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OCCASIONAL PAPER SERIES No 5 / 2015 OCCASIONAL PAPER SERIES No 5 / 2015 BUSINESS MODELS OF SCANDINAVIAN BANKS SUBSIDIARIES IN THE BALTICS: IDENTIFICATION AND ANALYSIS EXERCISE EVALUATION FORECAST REAL-TIME PSEUDO A DATASETS: MONTHLY LARGE USING GDP OF FORECASTING SHORT-TERM No 1 / 2008 BANK OF LITHUANIA. WORKING PAPER SERIES PAPER WORKING LITHUANIA. OF BANK 1 ISSN 2424-3213 (ONLINE) OCCASIONAL PAPER SERIES No 5 / 2015 BUSINESS MODELS OF SCANDINAVIAN BANKS SUBSIDIARIES IN THE BALTICS: IDENTIFICATION AND ANALYSIS by Aldona Jočienė* * The Centre for Excellence in Finance and Economic, Bank of Lithuania, Totorių g. 4, LT-01121 Vilnius, Lithuania. E-mail: [email protected], Vilnius University, Tel. +370 698 48685. © Lietuvos bankas, 2015 Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. Address Totorių g. 4 LT-01121 Vilnius Lithuania Internet http://www.lb.lt The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania 3 Abstract Since the crisis in the Baltic countries in 2009, the question on the particularities of business models adopted by foreign-owned banks has been often raised. The business models of these banks have changed significantly, but they still remain of major concern. The aim of this paper is to identify what type of business models have been chosen by the Baltic foreign-owned banks, to assess them as well as to provide recommendations on how to address the outlined challenges. The Literature Review showed that the Business Model Canvas approach can be used for bank business model analysis. However, banking specialness should be taken into account. Empirical research was carried out using a combination of qualitative and quantitative methods for nine Scandinavian banks subsidiaries operating in the Baltics. The main focus of this research was the complex analysis of bank business model components, using the newly created system of key business model indicators. Business model analysis was based only on publicly available information, which is limited and not standardised. The main characteristics of the business model of Scandinavian banks subsidiaries established in the Baltics are as follows: retail banks operating in one jurisdiction, dependency on the parent bank decisions, aversion to risk, stronger focus on non-interest income and high efficiency due to cost cutting and e-banking, orientation on safety (banks meet prudential requirements with large reserves), and medium profitability with a negative trend for the future. It was determined that if banks keep on doing their business as they are currently, their possibilities of generating acceptable returns will be of major concern. The biggest opportunity for banks in a low interest rate environment is to focus on increasing the volume of interest bearing assets. Financing small and medium-sized enterprises (SMEs), especially in productive sectors and innovative companies, could be the best outcome for banks and Lithuania’s economy. To achieve this goal, banks need to set SMEs financing as a strategic priority, make fundamental changes in their lending policy. The EU and local governments should give financial support for SMEs to strengthen this sector, and that should encourage banks to finance SMEs more actively as well. The analysis of bank business models is a relatively new approach towards banking industry analysis. This paper is the first attempt of deeper analysis of business models of Scandinavian banks subsidiaries operating in the Baltics. This paper can serve as an eye-opener for Financial Supervisory Authorities and Central Banks, Scandinavian banks when drafting strategies for their subsidiaries and Government representatives who are responsible for the banking system strategy and strengthening SMEs sector. Keywords: Baltic countries; foreign-owned bank; business model, sustainability, small and medium enterprises (SMEs). JEL Classification: G21; M21. -- I would like to thank Marius Jurgilas for the invaluable comments and suggestions, Mihnea Constantinescu for scientific advice, Karina Majevska for technical support, Prudential Supervision, Financial Stability and Economics Departments of Bank of Lithuania, Latvian Financial and Capital Market Commission and Estonian Financial Supervision Authority for the data and comments. 