Evaluating the Nordea Experiment: Evidence from Market and Accounting Data

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2007

Evaluating The Nordea Experiment: Evidence from Market and Accounting Data

Lawrence G. Goldberg University of Miami

Richard J. Sweeney Georgetown University

Clas Wihlborg Chapman University, [email protected]

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Recommended Citation Goldberg, L.G., Sweeney, R.J., & Wihlborg, C.G. (2007, Apr.) Evaluating the Nordea Experiment: Evidence from market and accounting data. Journal of Banking and Finance, 31(4): 1265-86. doi: 10.1016/ j.jbankfin.2006.10.010

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Comments NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Banking and Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Banking and Finance, volume 31, issue 4, in 2007. DOI: 10.1016/j.jbankfin.2006.10.010

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This article is available at Chapman University Digital Commons: https://digitalcommons.chapman.edu/ business_articles/47 November 1, 2004

The Nordea Experiment: A Preliminary Economic Evaluation *

Lawrence Goldberg a

Richard J. Sweeney b

Clas G. Wihlborg c

Abstract: For Nordea as a whole, accounting data are available only for the four-year period 1999-2002. Over this period, Nordea’s ROE and ROA are below those of comparables, whether measured by large comparables or by the complete set of comparables. Announcements of the mergers and acquisitions that led to the creation of Nordea tended on average to have wealth effects of approximately zero, when measured relative to comparables. When measured in a market-model regression, however, the average wealth effect is notably larger, and one event has a positive and statistically significant wealth effect. Data for Nordea’s prices and dividends are available from November 2, 1995 to January 1, 2004. For the first six years, Nordea outperformed the comparables, but for the final three years, underperformed the comparables substantially. For the 1999-2002 period for which Nordea accounting data are available, the comparables outperformed Nordea in the stock market by 11.3%/annum versus 4.1%/annum, but this difference is not statistically significant. Over time, however, Nordea’s market beta fell substantially in absolute terms and relative to the comparables’ beta. This suggests that Nordea’s expected rate of return should fall relative to the comparables’. Indeed, Nordea’s market beta is approximately zero over the last three years of the sample. This suggests that the expected rate of return is small, approximately the risk-free rate, and that ROE and ROA will be comparably low—do analysts and the market understand this?

* Thanks are due to Niels Blomgren-Hansen, Sandeep Dahiya, Richard Herring, Poul Kjaer, Magnus Olsson, Henrik Prieergaard, Rille Roomeldi, Ole Simonsen, Maria, Snöbohm and Dorian Moyun Xu. Financial help was provided by the Copenhagen Business School and The McDonough School of Business, Georgetown University. a University of Miami. 1-305-284-1869. [email protected]. b The McDonough School of Business, Georgetown University. 1-202-687-3742. e-mail: [email protected] c Copenhagen Business School. + 45 3815 3628. e-mail: [email protected]

The Nordea Experiment: A Preliminary Economic Evaluation

1. Introduction

Nordea’s strategy is to provide a full range of financial services throughout each of the

Nordic countries—Denmark, Finland, Norway and Sweden. Nordea was built by merger and acquisition of on-going well-established full-service financial institutions in each of the Nordic countries. The Nordea strategy of providing a full range of financial services throughout multiple countries, with operations of approximately the same size in each country, is highly unusual in world banking. Many financial institutions have portfolio investments outside their home countries, or have branches in foreign countries mainly to services in these countries to their major home-country customers, and some have full-service subsidiaries that are, however, substantially smaller than home country operations. In the future, other banks may well adopt the

Nordea full-service multiple-country strategy, especially if the Nordea experiment proves successful. Nordea is clearly a pioneer in an exciting area, and if successful may serve as a trailblazer that many other financial institutions may later follow.

Nordea’s experiment raises a host of questions regarding transnational regulation, the nature of economies of scope and scale in banking, the appropriate mix in each country of national banking practices for some services and uniformity across countries for other services, and many more questions. A fundamental question is the economic success of Nordea’s experiment. Of course, it may well be too early to give a satisfactory evaluation of Nordea’s economic success. A number of the constituent financial institutions from which Nordea was built were in need of improvements when incorporated into Nordea. Further, Nordea is an on- going experiment in which previously foreseen problems are still being addressed, for example, optimal legal and functional organization. In addition, unforeseen