Bloomberg News

Nordic Banks Offer ‘Best Place to Hide’ From Capital Stress

October 21, 2011

(Updates with Swedish comments on EU capital caps in 10th paragraph.)

Oct. 21 (Bloomberg) -- Nordic banks may offer investors the best protection against a recapitalization wave that threatens to dilute the share values of Europe’s lenders, said UBS AG.

“It is a very attractive place for European investors to hide from the ongoing eurozone problems,” Nick Davey, a London- based analyst at UBS, said in an interview.

Scandinavian banks, including Nordea Bank AB and DnB NOR ASA, have negligible holdings of bonds sold by Europe’s most indebted nations and are better capitalized than most of their European peers. Nordea Chief Executive Officer Christian Clausen said this week his bank has no plans to sell shares. At the same time, Nordic governments have some of Europe’s smallest budget deficits. Norway has the biggest budget surplus of any AAA rated nation, offering an extra layer of protection to investors.

Shares in DnB NOR rose 3.2 percent to trade at 62.95 kroner as of 10:59 a.m. in Oslo, outperforming the 46-member Bloomberg index of European financials, which gained 1.9 percent. Nordea rose as much as 1.8 percent, before trading 0.6 percent higher in Stockholm.

In Norway, “the banking industry has a good solvency position, satisfactory profitability and low loan losses,” the head of the country’s financial regulator, Morten Baltzersen, said in an interview. “These factors provide a good starting point to meet potential challenges.”

‘No Immediate Need’

Swedish Finance Minister Anders Borg said Oct. 18 he sees “no immediate need” for the country’s banks to raise their capital buffers.

The European Union may require banks in the region to increase core capital ratios to 9 percent of their risk-weighted assets, according to a person with knowledge of the plans. The deadline for meeting the increased capital levels may be the middle of next year, German Finance Minister Wolfgang Schaeuble told a closed parliamentary committee this week, according to two lawmakers who attended the meeting. That’s almost seven years ahead of the target set by the Basel Committee on Banking Supervision.

Nordea, the biggest Nordic lender, had a core Tier 1 capital ratio -- a measure of financial strength -- of 9.2 percent in the third quarter. DnB NOR had a capital adequacy ratio of 11.7 percent at the end of the second quarter, the most recent reported figures show.

Sidestepping EU

Nordea passed the European Banking Authority’s July stress tests with a 9.5 percent capital ratio, almost twice the minimum requirement of 5 percent. DnB NOR passed with a 9 percent ratio. Another round of exams would help European leaders identify capital needs.

Sweden’s lenders need to maintain higher capital levels than their foreign peers because the country’s bank industry is four times the size of the economy, Financial markets Minister Peter Norman said in Stockholm today.

The country is also ready to sidestep European Union efforts to impose caps on capital buffers beyond minimum ratios set by the Basel Committee on Banking Supervision, said Lars Frisell, chief economist at the Financial Supervisory Authority.

Sweden “will of course use pillar 2,” which focuses on risk management, to enforce higher capital requirements for its banks if the country is unable to do so under pillar 1, Frisell, who is also a member of the Basel Committee, said at an event in Stockholm today.

Tapping Debt Markets

Nordic banks are among the few in Europe still able to tap wholesale funding markets. Two Swedish lenders issued senior unsecured notes last week; SEB AB sold 750 million euros ($1.03 billion) in floating rate notes due in 2013, while Svenska Handelsbanken AB sold 1.25 billion euros in notes due in 2021.

“That sends a pretty clear message to the market: we are amongst the few funding safe havens still left standing in the European banking index,” Davey said.

Besides Nordic lenders, Germany’s Deutsche Bank AG and Commerzbank AG have sold unsecured debt since September, as have London-based HSBC Holdings Plc and Rabobank International of the Netherlands.

Banks in Norway and Sweden “have very little that they need to demonstrate in this round of stress tests,” Davey said. “Capital ratios already have extremely thick buffers above this required hurdle rate and they simply don’t have a lot of exposure to volatility to sovereign debt prices.”

Raising Capital

Europe’s banks may need to raise 150 billion euros ($205 billion) to 230 billion euros to meet additional capital requirements, Kian Abouhossein, a JPMorgan Chase & Co. analyst in London, wrote in an Oct. 1 note.

The EBA estimates Europe’s banks need to an additional 70 billion euros to 90 billion euros in capital, the Financial Times reported yesterday, citing people familiar with the talks.

Nordea has “no direct exposure” to bonds sold by Portugal, Italy, Ireland, Greece or Spain, it said on Oct. 19. Norway’s six largest banks hold less than 1.3 percent of their managed capital in assets from those countries, the financial regulator said in June.

Norway, which channels most of its oil income into a $530 billion sovereign-wealth fund, has been shielded from the worst of the euro area’s debt crisis, helping keep unemployment below 3 percent, Europe’s lowest rate. This has allowed banks such as DnB NOR, the country’s biggest, to benefit from lower risk premiums than the rest of Europe, the Financial Supervisory Authority said last month.

No Crisis

“The Norwegian banking industry is clearly not in a state of crisis,” Baltzersen said.

Lenders including Deutsche Bank AG have said they oppose recapitalization because it would dilute existing shareholders without addressing the risk of sovereign debt defaults. BNP Paribas SA and other banks have said they can meet increased capital requirements without cash injections.

Concerns over a potential default by Greece and contagion in other debt-ridden nations have pushed the 46-member Bloomberg Europe Banks and Financial Services Index down 31 percent this year. DnB has lost 23 percent and Nordea has dropped 24 percent.

Norwegian banks’ “situation is quite solid, especially in relative terms compared to an average European bank,” Oeystein Olsen, the governor of the central bank of Norway, said in an interview this week.

“The further down the road we get the more the Norwegian sovereign wealth looks like an attractive backdrop in which to operate,” Davey said.

--With assistance from Adam Ewing and Johan Carlstrom in Stockholm. Editors: Tasneem Brogger, Jonas Bergman.

To contact the reporter on this story: Josiane Kremer in Oslo at jkremer4@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net


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