4 Santrauka Nuo 2009 metų krizės Baltijos šalyse dažnai keliamas klausimas apie užsienio bankų verslo modelių ypatumus. Skandinavijos bankų patronuojamieji bankai, veikiantys Baltijos šalyse, taikomus verslo modelius gerokai pakeitė, tačiau jie ir toliau kelia susirūpinimą. Šio darbo tikslas – nustatyti, kokios rūšies verslo modelius yra pasirinkę Baltijos šalyse veikiantys užsienio bankai, įvertinti šiuos modelius ir jų keliamus iššūkius, taip pat pateikti rekomendacijas, kaip su nustatytais iššūkiais būtų galima susidoroti. Atlikta literatūros apžvalga parodė, kad toks metodas kaip verslo modelio paveikslas (angl. Business Model Canvas) gali būti taikomas bankų verslo modelių analizei, tačiau turi būti atsižvelgiama į bankininkystės verslo ypatumus. Empirinis tyrimas atliktas naudojant kiekybinių ir kokybinių metodų derinį ir jį taikant devynių Skandinavijos bankų, veikiančių Baltijos šalyse, verslo modeliams išanalizuoti. Koncentruojamasi į atskirų verslo modelio komponentų kompleksinę analizę, jai taikant sukurtą verslo modelio indikatorių sistemą. Verslo modelių analizė atlikta naudojant tik viešai prieinamą informaciją, kuri yra ribota ir nestandartizuota. Nustatytos tokios Skandinavijos bankų, veikiančių Baltijos šalyse, verslo modelio pagrindinės savybės: tai mažmeninis bankas, vykdantis veiklą vienoje jurisdikcijoje, labai priklausantis nuo patronuojančio banko sprendimų, vengiantis rizikos, dedantis pastangas gauti daugiau nepalūkaninių pajamų ir pasiekti didesnį veiklos efektyvumą, besiorientuojantis į banko saugumą (vykdo riziką ribojančius normatyvus su didele atsarga), jo pelningumas vidutinis ir pelningumo tendencija ateityje neigiama. Nustatyta, kad jei šie bankai veiklą vykdys taip, kaip vykdo šiuo metu, jų galimybės generuoti priimtinas grąžas ateityje bus problemiškos. Didžiausių galimybių bankams, esant žemų palūkanų normų aplinkai, teiktų palūkanas uždirbančių aktyvų didinimas. Aktyvesnis mažų ir vidutinių įmonių (MVĮ) kreditavimas, ypač orientuojantis į produktyvius sektorius ir inovatyvias įmones, galėtų duoti geriausią rezultatą bankams ir Lietuvos ekonomikai. Kad pasiektų šį tikslą, bankai turi laikyti MVĮ finansavimą strateginiu prioritetu, atlikti fundamentalius pokyčius kreditavimo politikoje. Europos Sąjungos ir vietinės valdžios institucijos, teikdamos finansinę paramą MVĮ, dar labiau sustiprintų šį sektorių, o tai skatintų bankus aktyviau finansuoti MVĮ. Bankų verslo modelių analizė yra naujas požiūris bankininkystėje. Šiame straipsnyje pirmą kartą pateikiama išsamesnė Skandinavijos bankų, veikiančių Baltijos šalyse, verslo modelių analizė. Straipsnis turėtų būti naudingas finansų priežiūros institucijoms ir centriniams bankams, taip pat Skandinavijos bankams, rengiantiems patronuojamųjų bankų strategijas, ir valdžios atstovams, kurie yra atsakingi už šalies bankų sistemos strategiją ir MVĮ sektoriaus stiprinimą. Pagrindiniai žodžiai: Baltijos šalys; užsienio bankai; verslo modelis; tvarumas; mažos ir vidutinės įmonės (MVĮ). JEL klasifikacija: G21; M21. 5 CONTENT INTRODUCTION .......................................................................................................................................................... 7 I. LITERATURE REVIEW ON BANK BUSINESS MODELS .................................................................................................. 8 1.1. CONCEPT OF BUSINESS MODELS ....................................................................................................................................... 8 1.2. BANKING SPECIALNESS................................................................................................................................................. 10 1.3. BANKING BUSINESS MODELS AND FINANCIAL CRISIS OF 2008-2009 ..................................................................................... 11 1.4. BANKING BUSINESS MODELS CLASSIFICATION ................................................................................................................... 13 1.5. BANK BUSINESS MODEL SUSTAINABILITY ASSESSMENT BY SUPERVISORS .................................................................................. 17 II. EMPIRICAL RESEARCH ON BUSINESS MODELS OF SCANDINAVIAN BANKS SUBSIDIARIES IN THE BALTICS ............. 19 2.1. RESEARCH METHODOLOGY ........................................................................................................................................... 19 2.2 OVERVIEW OF THE DEVELOPMENT OF BANKING SYSTEMS IN THE BALTICS IN 1990-2014 .......................................................... 21 2.3. SCANDINAVIAN BANKS GROUPS AND THEIR SUBSIDIARIES IN THE BALTICS ............................................................................... 26 2.4. ANALYSIS OF THE BALTICS MARKET FACTORS .................................................................................................................... 30 2.4.1. Macroeconomic environment ........................................................................................................................ 30 2.4.2. Regulatory and supervisory changes ............................................................................................................. 33 2.4.3. Technological
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