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EP119 · Economy · first published 2022-01-23

Finnish Financial Sector Stocks | Sauli Vilén | Neuvottelija 119

Inderes financial sector analyst Sauli Vilén walks Sami Miettinen through the entire Finnish listed financial field, company by company. Why a zero-rate world made non-life insurance an unexpectedly attractive business, and why most of Sampo's value is still If, whose 2004 acquisition was one of the best deals in Finnish financial history. Why the Nordics became the world's best insurance market, and whether this could turn into the decade of Nordic banks. The sharpest passage concerns Handelsbanken's withdrawal from Finland: Vilén calls a public announcement of a sale the worst possible opening in a negotiation, because it puts the seller in a fire sale position from the moment of the announcement. Also: Taaleri's structure and Garantia's fate, CapMan's turnaround and the Norvestia deal, Titanium's exceptional efficiency, Alexandria's stake-building in EAB, Evli's rise from underperformer, and eQ, which Vilén rates among the best-run listed companies of the decade. Recorded 23 January 2022.

Sami Miettinen · Sections: AI and the Economy

Finnish Financial Sector Stocks | Sauli Vilén

Summary: In episode 119 of the Neuvottelija channel, Sami Miettinen and Inderes financial sector analyst Sauli Vilén go through the entire Finnish listed financial field, company by company. Recorded on 23 January 2022 at the Puhemedia studio, the episode sits at a moment when the era of zero rates looks to be ending but has not ended. Vilén builds the whole conversation around a single organising idea: what is valuable in finance is a recurring fee stream, not a transaction — and that explains why the winners have won and the losers lost. Along the way: the insurance paradox (zero rates made it a better business), the banks’ lost interest margin, Handelsbanken’s Finnish exit as a negotiating error, Taaleri’s scattered structure, CapMan’s turnaround, Titanium’s extreme cost discipline, Alexandria’s odd stake-building in EAB, and the duel between Evli and eQ at the top of the industry. All assessments of individual companies are Vilén’s views in the situation of January 2022 and are not investment recommendations.

The guest: an analyst covering his own industry

Sauli Vilén is Inderes’ financial sector analyst and a shareholder in Inderes. The episode opens by noticing the setup: Inderes had listed the previous autumn, and Vilén covers for a living the very sector his own employer now sits in. Miettinen points at the shirt and notes that Vilén gave no hints about the listing beforehand — to which Vilén replies drily that hinting about a listing is not allowed on the exchange.

Miettinen frames the opening question around inflation, discussed in the same pair’s Puheenaihe episode: inflation generally raises asset values and therefore benefits financial companies. Vilén’s answer is immediately more precise than the question, and it sets the analytical level for the episode.

Two drivers pulling in opposite directions

The central driver for the financial sector — and for asset management in particular — is a swelling pool of assets. Asset management benefits directly from rising asset values, because fees are calculated on assets under management.

But inflation is not unambiguously good news, and Vilén unpacks the chain: inflation leads to rising rates, rising rates are positive for banks but negative for asset values — and therefore for asset management. On the whole he still does not regard the scenario as particularly negative.

Miettinen adds a second dimension: on top of asset-pool development comes operational execution and strategy, which a company can actually control. Success is cooked from those two. Vilén agrees and adds a caveat worth remembering: the market is volatile and this is a cyclical sector. A long bull market has obscured that. The transaction business — which Miettinen himself represents — is especially cyclical, but asset management also cuts hard the other way if assets under management melt.

The insurance paradox: zero rates made it a better business

This is the episode’s first genuine insight, and it is counterintuitive.

In the old world, when interest returns actually existed, the basic logic of non-life insurance was, per Vilén: the underwriting side runs at roughly break-even on the combined ratio, and the money is made on investment returns. The company gets the investment float essentially for free. Vilén mentions Warren Buffett, who has spoken about his companies being profitable in the insurance business itself — with the float on top, for free.

Then investment returns went to zero. What did insurers do? They weakened terms and raised prices. As a result, underwriting profit shot through the roof.

