Scandinavian regulators' divergence from the European Central Bank's dividend policy could allow for lenders in Sweden, Norway and Denmark to pay out more generous dividends than their eurozone peers.

In fact, large Swedish and Norwegian banks such as Skandinaviska Enskilda Banken AB, Svenska Handelsbanken AB (publ), Swedbank AB (publ) and DNB ASA could be permitted by their national regulators to pay out dividends in 2021 that would be more than 5x higher than what the European Central Bank has recommended, according to an analysis by Nordic Credit Rating, a rating agency based in Oslo and Stockholm.

The more accommodative approach by Scandinavian regulators will be viewed favorably by equity investors, said Johann Scholtz, a European bank analyst at Morningstar, in an interview. He pointed to Switzerland as an example where banks' dividend resumption, after getting the green light from their national regulator in November, has positively impacted their valuations, he said.

Diverging regulatory line

The ECB, which oversees the largest eurozone banks, updated its dividend policy Dec. 15, saying it expects lenders to keep dividends and share buybacks below 15% of their combined 2019 and 2020 profits, or 20 basis points of their common equity Tier 1 ratio — whichever is lower — until the end of September 2021.

This means a bank like Nordea Bank Abp, the largest lender in the Nordic region, is limited to paying out 7.5 euro cents per share for 2019-2020 earnings, according to Nordic Credit Rating, down from a payment of 69 cents per share for 2018.

Nordea falls under ECB supervision because it is headquartered in Finland, a eurozone country.

Meanwhile, in neighboring, non-eurozone states Sweden, Norway and Denmark, banks such as SEB, Handelsbanken, Swedbank, DNB and Danske Bank A/S are supervised on a national level. In those three countries, also known as Scandinavia, financial supervisory authorities have issued their own dividend recommendations, which open the door for more generous distributions than eurozone banks.

Most significantly, in respective statements on Dec. 18 and 21, Swedish and Norwegian regulators allowed banks to propose dividends of up to 25% of combined 2019 and 2020 earnings.

Denmark's financial supervisor, meanwhile, chose not to set a specific limit at all. Instead it suggested in a statement Dec. 18 that distributions should be based solely on 2020 results and be "lower than what the institution would normally pay." This could, in theory, be higher than the ECB's recommendation, the Danish regulator confirmed in an email.

Removal of capital limit

The fact that all three national supervisors have removed the ECB's 20 bps CET1 limit — as such allowing dividend proposals to be based on profits rather than capital levels — will make the biggest difference for Scandinavian lenders, Sean Cotten, Nordic Credit Rating's chief rating officer, told S&P Global Market Intelligence. The decision by Norwegian and Swedish regulators to additionally raise the dividend limit to 25% from the ECB's 15% of 2019-2020 earnings is also "meaningful," he added.

The ECB's 20 bps CET1 limit would have been the key constraint for the ability of large Nordic banks to reward shareholders, if regulators in the region had followed the ECB's policy, a previous analysis by the agency found.

Nordic Credit Rating expects that Swedish and Norwegian banks will aim to pay the maximum allowable dividend in 2021. In such scenario, Norway's DNB, for example, could pay out 7.3 Norwegian kroner per share, as opposed to a 1.3 kroner per share limit imposed by the ECB. Sweden's Swedbank could pay up to 7.2 Swedish kronor per share, against a 1.2 kronor ECB cap. Nordic Credit Rating's analysis uses consensus estimates for the fourth quarter of 2020.

Despite a challenging year and high loan loss provisioning, Nordic banks have material capital buffers above regulatory requirements, and analysts have ranked them among those European banks best-placed to resume normalized dividends.

Danske's unlikely dividends

In Denmark, although the regulator has provided room for dividends to exceed the ECB's recommendation, the lack of a specific limit makes it harder to predict what banks could propose.

There are other factors at play, too, especially for Danske Bank, the country's largest lender by assets, which is still being investigated by authorities in the U.S., Denmark, Estonia and France for its involvement in a €200 billion money-laundering scandal at its Baltic business. Jyske Bank analyst Anders Vollesen expects that, if any of those investigations are still open by the time Danske presents its 2020 annual report, the bank will not propose any dividends for that year.

One the other hand, should the cases conclude before then, Danske might decide to distribute a dividend, Vollesen said in an interview. But he said it would probably be "insignificant" and lower than the ECB's limit; he estimated that such dividend would be in the range of 10 bps and 12 bps of Danske's CET1 ratio.

Dividends for other large Danish banks could be more significant, Vollesen said. Yet he noted that most lenders in Denmark recorded weak earnings last year due to pandemic-related loan loss provisions, and so their dividend prospects will generally be dampened by the regulator's requirement for them to base their proposals on 2020 results alone.

As of Jan. 5, US$1 was equivalent to 6.06 Danish kroner, 8.50 Norwegian kroner and 8.20 Swedish kronor.