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"We share the same political heritage, the same religious background, the same type of education system, the same moral view of the world," says Hans Dalborg, supervisory board chairman of Scandinavia's Nordea, trying to explain why his smorgasbord of a bank will ultimately succeed in blending its four main ingredients: Norway's Christiania Bank og Kreditkasse, Finland's Merita Bank, Denmark's Unidanmark and Sweden's Nordbanken. "Norwegians, Finns, Danes and Swedes share the same basket of values," contends Dalborg.

One core tenet of Scandinavia's predominant Lutheranism undeniably applies to Nordea: justification by faith. The bank is a bold experiment in Nordic cooperation that critics say is as doomed as Queen Margaret I's 1397 Kalmar Union of Denmark, Norway and Sweden. The biggest bank in Scandinavia, with E261.9 billion ($297.5 billion) in assets, E14 billion in market capitalization, 34,600 employees, 1,240 branches, 10.5 million retail customers and 500,000 business customers, Nordea was supposed to metamorphose from its merger spree as a vastly bulked up but still nimble regional player willing and able to take on all comers in an era of relentless consolidation among European banks (and Europe itself).

That may yet turn out to be Nordea's destiny. But in the meantime, this bank of banks looks a lot like a Stockholm School of Economics case study of what can -- and so often does -- go wrong with cross-border bank mergers. Rather than expanding along with its geographical reach, Nordea's profits contracted by almost half -- to E887 million -- between 2000, when its last big bank components were set in place, and 2002. The cost-cutting critical to any successful corporate consolidation never materialized; indeed, expenses shot up.

Nordea's stock price, which soared to an all-time peak of 80 Swedish kronor ($8.40) in January 2001 on high hopes for merger synergies, had skidded 52 percent, to Skr38.70, by mid-July 2003. Contrast that with the average 23 percent drop for its five biggest rivals over the same period. And CEO Thorleif Krarup, who had formerly run Nordea constituent bank Unidanmark, was replaced in August 2002 after just 20 months on the job.

Nordea's current CEO, Lars Nordström, has had to modify Krarup's overly ambitious cost-cutting and market share targets. "In the present environment profitability and more efficient use of capital must and will come before positioning the bank to aggressively capture market share," Nordström concedes during an interview with Institutional Investor in an airy, modern conference room on the top floor of Nordea's seven-story granite-and-glass headquarters in central Stockholm. His aim now is to improve efficiencies in small increments, emphasizing best practices and setting performance benchmarks to tide the bank over a lousy economic spell until it can invest more aggressively. "The costs related to the introduction of a single information technology system for retail customers are so huge as to be prohibitive," says Nordström of one of the pillars of the original Nordea blueprint.

But the bank's dramatically scaled-back ambitions "raise the question of why the merger went ahead in the first place," points out Standard & Poor's banking analyst Per Tornqvist. "Nordström's revised targets are basically an acknowledgement that extracting synergies from cross-border retail banking mergers is hugely difficult, if not impossible."

Just give him time, pleads Nordström, who ran Nordea's retail operation before becoming CEO in August 2002. "We still believe the pan-Nordic model will produce stronger, healthier results and better growth long term than the more domestically focused strategies" of Nordea's rivals, he insists.

Shareholders, however, may feel that the bank has tried their patience enough. Banking analyst Thomas Johansson of Enskilda Securities in Stockholm says, "It's fair to ask if the banks that created Nordea wouldn't be easier to manage and worth more on their own than as part of this group."

THE VISION OF A WORLD-CLASS PAN-NORDIC BANK was Dalborg's. Soon after becoming CEO of Sweden's then­No. 4 bank, Nordbanken, in 1991, he foresaw that Europe's push for monetary union would cause an upheaval in banking as big banks got bigger and small banks got swallowed up. But he wasn't content to passively await a buyout offer from one of the Continent's emerging megabanks. Dalborg wanted Nordbanken to be among the pursuers, not the prey.

The odds against a regional bank like Nordbanken rising to pan-European prominence were daunting. Dalborg, however, faced a more immediate challenge: He had to ensure that Nordbanken survived at all. The government had been forced to rescue the bank -- Dalborg, a former chief operating officer of insurance giant Skandia, was brought in to overhaul management -- after Nordbanken flirted with failure in the 1990­'91 recession because of commercial real estate loans that went sour.

