Nordea Bank Abp, the biggest bank in the Nordic region, raised its full-year profitability guidance as the tailwind from rising interest rates helped it generate better than expected profits in the second quarter.
(Bloomberg) — Nordea Bank Abp, the biggest bank in the Nordic region, raised its full-year profitability guidance as the tailwind from rising interest rates helped it generate better than expected profits in the second quarter.
The Helsinki-based bank now forecasts return on equity of more than 15%, up from a previous estimate of more than 13%, it said in a statement on Monday. That would be its highest level since 2008, while analysts on average expect to see ROE of 15.8%.
Its return on equity for the second quarter had already come to more than 18%, “driven by strong income growth, improved efficiency and low cost of risk due to a very well diversified credit portfolio,” the bank said.
“We have again shown that we can generate stable and sustainable profit growth,” Nordea Chief Executive Officer Frank Vang-Jensen said in the statement. “We have upgraded our outlook for the full year and expect return on equity to be comfortably above 15% in 2023.”
Nordea’s net interest income rose 40% to €1.83 billion ($2.1 billion) in the three months through June, compared with an average analyst estimate of €1.81 billion in a survey by Bloomberg.
The shares of Nordea and most other Nordic banks have underperformed European peers amid worries over exposures to Sweden’s troubled commercial real estate companies. Nordea is one of the four biggest lenders in Sweden but has the lowest exposure among them to that subset of the property market.
What Bloomberg Intelligence Says:
Nordea’s raised return-on-equity (ROE) target of above 15% in 2023 might still look too conservative after a solid second quarter in which pretax profit beat consensus by 4%, helped by lower costs (2% beat), higher revenue (2% beat) and continuing strong credit quality (4 basis-point charge). Consensus ROE of nearly 16% seems feasible. Capital is strong, 400 basis points above requirement, suggesting further repurchases might be in the cards.
— Mar’Yana Vartsaba, BI industry analyst, and Philip Richards, BI senior industry analyst
Nordea holds a €572 million buffer against future losses, unchanged in local currencies, and said net loan losses in the second quarter amounted to €32 million, much lower than analysts had anticipated.
“Our loan portfolio is large and spread evenly across the Nordic region and across different sectors. This is a structural advantage, which enables us to avoid larger concentrations,” Vang-Jensen said. “We see no real signs of stress in our portfolio, but are naturally following the impact of macro developments on our customers very closely.”
Second-quarter net income at €1.34 billion also topped estimates averaging at €1.26 billion, while income from fees and commissions was slightly below estimates. The long-term financial target for 2025 remains under review, with a view to publishing a new target in connection with the fourth-quarter report, Nordea said.
The report was “good” with “a very impressive ROE in the quarter,” said Roy Tilley, an analyst at Arctic Securities AS.
“A strong capital position and continued high ROE should be supportive for capital distribution,” said Tilley, especially as the bank isn’t forecast to grow strongly in the near future. Nordea is in the middle of its fourth stock buy-back program, and has repurchased €4.7 billion worth of shares since late 2021.
The second-quarter report was a “solid” beat and likely to generate “single-digit consensus earnings upgrades,” Maria Semikhatova, an analyst at Citigroup, said in a note to clients.
Lending to large corporates increased 3% in local currencies from the prior quarter, and driving it are investments, Vang-Jensen said in an interview.
“We probably haven’t understood fully in society the big demand for investments in the green transition,” said the CEO. “And if we then add a slow, but increasing focus on defense investments and that a number of companies are looking at their supply chains — there is of course a big geopolitical agenda here — if you add it all up in a basket, it becomes quite significant.”
–With assistance from Steven Arons.
(Updates with analyst comments from seventh paragraph)
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