Investeringskommentar, Stephen Ellis, Sector Director, 27/4/2016
In a difficult environment, Nordea delivered acceptable results, however, we don’t anticipate the path going forward will get any easier given the ongoing pressures from the Panama Papers as well as negative interest rates. We plan to maintain our SEK 94 fair value estimate and narrow moat rating. At this point, the Swedish Financial Supervisory Authority is investigating Nordea over its involvement in the Panama Papers, and the bank has been on the defensive. Unsurprisingly, the bank spent considerable time in its quarterly press release detailing its compliance efforts and is undertaking an investigation that it expects to be completed around mid-year. Given the high-profile nature of the Panama Papers, we expect this to be a continued unwelcome distraction for the management team.
From a results perspective, the first quarter was weak as we expected. We believe the volatile markets are actually pushing consumers to increase their deposits at Nordea, as deposits increased 7% sequentially, and these deposits are not as profitable given the negative interest rate environment. From a lending perspective, Norway remains weak due to the energy markets, and Denmark is seeing weakness in its housing markets, putting pressure on Nordea’s lending volumes (down 3% from last year) and margins. Overall, net interest income fell 3% sequentially and 7% from the prior year to EUR 1.2 billion. Fee income also declined 6% sequentially to EUR 772 million, thanks to lower average assets under management. As we expect the environment to continue to remain volatile for the near term, we expect similar results for the remainder of 2016.
Bulls Say
- With most of the banking assets and operations in Scandinavia, Nordea is not exposed to the sovereign debt contagion that much of Southern Europe has experienced.
- Expense-reduction efforts should help maintain positive earnings and continue to build capital during this slow economic environment.
- With Nordea's multiple delivery channels, it is able to capture an increasing number of relationships in a very competitive banking environment.
Bears Say
- Like many Swedish banks, Nordea relies on wholesale funding markets to get access to cheap funding on the covered bond market.
- Nordea's home markets and customers in Sweden and Finland depend on the rest of Europe for its export business. Norway's economy is very sensitive to oil prices.
- With NIMs below 1%, Nordea competes in a very competitive banking market and has little relative pricing power.
