EUR 850.00 For Business Accounts Only

Morningstar | We Reinitiate on Nordea; Our Fair Value Estimate is SEK 85 per Share

Nordea has been in a state of flux over the past five years now. In an effort to de-risk the balance sheet, the bank has offloaded its Russian exposure and sold off its non-Nordic shipping, oil, and offshore exposure. It also divested its Polish operation, its Danish life and pension business, its private banking operation in Luxembourg, and is in the process of divesting its Baltic banking joint venture share. For good measure, Nordea also underwent an extensive risk and compliance restructuring and relocated its headquarters to Finland, now falling under the regulatory umbrella of the ECB after a myriad of disagreements with Swedish regulators.All this coincides with declining income and slowing profitability over the past five years, which we believe has not been fully addressed by management’s strategic repositioning yet. While we generally agree with the strategy to refocus operations on the Nordics and believe the bank today stands on a solid footing, we find Nordea's initiatives to drive business momentum largely uninspiring as we miss a clear outlook on how it plans to out earn its cost of capital in the medium-term.Nordea largely looks toward investments in private banking in Norway and Sweden and regaining momentum on mortgages to drive top line growth. We are more enthusiastic on the former than the latter. Mortgage markets in the Nordics are becoming increasingly competitive by the day as challenger banks with different business models and funding structures undercut established players. Nordea has been on the receiving end of this and we doubt that it will be able to make easy inroads in this area without conceding on either volume or margins.Nordea acquired Gjensidige Bank in 2018, an online bank offering consumer financing products in Norway, which given its relatively fast growth (low double digits) and potential for expansion across the Nordics offers some promising long-term upside. But with about EUR 5 billion in customer assets, Nordea will need to look elsewhere to increase income generation meaningfully in the short to medium-term.