S&P Global Ratings believes that Nordic banks' risk-adjusted capitalization (RAC) remains robust and a key rating strength, despite increased provisioning amid the COVID-19 downturn and strong loan growth. The region's banks have continued to bolster their capital position. We have seen a 16 basis points increase in their weighted average RAC ratio over 2020, but we continue to see differences between banks due to growth dynamics. Overall, the banks' weighted average RAC ratio was 13.1% at year-end 2020, versus 12.9% at year-end 2019. The year-end 2020 figure compares well with the top 50 European bank average RAC ratio of 10.4% as of year-end 2020. For Nordic banks, we project a ratio of 13.3% on average by year-end 2021.

Of the 30 banks we rate in the Nordics, 17 have a RAC ratio higher than 15%, and all have a RAC ratio above 10%, reflecting strong or very strong capitalization under our bank criteria (see chart 1).

Chart 1

A few Nordic banks exhibited a change in RAC ratios from year-end 2019 to 2020 of at least 1 percentage point in either direction for various reasons:

• Arion Bank, SEB, Swedbank, and Swedish Export Credit: Their RAC ratios increased primarily due to dividend cancellations or restrictions.
• Aktia Bank: The RAC ratio decreased on the back of the strong loan growth, especially in the corporate segment.
• Bank Norwegian: The stagnating loan book and lower risk-weighted assets (RWAs) led to an increase in the RAC ratio.
• Eiendomskreditt: Lending growth leading to higher RWAs was counteracted by earnings growth, which had a net positive impact on the RAC ratio.
• Eksportfinans: The RAC ratio increased due to the continued run-down of the loan book and reclassification of the liquidity portfolio to hold-to-maturity.
• Landshypotek: The RAC ratio decreased because of above-average RWA growth as the bank grew its lending book.
• LF Bank: The RAC ratio increased mainly due to strong earnings growth.
• S-Bank: Continuous loan growth exceeded the capital build-up, leading to a decrease in the RAC ratio.

Capital is ready to be distributed as economic conditions normalize and regulatory restrictions end

Despite the challenging operating environment in 2020, Nordic banks delivered solid earnings and continued their sound performance through mid-2021. Regulators in the region proactively wanted to ensure that potential losses from a more difficult operating environment were well covered, and that the banks maintained their lending capacity. As a direct result, the countercyclical buffer was lowered to 0% in Sweden and Denmark, while in Norway authorities eased the buffer requirement to 1% from 2.5% previously. Similarly, dividend restrictions were also put into force. The dust is now settling, and we expect most banks, as restrictions are lifted, will resume dividend distributions and supplement them via extraordinary dividends or buybacks.

The biggest Swedish institutions, Swedbank, SEB, and Handelsbanken have paid out a maximum 25% of 2019 and 2020 profits, in line with Swedish Financial Supervisory Authority (FSA) guidance. In August 2021, the Swedish FSA announced that the recommendation for dividend restrictions would not be extended beyond Sept. 30, 2021. As a first step, Handelsbanken announced its plan to make a shareholder distribution in the form of a dividend in kind in Industrivärden shares in fourth-quarter 2021. Similarly, at the beginning of October, Swedbank announced it will pay out further ordinary dividends in the beginning of November. Together with the previously paid out dividends for 2019 and 2020, the cumulative amount of dividends will correspond to 50% of net profit for the respective financial years.

In Norway, DNB paid out a dividend representing 30% of combined 2019 and 2020 profits, in line with the limit set by the Norwegian FSA. Owing to abating uncertainty about economic conditions, the Norwegian authorities recently removed the restrictions on dividend distributions after Sept. 30, 2021. In line with the Danish regulatory guidance of paying out lower-than-normal distributions to ensure capital preservation, Danske Bank distributed 38% of 2020 profits, that is, slightly below the general dividend policy of 40%-60% paid out of net profit. Jyske Bank did not pay a dividend but bought back shares of Danish krone (DKK) 0.5 billion in 2020, versus DKK 1.6 billion in 2019, a decline attributed to the uncertain environment.

Due to restrictions imposed by European Central Bank (ECB) guidance, Nordea paid out 15% of profits for 2019-2020 so far. Following the expiry of the ECB's dividend ban, Nordea's board has decided to distribute the unpaid ordinary dividend of €0.72 per share for 2019-2020 in October 2021. Furthermore, the ECB recently approved Nordea's share buybacks of up to €2 billion, opening a window for further shareholder distributions in line with the bank's commitment to shareholder returns and as a way to optimize its capital position. Similarly, OP Financial Group resumed interest payments on its profit shares for 2020 following the expiry of the ECB recommendation in October.

Midsize and smaller Nordic banks have largely adhered to local FSA guidance of restricting dividend payments. Compliance has been primarily upheld either by accepting the maximum payout set by the regulator, as in the cases of Bank Norwegian, Aktia Bank, and Oma Savings Bank; some banks reduced stipulated dividend policies to a temporarily lower level or canceled dividend payments.

