The coronavirus epidemic does not only throw up challenges for corporates across sectors, it also raises questions about the robustness of banks’ business models.
For although the buffers put into the banking sector since the global financial crisis (GFC) have ensured that most large institutions have weathered the storm so far, a variety of challenges have nonetheless impacted banks.
For Masih Yazdi, who stepped up to become CFO of Swedish bank SEB (Skandinaviska Enskilda Banken), in January, having joined the bank in 2013, the business environment before the arrival of coronavirus was anything other than benign.
“Two issues had been hurting banks for quite a long time, very low interest rates, and a lot of liquidity in the system, which creates a lot of profitability issues for banks in general,” He says that although SEB had been performing well, combination of factors “made it difficult to uphold margins,” he says.
In addition, the banking sector has been trying to get to grips with disruption of new competition coming into the market and distribution moving from offline to online. “I think that transformation continues to have a massive impact on this industry,” adds Yazdi.
But the arrival of coronavirus had the effect of creating even more tougher conditions for banks such as SEB, which has a strong presence across Scandinavia and smaller operations in several European countries. SEB, which has a market cap of around SKr170bn (£14.7bn) at the start of October, makes it Sweden’s biggest bank and the third largest in the Nordic region by that measure having delivered operating profit 2019 slightly down on the previous year at SKr621m on sales up 5.8 percent at Skr7.35bn over the same period on a like-for-like basis.
“Global central banks cutting interest rates and undertaking even more quantitative easing to create even more liquidity is going to be very problematic for banks, says Yazdi. “And then on top of that you have some impact on asset quality and future earnings potential with the likelihood of being in a downturn for a couple of years, with lower demand for lending and lower demand for other parts of our business,” he adds.
But despite the potential enormity of the task, Yazdi is well placed to understand where the potential dangers could be lurking and the actions that need to be taken to mitigate them. An economics degree and MBA graduate of Stockholm University, he worked as a risk analyst at Sweden’s financial regulator before becoming a banking sector analyst at Erik Penser Bank and then investment bank Credit Suisse.
This combined experience gave him a strong grounding in understanding how SEB and other banks performed during the global financial crisis. “When I was at the regulator the FSA between 2005 and 2010 I was very much involved in all the measures Sweden took to stabilise the banking sector. I think that taught me a lot in terms of how you deal with a financial crisis- what kind of measures that are needed, and what issues you need to focus on,” he says.
Yazdi says that although the elements of the global financial crisis are very different to the current environment, going through that previous experience was very helpful once the coronavirus pandemic hit. “It’s still the same kind of process and procedures you need to follow and the same kind of questions that need to be raised.
“It starts with the question of liquidity and capital and how much of that do we have and how long can we survive? What is the toolbox we use to make sure that we can cope with this for as long as needed? Being able to use that experience 10 years later is extremely important,” says Yazdi.
On being made CFO of SEB, Yazdi says his principle focus was in ensuring the bank was creating shareholder value, something his background ensured he wouldn’t lose sight of.
He says his previous finance roles at the bank- head of group financial management (responsible for the bank’s strategy and balance sheet) and then finance director, were valuable steeping stones. “I got a bit more insight into the operational work of the bank, and I could create a platform and network internally as a result,” he says.
But important as those roles were, the most vital point of his career, “developing a very holistic view of banks” had already been reached early in his career. He says he brings that approach to every meeting and discussion at the bank. “I always have that as something I think about and always question whether what we’re doing is, in the end, creating some kind of value for shareholders.
“When you work operationally in the bank and you’ve done that for many years, even though you understand that that’s what you’re trying to achieve to create as much value as possible, you often sometimes forget about it.”
Yazdi says its sometimes important to remind colleagues that “the strategic and tactical focus should be about creating as much shareholder value as we possibly can, and it should be long term and sustainable,” he says.
A visible demonstration of that approach is Yazdi’s push to develop a new reporting system, using more real time data to report the financial performance across the bank. “It will allow us in a much more granular way to understand how things are developing in the bank so that we can optimise the financial steering of the bank in a much better way,” he says.
Ultimately, it means the bank will be better able to allocate capital and costs to the parts that can generate the most value as effectively as possible. “I think my role is to make sure that this allocation of cost and capital is as optimal as possible with tools using performance metrics and KPIs,” says Yazdi.
Such is his enthusiasm for ensuring the message around value creation and retention is maintained that Yazdi says he frequently leads internal discussions on the issue. “It’s a lot about education. One might believe that everyone working in a bank understands how you create value, but that’s not always the case.
“People understand revenues and they understand income, but understanding profitability and value creation is a bit more difficult, so you need to educate people all the time on that topic,” he says.
Catalyst for change
In many respects the impact of coronavirus has fast forwarded much of the thinking that was already in place, such as digitalizing the bank. “It has been a massive catalyst in looking at how we distribute our products. If you take the mortgage lending business in Sweden, it’s not a fully digital process when granting a mortgage, so you need to make it fully digital because people are now not coming to our physical branches,” he says.
In May a strategic plan that Yazdi says was triggered by the coronavirus outbreak, proposed 17 initiatives in response to the pandemic. “We looked, among other things, at changes in customer behaviour, new ways of working, the increased need for digital meetings, and at how our retail space and branches were being used,” he adds.
Opportunities from cutting costs and expanding into locations where other banks may be reducing their presence reflect some of the positives to counteract headwinds created or exacerbated by the coronavirus outbreak.
Although Sweden has fared relatively well so far during the pandemic, Yazdi remains cautiously optimistic on how well the Nordic economies will perform in months to come, although there is recognition that corporate business will be slower for the foreseeable future.
One of SEB’s strengths in challenging periods is the controlling share owned by the Wallenberg family which Yazdi says “has an extremely long-term view of how the bank should move forward.” He says it means that building customers relationships is seen as a priority.
“The first thing this bank did in the crisis was say let’s support the customers, and not pull out of some relationships because they are struggling at the moment. We want to help our clients through the epidemic, as it’s going to create even strong relationships post crisis,” he adds.
“It’s okay if we struggle for a couple quarters, if we have helped our customers, because we’re going to gain from it, in the long term. This approach has also had a big impact on myself in my role as CFO as everything I try to do is long term.
“I want to hand it over to the next person, so that they can follow the journey and continue to improve the bank. I won’t just initiate things that I think will conclude when I leave. I may start projects that will take maybe 10 years and maybe I’ll just be halfway through when I go,” he says.
The ethos of a sustainable business model relates to SEB’s commitment to ESG (environmental, social and corporate governance) strategies with its clients, Yazdi says, giving an example of its engagement philosophy. “You can pull out of customers that you feel have too much in co2 emissions, and you can make your balance sheet cleaner that way, or you can say we need to help them to change their business model to something more renewable.
“We have clearly taken the second path. With some companies that have a lot of work to do to reduce their co2 emissions or become more sustainable in the future, our strategy is always to keep helping them in that transition. We can provide them with capital to invest in more renewable plans or find different ways of utilising energy,” he says.
Yazdi says coronavirus has if anything accelerated the push to more sustainable models. “A big chunk of the fiscal expansion you’re seeing in Europe is related to sustainability- building new infrastructure, new energy plants that are renewable. We can help in that transformation,” he adds.