Biggest Nordic money managers hoard banks in laundering scandals

The biggest Nordic asset managers are either holding or increasing stakes in banks dragged down by vast money laundering scandals.

In a region where the concept of ethical investing is regularly held up as a goal, none of the big institutional investors contacted by Bloomberg said they would consider divesting shares of banks under investigation for laundering. A number have taken advantage of share-price declines to add to existing stakes.

At the top of the list is Norway's $1 trillion sovereign wealth fund, which this month underlined its intention to remain a long-term investor in the Nordic banks caught up in dirty money affairs. The biggest pension funds in Denmark and Sweden have made similar statements. The funds Bloomberg spoke with said it was their intention to stay invested to take on a more activist role.

"Of course we take it very seriously," said Eva Halvarsson, the chief executive officer of one of Sweden's biggest pension funds, AP2. "We have shares in all the banks and are also cooperating with them in our role as asset managers. We follow the developments closely and have contacts at various levels."

"It's important that we wait and see how things develop," she said. "But it's of course in the cards for us to stay active and have a dialogue. They need to explain what they are doing about it and how they see their future."

Danske Bank and Swedbank are being investigated in Europe and the U.S. amid allegations they handled billions of dollars in dirty money from the former Soviet Union via their Estonian units. Those who reportedly benefited from the transactions include convicted felon Paul Manafort and ousted Ukraine President Viktor Yanukovych, among others. Nordea Bank is also under investigation for laundering, though allegations against it are on a much smaller scale.

Preliminary charges have already been brought against a number of former Danske executives, including its ousted CEO, Thomas Borgen. Swedbank fired its CEO, Birgitte Bonnesen, amid allegations she misled the public about the severity of the bank's laundering scandal. Bloomberg Intelligence estimates that Danske may be facing a fine of about $1 billion in the U.S., and as much as $500 million from investor lawsuits against it.

"I have a great understanding for the complexity of it but of course the banks need to take it seriously in order to regain trust," Ms. Halvarsson said.

The pension industry's commitment to scandal-hit banks may raise questions around the principles of responsible investing based on environmental, social and governance concerns. ESG investing guidelines aren't standardized, making it hard to know what distinctions money managers are making. At the same time, there's a school of thought that said staying invested in companies involved in unethical behavior is a better way to wield influence than divesting.

"That's the way we work," said John Howchin, the secretary general of the Council on Ethics that sets guidelines for a number of Sweden's AP pension funds. "We stay and work together with the companies, as long as we think it gives results." In an interview, he said that the ethics council has a global focus, while it's up to the individual funds to take a stance on local investments.

In Norway, the CEO of the wealth fund, Yngve Slyngstad, said they "have a good dialogue" with the banks under investigation for money laundering. "Even so, we will remain long-term investors and it goes without saying that, as an investor in these banks, we have an expectation that the board will address these issues."

Some of the biggest funds in the Nordic region are adding to their stakes in the banks. ATP and PFA, Denmark's two biggest pension firms with a combined portfolio of about $210 billion, have both bought up shares of Danske Bank since the scandal broke. PFA CEO Allan Polack points to the bank's ability to make money as a key consideration. He said PFA is "very pleased" with Danske's commitment to its dividend.

Analysts seem to agree.

By far the majority of analysts covering Danske are advising clients to buy or hold on to the stock. Most recently, Barclays upgraded its recommendation on Danske to overweight.

Finland's Varma Mutual Pension Insurance Co., which manages more than $50 billion, sold its Danske shares in 2018 but tripled its Swedbank stake. Ilmarinen Mutual Pension Insurance Co., another big Finnish fund, also added to its Swedbank holding.

Institutional investors have mostly stuck around as others have fled. Danske's share price plunged almost 50% last year, while Swedbank is this year's worst-performing financial stock in Europe, having lost roughly a quarter of its value. Nordea fell about 25% last year, broadly in line with the European financial stocks on average.

The declines have forced Danske and Swedbank to the bottom of the ladder when measuring market values of the six biggest Nordic banks. Nordea remains the region's biggest. But DNB ASA of Norway, which has largely steered clear of laundering scandals, is now the second-biggest Nordic lender.

Sampo Oyj, Nordea's biggest investor, said it's time to look past the allegations, declaring that the "era of large scandals is over." Sampo Chairman Bjorn Wahlroos, who also used to run the board of Nordea, said earlier this month he's satisfied that the bank has in the meantime allocated as many resources to its anti-money laundering work "as is physically possible."