Besides IKEA, Stieg Larsson’s Millennium trilogy and abundance of blondes, Sweden is known for socialism "with a human face", where the nanny state protects citizens from the cradle to the grave and the tax man spreads the wealth. That description has stood the test of time, but is it still true?
Sweden has four ultra high net worth households per 100,000, according to the latest global wealth report from the Boston Consulting Group. The score puts the country just outside top ten, higher up than the US. Only four European countries fared better: Austria, Switzerland and Scandinavian neighbours Norway and Denmark.
“We have estimated that the private banking market in Sweden is worth about SEK2 trillion (about $307 billion), which represents an annual increase of between nine and ten per cent in recent years. We believe that the market will continue to grow, even if the international situation is challenging at the moment,” Inga-Lill Carlberg, head of private banking at Nordea in Sweden, Scandinavia’s biggest bank, told this publication.
Sweden’s economy grew faster than any other developed nation in the first quarter of 2011. Led by high levels of industrial production and strong exports, the country's GDP has grown by 6.4 per cent so far this year, one percentage point more than Germany. The Economist, which dubbed the country the “North Star” in June, forecast lower but steady growth next year. It is already the biggest economy in Scandinavia and with a GDP of $458 billion it is just outside top 20 in the world, according to the World Bank.
The world’s highest taxes?
How justified is the notoriety for high taxes? Celebrity chef Jamie Oliver of the UK fell in love with Sweden during his televised visit last year. “The only downside is 80 per cent tax, that’s the only one I can think of,” he told viewers after a few schnapps.
“When I’ve been in the US and other countries, I have noticed that the image of Sweden from the 1970s and the 1980s is still alive,” Johnny Munkhammar, member of the Swedish parliament and the parliamentary committee on tax, told this publication. “But it’s important to get the story right, there was only a period of 25 years from the late 60s and onwards that was dominated by socialism and when taxes were sky-high. Before that, in the 1960s, when Sweden became a rich country, and also in the past ten years which have been successful, we have had other policies.”
Munkhammar is a member of the Moderate Party, the senior partner in the four-party centre-right coalition, or “the alliance” as it calls itself. The main opposition party, the Social Democrats of the centre-left, was in power between 1936 and 1976, 1982 and 1991, and 1994 and 2006.
One of the first actions of the new government which entered office in 2006 was to remove the unpopular wealth tax. But taxes are still comparably high. At 57 per cent, the top rate of income tax is the highest in the world. The latest revenue statistics from OECD showed that Sweden, at 46 per cent, was second only to Denmark in terms of tax ratio as a share of GDP. It is considerably higher than, for example, Switzerland’s 30 per cent and 24 per cent in the US. However, the figure was well above 50 some years ago.
“If you look at the Index of Economic Freedom (by the Wall Street Journal and the Heritage Foundation), Sweden is one of the freest countries in the world in terms of regulation and finance,” said Munkhammar. “The only thing that is lagging behind is the tax burden, but that’s about to change.”
The government has prioritised to cut taxes for people on low and middle incomes, something Munkhammar, whose role model is Margaret Thatcher, thinks is a sound policy.
A stable financial sector
Sweden’s pony-tailed finance minister, Anders Borg, is not just a tax-cutter; he is also a bank regulation enthusiast. In September 2009, he signed a letter along with, among others, Christine Lagarde, then France’s finance minister and now head of the IMF, calling for strict regulation of bankers’ compensation.
Financial services accounts for about 4 per cent of Sweden’s GDP. The country’s banking system was almost spared from the financial crisis in 2008, partly because it was well prepared after having a deep crisis in the early 1990s caused by a housing bubble that burst, resulting in bust banks and unemployment. According to the Swedish Bankers’ Association, the Swedish banks are among the best capitalised in the world.
The Big Four
Wealth management in Sweden is dominated by four big banks: Nordea (formerly under the name Nordbanken in Sweden), SEB, Swedbank (formerly Föreningssparbanken) and Handelsbanken, many of whose private banking operations are less than ten years old. As the wealthy population grew by 40 per cent between 2004 and 2007, according to Swedish business magazine Affärsvärlden, the area has been a top priority for them in the last couple of years.
Even though the banks do most of their business in Sweden, Scandinavia and the Baltic states, some of them are trying to crack into the UK market. Simon Gammon, managing partner at Knight Frank Finance, said that Swedish banks are among those lenders to the high net worth real estate market in the UK, highlighting SEB and Nordea. Handelsbanken opened 27 branches in the UK last year and reached 100 branches this year. The bank's UK head office is located in Birmingham.
At the end of the second quarter of 2011, Nordea had €55.6 billion (about $79 billion) in client assets in its Nordic private banking, which include all Scandinavian countries, up from €48.1 billion a year earlier. The bank also has a private banking office in Luxembourg for clients in continental Europe, many of whom have emigrated from Scandinavia. In international private banking, assets under management shrank by €500 million to €9.7 billion during the second quarter of 2011, but this is still €500 million more than a year ago. At the Nordea Group as a whole, assets under management jumped to €191.1 billion, up 12 per cent from €170 billion a year earlier.
“We launched private banking in Sweden in 1999 and have grown roughly between 15 and 20 per cent a year since,” Carlberg, Nordea’s private banking boss in Sweden, told Wealthbriefing. “We have also doubled our staff in the field, from about 100 to 200. Because we think that the market will continue to grow, our goal is to expand the business by 20 per cent a year until 2015.”
SEB was the first bank to launch a private banking division in Sweden and is also the biggest player on the market. In the second quarter of 2011, profit from wealth management was SEK309 million, down 24 per cent from SEK405 million for the first quarter. However, the positive trading figures in the beginning of the year means that the bank is still 2 per cent up on a half-year basis compared with last year. The private banking business recorded net sales of SEK7 billion during the quarter.
David versus Goliath
As Sweden’s wealthy population grows, smaller family offices are popping up on the market. One of the new firms is Catella, which, through the acquisition of Enskild Kapitalförvaltning, launched a new wealth management arm in April this year.
“I don’t think it’s healthy that the big banks have such a big piece of the action,” Michael Merzinger, responsible for business development at the firm, told this publication. “We have a lot to learn from family offices in the UK and Switzerland, but we also have to be different because the Swedish market is comparatively small. We cannot be secret and take on clients by invitation; we have to be more transparent.”
Catella had about SEK3.6 billion of client assets in wealth management at the end of June. It aims to expand to SEK20 billion by 2015, and to add about six asset managers and advisors to its 12-strong team in 2011 - a strong sign of the firm's belief in the market.