Aktia Q3'24: Interest income down, but profitability maintained

Translation: Original published in Finnish on 11/6/2024 at 9:30 pm EET.

Aktia published a stronger-than-expected Q3 result this morning. However, changes in forecasts following the report remained modest. In line with the rest of the banking sector, we consider Aktia's valuation to be low and believe that the earnings development we forecast, together with the upside in valuation multiples and strong dividend yield, offers investors a good return expectation. We therefore reiterate our target price of EUR 10.5 and Accumulate recommendation.

The year continued strongly

In Q3, performance improved on both the income and expense sides, and credit losses remained moderate. The report was not all celebration, however, as the interest income, which is key to the bank's earnings, fell more than expected. In any case, the quarter ended with a strong return on equity of around 15%. As expected, Aktia did not touch its guidance for the current year, so the bank still expects its comparable operating profit to be higher than in the previous year (2023: 104.8 MEUR). In our view, there is no uncertainty in achieving this.

Only modest estimates revisions

We have made only marginal changes to our forecasts following the Q3 report. We have slightly lowered our expense forecasts due to good cost control, but at the same time we have lowered our interest income forecasts for the coming years due to the lower-than-expected interest margin in Q3. As a result, our earnings forecasts for the coming years were virtually unchanged.

In our forecasts, Aktia's interest income peaked at the beginning of the year. Thus, the curve is downward sloping in the coming years, although the revival of credit demand and the growth of the loan portfolio do somewhat mitigate the decline. However, we do not expect a significant drop, as current market forecasts do not foresee a return to zero interest rates. We expect that fee and commission income will grow steadily with AUM growth and gradually normalizing loan demand. However, due to a very fixed cost structure and a gradually declining interest income, earnings are expected to decline in the coming years. Nevertheless, we expect Aktia's return on equity to remain at a historically good level of around 11-12%. When the central bank's interest rate cuts are completed in due course, earnings should also begin to recover as loan volumes and client assets under management increase.

The current valuation is not too high

We have examined Aktia's valuation through balance sheet multiples, Nordic bank peers and the dividend model. The methods indicate that the value of the share is EUR 9.3-11.8, with a midpoint of EUR 10.6. As a whole, we still consider Aktia’s valuation attractive and feel the upside in the multiples and strong dividend yield (8-9%) offer a good expected return to investors. Earnings growth in turn will be slightly negative in the coming years due to the declining interest income. The current price level could also justify a stronger view of the share. However, the company's performance has been volatile in the past and there are still questions about the company's normal earnings level (and ROE). Furthermore, we believe the company has all the preconditions to grow strongly in its asset management, but performance there has been subdued. We feel these factors take away the best edge from the stock's upside.