The activities of major Nordic banks in the Baltic region have come under intense scrutiny in the light of money-laundering allegations and investigations. Many of the allegations surrounding Nordic banks cover historical periods. But as has been shown, past governance failures can lead to present-day investigations and possible financial penalties; caused by banks taking too much for granted in an environment where corruption had in some cases become institutionalised, Scope says in a report out today.

“Comparing the business models of the major Nordic banks operating in the Baltics, Swedbank and SEB have emerged as winners in terms of size in the region, although not all of their competitors set out to build similar scale,” said Jennifer Ray, executive director in the banks team of Scope Ratings and author of today’s report.

Given Swedbank’s current travails, the only fully successful player in the region is SEB, notes Ray, which so far has not been affected by money-laundering scandals and whose management remains confident it has the required controls in place. “All other foreign operators with large ambitions have considerably scaled back their operations in recent years due to lack of commercial success. In truth, the Baltics offer limited upside for significant operational risk,” Ray said.

Nordea and DnB are in the process of exiting banking business in the Baltics, with DnB set to maintain a minority stake in Luminor Bank, which it co-created with Nordea in 2016. Blackstone is set to acquire a majority of Luminor in 2H19; DnB and Nordea will initially retain a c.20% stake but the latter has agreed to sell its remaining stake to Blackstone in the future.

In recent months Scope revised its Outlooks on Danske Bank and Swedbank to negative following the emergence of allegations of money laundering through their Baltic operations. The changes reflect uncertainty related to the resolution of various probes by authorities, which could also lead to the imposition of fines.

“Given Danske Bank’s forced exit from Estonia, there is in theory a possibility that Swedbank could be faced with a similar demand. Yet this poses a conundrum for the authorities. Given the scale of the bank’s operations in the Baltic countries – it is far more systemically important to the region than Danske Bank– there is the issue of how this could be applied in practice, and the effect it would have on Swedbank,” Ray added.

The Baltic region accounts for a larger share of Swedbank’s operating profits than is the case for either SEB or Danske Bank.

Banking in the Baltics is dominated by Nordic banks. After Swedbank, SEB and Luminor Bank are the largest players in the region, each following a universal bank model with a significant retail presence and largely deposit-funded. As of year-end 2018, the three banks accounted for 79% of banking assets in Estonia, 84% in Lithuania and 64% in Latvia. Danske Bank, by contrast, accounts for just 5% of banking assets in Estonia. Its current presence in Latvia and Lithuania is even smaller.

The report, which provides a detailed update on the major Nordic banks’ operations in the Baltics, can be downloaded here.