Some of Sweden’s biggest banks have set themselves a target of returning about three-quarters of their profits to shareholders. But new rules on how to calculate capital burdens, as well as weak earnings, mean they now probably won’t be able to afford that.
”Growth in distributable capital is under pressure both from an operating and from a regulatory point of view,” Kristin Dahlberg, an analyst at Jefferies International Ltd. in London, said by phone. ”The banks are not under-capitalized in any way -- they are strong from a European perspective -- but it has become more difficult to estimate excess capital, and distributing up to 75 percent of earnings seems ambitious.”
Bloomberg BDVD dividend forecasts show that the 31 percent growth rate in dividend payouts that Nordea, Swedbank, Handelsbanken and SEB delivered to shareholders, on average, over the past three years will shrink to 5 percent from 2015 through 2017.
It’s not just the prospect of more onerous capital requirements that’s hitting dividends. Banks in Scandinavia, where financial regulation has tended to be stricter than elsewhere in Europe, are languishing under negative interest rates that have depleted traditional lending income. Nordea has already signaled it may need to review its dividend policy to adjust to the changing regulatory and earnings environment. Its payout target of at least 75 percent of profits is the highest among Sweden’s banks.
“I don’t think it’s impossible that we will see downward adjustments of dividend payout in the next few years, given less favorable earnings growth and the risk for increasing risk-weighted assets,” Dahlberg said.
The issue lies in how to treat risk weights. Jens Hallen, a senior director at Fitch Ratings, points out that Swedish banks have some of the highest risk-weighted capital ratios in the world. But when you look at their unweighted capital ratios, they do no better than peers.
That means that new regulation designed to ensure risk weights aren’t too low may hit Swedish banks harder than most. As a result, there’ll be less excess capital for shareholders and a heavier issuance of capital instruments, according to Fitch.
“Banks are making significant profits and particularly the Swedish have high payout ratios,” Hallen said. “If the leverage ratio is set high, and if it’s implemented quickly, the banks may have to retain more of their profits and thereby reduce payouts.”
Nordea’s financial targets for 2016 to 2018 imply annual dividend growth of more than 10 percent, based on “currently known regulatory requirements,” it said in May. According to BDVD, which considers factors such as company guidance, financial analysis and analyst estimates, the bank won’t meet that growth target.
Nordea’s dividend for the current year is seen rising 4.6 percent, with the pace of growth then slowing to 1.4 percent for 2016 and for 2017. That contrasts with recent payments, with the bank lifting the dividend for 2014 by 44 percent and for 2013 by 26 percent.
“Nordic banks have the highest forecast payout ratios of banks globally thanks to capital ratios well in excess of peers,” Jonathan Tyce, senior banks analyst at Bloomberg Intelligence, said. “However, as earnings growth stalls with provisions already at a cyclical trough and revenues flat-lining, at best, on margin pressure, absolute dividends are unlikely to grow.”