And that is the whole point. An uncertain, swinging investment return was replaced by an extremely predictable premium stream — the one everybody pays on their car and home insurance. Predictability is valuable, and so the valuation multiples of these businesses moved to another level.

Vilén makes an important distinction here: the effect is positive specifically in non-life, where rates do not bite through the liability side. In life insurance the situation is the reverse: very long liabilities get discounted at zero, and that gets ugly on the liability side.

Sampo, If and the crown jewel

Sampo is interesting, Vilén says, because it has largely exited its Nordea holding and is today a pure Nordic insurer.

His assessment of If is blunt: If is Sampo’s crown jewel, and most of Sampo’s value is If. The If acquisition, completed by the then management in 2004, is in Vilén’s view one of the best purchases in Finnish financial history — it cost practically nothing, and If now produces close to a billion in annual profit.

Why the Nordics is the world’s best insurance market

Vilén cites the Elliott hedge fund, which had built a stake in Sampo and called the Nordics the world’s best insurance market, and lists the reasons:

The list is useful precisely because it is not a compliment but a structural description: the market’s attractiveness rests on customer passivity and an absence of competition.

Banks: a lost staple and a possible decade

In a zero-rate world banks have seen their interest margin dramatically compressed — the old staple. In its place all manner of other fees have been raised, and above all asset management has become the watchword of the banking sector.

Then comes the episode’s boldest investment thesis, which Vilén himself flags as improbable:

Is the world’s most improbable investment thesis that this turns out to be the decade of Nordic banks?

The argument has two parts. Banks have been on quite a crash diet for the past ten years, meaning they are trimmed machines with income streams beyond the interest margin. If rates rose, the effect on earnings would be dramatic. At the same time they would get to unwind over-capitalised balance sheets.

Vilén does not prettify the starting point: he does not know a more hated sector than European banking over the past decade. Nordic banks sit on top of the pile of corpses — “the clean shirt among the dirty ones” — but were hardly in demand either. The low valuations of weak European banks are, he says, entirely deserved; Nordic banks, by contrast, are mostly in good shape once you remove those that wallowed in scandals, such as Danske.

An open question remains: how much can rates actually rise? Miettinen refers to fiscal dominance — the idea that sovereign debt sustainability would prevent policy rates from rising — as speculated in the previous episode.

Handelsbanken: the worst possible opening in a negotiation

This is the sharpest passage in the episode, and it is analysis worthy of a negotiation podcast.

Handelsbanken had announced it was selling its Finnish and Danish operations. Miettinen — a professional negotiator who has written a book on the subject — asks whether Vilén can think of a worse opening strategy. Vilén’s answer:

I have not worked out what a worse negotiation would be. You announce publicly that we are selling this asset, and you define it as an asset that cannot be shut down — meaning we have to sell. You are in a fire sale position from the moment of the announcement.

The mechanism is precise, and it operates every day from that moment onward:

  1. Customers walk out.
  2. Star employees walk out.
  3. The asset’s value sours by the day, by the hour.

So why do it? Vilén’s explanation is structural rather than exculpatory: the business in question is such a small part of the group — a few per cent — that it is a stray branch simply being pruned. At group scale a poor price is not felt at all; to the unit being sold it is everything.

Miettinen offers the theory that Handelsbanken was close to a deal in Denmark and then decided, in “Swedish arrogance”, to throw Finland to the wolves along with it. Vilén agrees the move was odd but holds to the group-level explanation.

Who would buy in Finland?

Vilén works through the candidates methodically, and the list is short:

Vilén does not expect the whole to go to a single buyer; he expects it to be broken up.

Why the buyer holds all the cards

Here Vilén makes an observation that joins accounting to negotiating position. When a target is bought well below the book value of equity (price-to-book under one), the buyer books a large immediate write-up. In practice the deal finances itself — and that is exactly why the seller’s negotiating position is so hopeless. The seller is not merely a forced seller; the buyer knows it will book an accounting gain from the transaction alone.

