Nordea Hints Patience Running Out Over ECB’s Dividend Regime
(Bloomberg) -- Two years ago, Nordea Bank Abp packed up and moved its headquarters to the euro area in search of a friendlier regulatory setup. But the decision has left shareholders worse off in one key area: dividends.
Frank Vang-Jensen, chief executive officer of Helsinki-based Nordea since late 2019, says there’s no going back. Moving from Stockholm “was the right decision,” he says.
But he also suggests the current cap on dividends in the euro zone, which is much stricter than in Sweden, ignores huge regional differences across the bloc, putting healthier banks at a disadvantage. He, like some of his peers elsewhere in the euro zone, wants the European Central Bank to take a more nuanced view.
“Sometimes, one size fits all is not the best,” Vang-Jensen said in an interview on Friday. “There are very good tools for trying to measure the strength of different banks,” he said.
Under the ECB’s single supervisory regime, Nordea is obliged to observe a 15% de facto cap on dividends (as a percentage of profit in 2019 and 2020). Sweden’s financial regulator places that cap at 25%. The ECB also expects banks not to pay out more than 0.2% of their key capital ratios, while Swedish lenders face no such limit.
Esbjorn Lundevall, chief equity strategist at SEB AB’s private bank, calls the development “somewhat ironic.” Nordea “expected to be able to pay out more generous dividends with the ECB as the regulator,” he said. The outcome is particularly unfortunate because, for bank investors, dividends are the “main attraction,” given the limited growth prospects for the sector, he said.
Nordic GDP Strength
A big part of the Swedish regulator’s recommendation is based on the strength of the local economy. Gross domestic product in Sweden shrank less than 3% in 2020, while the average contraction in the euro zone was almost 7% last year. Nordea is among a group of euro-zone banks that includes ING Groep NV and KBC Group NV that are most disadvantaged by the ECB’s restrictions, given expected capital returns, analysts at Berenberg said in December.
Read More: Benelux Banks Turn to Costs to Ease Dividend Cap, Weak Revenues
Since late 2017, when Nordea first proposed uprooting itself and moving its headquarters to the euro zone, its share price has slumped by about a third, broadly in line with the average for banks in the region. And the bank appears no longer to be keeping tabs on the 1.1 billion euros ($1.3 billion) in savings promised to shareholders “over time,” characterizing it now as a moving target.
On Thursday, Nordea signaled it’s had enough of the ECB’s dividend restrictions. The bank intends to pay part of its 2019 profit in February. The rest (what’s left of the 2019 dividend and all of the dividend planned for 2020) will be paid out after September, when the ECB’s effective cap is expected to be lifted. Vang-Jensen hinted any decision by the ECB to extend its guidelines beyond that date won’t go down well.
“We want to pay out a dividend and we intend to pay out a dividend,” he said on a conference call after presenting fourth-quarter results on Thursday.
What Bloomberg Intelligence Says...
“After 3-4 years of corporate-bank restructuring, dividend cuts and a 40% earnings demise, Nordea looks set to pay a near sector-high 70% dividend to shareholders this year. That’s underpinned by earnings recovery and growing surplus capital (11 billion euros), which can be used to finance a new share-buyback program, lifting total shareholder returns toward 100% or more.”
-- Philip Richards, Senior Banks Analyst
--Click here for the full report
The ECB’s de facto cap on dividends has already sparked a rebellion by two small Finnish banks, which last month both distributed four times the recommended amount. But for a bank as big as Nordea, explicitly disregarding the ECB’s guidance is less of an option, given the risk of a public shaming. Even so, Vang-Jensen says he still believes being in the euro area will “strengthen” Nordea in the long term.
Ultimately, the ECB provides a “more predictable and a more level playing field toward the rest of Europe,” he said.
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