Nordea Q2'24: Sustained strong performance

Nordea reported strong Q2 results in line with our expectations, with net interest income and fee and commission income developing as we had forecast. The bank's cost development during the quarter also did not provide any material surprises, and the company's profitability remains top-notch. In fact, we had to make only moderate changes to our estimates after the report. In our view, Nordea is still cheaply priced, in line with the rest of the Nordic banking sector, and the expected return looks attractive. We reiterate our EUR 12.5 target price and Buy recommendation.

Net interest income likely past peak

Nordea's net interest income increased by 4% year-on-year, which was quite in line with our forecasts. At the same time, the quarter-on-quarter growth slowed as net interest income declined slightly from the level in Q1, and it seems that the peak in net interest income is behind us. In fee and commission income, the development was slightly stronger than expected, especially in payments and advisory fees. The bank's operating cost level also developed broadly in line with our expectations, while loan losses were slightly lower than expected. There was a moderate deterioration in the quality of the credit portfolio in Q2, but the overall quality of the credit portfolio remained strong. With income and expenses well in line with our expectations, the net result for the quarter was also within our forecasts. Earnings per share were EUR 0.37 and return on equity was an excellent 17.9%. As expected, Nordea did not change its full-year guidance (ROE > 15%) in the Q2 report.

Forecast changes remain marginal after a quarter that met expectations

We have slightly raised our net interest income forecasts for the coming years, as expectations for the timing of central bank rate cuts have moved a step further into the future. We continue to assume that 3-month Euribor rates will settle between 2–3% in the long term, in line with current market forecasts. Nevertheless, interest rate hedging and the gradual adjustment of reference rates for loans will mitigate this trend and support the bank's profitability development. Our net interest income projections for 2026 should therefore already reflect a fairly sustainable level of net interest income. Correspondingly, our forecasts for operating expenses in the coming years have increased marginally, largely offsetting the effect of the increase in return forecasts. We forecast loan losses to rise above the company's estimated normalized level of 0.1% of the loan portfolio over the remainder of the year and to remain at about the same level for the next few years.

Overall, we expect Nordea's EBIT to decline in line with interest rates in the coming years but return on equity to remain above the target level of 15% throughout the current target period ending in 2025. Thereafter, we forecast ROE to decline to just over 13%, which we consider to be a sustainable level for Nordea even in a lower market rate environment. As the net interest income declines, the bank's results will be supported by an increase in fee and commission income, especially in asset and wealth management.

The share remains very cheaply priced

Based on our 2024–2025 earnings estimates, Nordea is valued at a P/E ratio of ~7–8x, which represents a discount of almost 30% to the bank’s historical levels (P/E ~11x). Like the rest of the banking sector, the valuation is low and paints an unnecessarily pessimistic picture of the company's earnings development. We see clear upside in the valuation multiples, which together with the profit distribution of approximately 10% offer investors a very good expected return at the current share price with a moderate risk level.