EUR 850.00 For Business Accounts Only

Morningstar | We Lower Nordea's FVE to SEK 104 From SEK 116 After Another Weak Quarter

We think Nordea’s geographical business diversity--mainly comprising what we view as the steady Nordic economies--is a plus for its stable net income generation and the main factor differentiating the firm from its peers. While Nordea’s net interest margin averaged 1.4% during 2005-10 with declining asset yields amid a lower-for-longer interest-rate environment, margins have since been pressured. Nordea has slightly above 40% exposure to the Nordic housing market via its mortgage segment. While it is hard to predict the general direction--which could pose a downside risk to earnings in a rapid downturn--regulators and banks have been more selective regarding commercial and residential real estate lending and underwriting. For example, the Swedish Financial Supervisory Authority has in our view taken valid steps to cool mortgage lending via introducing a mortgage cap, raising the risk weights on mortgages, and introducing an amortisation requirement.Although costs are increasing due to ongoing restructuring, which was the case throughout 2017, we expect costs to ease down from 2018 onward, given its digital transformation and simplification efforts. We expect the cost/income ratio to decelerate towards 50% during 2018-22 as cost investments become more visible.Following compliance issues in 2015 and 2016, Nordea underwent a significant compliance remediation program, which was mostly completed by year-end 2017. The transformation program is carried out under five main categories: risk and compliance, simplification, digitisation, cost and capital efficiency, and customer satisfaction. While this is causing something of a cost spike, in the long run we believe it will be beneficial and will limit the overall one-off regulatory cost.