Norwegian bank survey 2021 - The return of margins and dividends

Key takeaways from our eighth annual survey of the 50 largest traditional banks in Norway include an upbeat margin outlook for the next 12 months, led by expanding deposit margins and an imminent return of normalised dividend distributions. With prospects of rising interest rates and easing asset quality concerns, we see a fundamentally strong outlook for Norwegian banks. Our top sector picks are MING and NONG.

Sparebank 1 Østlandet (Buy, TP: NOK132.00) - Elevated activity and str...

SPOL reported a solid 12.1% ROE in Q2, partly explained by elevated financial gains. That said, the momentum in lending growth remains strong and activity across capital-light business areas is high. Combined with a slight miss on NII, higher costs have prompted us to trim our 2022–2023e EPS by c1–2%. We reiterate our BUY and NOK132 target price, with support from what we consider an attractive 6.8% yield for the next six months, a 2022e P/E of 10.9x adjusted for the Q4e dividend, and expected e...

Outlook appears bright

The pending rate hike from the Norwegian central bank (we now expect this in September) should provide decent repricing opportunities for Norwegian banks, contributing to a margin uplift in 2022–2023e. While we have taken a slightly more nuanced stance on certain stocks following share-price appreciation, we continue to see value potential, with the sector trading at an average 2022e P/E of ~11x and room for decent distributions. Our top picks are SRBANK, MING and MORG.

Margin outlook ahead of rate hikes

As we look to be gradually approaching higher interest rates in Norway, with an initial hike in H2e, we have taken a closer look at the margin outlook for Norwegian banks. Compared with previous hike cycles, we believe a lower outset for the key policy rate could indicate upside potential for deposit margins, other factors could mitigate some of the mortgage margin pressure seen during the last hike cycle, which was clouded by unexpected pricing behaviour by some market participants. In sum, we ...

Sparebank 1 Østlandet (Buy, TP: NOK125.00) - Demonstrating robustness

While the earnings mix was on the soft side, we consider the Q1 report a testament to SPOL’s robust balance sheet, as the bank booked net reversals of NOK18m. The capital position is also robust, with a 17.8% CET1, which combined with a retail-focused growth ambition leaves it comfortable on both growth capacity and asset quality. After lowering our NII forecasts, we have trimmed our 2022–2023e EPS by ~1–2% but reiterate our BUY, with a new target price of NOK125 (120).

Set for gradual margin relief

We see scope for rising key policy rates towards year-end, and have raised our 2022e EPS for the sector by ~2% on average due to increased margins. With additional earnings support from sequentially lower loan loss provisions in 2021e and a gradual normalisation of capital distributions, we continue to find the risk/reward appealing, with an average 2022e P/E of ~10x for the sector. Our top sector picks are still MING and SRBANK.

Northern Lights

Sparebank 1 Østlandet (Buy, TP: NOK111.00) - Strong end to the year

SPOL reported a solid 11.3% ROE in Q4, with improved margins being the main positive. Furthermore, asset quality remains robust and we see scope for the bank to continue to take market share in 2021 with support from a strong capital position and an uptick in corporate volumes, which lagged somewhat in 2020. We have increased our 2021–2022e EPS by 2–3% based on raised NII, and have raised our target price to NOK111 (107).

Set for profitable growth in 2021

Despite some NII headwinds due to customer rate changes, we expect a solid Q4 ROE of 11.4% aided by continued cost control and limited loan-loss impairments. We continue to find the risk/reward attractive, as we believe the valuation does not embody the robustness of Sbanken’s balance sheet. We reiterate our BUY and NOK76 target price, as in our view the 2020e P/B of 1.0x does not reflect the prospect of a 2021–2022e ROE of ~12%.

Northern Lights

Sparebank 1 Østlandet (Buy, TP: NOK97.00) - Continued growth momentum

We consider the Q3 report fairly solid, underpinned by an ROE of 10.9%, continued growth momentum and better-than-expected revenue trends. On the back of our positive earnings revisions (2021–2022e EPS raised by 2–3%), the recent share price decline, and our view of an increasingly attractive valuation (2020e P/B below 0.9x), we have upgraded the stock to BUY (HOLD) and our target price to NOK97 (94).

Profitability gradually picking up

Led by a NII rebound thanks to lower funding costs and a sequential decline in loan loss provisions, we expect a gradual pick-up in sector ROE in Q3. Nonetheless, lower interest rates are likely to curb NII expansion going forward, with retail-focused banks having a deposit-heavy funding mix most prone to this pressure. Thus far, Norwegian banks have proven resilient and remain well capitalised, and we reiterate our positive sector view. We keep MING and SRBANK as our top picks.

Norwegian bank survey 2020 - Overall position of strength

Being the largest bank in Norway, strong pre-provision profits allowed DNB to continue to report robust capital generation despite the turmoil in H1. As the Norwegian macroeconomic outlook appears to be gradually improving, we believe LLPs should come down in H2, and that the regulatory stance towards capital distributions will eventually turn more positive.

Sparebank 1 Østlandet (Hold, TP: NOK90.00) - NII to rebound from weak...

SPOL’s Q2 ROE of 11.3% and pre-tax profit of NOK534m were well above our forecasts, following strong net results from financial items and lower-than-expected costs. While the bank continues to gain market share, with annual lending growth of 9.4%, ‘real’ NII missed our estimate by 6% in Q2. While we expect NII to rebound in Q3, we have trimmed our estimates by ~1% to reflect lower NII and costs. We reiterate our HOLD and NOK90 target price.

Near-term NII headwinds

The Norwegian macroeconomic outlook is gradually improving on a wide range of fiscal measures, seemingly protecting asset values and overall credit quality. Lower interest rates nonetheless put pressure on the sector’s NII, particularly near-term. We expect an improvement in the sector’s capital generation in Q2 2020 QOQ, and continue to consider Norwegian banks well-equipped to endure the ongoing economic slowdown. We reiterate our positive sector view, but now take a more nuanced stance â...

Northern Lights

Sparebank 1 Østlandet (Buy, TP: NOK90.00) - Well-equipped for a downt...

SPOL’s Q1 ROE of 6.9% and PTP of NOK251m were well below our forecasts, following model-driven loan-loss provisions and weak net financial items. In our view, SPOL should be fairly resilient in the oncoming economic slowdown due to its low-risk balance sheet and solid capital position. Furthermore, the recent plummet in the NIBOR is set to neutralise the downward NII pressure from the announced rate adjustments from H2 2020. We reiterate our BUY and NOK90 target price, and have edged up our 20...

Good value despite headwinds

With valuations approaching previous troughs, we see meaningful valuation support as the sector is now trading at a 2020e P/B of ~0.7x. We have cut our earnings estimates for the Norwegian banks we cover to reflect higher loan losses given the rising macro uncertainty and downward pressure on margins. However, we believe extended fiscal easing should limit the Norwegian economic downturn. We reiterate our positive sector view, highlighting Sbanken as our top pick on robust asset quality and attr...

Northern Lights

Sparebank 1 Østlandet (Hold, TP: NOK102.00) - Increased focus on prof...

We have raised our 2020–2021e EPS by ~2% on higher NII following SPOL’s Q4 results. We appreciate its new ambitious ROE target of above 11% and less conservative capital strategy, considering it a meaningful step towards a strengthened profitability focus. We have increased our target price to NOK102 (96), but reiterate our HOLD.