While Nordic banks have long been heralded for solidity, combining excellent asset quality with strong profitability, recent events have tarnished this view. Danske Bank and Swedbank are at the centre of an Estonian money laundering scandal, the scale of which is surprising, despite money laundering being a significant global problem and a constant challenge for the industry.
Danske has admitted to channelling up to €200bn of suspicious transactions through Estonia from 2007 to 2015. The volumes are astonishing. Danske only had a small local banking presence, but was the largest processor of cross border payments. Swedbank strongly disassociated itself from similar types of activity. However, a series of recent programmes by Swedish state television (SVT) have made some concerning allegations. Supposedly the bank processed up to €135bn with Russian clients from 2008 to 2018 (though we do not know what proportion – if any – were “suspicious”), was involved in transactions linked to the Danske scandal, and may even, in a separate anti-money laundering (AML) probe, have misled US authorities. For Swedbank these are unproven allegations, and regulatory probes have only just begun. Yet stock and bond prices for both Danske and Swedbank have tumbled, and the CEO and Chairman for both firms have left. Numerous authorities (including the US) are investigating.
Looking past news drama, and how poorly Swedbank has dealt with it, from what we know the Danske case still looks more serious. Danske’s flows are larger when comparing “suspicious” flows versus “gross flows”. It is more natural for Swedbank to process large payment flows to Russia as it is the largest bank in Estonia, and we don’t yet know what action Swedbank has taken in relation to suspicious flows. The banks themselves are not responsible for catching money launderers, but should monitor transactions and report suspicious activities. In what defence Swedbank has put forward, by 2017 all of the 50 “suspicious” clients that SVT revealed in its first wave of allegations were no longer Swedbank customers.
Penalties can be substantial, but have generally been confined to earnings events. In the highest fine to date, BNP had to pay the US authorities $9bn in 2014 for allegedly channelling $9bn from countries under US sanctions (including Sudan, Cuba and Iran), but still managed to remain in profit. All other large cases have resulted in fines of less than $2bn, despite volumes of alleged unsupervised transactions in at least one case amounting to hundreds of billions of dollars. US authorities have been the most aggressive in punishing banks for AML breaches. A number of factors seems to play a part in the size of fines, including co-operation with authorities, whether a bank has a US licence, and size/systemic importance. While Danske (and potentially also Swedbank) most certainly had significant AML shortcomings, and significant fines are likely, they do not have US operations and are medium sized banks in a global context. I don’t believe a fine of more than US$2bn is likely in either case, which the banks can absorb through the P&L. If fines were larger, Danske has a more substantial capital buffer, but given Swedbank’s strong earnings power and the fact that it will likely take a long time before this is settled, I think both banks are in a position to manage this.
Considering other Nordic banks, we are cautious toward SEB. There is no indication it will become embroiled, but it is the second biggest bank in the Baltics. Nordea has been fined in the past for AML deficiencies, yet its Baltic presence was always smaller and it is a larger bank with some headline risk already factored into bond prices. Handelsbanken is our preferred name, given that it lacks a Baltic presence.
Disclaimer: Kames Capital holds bonds from both Swedbank and Danske Bank within some of its fund portfolios