UPDATE 2-Norway's DNB faces up to new world of lower bank profit
* Cuts 2015 ROE target to above 12 pct from above 14 pct
* Sees dividend payout ratio at 25-50 pct through 2014 vs 50 pct
* Shares underperform broader bank sector (Adds detail, CEO, analyst comment)
By Camilla Knudsen and Balazs Koranyi
OSLO, Sept 6 (Reuters) - DNB, Norway's biggest bank, slashed its dividend and profitability targets on Thursday, caving in to pressure from regulators to beef up its capital buffers and admitting to much slower growth due to tough economic times.
The decision to cut its return on equity target -- a measure of profitability -- shows how one of Europe's most solid banks is having to scale back its ambitions.
DNB has proved resilient to Europe's debt crisis and has remained one of the region's most profitable banks, but the group faces a slowdown in lending and interest income growth plus persistent regulatory demands to bolster capital quickly.
"Today the situation is completely different," Chief Executive Rune Bjerke said of the targets set over a year ago. "We have had a tsunami of new regulations and the macro economic situation is challenging ... interest rates are down and new regulation has come up, we need to adjust the way the bank operates to that."
Norway's regulators have urged banks either to cut dividends or raise capital to bolster their defences against the difficult economic climate. But DNB has been reluctant to heed these calls and has ruled out any capital increase via the equity market.
DNB cut its dividend in February, originally seen as a one off. The bank cut again on Thursday, saying it would pay out between 25 and 50 percent of profits to shareholders through 2014, down from a target of 50 percent.
This will help raise the bank's capital ratio from 9.6 percent to 10 percent by the end of the year and to between 12 and 12.5 percent by 2015.
DNB cut its 2015 return on equity (ROE) target to above 12 percent from previous guidance of above 14 percent.
The new target maintains DNB as one of the most profitable in Europe, where many euro zone banks have single digit or even negative returns on equity (ROE).
But its nearest rivals are well ahead, with Handelsbanken recording a 14 percent ROE in the first half of this year and Nordea chalking up 12.1 percent.
"The targets are in general less ambitious than what we had expected, with the most positive targets being for 2015," Credit Suisse said in a note.
Still, markets punished DNB shares only moderately as the new targets are more closely aligned with market consensus forecasts and show that DNB is facing up to reality and abandoning unrealistic expectations.
At 1025 GMT, its shares were up 1 percent, underperforming a 1.4 percent rise by European banks. Investors were disappointed but not devastated by the new figures and relieved there would be no capital increase.
"This (dividend cut) was already reflected in the market's projections," brokerage Terra Markets said. "Taking everything into account our EPS estimate for 2015 might be upped slightly."
DNB said the bulk of the ROE cut was the result of lower global interest rates while a two percentage point tax increase and the increased capital base were also responsible.
The bank, one of the biggest lenders to the shipping industry, will also cut its exposure to this sector where it has had to book bigger than expected losses due to the global economic downturn.
It had already cut the weight of the shipping loan book to 7.5 percent in its portfolio from 9.7 percent in 2008 and now is aiming for 6 percent by 2015.
Although DNB previously said it aimed for an operating profit before taxes and writedowns of 30 billion Norwegian crowns ($5.18 billion) by 2015, its latest guidance did not contain a profit target for the period.
"We believe the new financial targets imply pre-provision profits for 2015 of around 27 billion crowns," Nomura said in a note. "This is about 1 billion crowns ahead of our 2015 estimate."
($1=5.7925 Norwegian krones) (Editing by Mike Nesbit and Jane Merriman)
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