Nordea Avoids Most ‘Gruesome’ Capital Scenario as New Target Set

  • Bank’s capital ratio falls short of Swedish FSA’s requirement
  • Capital relief instrument helps Nordea move closer to target

The Nordic region’s biggest bank is closer to meeting stricter regulatory capital standards than the market had feared.

QuickTake Capital Requirements

Nordea Bank AB had common equity Tier 1 capital equivalent to 16.8 percent of its risk-weighted assets at the end of June, less than the 17.3 percent minimum requirement the Swedish Financial Supervisory Authority has told the bank it needs to comply with as of Sept. 30. Including a capital relief instrument that Nordea issued in August, the bank is proforma only 0.1 percentage point off meeting the target.

“It looks pretty good, relative to what the market had expected,” Karl Morris, an analyst at Keefe, Bruyette and Woods in London, said by phone. There were “some pretty gruesome estimates out there” but “the market will take this well.”

Nordea’s shares rose 2.8 percent to 87.55 kronor, their highest since March, as of 10:14 a.m. in Stockholm. The bank still has the “ambition” to raise its dividend every year, Rodney Alfven, head of investor relations, said by phone. The FSA’s new target is “very undramatic” and Nordea continues to target a management buffer of 50-150 basis points above the minimum requirement, he said.

Default Probability

Nordea said it disagrees with the regulator, but that it’s working toward achieving the higher ratio, according to a statement on Monday. The stricter standards follow on from the Stockholm-based FSA’s assessment of the probability of default in Nordea’s loan portfolio, as well as its application of risk weights to corporate loans, the bank said.

“Significant” progress is expected to have been made toward meeting the new requirement by the time Nordea presents its third-quarter report, it said. Including a so-called synthetic securitization issued in August, Nordea’s proforma CET1 ratio is 17.2 percent, it said. The bank also said a final decision on its dividend will be made during the annual general meeting in 2017.

“Adjusting to the new requirements will not affect our business,” Nordea said. According to Morris, the bank will probably be able to keep its “progressive dividend policy.” Though there is “still a risk of a dividend cut,” he said that risk is now “low.”

Corporate Risk

The FSA’s demands are “broadly in line with what they had expected, even with the additional capital charge,” Matti Ahokas, an analyst at Danske Bank A/S in Helsinki, said by phone. “It’s also better than the market had feared, as there has been a lot of uncertainty of what the additional capital charge would be.”

Ahokas said details released on Monday suggest Nordea may be able to generate the necessary capital without adjusting its dividend policy. He recommends buying the bank’s shares.

Svenska Handelsbanken AB said over the weekend its CET1 ratio of 23 percent, as of June 30, exceeds the FSA’s minimum requirement of 21.1 percent. It plans to apply for permission to alter its calculation method as the FSA intends to increase average risk weights for corporate exposures . Shares in Handelsbanken rose about 2.5 percent shortly after the market opened.

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