Aktia Q2'24: The year continued as expected

Translation: Original comment published in Finnish on 08/05/2024 at 8:17 am EEST

Aktia released a fairly unsurprising Q2 result on Friday. Forecast changes following the quarterly report were mainly limited to increased expenditure forecasts and we expect the result to grow this year, thanks to strong development in net interest income. We still find Aktia’s valuation attractive based on all indicators just like the entire banking sector, so we reiterate our EUR 10.5 target price and Accumulate recommendation.

Q2 report contained no significant surprises

Profit lines developed mainly as we expected in Q2, but operating costs exceeded our forecast. However, thanks to the strong performance of life insurance, the comparable EBIT of 30.8 MEUR exceeded our forecast by some 2%. EPS landed at EUR 0.34. Loan losses were lower than we expected in the quarter at 1.8 MEUR, even though the quality of loan portfolio declined moderately. This may still indicate slightly increasing loan losses for the remainder of the year. Loan demand remained subdued, which resulted in Aktia’s loan portfolio continuing to decline as in Q1. No material changes were seen in the bank’s solvency. The company’s expectations for the earnings development during the rest of the year remained unchanged, contrary to our interpretation in Friday’s flash comment.

Our earnings forecasts decreased slightly as cost forecasts increased

Forecast changes were relatively moderate after an unsurprising quarter. On the income side, our forecasts did not change much, but we raised our operating cost forecasts as IT costs in Q2 were somewhat higher than our assumptions. Overall, our comparable EBIT forecasts for the coming years decreased by some 3%, mainly due to this.

We now suspect that the quarterly interest income peaked in H1. Thus, starting from the end of the year, the decline in market rates will have a negative impact on the development of net interest income. This is difficult to compensate for by growing the loan portfolio, so in our forecasts, interest income turns to a decline in 2025–2026. We expect that fee and commission income will grow steadily with AUM growth and gradually normalizing loan demand. Due to the fairly fixed cost structure and gradually decreasing interest income, the EBIT curve is declining in our forecasts in the coming years. However, we expect ROE to remain historically at a fairly good level of 12-13%. When the central bank’s interest rate cuts eventually come to an end, the result should rise again with increasing loan volumes and AUM.

Share valuation is moderate

We have examined Aktia’s valuation through historical valuation multiples, Nordic bank peers and the DDM model. Different methods indicate the value of Aktia’s share to be EUR 8.9-11.3, with a mid-point of EUR 10.2. Therefore, we still consider Aktia’s valuation attractive and feel the upside in the valuation multiples combined with a strong dividend return (8-9%) provides investors with a good expected return. Earnings growth in turn will be slightly negative in the coming years due to the declining interest income. However, to reap the benefits of the potential the market must be reassured that the company can 1) at least maintain its market share in lending and 2) turn net subscriptions in asset management back to growth. In our view, these are the key drivers of the share and the company’s value.