Company Reports

Nordea reported fourth-quarter 2023 operating profit of EUR 1.415 billion, closing out a strong year for the Nordic universal bank. Income generation was good as further widening deposit margins more than offset lower volumes and lending margins across the group. Net fee and commission income also performed well, supported by a strong quarter in brokerage and advisory on the back of higher customer activity. Higher intangible write-offs due to a change in the accounting treatment of development costs and the absorption of inflation pushing up wage costs did drive the cost/income ratio up to 51% versus 44% a year ago, which is higher than Nordic peers we cover. That said, profitability was still good at a return on equity of 14.1%. We maintain our SEK 152 per-share fair value estimate and no moat rating.

We are raising our fair value estimate for Nordea to SEK 152 per share from SEK 131 previously after refreshing our model. Apart from the time value of money since our last model update, we believe that Nordea's midcycle profitability has structurally improved. While we previously believed that the bank could achieve about 11% in returns on equity through the cycle, we now believe 12% is more likely. Although interest rates are set to fall this year, we believe they will settle above previous levels, allowing for greater net interest margins than Nordea achieved over the past decade. Our no-moat rating is unchanged.

After years of shedding assets, Nordea has found its bearing and is driving solid returns for shareholders via dividends and share buybacks. Management’s strategic repositioning has succesfully adressed the declinding income and slowing profitability of its recent past. Nordea now largely looks toward investments in private banking in Norway and Sweden and regaining momentum on mortgages to drive top-line growth. We are more enthusiastic on the former than the latter. Mortgage markets in the Nordics are becoming increasingly competitive by the day as challenger banks with different business models and funding structures undercut established players. Nordea has been on the receiving end of this and we doubt it will be able to make easy inroads in this area without conceding on either volume or margins.

No-moat Nordea reported a decent first quarter, with a return on equity of 17.1%. The bank saw total operating income inch up 1% to EUR 2,921 million on a sequential basis as 8% higher net interest income more than offset weaker net fee and commission income and net insurance and net fair value results. The increase in net interest income was owed to widening deposit margins more than offsetting product margins as rates across Northern Europe have increased. Loan losses of EUR 19 million or 2 basis points of total loans was low, highlighting that risk indicators remain robust for now. With costs excluding regulatory fees down 2% to EUR 1,167 million as well, operating efficiency has been outstanding in the first quarter, with the bank posting a respectable 39.9% cost/income ratio. The resulting capital build and buffer above regulatory requirements (4%) puts the bank on a solid footing and allows for sizable shareholder distributions. The bank announced another share buyback program worth EUR 1 billion, after which it still sits on EUR 2.8 billion in excess capital, which translates to about 7.7% of its current market capitalization. We maintain our SEK 131 per share fair value estimate.

Fourth-quarter 2022 results were good for no-moat Nordea. Operating profit increased 26% to EUR 1.609 billion, mostly due to higher interest rates propelling net interest income up 31%, which more than offset 12% weaker net commission income. It also more than compensated for a 10% increase in operating expenses as Nordea absorbed inflation adjustments to its cost base and increased its investment into financial crime-prevention capabilities. Loan losses remained subdued at EUR 59 million or 7 basis points, signaling that credit quality still holds up well.

Nordea has been in a state of flux over the past five years. In an effort to derisk the balance sheet, it has offloaded its Russian exposure and sold off its non-Nordic shipping, oil, and offshore exposure. It also divested its Polish operation, its Danish life and pension business, its private banking operation in Luxembourg, and is in the process of divesting its Baltic banking joint venture share. For good measure, Nordea also underwent an extensive risk and compliance restructuring and relocated its headquarters to Finland, now falling under the regulatory purview of the ECB after a myriad of disagreements with Swedish regulators.

