page 8
Slide 9: Different strategic environments benefit different corporate structures The unspoiled Nordic Economic island Pole position Industry re-bundling Transparency Regulations take the scale advantage out of complex organisations and scope advantage out of financial conglomerates: single focus companies within asset management, transaction processing, risk insurance, broker business, ATM operations, etc. outgrow traditional Nordic financial conglomerates Political and regulatory development Sub-industry specialists Common regulations within EU per subindustry intermediaries, banks, life and general insurance encourage a race for scale advantage: the Nordic players take the lead towards sub-industry specialisation and geographic expansion. The financial conglomerates break apart development Macroeconomic The scale game International solutions National agendas Stability and control Survival of niche players A large number of banks and insurers break their solvency requirements and the Nordic governments nationalise their respective corporations rather than letting them be bought by foreign competitors: Niche players like local savings and loan banks and specialist insurers will be the survivors European conglomerates European governments ease requirements on the industry to help its survival and proactively support acquisitions of distressed companies: massive industry consolidations commence to gain better risk diversification and economies of scope across the subindustries and geographies of Europe Risk diversification 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
Slide 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 – European models 1) De-bundle into Nordic single vertical focus companies 2) Demerge into local niche players 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
Slide 11: For further information, please contact… Alexander Huun +47 47 89 88 09 alexander.huun@paconsulting.com Alexander Huun has supported clients across 16 countries, in developing and implementing 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