It’s the End of a (Very Profitable) Era for Nordic Bank Investors 

(Bloomberg) -- For years, Nordic banks have sent their shareholders eye-popping rewards. But after half a decade of negative interest rates compounded by financial scandals, the industry can’t afford more of the same.

Swedbank AB, which used to boast the most generous dividend policy among Nordic banks, just slashed its target by a third. Nordea Bank Abp can no longer guarantee its payout will grow each year. Investors at Svenska Handelsbanken AB, who were used to getting a bigger cash dividend every year, have this year seen their payments stagnate. Danske Bank A/S, which is at the epicenter of Europe’s biggest money-laundering scandal, has shelved share buybacks.

Lower dividends at Swedbank and Nordea show how “deteriorating revenue prospects, litigation risk and falling rates” are all “reasons for caution” when it comes to assessing European bank dividends, according to Bloomberg Intelligence analysts Jonathan Tyce and Georgi Gunchev. “Swedbank’s payout cut shows this, and we suspect Nordea will follow suit.” The analysts say that “other banks will likely also revise dividend guidance.”

Antti Saari, an analyst at OP Group in Helsinki, says that “it’s absolutely clear Nordea’s dividend policy will worsen.” UBS downgraded Nordea on Wednesday, citing a bleaker outlook for revenue, earnings and dividends; it’s no longer advising clients to buy the bank’s shares.

Nordea traded about 2% lower on Wednesday. Swedbank lost roughly 1.5% and Danske fell 1.6%. Sampo Oyj, Nordea’s biggest owner, was also dragged down amid concerns the bank will cut its dividend. It fell 2.6%.

What Bloomberg Intelligence Says:

“Nordea’s progressive nominal dividend goal is both unjustified and unattainable, in our view, given a 30%-plus earnings slide over 24 months, based on 2019-20 analyst estimates. That leaves a cut of about 30% possible when the dividend policy is reviewed in the autumn. With the earnings outlook remaining highly uncertain, that offsets capital surety.”
---- Philip Richards and Georgi Gunchev, bank analysts
Click here to view the research

Read More: Swedbank’s Dividend Forecast Falls 40% in Bloomberg Model

It’s a dramatic shift in fortunes for Nordic banks, which after the financial crisis topped industry ranks thanks to cost cuts and bigger capital buffers than their European peers. That had allowed them to return more to shareholders than their rivals further south.

The picture now is greatly altered. Laundering scandals mean some of the biggest Nordic lenders are facing substantial fines. Banks in the Nordic region, which have had to adapt to lower interest rates than their competitors in the euro zone, are also bracing for tougher capital requirements, leaving much less cash for investors.

Swedbank

• After hiking its payout policy to a staggering 75% of profit in early 2013, Sweden’s oldest lender Swedbank this month cut its target to 50%. That follows Sweden’s decision to raise its so-called counter-cyclical buffer. Swedbank is also adapting to the fallout of lower rates on a defined benefit pension obligation. Meanwhile, the bank is being investigated amid allegations it may have handled over $100 billion in suspicious transactions. As a result, Swedbank may be facing fines.

Nordea

• Nordea plans to review its financial targets, including its payout policy, this quarter, citing the pressure of negative rates and a tougher regulatory environment. Having moved to Finland late last year, the bank will soon be given new capital requirements. Only then will it know how much it can afford to return to owners.
• Analysts at Deutsche Bank now estimate that Nordea will need to cut its dividend for this year by almost half.
• Saari at OP Group says Nordea is “likely to cut the cash payout to a much lower level and then start targeting dividend growth again.” He also expects the bank to look into the option of share buybacks as an alternative, given how cheap the stock has become.

Danske

• Danske earlier this year cut its dividend for 2018 by 15% from the level paid for 2017, and said it plans no share buybacks this year "due to continued uncertainty" surrounding the fallout of its money-laundering scandal. But the bank’s dividend policy remains unchanged and it aims to pay out between 40% and 60% of annual profit.

Handelsbanken

• Though it has steered clear of the scandals that have tainted some of its Nordic peers, Handelsbanken is dealing with other problems. Its costs have been rising faster than income, which leaves less behind for shareholders. The bank surprised the market when it opted not to raise its regular cash dividend for 2018, ending years of increases.

Other Banks

• Sweden’s SEB AB and Norway’s DNB ASA haven’t signaled any changes to their dividend policies. SEB targets a payout of at least 40% of profit and distributed 61% in 2018 through an ordinary dividend and an extraordinary payout. DNB aims to pay out more than 50% of its profit and raise the nominal dividend per share each year. It distributed 56% for 2018 as a dividend. Including share buybacks, its payout ratio was 73%.

--With assistance from Joe Easton.

To contact the reporters on this story: Niklas Magnusson in Stockholm at nmagnusson1@bloomberg.net;Kati Pohjanpalo in Helsinki at kpohjanpalo@bloomberg.net

To contact the editors responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net;Christian Wienberg at cwienberg@bloomberg.net

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