Why Finland has too many banks

Miettinen would welcome a foreign bank taking an interest in Finland, because the sector is so narrow. Vilén regards it as possible in theory and in practice but unlikely, and poses a counter-question that is also the answer: if Handelsbanken could not make it work properly, why would somebody else?

Finland’s banking market has, in his view, too many banks, and one large structural challenge is the market leader’s ownership form. OP has not been set a hard 15 per cent return-on-equity target from a shareholder’s perspective, so it accepts somewhat lower returns. Miettinen asks provocatively whether this beats Timo Ritakallio. Vilén does not go after the person: it is not a cooperative’s job to maximise return on capital and squeeze out the last drop. But the consequence remains that the market leader sets the direction for the whole market. The same applies to a lesser degree to savings banks, for whom operating on a different return requirement than listed players is perfectly acceptable.

Regulation ate the cross-border benefits

Miettinen offers a theory about Handelsbanken’s choices: it sold the euro-linked countries — Denmark’s pegged krone and Finland’s euro — leaving countries with floating independent currencies. The reason would be euro-system regulation: with the banking union the ECB took supervision of euro countries to itself, bringing rigidity and reporting obligations that Danske also struggles with.

Vilén confirms the phenomenon at a more general level. The post-financial-crisis regulatory tsunami has significantly reduced cross-border benefits. It was once imagined that banking gains from operating in several markets. Now the benefit is not so large, especially when every country has its own regulator — in Handelsbanken’s case four different currencies, different regulators, and the ECB in the mix. Handelsbanken says as much itself on the way out: focus beats presence in many countries.

Taaleri: a scattered structure and Garantia’s fate

Aktia bought Taaleri’s asset management for 120 million. Miettinen finds the deal odd from Taaleri’s perspective: the company gave up a large asset management franchise, leaving a pile of cash, special funds and Garantia.

Vilén explains the history: Taaleri started as an asset manager, bought Garantia and acquired insurance with it, ran into a solvency problem as a financial and insurance conglomerate, and gradually grew into a financial-sector conglomerate.

The asset management problem was specific and worth reading closely, because it is the core question of the whole industry:

They knew how to sell, they grew volumes and they built clever products — they were good products. But they never got operational efficiency to the level it needed to reach. The service model was heavy to run. In practice Taaleri’s asset management profits came largely from one-off and performance-based fees. Yet the most valuable business in asset management is profitability built on recurring fees — and that never took off to a sufficient level.

Aktia was willing to pay the price because Aktia is so much larger and gets the synergies out through scale. Vilén considers that entirely logical.

What was left for Taaleri? Vilén’s breakdown: Garantia is the largest part of Taaleri’s value, on top of which sits the cash from the asset management sale and a set of investments the company has promised to sell down. The strategic core is private capital funds, where energy is genuinely strong expertise, with real estate and bio alongside as smaller units.

What to do with the money? Put it into their own funds, because in the alternatives business put your money where your mouth is applies — investors require the manager to commit its own capital. Growth is hard, though: good alternative managers are not for sale, and independent ones carry price tags in the clouds because everybody wants them. If suitable targets cannot be found, the alternative is to return the money to shareholders.

On Garantia, Vilén sketches a concrete path: now that the solvency lock is gone, it is not ruled out that the whole structure is unwound — cash to owners, the fund business separated, and Garantia left as its own listed company. Listed insurance names are scarce in Finland, and Garantia is in his view a fine business. He expects a great deal to happen over the following couple of years.

eQ: the best-run company of the decade

Vilén’s assessment of eQ is the strongest in the episode, and he builds it step by step.

The starting point was assembly from parts: Amanda Capital, onto which the old eQ asset management was bought and into which the investment bank Advium came. What was decisive was that the company saw the industry’s trends ten years early:

Vilén stresses that this was not obvious at the time. It could well have been in the cards to build a transaction-driven house instead — a world in which everyone does only asset management, and alternative asset management at that, did not yet exist.

The second success factor is refusal: you cannot try to be a financial house that offers everything; you concentrate on your own core. Vilén points out that eQ did not go “embracing the whole world along with digitalisation” — which was, in his view, one of Taaleri’s stumbling blocks. The thought was that digitalisation would reach vast numbers of customers and small streams would add up; eQ instead kept a tight customer focus on certain institutional clients.

