Nordea Chairman Says Payout May Rise on ‘Massive’ Capital Growth

The chairman of Scandinavia’s biggest bank says its dividend ratio may need to rise to avoid building up “massive amounts of excess capital.”

Bjoern Wahlroos says Nordea Bank AB has a “very robust capacity for generating capital” in the current environment, according to an interview in Stockholm on Thursday. Given the low credit growth, he worries that the bank’s regulatory reserves will grow too big “if we don’t maintain dividend ratios broadly where they are now or marginally higher.” Nordea paid out 70 percent of its 2014 profit to shareholders.

Based in Sweden, which boasts one of the world’s strictest regulatory environments, Wahlroos says Nordea is coping better than many other banks in adapting to historically low interest rates thanks to its mutual-fund and wealth-management business. The climate that shaped first-quarter results is unlikely to disappear any time soon, he predicts.

“I don’t see this environment changing very much,” Wahlroos said. “We were able to do pretty well in the first quarter in this environment and I see no reason why we wouldn’t continue to do so.”

Nordea’s competitors have struck a more cautious note as low, and even negative, interest rates erode lending income. SEB AB Chief Executive Officer Annika Falkengren said in April banks are now operating “in exceptional times” that have “turned economic relationships upside down.” Michael Wolf, the CEO of Swedbank AB, said last month record monetary stimulus has created “extraordinary” market conditions.

’Big Challenge’

Wahlroos also calls the current interest-rate climate “a big challenge” as “never in humankind have we seen interest rates this low.” But “for those banks that have the ability to offer customers alternative forms of savings, it is a very different environment.” He says it’s “one that we obviously can live quite well in.”

Though traditional lending income is under pressure, other areas of banking have performed well. Lenders have seen an increase in fees after responding to rising client demand for risk-management, loan conversion, and as customers move out of deposit accounts and into products such as mutual funds. Banks have also suffered fewer loan impairments as borrowers’ interest costs have dropped.

While Nordea’s net interest income fell 5.4 percent last quarter, net fee and commission income rose 7.5 percent and the bank’s assets under management reached a record. The results helped drive net income up 30 percent in the period.

Shift of Earnings

“There’s a lot of change going on because what the low interest rates do is that they push both retail and wholesale clients to look for yield and return elsewhere, so you see a shift of earnings,” Wahlroos said. To do well right now, banks need “a very good fund and wealth management business” as lenders without such a franchise are more challenged. “For us, it is a challenge and an opportunity -- not a threat.”

Nordea raised its dividend ratio for 2014 by one-quarter from the 56 percent it paid out the previous year and 44 percent for 2012. The bank has said it plans to continue increasing payments to shareholders.

Chief Executive Officer Christian Clausen said in a March 23 interview that “also for 2015, we will have a higher payout ratio.” When reporting first-quarter earnings, Nordea reiterated that plan and said it will present new financial targets for 2016 to 2018 on May 27. Its current policy is to pay out more than 4O percent of profit to shareholders.

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