Nordea Shunning ECB Cash Gets Market Thumbs Up, CEO Says

Nordea Bank AB Chief Executive Officer Christian Clausen
Nordea Bank AB Chief Executive Officer Christian Clausen. Source: Nordea Bank AB via Bloomberg

Nordea Bank AB’s decision to avoid three-year loans offered by the European Central Bank is proving a winning strategy as investors reward the bank with lower borrowing costs, Chief Executive Officer Christian Clausen said.

“For us it’s more important to have a very strong, consistent, market-oriented funding strategy,” Clausen, who is also the president of the European Banking Federation, said in an interview in Stockholm. “We get clear feedback that investors really like that.”

The ECB has poured more than 1 trillion euros ($1.3 trillion) into Europe’s banks since December in an effort to support debt markets and stem the region’s crisis. While the cash infusion initially showed signs of propping up bonds sold by Italy and Spain, yields last week crept up again, signaling the effect may not be long-lasting. For Nordea, the facility didn’t offer enough benefits, Clausen said.

It’s “not so much a stigma,” he said. Instead, “we don’t think it will be regarded as three-year money, but more like one- to two-year money. Then the price is not significantly different from what we could fund ourselves at.”

The cost of the ECB’s three-year loans is based on the bank’s refinancing rate, 1 percent since December, and calculated as an average over the life of the loan. The ECB has suspended rating requirements for bonds from Greece, Portugal and Ireland, meaning it accepts securities rated junk as collateral.

‘Tremendously Risky’

The facility helped send yields on 10-year Italian debt below 5 percent at the beginning of last week from more than 7 percent in November as banks used the cash to invest in sovereign-debt markets. Still, Italy’s 10-year yield approached 5.10 percent last week. The yield on Spain’s 10-year note also rose above 5 percent, after having slipped below that level at the beginning of March.

“The ECB LTRO program is tremendously risky,” said Daniel Sachs, chairman and chief executive officer at Stockholm-based corporate-bond investment firm Proventus AB. “It is leading to banks with large structural problems getting new funding at rates below market levels and suddenly becoming more active again on the lending market.”

According to Clausen, the only way to restore confidence in Europe’s banks is by demonstrating they have adequate capital buffers. Lenders will struggle to win over investors if they have less than 10 percent in reserves backing their risk-weighted assets, he said.

‘Significant Factor’

At Nordea, “it’s a significant factor that we are above 10 percent capital, which other banks in Europe might not be,” Clausen said. “That is a disqualifier. You have to be above a certain hurdle.”

Sweden’s four biggest banks, Nordea, Svenska Handelsbanken AB, Swedbank AB and SEB AB, all have core Tier 1 capital ratios of at least 11.2 percent. All four have issued senior unsecured debt this year, rejecting the ECB’s emergency cash.

Clausen said he is “not criticizing” banks that used the facility. “I can perfectly well understand why they do it and we would have also done it if it had matched our funding strategy. It just doesn’t match our strategy.”

Sweden’s government in November told the country’s four biggest banks to target higher capital buffers than those set by the Basel Committee on Banking Supervision and to reach the goals six years earlier than Basel’s 2019 deadline.

More Not Better

Swedish banks need to bring their core Tier 1 capital ratios -- a measure of financial strength -- to at least 10 percent of their risk-weighted assets by next year. That ratio needs to rise by 2 percentage points by 2015. Basel sets a minimum target of 7 percent by 2019.

Still, once a bank has passed the 10 percent capital threshold, the benefits start to wane, according to Clausen.

“The more the better is not the case,” he said. “ Risk diversification is extremely important, volatility in the income stream is very important, the level of income is very important, then you move into other areas.”

Finance Minister Anders Borg says the stricter capital rules will protect tax payers from potential losses. Sweden’s banks, whose combined balance sheets are about four times the size of the $500 billion economy, will win investor confidence thanks to the stricter rules, according to Borg.

“In a risky environment, strong capital requirements can be good for shareholders,” Borg told Bloomberg. “It should be much more acceptable for investors to be willing to put money in a bank that is safe.”

Credit Derivatives

Credit-default swaps tied to Nordea, Handelsbanken, Swedbank and SEB all trade at lower prices than the average for banks in Europe. That means investors are willing to pay less to insure against default at the four lenders than on their European rivals.

Handelsbanken raised 1 billion euros of debt in January due July 2017, while Nordea sold two-year floating-rate notes that were priced to yield 95 basis points more than the benchmark euro interbank offered rate. Sweden’s biggest bank also sold 4 percent fixed-rate bonds due July 2019 to yield 195 basis points over the mid-swap rate, according to data compiled by Bloomberg.

ECB President Mario Draghi lashed out last month at bankers who said tapping the three-year-loan program carries a stigma, after executives including Deutsche Bank AG’s Josef Ackermann said they shunned the loans.

“Mario Draghi was very clear that there was no stigma attached to being a part of this broad-based support system,” Borg said. “There are some 800 banks in Europe that are taking part in this system. What the ECB is trying to do is to get the transmission mechanism to work, to get interest rate cuts to feed through in terms of demand stimulation.”

The facility has given troubled banks time to adjust, Clausen said.

“You could say there’s some good oil in the system to make everything work together in a good way,” he said. “There are a few that will have real issues. They’ll just get a little more time to handle that and restructure.”

Nordea’s shares fell 1.2 percent to 61 kronor at 11:06 a.m. in Stockholm, compared with the 43-member Bloomberg Europe banks and financial services index that was down 0.8 percent.

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