Nordea Joins Swedish Peers in Bolstering Its Capital Buffers

Nordea Bank AB, the Nordic region’s largest lender, joined its Swedish peers in reporting rising capital ratios as the country’s banks strengthen their position as the most capitalized in the European Union.

Nordea’s core Tier 1 capital ratio under current rules jumped to 14 percent at the end of June from 13.2 percent in March, while Svenska Handelsbanken AB’s rose to 18.2 percent from 18 percent. Under Basel III regulations, Nordea and Handelsbanken estimated their ratios at 14 percent and 17.8 percent, respectively.

Sweden’s biggest banks have built up more reserves than EU competitors, helping drive down funding costs and freeing them to raise dividends while others focus on preserving cash. The four biggest lenders, which include SEB AB and Swedbank AB, already fulfill the Swedish government’s requirement of a core Tier 1 ratio of 12 percent by 2015.

“The tougher regulatory regime has so far benefited the Swedish banks if you look at our share price development and the buffers we have if the economy turns sour again,” Swedbank Chief Executive Officer Michael Wolf said in an interview on Bloomberg TV yesterday, after his bank reported earnings.

Swedbank reported a common-equity Tier 1 ratio under Basel III of 17.2 percent, while SEB said its ratio by that measure rose to 14.2 percent. In the first quarter, Handelsbanken was the best capitalized among the EU’s largest banks, followed by Swedbank and SEB, with Nordea fifth.

Higher Dividend

“Nordea has increased the core Tier one ratio by 2.7 percent since 2010,” CEO Christian Clausen said in today’s earnings statement. “At the same time our lending has grown by approximately 20 percent, and we have paid full dividend during this period. This is an excellent illustration that our profitability is high enough to support growth, dividends and increase our capital ratios.”

Nordea’s capital level supports a dividend payout in excess of the 40 percent of net income the lender is targeting, Clausen said in an interview with Bloomberg TV today. The bank will “most likely” pay a higher dividend for 2013, and will make a decision by the end of the year, he said.

Higher capital ratios and the prospect of fatter dividends and share buybacks have lifted Swedish banks’ shares this year. Nordea has climbed 24 percent this year, while Handelsbanken advanced 20 percent. Both banks retreated today.

Tougher Standards

Nordea said on Jan. 30 that it targets a core Tier 1 capital ratio above 13 percent and a return on equity of 15 percent, under normal interest rate conditions, by 2015. Swedbank estimates it needs a capital ratio of about 15 percent under Basel III regulations, it said on July 16.

Regulators in Sweden and elsewhere are toughening capital standards to protect taxpayers from banking industry losses following the financial crisis.

While Swedbank raised its dividend payout ratio to 75 percent of profit earlier this year, it is awaiting the completion of banking regulation in the EU before deciding on new capital objectives, it said this week.

The capital buffers of Sweden’s banks will probably swell further as they post profits. Banks including Swedbank have applied to Sweden’s regulator to use a new model to calculate risk-weightings for corporate lending, which would further strengthen the capital ratio if approved.

Payout Estimates

Swedbank is seen raising its dividend by 5.1 percent to 10.4 kronor, according to Bloomberg dividend forecasts. Nordea’s payout is seen rising 18 percent to 0.4 euros, while SEB is forecast to distribute a dividend of 2.85 kronor, up 3.6 percent. Handelsbanken is estimated to increase its dividend 4.2 percent to 11.2 kronor.

Nordea reported a profit of 772 million euros ($1.01 billion) in the second quarter, while Handelsbanken said net income rose to 3.7 billion kronor ($560 million) from 3.33 billion kronor. Swedbank posted a profit of 1.59 billion kronor while SEB’s net income advanced to 3.79 billion kronor.

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