Translation: Original published in Finnish on 7/17/2025 at 7:13 pm EEST.

Nordea reported a better-than-expected Q2 result. This was explained by a favorable development in credit losses, as the company released its discretionary buffers more aggressively than before. Our near-term earnings estimates increased as our loan loss estimates declined, and the outlook for net interest income has also improved slightly. The share price is still not too demanding but offers an attractive combination of dividend yield and moderate multiple expansion potential. We revise our target price to EUR 12.5 in line with our estimate upgrades and reiterate our Accumulate recommendation as the market is pricing in an unnecessarily emphasized decline in earnings.

Positive credit loss provisions clearly supported the Q2 result

Nordea's operating figures in Q2 were largely as expected. Net interest income continued to decline and net fee and commission income was roughly flat year-on-year. Credit demand remained relatively subdued, although a pick-up was seen in corporate loans. In asset management, new sales performed well, but the weakening dollar and high asset value volatility weighed on management fees. Due to declining revenues and rising costs, EBIT ultimately decreased by around 5% from the comparison period. However, the result and profitability (ROE 16.2%) were clearly above our expectations thanks to positive credit loss entries, which were due to the release of previous credit loss provisions. The significance of the earnings beat thus remained very modest. The full-year earnings guidance (ROE > 15%) remained unchanged, which likely means the unwinding of loan loss provisions will continue at a faster pace than before.

Earnings forecasts rose

Following the Q2 report, we revised our earnings estimates for the coming years upwards. For the current year, the largest impact came from credit losses, which we expect to be negligible for the rest of the year as the bank unwinds its existing credit loss provisions. The largest impact on the upward revisions to our forecasts for the coming years was on the net interest margin, which we expect to narrow less than our previous estimates as market interest rate forecasts rose moderately. We also expect credit demand to pick up from next year onwards. Overall, our current year's EBIT forecast rose by 4% and our 2026-2027 forecast by 2-5%.

We expect Nordea's operating profit to decline moderately in the coming years along with interest rates. On our estimates, the bank's return on equity will decrease this year to around 15%, which is in line with the bank's guidance. The unwinding of existing credit loss provisions provides support for the remainder of the year, as well as for next year's performance. However, adjusted for this, profitability in our forecasts is already below the target level. From next year onwards, Nordea's return on equity stabilizes in our forecasts at slightly over 14%, which we consider a sustainable level for Nordea even in an environment of lower market interest rates. We note that the profitability level based on our estimates is still excellent and clearly exceeds the bank's cost of capital. The distribution of profits will remain generous, as the bank supplements the dividend with regular share buyback programs.

High profit distribution supports earnings expectations

Looking at the balance sheet, Nordea is valued at a P/B ratio of ~1.4x. The valuation is not too demanding and, in our opinion, paints an unnecessarily pessimistic picture of the company's outlook. In our calculations, an acceptable valuation range for Nordea is around 1.4-1.5x, which would correspond to a value of EUR 12.3-13.1 per share. Therefore, the stock's current valuation is at the lower end. 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.