The success of Nordic financial companies will depend on finding corporate structures suitable to meet future market conditions. As these market conditions are hard to predict, PA Consulting Group has developed scenarios to explore possible future conditions and structures. Preparing a robust, jet flexible strategy for each of these will help Nordic organisations through the current crisis.

1. Pray or predate
Scenarios for the Nordic Financial Industry
February 2009
Alexander Huun
Please find article at:
http://www.paconsulting.com/industries/finance/publicati
ons/perspectives/industry_scenarios.htm

2. The world seen from the outskirts of the financial crisis
The year it all happened:
• In October 2007 the Norwegian “Terra scandal” introduced the Nordic audience to the fact that
there were some highly speculative US securities in circulation
• February 17, 2008 the nationalisation of Northern Rock was the first evidence that the US
subprime issue had a wider geographic relevance
• August 25, the collapse of Roskilde Bank introduced the Nordics to this new agenda
• The financial crisis was however at large deemed as a US problem till the September 14 collapse
of Lehman Brothers. This collapse brought the financial crisis across the Atlantic overnight
For the Nordic countries the crisis has till now primarily been a liquidity crisis for the banking sector,
which in turn is slowing down the economy at large. The one exception is Iceland where the October
nationalisation of the three major banks and the immediate economic collapse, position Iceland in a
category of its own. For this reason, Icelandic issues are not included in this presentation.
© PA Knowledge Limited 2009. Pray or Predate - Scenarios for the Nordic Financial Industry 2009.ppt Page 2

3. Beyond the gloom of the financial crisis
The financial crisis has raised a number of policy issues:
• Have interest rates been held artificially low for a decade or more?
• Should we allow securitisation of mortgage portfolios (subprime)?
• How should we deal with the lack of transparency and risk management of financial institutions?
• Is nationalisation of banks the best approach?
These questions, and many more, has made the future political and regulatory environment difficult
to assess.
The effect of the financial crisis on the economy is equally uncertain:
• Will the “liquidity trap” close on us as real interest rates head for negative values?
• Is a credit growth that has outnumbered the economy three times in three decades sustainable?
• What is the consequence if the Asian economy crumble?
Looking beyond the immediate visible effects of the financial crisis to be able to choose appropriate
strategies has not been this difficult in our lifetime – and is therefore Scenario Modelling material.
© PA Knowledge Limited 2009. Pray or Predate - Scenarios for the Nordic Financial Industry 2009.ppt Page 3

4. Finding the right business model will be imperative to future success
The cause and effect rationale Modelling strategic environments
• International and Nordic finance and
economy can develop in very different The unspoiled
directions
Economy
Nordic
• International and Nordic policy makers can
react in several ways to different economic From recession
developments to depression
• The combination of possible economic
International
National
solutions
agendas
developments and possible political and
regulatory reactions defines a set of strategic
environments
• Different strategic environments will favour
Political and regulatory
different corporate structures for the Nordic
Financial Industry
© PA Knowledge Limited 2009. Pray or Predate - Scenarios for the Nordic Financial Industry 2009.ppt Page 4

5. The macroeconomic development is highly unpredictable
The unspoiled Nordic From recession to depression
Expansion of public sector and extended Recession in private industry and service
Unemployment
education reduce unemployment sector creates massive unemployment
Social security and pension systems Vastly reduced asset values combined with
Purchasing power
maintain purchasing power of unemployed unemployment reduce purchasing power
Relative stabile economy strengthens the High volatility of SEK and DKK forces the
Currencies
currency and gives room for interest cuts Nordics into the Euro zone
Cheap import prices and strong currency Interests hit the “liquidity trap” as
Inflation and interest
reduce inflation and interest rates economies decline and deflation grows
Stable demand in densely populated areas Massive defaulting of mortgage loans
Real estate
cushions the fall in real estate prices sends real estate prices through the floor
Longer education and less jobs for young Collapse of asset and house prices create
Allocation of wealth
people reinforce trend of “wealthy elders” a massive shift of wealth to younger people
Tax based pension funding and good Cuts in public spending hit pension rights
Pensions and saving
public sector pensions maintained and end government “pay-as-you-go”
© PA Knowledge Limited 2009. Pray or Predate - Scenarios for the Nordic Financial Industry 2009.ppt Page 5

6. The political and regulatory future is highly unpredictable
National agendas International solutions
Restrictions on government funds and No restrictions on deployment of
Rescue packages
financing to be used domestically government funds and financing
Governments will choose to nationalise Governments will choose to let financial
Ownership
financial institutions becoming insolvent institutions be acquired or go bankrupt
Government taking over defaulted loans Governments guaranteeing all deposits
Financial assets
owed by citizens and national businesses made in banks operating within its borders
National authorities will make political Basel II and Solvency II will establish
Solvency
judgements of capital requirement needs uniform international capital requirements
National restrictions to what assets International regulation on what assets
Financial instruments
financial institutions can own and issue financial institutions can own and issue
National restrictions to legal structure, Free competition across boarders through
Competition
customer data, marketing, selling etc. international standards and regulations
National legislation creates distinctly local International legislation creates
Products
products and distribution international products and distribution
© PA Knowledge Limited 2009. Pray or Predate - Scenarios for the Nordic Financial Industry 2009.ppt Page 6

