Banks Test Swedish Government Threats as Dividend Surge Cleared

Sweden’s government said it won’t criticize banks for ladling out bigger cash rewards to shareholders while warning the industry to gird for tighter rules that will limit the scope for future dividends.

Banks “must understand that we will increase our demands when it comes to capital going forward” and “take that into account when they make forecasts for dividends,” Financial Markets Minister Peter Norman said in an interview in Stockholm after a speech yesterday. It’s “the shareholders’ privilege to decide how big dividends they want to pay,” he said.

The comments follow a plan by Nordea Bank AB, the Nordic region’s biggest lender, to almost double its dividend target and raise payouts by a third from the level paid for 2013. Doing so would match the 75 percent ratio at Swedbank AB, which is the Nordic region’s best-paying lender. Nordea Chairman Bjoern Wahlroos said in an April 7 interview dividends need to rise to prevent the bank sitting on too much capital.

Sweden’s government has railed against banks, whose assets at home and abroad are equivalent to four times the nation’s gross domestic product, for exposing the economy to risk. The industry’s size means banks need to meet stricter capital requirements than those set elsewhere, Finance Minister Anders Borg argues.

It’s “key that they cut their risk exposure and are careful and raise their capital,” Borg said yesterday.

Surprising Move

Borg as recently as February criticized bank plans to raise dividends, arguing such a move would erode buffers he says are needed to protect taxpayers. Sweden’s four largest banks earlier this year proposed paying 66 percent of profits on average for 2013, which shareholders approved last month.

“It’s a bit surprising that one chooses to go with larger dividends in a situation where we clearly have signaled that the banks need to have large core capital,” Borg said on Feb. 6. “We clearly will have to look over how to tighten our regulations to make them take their responsibilities with greater seriousness.”

Borg again warned banks on March 19 that banks face higher capital requirements as the government lays out a “road map” this spring. The country will continue to tighten bank rules over several years, Borg said. As long as banks claim they have enough capital, the government will keep raising requirements, he said.

Excess Capital

Sweden’s largest banks already exceed a 12 percent core Tier 1 ratio of risk-weighted assets set for 2015, and argue they should be free to use excess capital to reward owners.

Nordea’s core Tier 1 ratio rose to 14.9 percent at the end of last year, excluding so-called transition rules. Swedbank AB’s common equity Tier 1 ratio reached 18.3 percent under Basel III rules, while Svenska Handelsbanken AB’s was 18.9 percent. SEB had a common equity Tier 1 ratio of 15 percent.

Nordea paid out 56 percent of profit to its owners this year and has said it will raise its dividend payout target this year from a goal of distributing more than 40 percent of profit.

The 56 percent of profit Nordea delivered shareholders for 2013 “will not be sufficient to prevent an excessive increase in core Tier 1 capital,” Wahlroos said. Referring to the three-quarters of profit that Swedbank returned to its owners, Wahlroos said that “in the long term, it certainly now seems that we will be pushing towards those kinds of numbers.”

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