Cooperative banks in 2021: Reflation worked wonders

The reflation measures of governments and central banks offered banks the keys to success on a silver platter last year.  For example, OP Financial Group and Savings Bank Group characterized their results as record high. In 2022, their own skills will also be weighed.

Banks’ money transactions with consumers went well last year. More loans were granted to households and housing associations than in the previous year, and investment funds also grew. Households had accumulated savings during the first corona year. In the second pandemic year, savings started to be invested in funds and new homes. However, towards the end of the year, housing sales waned, and the beginning of 2022 was relatively calm in the housing market. Rents also decreased compared to a year ago.

In last year’s economic environment, it was easy for banks to make a profit also with investments. Now the situation is different, as the stock market’s development at the beginning of the year was the worst in 50 years. Corporate loan activity was relatively quiet for the second year in a row in all banks.

Strong banks in Finland

Finnish banks are strong in a European comparison. Solvency ratios are stronger than the European average, thanks to which banks are more resistant to changes in the operating environment. Finnish banks also operate efficiently, as the cost-to-income ratio was 51 percent last year, while the average ratio for banks in EU countries was 60 percent.

In 2022, the results of Finnish banks will certainly differ more from each other. Risks must be managed better than last year. Due to the difficult predictability of interest rates, banks accept new loan customers with very strict criteria. Changing one’s bank will be difficult for both consumer and business customers.

OP Cooperative reduced its bonuses

Consumers’ weak financial knowledge is a business advantage for banks. The laws of the economy are unknown, which makes it easier for banks to sell their own investment products and loan protection to consumers. Last year, OP-Climate was the largest fund in Finland in terms of the number of shareholders. The fund is expensive in terms of maintenance costs, but consumers are clearly ready to pay for the well-being of the environment.

Banks also eagerly sell loan interest protection and repayment security. Consumers buy the feeling of security without calculating its price or comparing it to other products that protect against risk. OP Financial Group reports that at the end of last year, almost 30 percent of all its housing loans were interest-protected.

OP Financial Group used 60 percent of last year’s 1.1-billion-euro profit to strengthen its own solvency and a fifth for owner-customer rebates in the form of OP bonuses and discounts. The amount of OP bonuses paid to owner-customers decreased by 45 million euros from the previous year.

An essential part of banks’ competitiveness is the accessibility of customer service personnel. Smaller banks are praised for allowing customers to call their staff directly, instead of using a chatbot or an online form. Cooperative banks have also introduced a service in which consumer customers are assigned their own contact person in the Owner Plus service.

Inefficient S-Bank

S-Bank, which is part of the consumer coop S group, is rapidly becoming a large bank for consumer customers. Last year, S-Bank’s mortgage balance grew more than three times faster than the average mortgage balance of banks. S-Bank also introduced several investment funds to the market.

S-Bank’s weakness is the inefficiency of its operations. The cost-to-income ratio was as much as 78 percent, while it was, for example, 49 percent at Nordea. The inefficiency is due to the fact that S-Bank has no business customers at all, from which other banks get the best margins. In its strategy, S-Bank has set the goal of weighing the expense-income ratio below 60 percent.

S-Bank’s inefficiency is also explained by the fact that the bank has 2.5 million customers, only a fifth of whom use S-Bank as their first bank. You can ask how reasonable it is to force all S Group coop members to become S-Bank customers, even though most of them use S-Bank only as a bonus warehouse. Despite the inefficiency, the S Group sees synergistic benefits in terms of other business operations in having its own financial institution. S-Bank’s decision-making is now completely in S Group’s own hands, as last year it bought the rest of S-Bank’s shares from mutual insurance company LähiTapiola and the pension insurance company Elo.

Despite the increase in interest rate risks, S-Bank expects its operating profit to improve in 2022. OP Financial Group, on the other hand, predicts that its operating profit will be lower than last year. The view is right, because, for example, OP Corporate Bank’s profit for the first quarter of 2022 was only three million euros, compared to 115 million euros a year earlier.

Changes in POP Banks

EU-level regulation, solvency requirements and reporting obligations lead to the fact that the number of banks decreases, and the size continues to increase. A good example of the development can be found in POP Banks. Suomen Osuuspankki (Coop Bank of Finland) started its operations in 2022, which was formed from the merger of Suupohja, Lieto and Piikkiö cooperatives. The name seems a bit extensive since there are still other cooperative banks in the country. From the name choice, it can be concluded that in a few years all POP Banks will belong to Suomen Osuuspankki.

The central company owned by the regional POP Banks, POP Pankkikeskus, will soon become redundant. Perhaps the change of CEO that took place in 2022 also points in that direction.

Markku Pulkkinen
The author is a journalist and a member of Cooperative Magazine’s Yearbook analyst team.

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