Back when I revitalized my newsletter under Sung Capital, I wrote about how Denmark is over-banked, having twice as many banks per capita as the European average, with >90% of them fighting over <10% of the deposit market.
That number has shrunk from 219 banks in 1991 to the mid-50s today, driven by a wave of regulations and the shift from an agri-based economy to a service-based one.
This trend is unlikely to end soon, and it’ll continue for the following main reasons:
- Banking has increasingly become an infrastructure business. Compliance, cybersecurity, and regulatory reporting all carry fixed costs that don’t scale down for small institutions. Whether a bank has DKK10bn or DKK200bn in assets, it must still maintain a compliance team, AML oversight, and a core system capable of meeting the same supervisory standards. For many small, regional lenders, merging upwards is a structural necessity to spread those costs across a larger asset base.
- The lending side of banking is a commoditized business. It’s cheap deposits that give a bank competitive advantage and act as barrier to entry. Local banking historically thrived on proximity and trust, providing low-cost deposits and sticky relationships with local SMEs. That’s still evident, but it’s being increasingly eroded by urbanization, and locality is now overshadowed by digital capability, where customers expect frictionless mobile banking, instant transfers, and seamless integration across payments, savings, and credit platforms. Setting up and handling such infrastructure requires scale too.
- The capital framework amplifies the divide between small and large banks further. Small banks use standardized models for risk weightings, while large banks often get approval for their internal IRB models that allow them to assign lower risk weights to similar exposures. This means big banks hold less capital for the same loan book.
- Despite the different bank holding structures that can make Danish bank mergers a small headache, few industries make consolidation as straightforward as banking. Operationally, there is large overlap, and an acquiring bank’s core system can handle twice the transactions at a small incremental cost. There are three core banking providers in Denmark — BEC, Bankdata, and SDC — making integration risks low and cheap (except when the acquiree must switch systems, which triggers a break fee). That, coupled with cross-selling, rationalizing deposit costs, and eliminating risky product lines, means acquirers can usually calculate synergies with precision.
- Once a bank is small and local, it tends to stay small, unless it merges. Denmark’s competition authority, Konkurrence- og Forbrugerstyrelsen, has reported that new entrant banks’ asset bases remain flat through their first four years of operations. Regulatory friction and low customer mobility (~5% across the Danish banking sector) make organic growth strenuous without piling on risk on the asset side.
- Many Danish regional and local banks are led by long-tenured managements and locally anchored boards. Succession planning is often informal, and strategic vision can be cautious. Therefore, merging with a larger player often provides an orderly exit for leadership teams and continuity for employees and depositors, which is quite an incentive to solicit offers. Even underperforming banks can become attractive targets, as a bank’s issues often stem more from management skill than from asset quality.
Because there are rationales on both sides of the table here, bidding processes in this consolidation story can become competitive very quickly.
In June, I singled out Nordfyns Bank, a small, well-capitalized bank based on the island of Funen, which at the time was in merger talks with Fynske Bank. It was a deal that, on paper, made sense: two banks in the same region but with limited geographic overlap.
But it didn’t play out that way. What began as a tidy “merger of equals” between Nordfyns Bank and Fynske Bank soon unraveled over valuation, with an exchange ratio of 2.7 Fynske shares at the time pricing Nordfyns at DKK378 per share. Shareholders at Nordfyns pushed back against the initial exchange ratio, and before the two sides could align, Middelfart Sparekasse — a larger, self-owned savings bank from western Funen — quietly stepped in, buying a quarter of Nordfyns’ shares from SJF Bank at DKK510 per share. Fynske Bank wrestled to force a vote through, but a few months later, Middelfart returned with a full cash offer of DKK620 per share, effectively ending the Fynske talks and turning Nordfyns’ stock into a homerun.
Well, yesterday, another merger hit the tapes, this time on another scale. Sydbank, Arbejdernes Landsbank, and Vestjysk Bank announced plans to merge, creating a top-five Danish bank by assets with a collective loan book of DKK137bn (the two former were already number 5 and 6 on the list). This deal isn’t just another regional tie-up. Together with Nykredit’s acquisition of Spar Nord and Arbejdernes Landsbank’s purchase of PenSam Bank earlier this year, it marks the point where consolidation has moved to the core of Danish banking. As the industry grows increasingly top-heavy, the rationale for the bottom 90% to scale up becomes more urgent.
After cleaning up for ongoing merger deals, this’ll be the remaining landscape:
At the top sit Danske Bank, Nordea, Nykredit, and Jyske Bank alongside the Danish branch of Nordea, dominating the lion’s share of credit and deposit flows. They’re followed by a mid-tier of fewer than a dozen regionals, and then a long tail of small local banks. That tail is likely to be the future theater for M&A, while, other than mergers left and right, the driving forces will increasingly come from the Group 2 banks rather than Group 1.
Danske Bank, still focused on repairing credibility and cost efficiency after years of restructuring, is likely sitting out. Nykredit will, after its Spar Nord deal, prioritize stability over expansion. Jyske Bank has shown itself willing to move when it sees a strategic fit, like when absorbing Handelsbanken’s Danish retail unit, and could participate again. But the Group 2 banks are the ones large enough to matter regionally and the ones most likely to pull the M&A lever to gain scale in an increasingly top-heavy industry.
This is what we know about some of the Group 2 players’ M&A appetite:
- Ringkjøbing Landbobank, a best-in-class bank with a strict credit culture, merged with Nordjyske Bank in 2018. It’s opportunistic but will be deeply selective. Its strong balance sheet gives it room, but its next acquisition, if any, would probably be incremental.
- Sparekassen Danmark, itself formed through the merger of Sparekassen Vendsyssel and Sparekassen Thy in 2021, has been a proactive consolidator in northern and western Jutland (the large peninsula sticking out of Germany if you’re looking at a map). Management has been explicit about using its strong capital base to drive further deals with local institutions.
- SJF Bank has hinted at openness to “strategic combinations” and owns minority stakes in two other Danish listed banks. It was the one that offloaded its shares in Nordfyns Bank to Middelfart Sparekasse, shutting down rumours that it might have entered the bidding war itself. SJF has a strong, liquid balance sheet.
- Middelfart Sparekasse has emerged as opportunistic. Unlike the listed banks, Middelfart operates with autonomy, allowing it to move quietly.
- DAB has absorbed a handful of local cooperative banks over the past decade. The bank is 40% owned by Nykredit and 10% owned by Jyske Bank.
- Sparekassen Kronjylland was a regional acquirer during and after the GFC, completing a series of deals with smaller savings banks.
- Lån & Spar Bank has, as a partly listed and partly union-owned bank, historically remained conservative. It’s more focused on member-driven retail growth and is unlikely to be a consolidation participant.
With Vestjysk Bank and Nordfyns Bank leaving the stock market, only 16 banks will remain listed. This means many future deals will be a mix of listed and self-owned institutions, with much of the consolidation taking place outside the public market. Still, with the public landscape shrinking, I, as you probably know, have my favorite pick as the most obvious remaining target. Even without a deal, this bank is deeply mispriced. (I only play in pre-announcement situations if they’re already cheap and offer a large margin of safety.) You can read my writeup of the stock here.
Tomorrow (probably), I’ll send you a writeup on — apologies to the ESG folks — Karelia Tobacco. This stock is well-known in the deep value sphere and has no shortage of reasons for remaining mispriced by the market, but there are two main reasons I’m writing it up now, and they’re both recent. This could soon turn into a dirt-cheap special situation. So keep an eye on your inbox over the next couple of days.
Cordially,
Oliver Sung