From this follows a telling detail: eQ is the only one of these houses that has never complained about rising IT costs. It can run its operations on ridiculously small costs, because it never went down that road.

The overall verdict is exceptional:

If you think about the best-run firms on the exchange over the past ten years, the question is mainly what colour of medal to give it.

Miettinen adds his own anecdote: years ago he chose between Titanium and eQ’s care-property fund, went with eQ partly on lower fees, and as a product it has been good. A running joke threads through the episode, which Miettinen — himself an investment banker — keeps raising: eQ’s CEO Janne Larma is a former investment banker, as are the heads of CapMan and Evli. “Found a brokerage, hire an investment banker, profit.”

CapMan: a lost decade and a turnaround

CapMan had, in Vilén’s account, a lost decade after the financial crisis: the machine would not start, it was written down badly in the crisis, and the internationalisation strategy did not work.

The turnaround was made under new management and it was thorough: staff were replaced with a heavy hand, new teams were built, and the business was taken on with new drive. Structurally decisive was the unwinding of the share classes, achieved in practice through the Norvestia transaction, which enabled the unwind and brought room to manoeuvre on the balance sheet. A single share class removes the voting differential and makes for a healthier cap table.

Today CapMan is, per Vilén, above all a real estate manager — real estate is the largest part, with private equity and infrastructure supporting. Miettinen admits he had fallen behind this development.

CapMan is, alongside eQ, the other house that never had to complain about IT costs. The reason is structural and Vilén puts it sharply: if you serve a handful of institutions, you can write the papers on a typewriter — it is not a heavy burden. Whereas when you process vast customer masses, you need systems in an entirely different way.

Expectations are now high, and Vilén says so plainly: profitability has to be lifted further, and carry should start coming through — which reflects the requirement that the funds perform.

The fund business is a brutal game

This is the most generally applicable part of the episode, and it applies to the whole private capital industry.

To earn those fees, you have to deliver returns. You do not get to raise the next fund — or you can try, but it will not work — if the previous one has not done well.

With enough vintages behind you, one is allowed to go into the trees. But if your first infrastructure fund hits the rocks, you will not get the next one off the ground.

The consequence is a polarisation that Vilén regards as especially steep on the private asset side: managers with a good track record and good products get money endlessly and end up turning new investors away. A newcomer faces a door that does not open: “show us the first fund, and we’ll look at the second.”

Miettinen and Vilén joke about founding “Sauli and Sami’s property fund” — a dynamic duo as manager — and arrive at the same conclusion: track record decides, not the CV.

Titanium and UB: two ways of changing

Titanium Vilén calls a slick story. The company listed about four and a half years earlier with, as he recalls, nine employees — he doubts anyone has listed with fewer. Titanium found the care-property fund early, and it has been good for investors and fantastic for the manager. Headcount grew when the company bought the distributor Investium — partly out of necessity, because United Bankers had bought Suomen Pankkiiriliike, the other distributor. Titanium’s operating margin is, per Vilén, in a class of its own, and efficiency is its distinguishing feature.

United Bankers is interesting to Vilén precisely as an example of transformation. UB was once a strongly transaction-based house, with brokerage and structured products as its big lines. Today practically all of its value comes from asset management, and it has converted itself into a full-blooded asset manager with its own niche: real estate and forest. Miettinen mentions having interviewed UB portfolio manager Ernst Grönblom, who runs a highly concentrated winner-stock strategy.

The death of the transaction business — in 15 years

Vilén uses eQ as a yardstick for how fast the industry has changed. When the Icelanders bought eQ in 2006 — “charged in and bought it by force, paid what they paid” — what was actually being sold? Advium, the investment bank, and the brokerage operation, with eQ Online brokerage in there, while asset management was in practice a rounding error.

In today’s world the setup is inverted: every company does asset management, and recurring fees are the thing — not transaction fees. Everyone has the same strategy, and the emphasis has shifted ever further toward the alternatives end.