Dalborg revamped Nordbanken's operations and emphasized mortgage and small-business lending, and by 1996 the bank was quite profitable. Much of it was reprivatized the previous year (the government still holds 18.5 percent), rewarding shareholders with a rising stock price. Still, even a revived Nordbanken, with its Skr338 billion in assets, was but a midsize player from one of Europe's smaller economies.

As Dalborg saw it, the bank had no choice but to expand aggressively beyond Sweden to fulfill its destiny of becoming a pan-Nordic, Europe-ready institution. His goal, the 62-year-old Dalborg now explains, was to create "a group that has the cross-border muscle that can bring us into the future."

So in 1997, with Nordbanken retail boss Nordström at his elbow, Dalborg put his audacious, even quixotic scheme into motion. First, he negotiated a E3.8 billion all-stock merger with Finland's largest financial services company, Merita Bank, in 1997. Then in 2000 he paid E5 billion in stock for Denmark's No. 2 bank, Unidanmark, and later in the year bought Norway's No. 3 bank, Christiania Bank, for E3.3 billion in cash. In little more than three years, Dalborg acquired three banks with E160 billion in combined assets. In effect, little Nordbanken had more than tripled in size.

Much of what Dalborg envisioned has come to pass. Banks are consolidating; Europe is uniting. And Nordea -- the name is a combination of "Nordic" and "idea" -- has become a force to be reckoned with in Scandinavia and in competition with European rivals.

But swooping across so many borders in such rapid succession in a series of Viking-like raids has left top Nordea executives with little time and less attention to come up with common products, coordinate data processing or seek those elusive synergies. The bank is still relying, for instance, on a patchwork of more than a dozen information technology platforms to run its main business lines: retail, corporate and institutional banking, asset management and life insurance.

"Back in 2000 Nordea gained a reputation as the strategy king of the region, with unprecedented cross-border mergers that offered the promise of realizing shareholder value much faster than rivals," says Garth Leder, a banking analyst at Fox-Pitt, Kelton in London. "Unfortunately, the group's fundamentals have been revealed as less than convincing."

CEO Nordström is determined to fix those fundamentals. He needs to lower expectations along with costs. For one thing, he has indefinitely set aside plans to integrate back-office operations all across Nordea. Once touted as the key to the kind of economies of scale that were required to justify a multicountry megabank like Nordea, integrating back offices has been declared largely out of reach, at least for the time being. That is particularly true of the area in which Nordström has special expertise -- the sprawling retail bank. It accounted for some 69 percent of Nordea's expenses but also almost three quarters of its E5.67 billion in revenues in 2002.

Today Dalborg basically blames former CEO Krarup -- from whom both he and Nordström are distancing themselves -- for having "overpromised when it came to efficiencies and returns." Declares Dalborg, "We needed to be more focused on producing profit than on implementing synergies, which are likely to be gradual."

Nordström appreciates profits. His catchphrase, say colleagues, is "Show me the money." Dalborg hired him a decade ago from Skandinaviska Enskilda Banken, where he was one of three co-heads of retail. "Nordström was a performance-oriented banker who understood the importance of managing with simple, clear messages and goals," says Dalborg.

Born in Linköping, a quiet university town in southern Sweden, in 1943, Nordström studied law at the University of Uppsala, leaving in 1970, without receiving his degree, for a marketing job at SEB headquarters in Stockholm. "I preferred the relative independence of the banking job to engaging in dry legal research projects for partners who would be calling the shots for years to come," he says. From there he rose through the ranks, working as a branch manager and then in asset management and real estate. He became head of SEB's retail business in Stockholm and northern Sweden four years before joining Nordbanken. Today Nordström, who has a 26-year-old daughter, lives with his wife in Uppsala, 90 kilometers north of Stockholm. He likes to listen to Puccini and Mahler and watch Arsenal football matches on TV.

Nordström shared Dalborg's ambitions for Nordbanken. Starting in 1995 the government's steady sell-down of its 100 percent holding of the bank through rights issues on the Stockholmsbörsen provided a ready-to-hand merger currency. At first, Dalborg and Nordström went shopping close to home. They discussed combining with then-top-ranked SEB to form what would have been Sweden's largest bank by far. But the deal fell through; Dalborg said at the time that Sweden's wealthiest family, the Wallenbergs, who controlled SEB, wanted too much equity. The secretive Wallenbergs may also have been squeamish about becoming too entangled in a venture with the government.

