Sweden Lashes Out at Banks Luring Investors With 15% Returns

Sweden’s government criticized banks in the largest Nordic economy for chasing returns it says are likely to encourage risk taking.

Targeting a return on equity of 15 percent is “not reasonable,” Financial Markets Minister Peter Norman told reporters in Stockholm today. “I’m scared that that kind of return target at the banks can trigger a risk-behavior that’s not good for the banks or for Sweden.”

Norman, who earlier this week unveiled plans to raise capital requirements for Sweden’s biggest banks from levels that already exceed standards elsewhere, says the clampdown is necessary to protect Swedes from a financial industry that’s grown to four times the size of the economy.

Nordea Bank AB, Scandinavia’s biggest lender, has told investors it will try to deliver a return on equity of 15 percent in a “normalized interest rate environment.” The bank returned 11.6 percent in 2012. Swedbank AB, which also targets 15 percent, reported a 14.6 percent return for 2012.

SEB AB aims to “generate return on equity that is competitive with peers,” which means “the bank in the long-term aspires to reach a return on equity of 15 percent,” the lender said in its second-quarter report on July 15. Svenska Handelsbanken AB says it targets a higher return on equity than the average of its peers in the Nordic region and the U.K.

Low Inflation

“When we have a low inflation economy as we do in Sweden with 1-2 percent inflation, if you then add a risk premium and other things, it’s not reasonable to reach 15 percent,” Norman said.

Swedish bank shares declined for a third day, with Nordea falling 1.5 percent to 77.15 kronor as of 1:38 p.m. in Stockholm trading and Handelsbanken dropping 0.2 percent to 283.35 kronor. Swedbank dropped 0.5 percent to 149.7 kronor and SEB declined 0.7 percent to 67.5 kronor. The Bloomberg Banks and Financial Services Index decreased 1 percent.

The government said Aug. 26 Sweden’s four largest lenders now face an even higher minimum core Tier 1 capital requirement than the 12 percent of risk-weighted assets due to be enforced from 2015 as Sweden plans to use countercyclical buffers to ensure there’s no upper limit on reserve levels. All four banks already exceed the 12 percent target for 2015.

Offshore Funding

Sweden’s four biggest banks, which the government has said rely too much on short-term offshore funding, also face costs to help finance foreign reserves at the Riksbank, Norman said. That follows steps to triple the risk weights banks must apply to their mortgage assets amid criticism from the government and central bank that lenders helped fuel imbalances in Sweden’s housing market.

Norman and Swedish Finance Minister Anders Borg warned banks last year not to raise dividend payments and instead focus on increasing capital buffers further. Norman in January revised that guidance and told banks they were free to raise dividends after building reserves that exceeded regulatory minimums.

“We had the discussions about dividends when the banks had very low capital,” Norman said today. “The banks have now done what we wished, in other words, stashed away above the thresholds we ourselves have established, so the situation is somewhat different.”

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