Nordea: Q1'25: Clouded economic outlook not a concern

Translation: Original published in Finnish on 4/16/2025 at 9:40 pm EEST.

Nordea reported a better-than-expected Q1 result. However, the forecast beat was mainly explained by quarterly fluctuations in fair value, and the decline in net interest income kept the result down as expected. At the same time, increased uncertainty has weakened the outlook for credit demand, which together with lower interest rate forecasts lowered our earnings estimates. In light of the relatively stable earnings outlook, however, the stock's expected return is still sufficient, so we reiterate our Accumulate recommendation. We are revising our target price down to EUR 12.0 (was EUR 12.5) in line with our lower earnings estimates.

The quarter’s development was largely expected

Nordea's operational figures for Q1 did not offer any major surprises, but the result was stronger than expected thanks to fair value changes and very modest credit losses. Net fee and commission income increased year-on-year and asset management sales performed well, but this was not enough to offset the negative impact of the decline in interest income. Consequently, the result decreased by around 9% year-on-year. However, profitability was still at a strong level (Q1’25 ROE 15.7%). Credit volumes, on the other hand, remained moderately subdued, as the increase in uncertainty has kept customers cautious. The bank did not touch this year's earnings guidance (ROE > 15%), although increased uncertainty is clouding the outlook.

Weaker interest rate outlook lowered earnings forecasts

Following the Q1 report, we revised our earnings forecasts moderately downwards. This was mainly due to lower interest rate forecasts and increased uncertainty, which weakens the demand outlook for credit. However, this did not lead to significant changes, as our overall EBIT forecast for the current year was reduced by 1% and our forecast for 2026-2027 by 2-3%.

Overall, we expect Nordea's EBIT to decline in line with interest rates in the coming years. Our forecasts indicate that the bank's return on equity will fall below the guided 15% this year. Although the reversal of existing loan loss provisions may provide support for the development towards the end of the year, we see the risk of a negative profit warning as higher than before. On the other hand, the easing of economic uncertainty could improve the growth outlook for the loan portfolio and asset management's AUM, but we believe caution is warranted given the exceptionally high level of general uncertainty. We note that the profitability level based on our estimates is still excellent and clearly exceeds the bank's cost of capital. Our view of the bank's earnings performance has also not changed materially. Therefore, we wouldn’t see a potential small downgrade in the outlook as a cause for concern.

From next year onwards, we forecast Nordea's ROE to stabilize in the 13-14% range, which we consider to be a sustainable level for Nordea even in a lower market rate environment. The distribution of profits will remain generous, as the bank supplements the dividend with regular share buyback programs.

Expected return is still sufficient

Looking at the balance sheet, Nordea is valued at a P/B ratio of 1.3x. The valuation is moderate and, in our view, paints an overly pessimistic picture of the company's outlook. In our calculations, an acceptable valuation range for Nordea is around 1.3-1.5x, which would correspond to a value of EUR 11.1-12.8 per share. Similarly, relative to a peer group with a lower return on capital, the valuation can be considered unduly low. We therefore see moderate upside in the valuation levels, which together with the profit distribution of some 10% still offer investors a sufficient expected return at the current share price with a moderate risk level.