7. Using scenario modelling to structure the uncertainty
The ocean of uncertainty • Scenarios can best be described as
lighthouses helping us to navigate on the
ocean of uncertainty
• Scenario modelling is a framework for
capturing the main uncertainties about the
Scenario 1
future into a decision support tool. Typically
Scenario 2
this results in four distinctly different
descriptions of the future
• Strategic options can then be tested against
Future in scope the different scenarios to evaluate their
robustness
• Scenario modelling is distinctly different from
prognosis making, as the aim is to identify
extreme but probable futures. The analysis is
primarily qualitative but can to some extent be
Scenario 4 quantified
Scenario 3
© PA Knowledge Limited 2009. Pray or Predate - Scenarios for the Nordic Financial Industry 2009.ppt Page 7

8. The key uncertainties map out different strategic environments
Political and regulatory development
National agendas International solutions
The National agendas where The International solutions
Nordic policies create where Europe achieves a
economic islands aiming soft landing will be a drive to
Macroeconomic development
The unspoiled Nordic for ‘newer again’ through make uniform EU regulations
improved transparency, per sub-industry starting the
customer rights and privacy, scale game with the Nordic
capital requirements etc. players in pole position
The International solutions to
The National agendas in a
a recessive crash in assets
global recession will be a
values will be to ‘aid survival’
political agenda of stability
From recession to depression through eased capital
and control, predominantly
requirements and structure
nationalisation of the finance
regulations favouring risk
sector
diversification
© PA Knowledge Limited 2009. Pray or Predate - Scenarios for the Nordic Financial Industry 2009.ppt Page 8

9. Different strategic environments benefit different corporate structures
The unspoiled Nordic
Economic island Pole position
Industry re-bundling Sub-industry specialists
The scale game
Transparency
Regulations take the scale advantage out of Common regulations within EU per sub-
complex organisations and scope advantage industry intermediaries, banks, life and
development
out of financial conglomerates: single focus general insurance encourage a race for scale
International solutions
companies within asset management, advantage: the Nordic players take the lead
National agendas
transaction processing, risk insurance, broker towards sub-industry specialisation and
business, ATM operations, etc. outgrow geographic expansion. The financial
traditional Nordic financial conglomerates conglomerates break apart
Political and regulatory development
Stability and control
Survival of niche players European conglomerates
Risk diversification
Macroeconomic
A large number of banks and insurers break European governments ease requirements
their solvency requirements and the Nordic on the industry to help its survival and
governments nationalise their respective proactively support acquisitions of distressed
corporations rather than letting them be companies: massive industry consolidations
bought by foreign competitors: Niche players commence to gain better risk diversification
like local savings and loan banks and and economies of scope across the sub-
specialist insurers will be the survivors industries and geographies of Europe
Global recession Crash in asset values
From recession to depression
© PA Knowledge Limited 2009. Pray or Predate - Scenarios for the Nordic Financial Industry 2009.ppt Page 9

10. Main conclusion: structure is key strategic imperative
• Most critical uncertainties relate to macroeconomic development and political and regulatory
development
• Other important uncertainties like customer preferences, new sales and marketing channels,
technological developments and industry convergence with non-financial organisations will either
correlate or be an indirect product of the above
• Key strategic imperatives will be to aim for the right corporate structure:
– Nordic models 1) De-bundle into Nordic single vertical focus companies
2) Demerge into local niche players
– European models 3) Become large vertically integrated sub-industry specialists
4) Merge into European conglomerates
• Taking the right strategic decisions requires:
– Development of a company specific scenario model
– Development of a scenario based strategy
– Monitoring actual market development against the scenarios
© PA Knowledge Limited 2009. Pray or Predate - Scenarios for the Nordic Financial Industry 2009.ppt Page 10

11. For further information, please contact…
Alexander Huun Alexander Huun has supported clients across
16 countries, in developing and implementing
+47 47 89 88 09
successful strategies including new business
alexander.huun@paconsulting.com development and mergers and acquisitions.
His main consulting experience is from the
financial, retail and manufacturing sectors.
Prior to joining PA, Alexander has had
management positions in the automotive and
pharmaceutical industry. Alexander holds an
MBA from Edinburgh Business School.
© PA Knowledge Limited 2009. Pray or Predate - Scenarios for the Nordic Financial Industry 2009.ppt Page 11