Nordea’s $5 Billion Provision Fans Speculation Dividend at Risk

A decision by Nordea Bank AB to earmark extra reserves for stricter capital rules has triggered speculation that dividend levels at the best-paying Nordic bank may be at risk.

Scandinavia’s largest lender said last week it was setting aside 4.6 billion euros ($5 billion) in a “proactive” step to prepare for the possibility of tougher Swedish standards. That raises questions about future capital handouts to shareholders, according to Swedbank AB analysts.

“We are concerned by management’s remarks that regulators have a stricter view on risk weights and the related risk-exposure amount reservation,” the Swedbank analysts said on July 17. While the second-quarter results were strong, “remarks on capital make us cautious.”

Nordea this year almost doubled its target for how much it pays in dividends, aiming to pass at least 75 percent of profit on to shareholders. Though Nordea made assurances on July 16 that its most recent dividend targets still apply, analysts are voicing concerns.

Mattias Mauritzon and Bengt Kirkoen at Swedbank no longer recommend buying Nordea shares and are instead advising clients to take a neutral position on the stock.

They say they’re now “more uncertain about Nordea’s capital position,” and have shaved 4 percent off estimates for the bank’s dividend per share through 2017.

Rodney Alfven, head of investor relations at Nordea, said in an e-mailed response to questions that “the dividend is always decided upon the evening before the annual report is published, and by the board. For 2015, the ambition remains to raise the dividend ratio from last year’s level of 70 percent.”

Measuring Risk

The Swedish Financial Supervisory Authority signaled on July 3 that banks need to brace themselves for more stringent capital requirements after questioning the industry’s risk-weight calculations.

The watchdog said there are “indications that risk weights in recent years have decreased more than is justified by the actual level of risk” and warned that initiatives designed to address this “could lead to capital requirements rising considerably over the coming years.”

Nordea said on Thursday it was setting aside money to prepare for more onerous capital demands after it received a draft decision on the so-called Supervisory Review and Evaluation Process, which measures a bank’s ability to handle the risks to which it’s exposed.

Nordea’s common equity Tier 1 capital ratio rose to 16 percent of risk-weighted assets in the second quarter, from 15.2 percent a year earlier. The bank said the increase followed “currency effects, improved credit quality and strong profit generation.” The FSA sets a 14.7 percent minimum requirement for Nordea.

“Management’s vagueness regarding possible increases in capital requirements came as a surprise to the market, reducing the significance of the CET1 ratio increase,” Danske Bank A/S said in a note to clients.

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