Nordea reported third-quarter operating profit of EUR 1,297 million, 2% ahead of its earnings release in the same period a year ago. Wider deposit margins owing to higher interest rates and a strong demand for corporate loans stood out positively in the quarter, pushing net interest income up 15%. On the other hand, net fee and commission income declined 6%, driven by 4% lower assets under management as well as lower capital market activity. A 7% increase in total income to EUR 2,501 million in the quarter was still decent, however. Higher investments pushed operating expenses up 4% in the quarter, but given the good income performance, the cost/income ratio still came in at a respectable 45%. Even with further investments in the business in the last quarter of the year, the new guidance for the cost/income ratio of between 48% and 49% for 2022 looks achievable. For the first nine months of the year, the ratio stood at 49%. Loan losses of EUR 58 million, or 7 basis points, were low considering the historical context as well as the uncertain macroeconomic outlook borrowers face. We maintain our SEK 114 fair value estimate and no-moat rating.

No-moat Nordea reported second-quarter operating profits of EUR 1,361 million, up 2% compared with the same period a year ago. Net interest income, up 6%, was supported by strong volume growth of 4% slightly offset by weaker lending margins. The rapid rise in reference rates has driven up funding costs faster than lending rates could adjust, squeezing lending margins. Deposit margins on the other hand have started to benefit from higher policy rates in Norway and Sweden. All European banks are exposed to similar margin mechanics at this point in time. We anticipate Nordea to benefit from the currently higher interest rate outlook after lending margins start to rebalance and the full benefit on the deposit side trickles through.

Nordea has been in a state of flux over the past five years. In an effort to derisk the balance sheet, it has offloaded its Russian exposure and sold off its non-Nordic shipping, oil, and offshore exposure. It also divested its Polish operation, its Danish life and pension business, its private banking operation in Luxembourg, and is in the process of divesting its Baltic banking joint venture share. For good measure, Nordea also underwent an extensive risk and compliance restructuring and relocated its headquarters to Finland, now falling under the regulatory purview of the ECB after a myriad of disagreements with Swedish regulators.

Nordea reported a decent set of first-quarter results. Total operating income increased 3% versus the same quarter a year ago as higher net interest income and net fee and commission income more than offset weaker net fair value results. This was, however, counteracted by 5% higher operating expenses. We maintain our SEK 93 fair estimate and no-moat rating.

Nordea closed a good year with fourth-quarter operating profits of EUR 1,281 million, up 1% versus the quarter-ago period. In 2021, Nordea achieved a respectable return on tangible equity of 12.6%, surpassing its 2022 targets early. Encouraged by this performance, management adjusted the return on equity target upward toward above 13% while at the same time pushing it out until 2025. We maintain our fair value estimate of SEK 93 per share and no-moat rating. We await Nordea’s capital markets day on Feb. 17, which should bring greater clarity on its new strategic outlook, before updating our model and potentially adjusting our fair value estimate.

For the third quarter, Nordea reported operating profit of EUR 1.27 billion, 5% below what it had achieved a quarter ago. Income generation was down 3%. Net interest income came in flat at EUR 1.23 billion as higher lending volumes offset lower lending margins and a smaller benefit from the European Central Bank’s targeted longer-term refinancing operation. Net fee and commission income was down 1% to EUR 0.87 billion as higher card and payment income as well as growth in fees from savings and investments could not offset lower brokerage and advisory activity in the quarter. Net results from items at fair value decreased 19% on lower activity across all business units. Improving operating expenses, down 3%, partially counteracted the lower income in the quarter, but due to its operating leverage, Nordea’s profit before tax declined nonetheless. Last, the bank booked another quarter of small loan-loss reversals of EUR 22 million driven by fair value adjustments at Nordea Kredit. Excluding this adjustment, loan losses would have been at an equally benign EUR 4 million. We keep our fair value estimate of SEK 93 per share unchanged.

Nordea showed a solid performance in the 2021 European Central Bank's stress test. Its common equity Tier 1 ratio stayed 3.2 percentage points above its minimum requirement of 10.2%. Even if we were to include a countercyclical buffer (around 2%), Nordea would have passed this exercise. The decline of its common equity Tier 1 ratio (21.6%) can be broken down into 4.1% risk-weighted asset inflation and its capital base shrinking 18.4%. The culprits of the capital draw are easy to find. In this harsh scenario, credit losses more than tripled in 2021 from already elevated levels in 2020. Net interest income generation and net fee and commission income--albeit to a lesser extent--also saw a meaningful negative impact. That being said, Nordea only made a hypothetical loss in one year out of three, with the other two breaking even. In our book, that is a solid performance given the severity of the stress scenario. We maintain our SEK 93 per share fair value estimate and no moat rating.

