Bank Crackdown in Sweden Frustrates Payout Hopes: Nordic Credit

Investors will need to reverse bets that Sweden’s banks -- among Europe’s best-capitalized -- will have enough spare cash to dish out bigger dividends or buy back shares.

“The expectations of share buybacks and special dividends have clearly come down,” Johan Ekblom, a bank analyst at Bank of America Merrill Lynch, said in a phone interview. “The rhetoric by politicians shows they don’t want to see” such payouts. “They want to put pressure on the banks,” he said.

Sweden’s government this week unveiled the biggest clampdown on banks since November 2011, when it told lenders to target some of the world’s strictest capital standards. After an Aug. 26 announcement that banks will need to hold more core Tier 1 capital of risk-weighted assets than the 12 percent due to be enforced by 2015, Financial Markets Minister Peter Norman yesterday criticized lenders for targeting a 15 percent return on equity, a level he said encouraged risk-taking.

Bank shares sank this week. Nordea Bank AB, Sweden’s biggest bank by market value, fell for three consecutive days, and had lost 5.3 percent as of yesterday’s close since the government made its announcement on Monday.

Capital Uncertainty

Five-year credit-default swaps on Nordea’s senior unsecured debt rose to 70 basis points for the first time since July, according to data compiled by Bloomberg. The difference in the bank’s default swaps relative to similar contracts on the Swedish government widened to 53 basis points from 47 earlier in the month.

“All these comments once again show that uncertainty regarding bank capital requirements will remain for a while more,” Ekblom said. “It’s nothing that will disappear this year.”

Norman argues stricter bank controls are necessary to protect Swedes from a financial industry that’s grown to four times the size of the $540 billion economy. The measures will target banks that investors in bonds, credit derivatives and shares have treated as some of Europe’s safest.

Nordea Bank AB, Svenska Handelsbanken AB, Swedbank AB and SEB AB already hold more than 12 percent core Tier 1 capital. Handelsbanken reported core equity at 17.8 percent of its risk-weighted assets, under Basel III rules, at the end of June. That prompted speculation the banks would have enough reserves to step up dividend payments.

Dividend Guidance

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 payouts after building reserves that exceeded regulatory minimums.

“We had the discussions about dividends when the banks had very low capital,” Norman said yesterday. “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.”

Nordea is seen increasing its dividend for 2013 by 18 percent to 0.4 euro while Swedbank is expected to raise its payout to shareholders by 5.1 percent to 10.4 kronor, according to Bloomberg dividend forecasts. Handelsbanken and SEB are projected to raise their payouts by 4.2 percent to 11.2 kronor and by 3.6 percent to 2.85 kronor, respectively.

Buffer Levels

Nordea’s core Tier 1 capital ratio was 13.1 percent under Basel III at the end of the second quarter, allowing Scandinavia’s biggest bank to target a dividend payout in excess of its current target of 40 percent of net income, Chief Executive Officer Christian Clausen said on July 17. The bank will “most likely” pay a higher dividend for 2013, he said.

Swedbank on Jan. 30 raised its dividend payout ratio to 75 percent of profit, citing low demand for credit and a capital base that already fulfills Sweden’s 2015 capital requirements. The bank said then it plans to present new capital objectives by the end of this year.

Nordea Chairman Bjoern Wahlroos said in March he was “sure” his bank would look into raising the payout ratio because the lender is generating more capital than it needs. Raising the 2012 payout “was the first step in a process where we will eventually repatriate capital to our shareholders, either through dividends or share buybacks,” Wahlroos said in March.

Offshore Funding

Yet since then the list of government efforts to curb banks’ risk-taking has grown. Lenders have this year had to triple the risk weights they apply to their mortgage assets. Norman said on Aug. 26 that Sweden’s biggest banks, which the government has criticized for relying too much on short-term offshore funding, also face costs to help finance foreign reserves at the Riksbank.

While Sweden’s banks have weathered Europe’s debt crisis better than their European peers, the government has repeatedly argued in favor of ever stricter rules, citing the size and importance of the financial sector.

“To the extent that the market has been expecting higher dividends and/or capital repatriation from the Swedish banks in the short term, we think that the likelihood of this has substantially decreased,” SEB AB analyst Masih Yazdi said in a note to clients. “In the longer term, we think the higher capital requirements should lead to better margins, supporting earnings growth ahead.”

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