Sweden is telling its banks not to amass too much capital less than 18 months after breaking with the rest of Europe in demanding lenders meet some of the world’s toughest regulatory standards.
Financial Markets Minister Peter Norman said on Jan. 30 Sweden’s banks should “not have too much capital” while Finance Minister Anders Borg the same day told lenders they’re free to raise dividends after building up reserves that topped Swedish requirements.
The European Union’s best-capitalized banks, and their shareholders, are now reaping the benefits of swimming in surplus capital. The country’s four biggest lenders, including Nordea Bank AB, already exceed the 10 percent core Tier 1 ratio of risk-weighted assets that will apply this year. They even top Sweden’s 12 percent rule that takes effect in 2015.
The government’s instruction to banks to start showing restraint in building capital follows a broader push in Europe to delay implementation of some aspects of Basel III as the region struggles to emerge from its debt crisis. The EU and the U.S. have already missed a January deadline to start phasing in parts of the rules set by the Basel Committee on Banking Supervision.
“What we’re hearing now from Anders Borg and Peter Norman are the same noises that we’re also hearing in other places around the world,” Robert Bergqvist, chief economist at SEB AB in Stockholm, said in a phone interview. “They have become a bit more scared that the regulatory framework and demands may produce unnecessary uncertainty that could endanger the international recovery.”
Christian Clausen, who is both chief executive officer at Nordea and the president of the European Banking Federation, has argued that harmonized standards across borders should be the ultimate goal.
“It’s a quite natural development after a crisis, you do what you need to do and then afterwards you need to harmonize,” Clausen said in a Jan. 30 interview. “Governments in the EU agree it should be harmonized, but first we need to do this and that.”
The more lenient tone in Sweden marks a departure from last year’s message. Borg in November warned lenders they risked a regulatory backlash if they “start to discuss dividends,” adding that “we’re not in a situation where the banks ought to start to distribute money to the shareholders or start share buybacks.”
Borg has also pushed for tougher risk weights on mortgage assets. As recently as Jan. 21, he urged banks to be “cautious” with dividends.
Since then, Nordea and Swedbank AB, the EU’s second-best capitalized major bank after Svenska Handelsbanken AB, have continued to build regulatory buffers that far exceed this year’s minimum requirement. Nordea’s core Tier 1 capital ratio reached 13.1 percent of its risk-weighted assets at the end of last year, while Swedbank’s was 17.4 percent. SEB’s was 15.1 percent. Handelsbanken is due to report its results on Feb. 6.
“We have told the banks that we think that they need more and stronger capital,” Borg said on Jan. 30. “There’s now been a change where they’re doing that -- Nordea for example is increasing its capital -- and then the dividend issue becomes something that the owners must decide. They have increased their capital and that was the central and sharp opinion we had.”
Nordea, Scandinavia’s biggest bank, said Jan. 30 it targets a core Tier 1 ratio above 13 percent in coming years, including regulatory changes, and that it plans to distribute excess capital to shareholders. Its 44 percent payout ratio resulted in a dividend of 0.34 euro per share for 2012, versus 0.26 euro for 2011. Swedbank said the same day it will raise its payout ratio to 75 percent from 50 percent. SEB said yesterday it will hand out 40 percent or more of its profit in dividends, compared with a previous target of “about” 40 percent.
“Seen from a shareholder perspective, too high capital levels can destroy value by putting too little pressure on management in terms of efficiency,” Mads Thinggaard, an analyst at Nykredit Markets in Copenhagen, said in an e-mailed response to questions. “It also gets harder and harder to reap positive effects on the funding costs as capital levels go beyond very high.”
Sweden’s banks have outperformed an index of their biggest European rivals amid speculation they’d return a higher share of profits to their owners. Nordea is up 14 percent this year while Swedbank has gained 21 percent. Handelsbanken has risen 14 percent and SEB has advanced 16 percent in the period. The 38-member Bloomberg index of European financial stocks has risen 8.3 percent.
Credit derivative investors view Sweden’s banks as among Europe’s safest. It costs about 63 basis points using five-year credit default swaps to hedge against non-payment of senior notes issued by Handelsbanken, according to data available on Bloomberg. Equivalent contracts on Deutsche Bank AG, Europe’s biggest bank by assets, traded at 100 basis points this week. Swaps on French sovereign debt cost 87 basis points.
Sweden’s decision to go a little easier on its banks is unlikely to leave the industry less robust, according to Bergqvist at SEB.
“It’s a really quick turnaround but I think it’s the right analysis,” he said. “They’re drawing the right conclusions.”