Nordea, the biggest bank in the Nordic region, could meet its 15 percent profitability goal by the end of next year if markets return to normal, its chief executive said on Wednesday. Christian Clausen also said he was confident that a mooted$100-110 billion recapitalisation plan for European banks would soothe concerns over whether exposed lenders can cope with a Greek default or a wider contagion of southern Europe's debt woes.
"I think banks are going to take responsibility for this; they are going to retain earnings, maybe some will raise capital, and others will reduce their assets," Clausen told Reuters in an interview at its capital markets day in London. Clausen added the banking sector would likely take these steps by June next year.
Nordea, one of Europe's top 10 lenders, with a market capitalisation bigger than Deutsche Bank, had a return on equity (ROE) of just 6.5 percent in the third quarter. Clausen said the bank would boost its ROE by making operations more efficient and by reducing risk-weighted assets (RWA) though maintaining business momentum. In August, the bank announced plans to slash headcount by about 6 percent, or 2,000 jobs, joining a growing number of European banks resorting to lay-offs to boost profitability.
Asked if the bank could meet its profitability goal in 2012, Clausen said: "The two first elements, operational efficiency and RWA efficiency, we will deliver over the next two years, so during 2011 and 2012." "Towards the end of 2012 and the beginning of 2013 we will have implemented quite a lot of that, and then it's a question of normalisation. So yes, that cannot be excluded," he said.
Asked if that meant towards the end of 2012, should markets normalise, he said: "Yes, that looks likely." The 15 percent ROE target has sparked controversy in Sweden, where it was slammed by the finance minister for being too high. Clausen was confident European bank recapitalisations would help calm market fears about the debt crisis but added that politicians needed to do their part.
European leaders are in broad agreement on the need to recapitalise Europe's banks by 100-110 billion euros, but are not expected to agree a final plan for Greece, or on how to boost the firepower of Europe's EFSF bailout fund when they meet later on Wednesday. "This won't go without the EFSF programme to support the sovereigns," he said. "This is something they need to get out and running very quickly."
EU leaders are considering two methods for boosting the EFSF, including using part of its capacity to set up a special purpose investment vehicle (SPIV) that would attract money from sovereign wealth funds and other investors to buy debt. Clausen said the SPIV option was complicated.
"The best solution would be much more straightforward, just to have the firepower, the cash to buy bonds. That would be easier to understand for everyone." However, he was confident that funds were ready to jump in, especially if given guarantees. "We should not underestimate all the liquidity in the world that needs to be deployed," he said. "There is a lot of money waiting to actually step in, that I'm quite sure about. And with a first loss guarantee, I am sure that would be fine."
Analysts say investors view Nordea as a defensive play in a European context thanks to its high level of capital - it had a core tier one capital ratio of 11 percent in the third quarter - and because it has no direct exposure to southern Europe's mess. It has some of the lowest funding costs among Europe's major banks. But while Nordic banks have benefited from a strong recovery in the region after the economic downturn, growth at home is starting to look less robust. Nordea's third-quarter operating profits missed expectations last week as volatile stock markets squeezed income.