Skandinaviska Enskilda Banken AB proposed a dividend per share of 4.10 kronor as it presented its 2020 results but still recorded excess capital of 840 basis points above the regulatory requirement. The Swedish bank will now enter a "transition period" to bring down this level to a target of between 150 bps and 300 bps, said CEO Johan Torgeby, hinting that it is likely to be done through additional dividends and possibly combined with share buybacks, once it receives regulatory approval.
SEB's current dividend proposal is in line with the guidance from the Swedish financial supervisory authority, which has asked banks to pay no more than 25% of combined 2019 and 2020 net profit until the end of September 2021. This is significantly higher than the dividend cap set by the European Central Bank for eurozone banks.
Despite being allowed to pay some dividends, the Swedish lender still recorded a common equity Tier 1 ratio of 21.0% at the end of 2020, against a regulatory requirement of 12.6%.
New financial targets
SEB, having revised its financial targets, aims to have a CET1 ratio between 100 bps and 300 bps above what is required by the regulator, up from a previous goal of 150 bps. It said it will also seek to pay a yearly dividend of around 50% of earnings per share, up from a previous target of 40%, and will introduce share buybacks as a potential method to distribute capital that exceeds its new capital target.
But, speaking to analysts, CFO Masih Yazdi noted that "these are forward-looking financial targets, and they do not necessarily answer how we will address the current situation, where we have a capital buffer that is significantly above our target range."
SEB is entering a transition period "to get into a more normalized state," said Torgeby, speaking on the same call. He said there would be no statement today on how the bank aims to get there, but reasoned that it is unlikely to happen only through share buybacks, although this tool could be used in combination with dividends.
The bank will await clarity from the Swedish regulator before it communicates to the market its immediate distribution plans. If the regulator lifts the current restrictions when they expire in September, SEB's board could call for an extraordinary general meeting to pay out additional dividends later in the year, or communicate any such intentions at the 2022 annual general meeting, said Torgeby.
More flexibility to grow
While on paper SEB has increased its dividend payout ratio target, in practice it is a reduction compared to previous ones, given that the bank has paid out a 70% to 75% ratio in the last few years, Yazdi said.
The point of lowering the payout ambition is to allow SEB to reserve less capital for dividends, which in turn can be used to grow to meet rising customer demand, he said.
"Now we're just allowing ourselves to be able to improve market share in years when you see high demand from customers, and we can be more supportive of them. So it just gives us more flexibility," he said.
Torgeby noted that the management's capital aspirations are similar to the past 70% ratio, but that the introduction of share buybacks gives SEB more flexibility in how exactly that capital is repatriated.
When asked whether SEB considers M&A as a way to deploy excess capital, he said it is not a noticeable part of its current business plan.
As of Jan. 26, US$1 was equivalent to 8.29 Swedish kronor.