Nordbanken's other Swedish options were soon closed off. The country's largest retail bank, Svenska Handelsbanken, bought the top mortgage lender, Stadshypotek Bank, in February 1997. Two other sizable domestic banks, Sparbanken and Föreningsbanken, merged that same month to become Föreningssparbanken. And SEB itself merged with domestic insurer Trygg-Hansa in early October. By June 1997 Sweden's four biggest banks -- including Nordbanken -- controlled 80 percent of the country's loans. The insurance industry was almost as concentrated.

Dalborg and Nordström realized that Swedish antitrust authorities would block any further financial megamergers, so they began to look abroad for liaisons. In Finland they found a bank in a similar fix. Merita Bank, the country's largest retail operation, with a 40 percent share of that loan market, also had no real domestic merger options. Nordbanken and Merita consummated their merger of equals -- each had roughly E40 billion in assets -- in November 1997.

Over the next two years, the two banks largely succeeded in integrating their managements, with Dalborg becoming chief executive and Vesa Vainio, Merita's CEO, becoming chairman. But they kept their IT systems and retail banking product lines separate. Still, by 2000 the rechristened MeritaNordbanken hit its key financial bogeys, including at least E114 million in cost savings and a 16 percent return on equity. But that was largely because Dalborg sold off Merita's real estate assets and embraced the Finnish bank's existing expense-reduction program. Savings from consolidating overlapping operations were negligible -- the curse of most cross-border mergers.

With that deal under his belt, Dalborg issued an open invitation to banks in Denmark and Norway that were feeling confined in their home markets to join MeritaNordbanken and see Europe. The first to accept was Unidanmark, which became part of MeritaNordbanken in May 2000; Christiania Bank joined the club six months later. Both were significant retail banking groups, but Christiania was also a leading lender to the international shipping industry, and Unidanmark had merged the year before with Denmark's largest insurer, Tryg-Baltica.

Dalborg considered his strategy to be geared to the European Union's progressive economic integration (and its impending unified banking laws) but also very much attuned to Scandinavia. The Nordea boss spoke of the "common culture" of the Nordic states; he was fond of pointing out to investors that the banks all had similar lineages in that they'd grown through mergers of smaller banks.

In Nordea, Dalborg appeared at first to have formed a more cohesive Scandinavian union than Nordic politicians had ever achieved. A onetime lecturer at the Stockholm School of Economics, where he earned a Ph.D., he took pains to create a politically correct, seven-member executive board that rendered all decisions by consensus: It consisted of two Danes from Unidanmark, two Swedes from Nordbanken, two Finns from Merita and one Norwegian from Christiania (which had the least clout because it was the smallest of the banks).

Shareholders seemed pleased. Nordea's stock rose 43 percent in 2000, versus an average of 36 percent for the six largest Nordic banks, including Nordea.

But synergy can be as slippery as a Norwegian salmon. Although political differences among the four banks were largely smoothed over, pursuing integration targets in a coordinated fashion proved to be much more challenging. Consider one crucial assumption: that retail products could be made uniform and distributed efficiently across the region, permitting significant savings on overhead. Nordström, as head of retail banking, sat on the executive board, but the bank's top Danish and Finnish retail banking executives did not. Nor did the head of the relatively small Norwegian retail business. Operating more or less autonomously, they had little incentive to carry out integration initiatives promulgated in Stockholm. Concedes a senior Nordea official, "Synergy efforts got a lot less attention than they should have."

It fell to Krarup, the then-48-year-old Dane who became Nordea CEO in January 2001, to pull the bank's mishmash of cross-border operations together. Formerly the treasurer of stereo maker Bang & Olufsen and CEO of mortgage company Tryg Nykredit Holding, Krarup had in eight bull market years turned Unidanmark into Denmark's largest mutual fund group. His promotion to Nordea CEO in the aftermath of the Unidanmark deal "was part of the total picture of a negotiated merger," says Dalborg, who adds that it was the board's choice, not his.

