Sweden’s Nordea and Norways’s DNB have entered into an agreement to combine their banking operations in Estonia, Latvia and Lithuania.

The agreement represents an attempt to challenge the dominant position in the Baltic market held by Sweden’s SEB and Swedbank. It also marks further consolidation of the market, following Swedbank's acquisition of Danske Bank's retail operations in Lithuania and Latvia last September. 

Nordic banks have traditionally dominated the Baltic market, an exposure that led to big losses during the global financial crisis when Latvia had to seek an IMF bailout.

Nordea, Sweden’s largest bank by assets, is already the third biggest bank in the Baltics but lags far behind its Swedish rivals SEB and Swedbank. There had been speculation that it was seeking to exit the market, given its weak position. But combining with DNB could finally give it the presence to mount a strong challenge to the two market leaders. According to Nordea, the combined group would be the second biggest in the Baltics for lending and third in terms of deposits.

For DNB, Norway’s largest bank, the move also reflects its current financial woes, as it struggles to deal with a legacy of bad loans to the struggling shipping industry, its traditional focus.

“Together we will have the scale, stronger geographic presence and broader product offering enabling us to become the main bank for customers in the Baltics,” said Inga Skisaker, Head of Banking Baltic Countries at Nordea in a press release.

Nordea and DNB said their operations in the Baltics complemented each other because Nordea was strong in the corporate segment whereas DNB is strong in the SME segment. Nordea also has a big presence in Estonia, while DNB was stronger in Lithuania, and both had large footprints in Latvia.

Nordea’s and DNB’s Baltic operations have 1,300 and 1,800 employees and €8bn and €5bn in assets respectively.

“Scale is key in banking today, with larger banks having more efficient use of resources. The new bank will be better equipped to counter increasing competition in the region and capitalise on scale in order to become the main bank for more businesses, customers and partners in the Baltics,” says Mats Wermelin, Head of Baltic Division, DNB.

Nordea and DNB will have equal voting rights over the combined bank, while having different economic ownership levels that reflect the relative equity value of their contribution to the combined bank at the time of closing. The transaction is conditional upon regulatory approvals and conditions, and is expected to close around Q2 2017.

J.P. Morgan acted as financial advisor and BA-HR as legal advisor to DNB.