In addition to capital distributions, we have seen appetite for share buybacks and Nordic banks using their ample capital buffers to pay for bolt-on acquisitions to support their core businesses. Earlier this year, DNB announced the acquisition of Sbanken, as a further form of capital optimization. More broadly, we see the possibility of further smaller acquisitions across the Nordic banking landscape in the next several years.

Chart 2

Table 1

Regulatory capital requirements are likely to be reestablished over 2022

We generally expect capital requirements to increase, with the buffer requirements eased during the pandemic unlikely to remain at such low levels for Nordic banks. Moreover, in the medium term, the need to absorb Basel IV's impact should make Nordic banks prudent in their capital planning choices.

For the major Nordic banks, our current expectation is that existing buffers and retained earnings should cover increasing capital requirements. As such, despite the anticipation of comparatively high shareholder distributions, we believe the Nordic banks continue to demonstrate robust capital profiles in regulatory terms as well (see chart 3).

As the economy is rebounding strongly from the pandemic, regulators have already decided to increase the countercyclical capital buffers (CCyBs), with which banks need to comply, with a 12-month lag to allow for preparation. However, depending on developments in the operating environment, the pace of increases could vary:

• In Denmark, regulators increased the CCyB to 1% from 0% in June 2021, and expect to recommend a further increase to 2% by the end of 2021, to take effect from early 2023. The rationale is to build up the buffer before financial imbalances become excessive and the financial sector becomes vulnerable to negative shocks.
• In Sweden, the CCyB was recently raised to 1% from 0%, effective Sept. 29, 2022. The Swedish FSA had started applying a CCyB of 2% prior to COVID-19 and made the assessment based on its view of financial imbalances. House prices have continued to rise at an increasing rate and households have taken larger mortgages.
• In Norway, the buffer requirement was increased to 1.5% from 1.0% on June 17, 2021, effective June 30, 2022. Norges Bank's decision to raise the buffer requirement was driven by the increasing financial imbalances, such as rising household debt as well as a substantial increase in both residential and commercial property prices.
• In Iceland, the CCyB was increased to 2% from 0% on Sept. 29, 2021, effective in 12 months' time. The decision by the Icelandic Financial Stability Committee was driven by the rapidly rising asset prices and increased household debt pointing to a cyclical systemic risk at least at the pre-pandemic level.
• In Finland, the CCyB remains in the regulatory toolkit but has so far not been activated.

Furthermore, in Norway, the systemic risk buffer requirement was increased to 4.5% from 3.0% at year-end 2020. In line with European Systemic Risk Board recommendations, requested by Norwegian authorities to ensure a level playing field, we expect reciprocation of the Norwegian systemic risk buffer requirement to be primarily relevant for five pan-Nordic banking groups operating in Norway. In addition, the Finnish and Swedish FSA both decided to reciprocate the Norwegian Ministry of Finance's decision to implement an average risk weight floor of 20% for residential real estate exposures and 35% for commercial real estate exposures in Norway.

Chart 3

Sound earnings capacity and capital will remain a rating strength for Nordic banks

Overall, we expect the Nordic economies to benefit from the easing of COVID-19 restrictions, which in turn has improved the GDP growth outlook across the region. For the majority of the banks in the region, we expect positive developments for income on the back of steady loan growth and recovery of net commission and fee income.

In our view, Nordic banks' cost base will remain under control and their relative operating efficiency will continue to support earnings. We incorporate further investments in digital development in our projections as banks build on their leading digital platforms and offerings. At the same time, we expect the large Nordic banks to continue strengthening their anti-financial-crime systems to address any shortcomings, thereby remaining a noticeable portion of the cost base.

We project Nordic banks' cost of risk will decline materially this year (from 2020) and normalize over the next two years in tandem with improved economic conditions. Although we do not exclude reversals of loan loss provisions in single cases, we still believe banks remain cautious about releasing their management overlay buffers before the full impact of COVID-19 shows up on the sensitive parts of loan books.

We therefore foresee Nordic banks demonstrating sound earnings capacity through 2021 and 2022. This will enable them to build up capital to support business growth, following potentially some smaller accretive acquisitions, all the while returning to normally generous shareholder distribution levels. (see table 2 for our RAC projections.)

Table 2

Related Criteria

• Risk-Adjusted Capital Framework Methodology, July 20, 2017
• Banks: Rating Methodology And Assumptions, Nov. 9, 2011
• Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011

Related Research

• Banking Industry Country Risk Assessment: September 2021, Sept. 29, 2021
• Leading Nordic Banks Keep Calm And Carry On Despite COVID-19 Stress, Feb. 23, 2021
• SLIDES: Nordic Banks: Strong Fundamentals And Digital Preparedness Shield Against COVID-19 Stress, Feb. 18, 2021
• Capital Resilience Alone Won’t Stabilize European Bank Ratings In 2021, Feb. 3, 2021
• Bulletin: Swedish Banks High Capitalization Can Handle Regulator’s Plans To Raise The Maximum Distribution Amount, Oct. 9, 2020