Translation: Original published in Finnish on 10/18/2024 at 9:45 pm EEST.

On Thursday, Nordea announced a Q3 result that was better than we expected. The bank's net interest income and fee and commission income developed in line with forecasts, but changes in fair value and cost levels led to a positive surprise. At the same time, Nordea revised upwards its profitability guidance for the current year. We have slightly lowered our forecasts for net interest income in the coming years, but our view on the company and its earnings outlook has remained virtually unchanged. In our view, Nordea is still cheaply priced and the expected return looks attractive. We reiterate our EUR 12.5 target price and Buy recommendation.

Interest rate cuts not yet reflected in the numbers

As expected, Nordea's net interest income declined slightly for the first time also at an annual level, despite a slight pick-up in lending. Net fee and commission income was also in line with our estimates, supported by an increase in AUM in asset and wealth management. However, the positive impact of fair value changes on the result was higher than expected. Meanwhile, operating expenses and net loan losses were more moderate than forecast. As a result, Nordea's Q3 EBIT exceeded our forecast by around 3%. Earnings per share were EUR 0.36 and return on equity was an excellent 16.7%. At the same time, Nordea raised its profitability guidance for the current year and now expects the bank's return on equity to exceed 16% instead of the previous 15%. Our own estimates currently put the return on equity at 16.4%. Nordea also announced that the ECB has approved the bank's application to launch a share buyback program. The program, which is now launched, amounts to 250 MEUR and will end no later than the end of February 2025.

Adjustments to net interest income projections

We have refined our forecasts following the Q3 report. The main forecast changes were in net interest income, where we lowered our forecast for the coming years by approximately 3-4%. The impact on our EBIT forecast was similar. However, this is not a dramatic change in the outlook, as even small changes in the net interest margin lead to moderately large differences in the forecasts. Despite the forecast changes, our view of the company has remained unchanged. Overall, we expect Nordea's EBIT to decline in line with interest rates, but the return on equity (ROE) to still remain at around 15% next year. Thereafter, we forecast ROE to decline to around 14%, 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. Profit distribution remains strong in our forecasts, and we expect the bank's total profit distribution to be around 85% of the result in the next few years.

Valuation not challenging

Nordea is currently valued at a P/B ratio of 1.2x. Like the rest of the banking sector, the valuation is low and paints an unnecessarily pessimistic picture of the company's earnings development. In our view, 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. Similarly, relative to a peer group with a lower return on capital, the valuation can be considered unduly low. We therefore see clear upside in the valuation levels, which together with the profit distribution of approximately 10% offer investors an excellent expected return at the current share price with a moderate risk level.