Nordea reported a decent second quarter with an operating profit of EUR 1.3 billion, supported by small loan-loss reversals and stable income generation at group level. Net interest income increased 2% versus the prior quarter, driven primarily by a higher day count in the quarter, however. A slight positive contribution from volumes was offset by a touch weaker margins. Net fee and commission income has shown a great performance year to date, carried by savings and investment commission income. Compared with the previous quarter, this line item grew 6% to EUR 878 million, and is therefore well ahead of our previous assumptions. We have adjusted our medium forecast as a result of this performance, and in particular believe the good performance in asset management and savings products is sustainable. Our fair value estimate increases to SEK 93 from SEK 85 per share. Shares are slightly overvalued.

Nordea has been in a state of flux over the past five years. In an effort to derisk the balance sheet, it has offloaded its Russian exposure and sold off its non-Nordic shipping, oil, and offshore exposure. It also divested its Polish operation, its Danish life and pension business, its private banking operation in Luxembourg, and is in the process of divesting its Baltic banking joint venture share. For good measure, Nordea also underwent an extensive risk and compliance restructuring and relocated its headquarters to Finland, now falling under the regulatory purview of the ECB after a myriad of disagreements with Swedish regulators.

Nordea reported a strong first-quarter 2021 with operating profits of EUR 1.1 billion, up 8% versus the fourth quarter of last year. We increase our fair value estimate to SEK 85 from SEK 74 per share previously, primarily after lifting our income assumptions on the strong performance this quarter as well as a more solid outlook. Our no moat and stable trend ratings are unchanged.

Nordea has been in a state of flux over the past five years. In an effort to derisk the balance sheet, the bank has offloaded its Russian exposure and sold off its non-Nordic shipping, oil, and offshore exposure. It also divested its Polish operation, its Danish life and pension business, its private banking operation in Luxembourg, and is in the process of divesting its Baltic banking joint venture share. For good measure, Nordea also underwent an extensive risk and compliance restructuring and relocated its headquarters to Finland, now falling under the regulatory purview of the ECB after a myriad of disagreements with Swedish regulators.

Nordea has been in a state of flux over the past five years. In an effort to derisk the balance sheet, the bank has offloaded its Russian exposure and sold off its non-Nordic shipping, oil, and offshore exposure. It also divested its Polish operation, its Danish life and pension business, its private banking operation in Luxembourg, and is in the process of divesting its Baltic banking joint venture share. For good measure, Nordea also underwent an extensive risk and compliance restructuring and relocated its headquarters to Finland, now falling under the regulatory purview of the ECB after a myriad of disagreements with Swedish regulators.

We maintain our fair value estimate of SEK 74 per share and no moat rating for Nordea Bank. The group reported a good end to 2020 largely in line with our expectations. On an underlying basis, net profit for the full year has declined 9% to EUR 2.3 billion, but the overall picture is brighter in our view. The culprit of this performance has been loan-loss provisions. In 2020, Nordea booked EUR 860 million versus EUR 242 million a year ago. Excluding this elevated line item during the coronavirus, profit before loan losses showed an applaudable 6% increase year over year supported by a flat income line and lower operating expenses.

For all intents and purposes, the European Central Bank has extended its shareholder distribution suspension for European banks until September 2021. Supervisors did give a small concession in the form of reduced dividend distributions for 2020, but essentially the suspension remains in place. We think the ECB has struck middle ground in its decision, trying to appease banks and their shareholders as well as securing financial stability in uncertain times. We also believe the distribution limit has been set to such a level that all banks could stomach it. This is important from a supervisory standpoint as it avoids any potential signaling of which bank is currently under higher capital constraints. Because of this signaling effect, we expect banks to bend over backwards to pay the maximum allowed dividends in 2020 if permitted by supervisors. With the exception of the banks we anticipate to be loss-making this year, and therefore not eligible to pay dividends under the new guidance, we estimate that all banks under coverage have the capacity to pay up to the maximum amount allowed. Our fair value estimates and moat ratings across the board are unchanged.