Some European banks have shifted focus to private banking from retail services. In this study, WealthBriefing shows how one Danish bank undertook this shift and reveals what other banks can learn from it.

(On the same day the article below was published, Danske Bank replaced its CEO, Eivind Kolding, who resigned immediately, according to a statement issued by the bank. The board of directors of Danske Bank said the head of corporate and institutional banking, Thomas F Borgen has been appointed as the new CEO.

In the autumn of 2012, Denmark’s largest retail bank, Danske Bank, threw itself upon the mercy of the Danish press and public when it announced a new corporate strategy. By closing teller services across the country and implementing high fees on retail banking services, the bank shunned the broader public in the hopes that a renewed focus on advisory services would pay rich dividends.

As such, the bank launched the strategy “new standards” which led to the closure of a number of branches in exchange for 80 new advisory centres catering to the wealthy.

“These centres will offer personal customers expert advisory services from specialists in all aspects of personal finance,” the firm said when announcing the new strategy just under a year ago. It aims to attract more private and corporate clients.

“Business customers have an increasing need for advanced financial advice based on the individual company’s specific challenges. In the future, we will therefore strengthen our advisory competencies and solutions in four general areas: risk solutions, cash management, trade finance and lending”, reads the Danske strategy.

This shift in focus is an issue that has faced other European banks looking to shift client segmentation policy, such as going after higher-value clients by raising minimum deposit amounts, to increase overall profitability.

The shift came at a time when Danske Bank’s returns and overall performance was less than impressive. As such, Danske Bank had to take drastic measures to increase revenue, explains the financial editor of Denmark’s leading business publication, Borsen.

“Danske Bank's return on equity has not been good enough in recent years. In particular, the other major bank in Denmark, Nordea, has fared better. As such, Danske Bank has been forced to improve earnings, and in this respect, the new customer strategy is an attempt to increase the profitability of each customer”, Morten Jeppesen told WealthBriefing.

Over the course of 2012, Danske was losing the revenue battle to major competitors in Scandinavia. The Nordic financial powerhouse Nordea and the Swedish banks SEB and Handelsbanken performed significantly better on returns on equity than Danske Bank. Consequently, the bank decided to focus on services that would attract high net worth clients, while introducing fees for the broader public when i.e. opening a checking account. Such practices are generally uncommon in Denmark, where banking clients often enjoy free services and accounts and as such, Danske’s move was considered extremely unpopular by the press and public alike, said Jeppesen.

“In Denmark, the bank was met with a lot of criticism. In particular, the Danes have been very critical of the model where it now costs money for the weakest customers to have an account with the bank,” he continued.

Since the move, client trust has fallen drastically and even though the bank still has about two million retail clients, the first quarter of 2013 alone saw 30,000 clients leave the bank for greener pastures - in this respect, the plethora of Danish banks not charging for retail services. The bank recently appointed a new chief of personal banking, Thomas Mitchell, whose only job is to repair the damage caused by the new strategy and get Danske’s customers to stay. A job, which in Mitchell’s words, “is all about improving communication”.

However, that move may be too little, too late, said Jeppesen. The bank’s communication strategy should have been thought through far earlier.

“Danske Banks chief executive officer Eivind Kolding has been talking to shareholders throughout the process. He has time and again pointed out that the changes were implemented to increase the return on equity. I think that if Danske Bank could do it over, the bank would have focused on communicating with and explaining the strategy to customers rather than the shareholders”, explained Jeppesen in reference to the bank’s somewhat mum approach to the public once the strategy was launched.

In this respect, there is no question that the shift in strategy was the right thing to do, said Jeppesen.

“The bank had no other option. If not, Danske Bank’s market status would have been beaten by competitors. The question is more whether the bank's way of doing it, has been the right one,” he added.

Lesson

Consequently, there is a clear lesson in basic PR to learn from this - remember to take the reactions from the public and press into account when planning a major shift in customer strategy.

Moreover, a recent outlook downgrade by Standard & Poor’s has caused more woes for the bank. According to the rating agency, Danske has failed to curb funding risks linked to financial innovation and will probably only avoid downgrades if national regulators force through stricter measures. The downgrade related to F1 loans in the Danish mortgage system, the world’s largest mortgage bond market per capita, where banks refinance as much as $228 billion annually, spread over quarterly auctions. This amounts to 50 per cent of Danish borrowers refinancing their mortgages on an annual basis, according to the FSA in Copenhagen.

As such, the bank has made efforts to sidestep funding mismatches by inventing new securities. But according to S&P’s Stockholm-based analyst, Per Tornqvist, “this does little to persuade us that the lenders are really addressing liquidity risks”.

The downgrade has fuelled concerns at Danske Bank, that it may increase the cost of the bank's access to funding. The long-term effects of which, could be negative.  

“It will hurt the bank in its attempts to catch up with competitors,” said Jeppesen.

Downgrades, and failed PR strategies aside, did the new strategy focusing on private banking rather than retail, actually work?

Yes, said Jeppesen.

“Danske Bank's ambition is to increase the profitability of each customer, thus increasing return on equity. It is still too early to tell whether the strategy will succeed. In the short term, however, the bank has improved its’ ability to make money, while it has managed to take control of write-downs,” he said.

Since Danske implemented the new strategy in the third quarter of 2012, it’s results have gradually improved. From the second quarter of 2012 the bank’s results improved from a net profit of DKK1.49 billion ($266 million) to DKK2.18 billion ($387.6 million) reported on 30 June 2013.

To this end, it is clear that Danske Bank’s desire to attract more profitable customers and thereby attain a better financial result, fuelled the increased focus on private banking. What’s more, Danske might not be the only Scandi bank considering the advantages of a change in their customer base.

“My impression is that many other banks worked with a similar strategy,” said Jeppesen, who has followed the Scandinavian banking and wealth management industry closely, as one of Denmark’s key financial commentators.

To this end, only time will tell if other banks dare follow the somewhat troubled path of Danske Bank.