Banks Swimming in Capital Get Dividend Go-Ahead: Nordic Credit

Sweden’s banks are free to raise dividend payments after building up surplus capital that more than fulfills the nation’s regulatory requirements, Financial Markets Minister Peter Norman said.

“It’s a question for the banks themselves,” Norman said in a Jan. 18 interview in Stockholm. Sweden’s banks now exceed the nation’s capital requirements “by a good margin,” he said.

Sweden in 2011 told its banks to set aside bigger capital buffers than those required elsewhere and in November said stricter risk weights will apply to their mortgage assets. Yet banks in the largest Nordic economy have managed to build up reserves that exceed the requirements, spurring speculation that shareholder payouts will soon be increased.

Svenska Handelsbanken AB, Swedbank AB, SEB AB and Nordea Bank AB already hold more than the 10 percent core Tier 1 equity relative to their risk-weighted assets that they’re required to set aside this year. They also exceed the 12 percent minimum requirement that will apply from 2015.

Credit derivative investors have rewarded the lenders for amassing extra capital, with default swaps on debt sold by Handelsbanken costing about 20 basis points less than similar-contracts on Deutsche Bank AG, according to data available on Bloomberg.

Shares in Handelsbanken rose 1.1 percent to 245.70 kronor as of 1:46 p.m. in Stockholm, making it the day’s best-performing major bank in the Nordic region. Swedbank rose 0.7 percent, SEB gained 0.3 percent and Nordea increased 0.2 percent. All four banks’ share moves topped the 0.1 percent gain in the 38-member Bloomberg index tracking European financial stocks.

Not ‘Acute’

Sweden, which originally wanted to enforce the 10 percent rule as of Jan. 1, has pushed back its deadline as the Nordic country waits for European regulators to complete the administrative groundwork that enables the switch, Norman said. Setting a new date for implementation is no longer “acute” because banks already comply with the standard, he said.

“Going into fourth-quarter results, we think the focus of Swedish banks should be on dividends and capital returns,” Masih Yazdi and Carla Antunes-Silva, analysts at Credit Suisse, said in a note to clients today. “We see scope for positive surprises on the proposed dividends for 2012 as well as signals of changed dividend policies for the coming years.”

‘Excess Capital’

Handelsbanken and Swedbank had ratios of 17.9 percent and 17.3 percent, respectively, at the end of September. SEB’s stood at 16.5 percent, while Nordea’s was 12.2 percent, according to their third-quarter earnings reports.

Nordea and Swedbank are due to report fourth-quarter earnings on Jan. 30, followed by SEB on Jan. 31 and Handelsbanken on Feb. 6.

“We don’t see why SEB, Handelsbanken and Swedbank should not be allowed to distribute excess capital freely in 2013,” Andreas Hakansson, an analyst at Exane BNP Paribas, said in a phone interview. “We do not expect buybacks, but we do expect Swedbank to increase its payout to 65 percent while SEB and Handelsbanken will pay out 50 percent.”

Handelsbanken may raise its 2012 dividend by 11 percent to 10.8 kronor a share; pay out 11.2 kronor next year and 12 kronor for 2014, according to Bloomberg dividend forecasts. Swedbank will probably increase its dividend for 2012 by 17 percent to 6.2 kronor a share, 6.6 kronor the following year and 7 kronor for 2014. SEB AB may boost it by 20 percent this year to 2.1 kronor, while Nordea Bank by 15 percent to 0.3 euro, the forecasts show.

Risk Weights

“Swedish banks are in a position where they can meet the requirements without having to jeopardize their business models or sell assets,” Michael Sandfort, chief analyst at Nordea Markets. “It is easier to operate in an economy that is fairly robust, as the Swedish one is.”

Borg has urged banks only to consider raising dividend payouts if they continue to meet capital requirements after taking the stricter risk weights into account. Sweden’s financial regulator on Nov. 26 set a minimum risk-weight requirement of 15 percent for mortgage assets, almost three times existing levels. That would require Sweden’s biggest banks to set aside an additional 20 billion kronor in capital, the Financial Supervisory Authority estimated at the time.

The new rules would lower Swedbank’s core capital ratio by 1.5 percentage points and Handelsbanken’s by 1.1 percentage points, the FSA said. Nordea would need to set aside 3.4 billion kronor and SEB 2.3 billion kronor, cutting their ratios by 0.2 percentage point and 0.4 percentage point, respectively. The calculations haven’t been adjusted for the effects of Basel III.

Default Risk

Under the so-called Basel III rules, banks are required to have a minimum core Tier 1 capital ratio, a measure of financial strength, of 7 percent.

Handelsbanken, Swedbank and SEB were the best-capitalized major lenders in the European Union in the third quarter, according to a Bloomberg ranking of 20 of the region’s largest banks. Nordea was No. 6, after retaining earnings, cutting costs and risky assets in recent quarters.

Swedish bank default risk tumbled to an almost 18-month low this month as investors reward the lenders for setting aside more capital, credit default swaps show.

It costs 75 basis points to insure against default on senior debt issued by Nordea, compared with as high as 176 basis points in May last year, according to data available on Bloomberg on five-year credit-default swap contracts. Investors need to pay 117 basis points to insure against non-payment on similar debt sold by Citigroup Inc. Default swaps on Deutsche Bank AG traded at 90 basis points last week.

“The Swedish FSA has been pretty aggressive, and from a pure credit perspective, that is positive for the banks,” said Sandfort. “The Swedish FSA will stay on the hawkish side of the playing field.”

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