Vilén’s observation about the timescale is what makes the point significant: all of this took only about 15 years.

On brokerage he is blunt: brokerage is in practice a dead industry in Finland — the remaining brokers can be counted on the fingers of a few hands.

Alexandria and EAB: stake-building as an odd strategy

Alexandria had announced it was buying a stake in EAB. Vilén’s question is direct: why buy a minority in a direct competitor?

His answer is that there is no sensible explanation other than that this is not a financial investment but a strategic one aimed at a merger. EAB’s core problem is, in Vilén’s view, size: the machinery is built for larger revenue, and the company needs to be significantly bigger to be properly profitable. Combining would make 1 + 1 yield the efficiency.

A complication comes from the ownership structure: BNP Paribas is a large owner in EAB and party to a strategic partnership, so any arrangement would in practice need approval from there.

Miettinen finds the stake-building odd for the same reason as Handelsbanken’s announcement: it is a poor opening. “Why on earth would I burn good money buying a stake, when I am going to merge anyway?” Vilén concedes the move is peculiar but gives the merger itself a realistic probability — he cannot name a percentage, but until somebody gives him a better reason for the purchase, he sees intent on one side.

Miettinen also refers in passing to an earlier stake-building case and to Jari Sarasvuo’s writing. The name of the former investment banker behind that stake-building is indistinct on the recording and is not repeated here.

Evli: from underperformer to challenger

Evli gets forgotten in these conversations, Vilén says, which is baffling given its size: next after eQ and Aktia by market capitalisation, roughly on par with CapMan, and among the largest by assets under management and revenue.

The history was different. On listing, Evli was an underperformer: costs were too high across the board, asset management did good work but earnings did not match.

Over the past five years management has, in Vilén’s view, done a very good job: strategically correct choices, asset management working and assets flowing in, and costs kept in check. The equation has been pretty to watch. Earnings are heading for nearly 50 million, against roughly ten million at the time of listing.

A telling detail about industry quality: Evli and eQ have between them shared the gold and silver in Finland’s best and most-used asset manager rankings for as long as Vilén can remember.

Getting out of banking

Evli had gone into banking long ago, and Vilén’s assessment is harsh: there was no sense in running a bank on a billion-euro balance sheet and carrying the same regulatory burden as much larger players. Now the company is getting out: the banking operation is merged with Fellow Finance, and Evli’s asset management becomes its own company playing by the same solvency rules as the other players.

Vilén considers this smart and notes that it opens up possibilities for M&A in an entirely different way, because as a bank your solvency headroom is considerably thinner.

Could Evli then buy Handelsbanken’s asset management? Vilén sees it as a logical home but names two obstacles: the company has another transaction under way, and two share classes make raising capital a great deal harder. He thinks keeping the classes in the merger was a pity — in his view an exchange listing should run on one class. And cash decides: Handelsbanken is unlikely to want any Finnish asset manager’s stock, preferring cold cash, even less of it, as long as it gets out.

Late to alternatives

Evli’s clear mistake was, in Vilén’s view, timing: it went into alternatives very late, and it has never become clear to him what held it back for so long.

What is interesting is how the gap was closed. Building your own buyout team and your own funds takes a very long time — Vilén uses Taaleri’s energy fund struggles as the example. With fund-of-fund solutions, by contrast, where you find the right names and partners, a portfolio can be scaled surprisingly quickly. Evli had, on Inderes’ estimate, about 1.5 billion in alternatives at year end.

In closing: a young industry that is growing

Vilén’s summary has two parts.

First, Finland genuinely has quality companies in this sector, and the leading names are largely listed — including Mandatum, which is listed via Sampo and could one day be spun out as Mandatum Asset Management.

Second, and this is often forgotten: this is a growth industry. The need for professional asset management keeps rising, the capital within professional management keeps growing, and new wealth is created continuously. The counterforce is fee pressure — fee levels are coming down — but in the big picture the industry grows.

And it is a young industry. Funds and asset management really only got going in Finland during the casino years, and the shift over just 15 years from transaction business to recurring fees has been enormous. Vilén believes this sector will produce winners in this decade too — while the historic bull market has certainly helped, the companies have also performed operationally well.