To achieve the objectives of Dalborg's game plan, Krarup adopted performance targets that turned out to be too aggressive. By 2004, he vowed, Nordea would be reaping annual savings of E720 million from vaguely defined technology initiatives, staff cuts and product synergies. The bank would also be returning 16 percent on equity and enjoying an excellent cost-to-income ratio of 50 percent.

Those figures now seem hopelessly out of reach. Between 2000 and 2002 Nordea's expenses soared 31.4 percent, to E3.8 billion. This was partly because Christiania was not yet consolidated into Nordea's accounts in 2000 but also because merging the various banks was proving to be costly. Moreover, Krarup failed to take adequate defensive measures as bond and stock markets plummeted in the group's first two years. Nordea's money management and life insurance operations posted a E122 million loss in 2002; Krarup is faulted for keeping more than 50 percent of the bank's E93 billion in managed assets in stocks.

Nordea's cost-to-income ratio took a direct hit when the bank was forced to contribute E272 million to an employee pension fund to counterbalance market losses. Nordea's return on equity collapsed, from 16.1 percent in 2000 to 7.5 percent last year, and the bank's cost-to-income ratio moved the wrong way, jumping from 58 percent to 65 percent.

Meanwhile, the bank's stay-at-home rivals have generally fared a lot better. For instance, Svenska Handelsbanken managed a 14.6 percent ROE and a 52 percent cost-to-income ratio last year. Denmark's Danske Bank had a 14 percent ROE and a 57 percent cost-to-income ratio.

Krarup resigned as CEO in August 2002, citing personal reasons. He had gone through a divorce in 2001, not long after leaving his wife and three teenage sons behind in the move from Copenhagen to Stockholm. Dalborg makes it clear, however, that stepping down was not entirely Krarup's decision. Although Krarup harmonized IT systems for asset management and corporate finance and sold off a money-losing general life insurance operation, he failed in his most important chore: integrating the disparate parts of the retail operation.

"The board could see as well as [Krarup] could that we were not reaching our targets," says Dalborg. "It was time to do something." Yet in a strange though not un-Scandinavian twist, Krarup has remained at Nordea, in Copenhagen, at half the pay, as senior vice president in charge of relationships with large corporate borrowers. He declined to be interviewed.

Nordström, Dalborg's man, is not shooting for Krarup's lofty targets. In a presentation to analysts and investors in London last November, the CEO pledged only to freeze total spending for the next two years. His goal for return on equity in 2005 is 15 percent; for cost-to-income, 55 percent.

Nordea is chipping away at its huge workforce: The bank is laying off 1,200 people, a relatively modest 3.5 percent of the total. That still leaves it with an average of 18 employees per branch, compared with 14 for the typical Nordic bank. "In bad times we should protect our core business -- serving our retail customers," says Nordström. "To downsize that asset would be a high-risk move when it comes to future growth."

The bank runs Europe's biggest online banking operation, with 3.3 million customers, yet that success has not permitted significant branch closings. "We can gradually close some branches, but not a large number," says Bo Harald, a Merita Bank veteran who runs Nordea's electronic banking operation from Helsinki. "Even if more and more people in the Nordic countries are conducting transactions and payments over the Internet, what we've found is that we need to be at the branches to talk people through things like mortgage loans and even to sell our Internet banking services."

Nordström does intend to slash annual IT spending by 20 percent, to E360 million, this year, and he has appointed the bank's first deputy CEO for group processing and technology -- Finn Markku Pohjola -- to accomplish the task. "My mission is to unite IT and back-office processing as much as possible so that the rest of our executives can concentrate on selling," says Pohjola, who has previously headed retail and corporate banking. Asserts Nordström, "If we can't fully integrate technology, we are already finding and applying best practice when it comes to customer information, recordkeeping, marketing and pricing." Nordea is, however, negotiating with IBM Corp. to form a joint venture to assume all back-office operations.

Nordström has shut Nordea Securities' offices in New York and London and chopped the brokerage and investment banking unit's staff by almost one third, to 400. "We are committed to changing, terminating or selling operations that are not performing, and this was an example of that," says Nordström.

