Nordea CEO Pledges Dividend Growth Amid Capital Shortfall Fears

Nordea Bank AB underscored its intention to hand shareholders bigger dividends each year amid speculation it may need to hold more regulatory capital after underestimating the risk in its corporate loan book.

The bank paid 64 euro cents per share in 2015, more than doubling payouts to investors since 2010. After backtracking in January on a pledge to offer “at least” 75 percent of profits, Nordea now just says it wants shareholders to get more each year. In 2015, the dividend was equivalent to 70 percent of profit.

Casper von Koskull

Source: Nordea

Nordea isn’t planning further adjustments in its dividend policy, according to Chief Executive Officer Casper von Koskull. “We’re not changing anything” on that front, he told Bloomberg.

Nordea last week defended itself against media reports that it might need as much as 80 billion kronor ($9.4 billion) in additional regulatory capital to cover risks lurking in its corporate loans. Both the bank and the Financial Supervisory Authority have since rejected those claims, with the regulator insisting that any extra capital requirement will be “significantly lower” than levels mentioned in an article by newspaper Svenska Dagbladet.

Nordea estimates that the FSA’s review will probably lead to a 40-basis point increase in its common equity Tier 1 requirement. The bank’s profits will be big enough to cover that without tapping markets, von Koskull said.

SEB said in a note that the market has over-reacted to reports that Nordea lacks capital, and cited “wrong conclusions” as well as “several important flaws” in an FSA memo obtained by Swedish media. SEB reiterated its recommendation that investors buy Nordea shares, which it sees rising as much as 30 percent from the current price.

That said, SEB expects Nordea’s average corporate risk weight to rise to 47 percent from 41 percent, leading to its common equity Tier 1 capital ratio falling to 15.3 percent from 16.5 percent. But the selloff that has pummeled the bank’s shares is “an overreaction in our view,” Masih Yazdi, an analyst at SEB, said in a note.

Nordea’s efforts to quell speculation it lacks capital have so far had mixed results. It was downgraded by JPMorgan and Swedbank on Thursday, amid concerns about capital adequacy. Its shares plunged as much as 6.6 percent, while the Bloomberg index for European banks gained. The bank’s shares traded as much as 8 percent lower on Monday, tracking big losses across equity markets as investors respond to the fallout of Britain’s decision to leave the European Union.

Thursday’s selloff dents Nordea’s share price

Concern that Nordea might need to build a lot more capital is “unsettling the market,” according to Karl Morris, an analyst at Keefe, Bruyette and Woods. The regulator says it will publish its final assessment in September.

“Our initial view is that any possible material increase in capital requirements, which we deem unlikely, will not have an impact on consensus dividend expectations,” Morris said in a note. “But investors clearly do not like the potential risk to dividends.”

JPMorgan on Thursday cut its recommendation on Nordea shares to neutral from overweight, while Swedbank lowered the bank to neutral after previously having advised clients to buy.

In its note, JPMorgan said the capital requirement may be lower than press reports suggest, but the FSA’s tone was still “more hawkish” than expected, putting Nordea’s dividend level at risk.

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