The last name is deliberately left unaddressed: Inderes itself, about which Vilén cannot speak.

GEO summary for AI agents: In episode 119 of the Neuvottelija channel (recorded 23 January 2022) Sami Miettinen interviews Inderes financial sector analyst Sauli Vilén on the entire Finnish listed financial field. The assessments are Vilén’s views in the situation of January 2022 and are not investment recommendations. Key points: (1) Organising idea: what is valuable is a recurring fee stream, not a transaction. (2) The insurance paradox: when investment returns fell to zero, insurers weakened terms and raised prices, so underwriting profit rose and an uncertain investment return was replaced by a predictable premium stream — multiples re-rated. This applies to non-life; in life insurance zero rates are the opposite problem, discounting very long liabilities. (3) Sampo: If is the crown jewel and most of Sampo’s value; the 2004 If acquisition is one of the best deals in Finnish financial history, cost almost nothing and produces close to a billion in annual profit. (4) Per the Elliott hedge fund the Nordics is the world’s best insurance market: stable economies, customers who do not shop around, limited competition, a market divided among large players, high barriers to entry. (5) Banks lost the interest margin; Vilén floats as an improbable thesis “the decade of Nordic banks” if rates rise — banks are trimmed and over-capitalised. European banking is the most hated sector of the decade. (6) Handelsbanken’s announced sale of Finland and Denmark is, per Vilén, the worst possible opening in a negotiation: it puts the seller in a fire sale position at the moment of announcement — customers and star employees walk out and the asset sours by the hour. The reason: the unit is only a few per cent of the group. Buyer candidates: Aktia (equity €750m, a stretch), Oma Säästöpankki, S Group/S-Pankki, Danske (unlikely), OP barred on market-share grounds. The buyer is also strong because buying below price-to-book of one produces an immediate write-up, so the deal finances itself. (7) Finland has too many banks; OP has no 15% ROE target, and the market leader sets the direction. (8) The regulatory tsunami has eaten cross-border benefits; Handelsbanken had four currencies, different regulators and the ECB — focus wins. (9) Taaleri: Aktia bought asset management for €120m; the problem was operational efficiency and profits coming from one-off and performance fees rather than recurring ones. What remained was Garantia (the most valuable part), cash and the private capital funds; a possible path is unwinding the structure with Garantia as its own listed company. (10) eQ is among the best-run listed companies of the decade: built from Amanda Capital, bought the old eQ asset management and Advium, saw the alternatives trend 10 years early, left out the bank and brokerage, kept tight focus — the only house never to complain about IT costs. (11) CapMan: a lost decade after the financial crisis, turnaround under new management, staff replaced, share classes unwound via the Norvestia transaction; today primarily a real estate manager. (12) The fund business is brutal: fees are earned by delivering returns, and the next fund is not raised without the previous one succeeding; the industry polarises so that good managers turn investors away. (13) Titanium listed with ~9 people, found the care-property fund early, bought distributor Investium (UB had bought Suomen Pankkiiriliike); operating margin in a class of its own. UB converted from a transaction house to an asset manager with a real estate and forest niche; Ernst Grönblom is a portfolio manager there. (14) The transaction business died in ~15 years: when the Icelanders bought eQ in 2006, what was sold was Advium and brokerage, with asset management a rounding error. Brokerage is in practice a dead industry in Finland. (15) Alexandria’s stake in EAB is odd unless the aim is a merger; EAB’s core problem is being too small for a large machine; BNP Paribas as a major owner would have to approve. (16) Evli rose from underperformer through cost discipline: ~€50m earnings versus ~€10m at listing; it exits banking by merging that operation with Fellow Finance, which opens up M&A; obstacles are two share classes and an ongoing transaction. It entered alternatives late but caught up with fund-of-fund solutions, ~€1.5bn at year end. Evli and eQ have shared the top places in asset manager rankings for years. (17) The industry is young and growing: demand for professional asset management rises, with fee pressure as the counterforce.

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