Nordström has revamped the executive board by designating four members as "country senior executives." Pohjola, for example, is the Finnish country chief. The CEO has also put all four retail banking chiefs on the executive board, including Kari Jordan of Finland, who is now in charge of all retail banking, and Peter Schütze, who oversees human resources while serving as country head for Denmark. "We've now got an executive group that can quickly evaluate what businesses we should stick with, adapt our operations to market conditions and effectively oversee the transfer of best practices from one market to another," says Nordström.

His approach to pan-Nordic union sounds a little like the EU's slogan, "Unity through diversity." Explains Nordström: "We are still going for pan-Nordic synergies, but in many cases we are going for unification rather than integration. That comes down to adapting the same procedures and ways of doing business throughout the group, across different IT systems and across markets that have different rules."

As an example, he points to the division of retail customers into three segments: basic, intermediate and core. The latter two groups, with some E4,000 and E14,000, respectively, to invest each year, are more likely to buy mutual funds or to take out high-margin consumer loan products like credit cards. "By dividing our client base like this," Nordström says, "we can have the same basic system for marketing our services and for client follow-up in all our markets, leading to both income and cost synergies."

The Nordea chief is being cautious about cross-selling, the chimera that has captivated so many bankers over the years --including Dalborg. The bank's huge retail and business customer base, which reaches into Estonia, Latvia, Lithuania and Poland in addition to the four Nordic countries, should offer abundant opportunities to standardize products and pare costs. But as Nordström acknowledges, "Back in 2000 we thought we could transfer cross-border product offerings on long-term savings, notably in mutual funds and life insurance, but with depressed stock and bond markets, those opportunities have not been there to the extent that anyone thought they would be."

The problem may be more than just lousy markets. The Nordic countries' supposed common culture turns out to be vastly complicated by different national psyches, languages, currencies and legal and accounting systems. Consumers' product preferences as well as banks' funding approaches vary greatly from country to country, making it difficult to create uniform products and unify back-office operations. "You can go down the entire product list, and you will find local preferences and differences that increase the expense of operating this bank," says S&P analyst Tornqvist.

Life insurance is the primary savings vehicle in Norway and Finland, for example, but policies must be structured differently in each country because of tax considerations. Denmark and Sweden are big markets for equity mutual funds; Norway and Finland much less so. Most mortgages in Finland and Norway have floating interest rates, while in Denmark and Sweden rates tend to be fixed.

The difficulty of coordinating strategies across borders shows up glaringly in Nordea's handling of bad debt. Some analysts have been questioning the bank's credit-risk management. Nordea's quarterly loan-loss charges have risen steadily, from E45 million in the first quarter of 2001 to E98 million in this year's first quarter. The bank's nonperforming loan ratio, at 1.9 percent, is low by European standards but is still the highest among the Nordic region's major banks. And one subsidiary, the former Christiania, reported E109 million in new nonperforming loans in the fourth quarter of 2002, bringing its NPL ratio to 3.9 percent. Nordea officials say that many of the Norwegian loans had previously been written off at group level but were being recorded on the subsidiary's books because of accounting technicalities. Still, as Fox-Pitt, Kelton analyst Leder says, "the fact that different parts of the bank have been writing off loans at different times makes you wonder how successfully they are applying truly standard credit policies at what remain four different national banks."

SINCE NORDSTRÖM'S NOVEMBER CHAT WITH ANAlysts, Nordea's stock has traded in a narrow range around Skr40. That can be interpreted as a tentative vote of confidence -- if not exactly a show of enthusiasm -- in the plainspoken, bottom-line-oriented Swede. Nevertheless, no other European bank has ever attempted anything quite like Nordea. The few multinational bank mergers that have worked out have involved a big bank buying a smaller one, such as HSBC Holdings' purchase of France's Crédit Commercial de France for E11 billion three years ago. The acquirer gained access to a new market at modest cost -- without having to face the integration challenges now confronting Dalborg's and Nordström's bank.

"Nordea spun a wonderful tale of cross-selling products and even cutting costs, but the details of how they would do that across such different markets were always lacking," says a European banking rival. "Their experience will make any bank that is looking for growth and increased efficiency through a cross-border merger think twice."

Although still committed to a pan-Nordic vision, Nordström may be having his own second thoughts. "To some extent," he says pensively, "what we are doing now is just a matter of improving performance without doing any integration at all."