When dividend restrictions expire at the end of September, shareholders in Nordea Bank Abp, DNB ASA, Swedbank AB (publ), Skandinaviska Enskilda Banken AB and Svenska Handelsbanken AB (publ) can look forward to receiving payouts they have missed out on during the coronavirus pandemic in the form of an extraordinary dividend payment, according to analysts.

Thanks to strong earnings and significant excess capital, the five Nordic lenders are expected to retrospectively distribute 2019 and 2020 profits in accordance with their normal dividend policies, provided that regulators allow them to do so. Of the Nordic region's six largest banks, Danske Bank A/S is the only exception to the prediction.

Nordic banks' capacity and commitment to paying dividends make them an attractive investment from a capital return perspective, said UBS analysts in a Feb. 16 note, forecasting an average cash return of 12% for the six largest banks over the next 12 months — compared to a sector average of 6% — and a 30% return over the next three years.

Material capital buffers

A de facto ban on dividends imposed by European regulators at the start of the pandemic was a particularly hard pill to swallow for Nordic bank investors, who have historically relied on attractive dividend yields.

The largest Nordic banks — excluding Danske, which faced a significant profit squeeze last year — have posted strong earnings in 2020 and ended the year with record capital levels so they "don't necessarily feel like they should have been restricted" from capital distribution, according to Sean Cotten, chief rating officer at Nordic Credit Rating, a rating agency based in Stockholm and Oslo.

SEB recorded a capital cushion of 840 basis points above the regulatory requirement, followed by Nordea and Handelsbanken at 690 bps and 650 bps, respectively.

"We rarely use the word 'extreme,' but I would say they have extreme capital buffers today," said Louise Lundberg, a Nordic bank analyst at Moody's.

As such, it was no surprise to analysts that all six Nordic banks moved to resume dividend payments after regulators replaced their dividend ban with a cap late last year.

DNB proposed a dividend representing 30% of combined 2019 and 2020 profits, the limit set by the Norwegian regulator. Swedbank, SEB and Handelsbanken proposed to pay 25% of profits for the two years, in line with guidance issued by the Swedish watchdog, while Nordea and Danske's number was below 10% due to restrictions imposed by separate guidance from the ECB and the Danish financial supervisor.

Nordic banks have taken different approaches in categorizing these proposed dividends, linking them to either 2019 or 2020 profits, or both.

Regardless of how banks have labeled their proposed 2019-2020 dividends so far, more payments are likely to be made once the current regulatory guidance expires on Sep. 30, 2021.

Nordea and DNB have already stated their intent to pay an additional dividend, asking their annual general meetings for authorization to pay a specified amount per share later in the year. If permitted by their regulators, this will bring the average dividend payout ratio for 2019 and 2020 to 84% for Nordea and 60% for DNB, according to S&P Global Market Intelligence calculations.

Swedish lenders Swedbank, SEB and Handelsbanken have not made specific proposals for extra dividends, but Cotten said they are likely to move toward their normal dividend payout targets for both 2019 and 2020 — 50% for Swedbank and SEB, and 40% for Handelsbanken.

Meanwhile, Danske Bank is unlikely to propose an additional dividend, according to Jyske Bank analyst Anders Vollesen, who pointed to the fact that Denmark's largest lender has clearly stated its 2019 dividend is canceled while subsequently posting poor 2020 results, of which it is paying out 38% in dividends.

Danske is also facing uncertainty related to the outcome of various money-laundering investigations and even if the cases are settled this year, Vollesen sees it as more likely that the bank will choose to distribute excess capital through its normal dividend payments in the future by aiming for the upper-end of its 40% to 60% payout target. Danske currently has a 510 bps cushion above the regulatory requirement.

Temporary measures

While Nordic lenders undeniably had material capital headroom above regulatory requirements at the end of 2020, analysts emphasize that some of it is driven by temporary measures that, once reversed, will drive down the levels of excess capital.

One is the suspended dividends' impact on capital ratios. SEB, Handelsbanken and Danske have — unlike DNB, Nordea and Swedbank — boosted their ratios by adding back suspended dividends to their common equity Tier 1 ratio, meaning that if they pay out special dividends later in the year, it would cost additional CET1 capital. UBS analysts estimate this would pull SEB's and Handelsbanken's CET ratios down by 110 bps and 100 bps, respectively. UBS does not expect an additional dividend from Danske.

Nordic banks have also benefited from regulators' decisions to suspend or reduce the countercyclical buffer requirements, which are likely to be reinstated from 2022 onwards, said Mario De Cicco, vice-president for global financial institutions at DBRS Morningstar.

For Nordea, this would mean an increase of 220 bps in the capital requirement, according to Vollesen's estimate.

Other upcoming regulatory moves will erode capital cushions even further, with Swedish banks facing an upcoming impact from Pillar 2 guidance, which will add at least 100 bps to the capital requirements of Swedbank and SEB in 2021, said De Cicco.

Meanwhile, the big "wild card," said Vollesen, is the implementation of Basel IV rules from 2023, where the introduction of output floors is expected to impact banks' risk exposure amount and consequently their capital ratios. The uncertainty around the effects will likely cause some restraint among banks in paying out excess capital outside of their normal dividend policies, he said.

Once there is more clarity over future countercyclical buffer requirements and the impact of Basel IV, Vollesen said a bank like Nordea may look to readjust its capital levels through share buybacks or acquisitions similar to that of SG Finans, for example. Equipment finance provider SG Finans was acquired by Nordea in October.

UBS analysts suggest that Nordea will have the highest capital return potential in the next three years, at 39.3%.