Nordea Bank Abp's upcoming €2 billion share buyback program will be followed by a series of regular repurchases as the bank seeks to reduce its substantial excess capital after two years of pandemic-driven restrictions from the ECB.
Share buybacks are "an integrated part of how we manage our capital efficiency and right-size the capital position," said CEO Frank Vang-Jensen on an earnings call Oct. 21. "We have not been able to use that in two years, and now we have the ability, and we will use it. And it's not a one-off."
The Nordic lender will commence a €2 billion share buyback scheme Oct. 22, and it further expects to seek approval from the ECB in early 2022 to conduct a follow-up program.
This comes after the ECB gave banks the green light to resume dividend payments and buybacks from the beginning of October. Previously, the regulator had asked lenders to limit distributions to 15% of their combined 2019 and 2020 profits, or 20 basis points of their common equity Tier 1 ratio — whichever is lower. This policy especially hurt Finland-headquartered Nordea, which is one of the best-capitalized banks in Europe.
Nordea's capital policy is to pay 60% to 70% of earnings in dividends while distributing any excess capital through share buybacks, with the aim of holding a CET1 capital management buffer of between 150 basis points and 200 bps above the regulatory requirement.
Capital deductions for Nordea's upcoming share buyback program brought its CET1 ratio down to 16.9% at the end of the third quarter from 18.0% three months earlier. But that still leaves the bank with 670 bps in CET1 capital above what is required by regulators.
"We're off the mark here," said CFO Ian Smith, speaking on the same call. "We still have a substantial capital excess that we will deal with on a measured basis over time."
New financial targets
The follow-up share repurchase program will not be as large as €2 billion, but it will be "meaningful," Smith said, adding that the bank intends to follow with regular, annual buybacks.
Nordea will publish new financial targets in early February, alongside the publication of its full-year results, and will on that occasion communicate future buyback plans, according to Smith.
The Nordic region's largest bank posted a net profit of €1.00 billion for the third quarter, up from €837 million a year earlier. Return on equity landed at 11.3% for the period, while its cost-to-income ratio fell to 47%, both well beyond the bank's ambitions.
Nordea's current target is to bring ROE above 10% and to reduce its cost-to-income ratio to 50% by 2022.
"We have made strong progress on delivering on our business plan and towards our 2022 financial targets; we have met these targets, and we feel that it's the right time to update these," Vang-Jensen said.
While the CEO would not comment on what future goals could be, analysts believe Nordea is well placed to raise them closer to the levels of best-in-class regional peers.