Aktia Q1'25: Strong payout outlook supports expected return

Translation: Original published in Finnish on 5/7/2025 at 9:38 pm EEST.

Aktia published a weaker-than-expected Q1 report. This was due to the income side, with the net interest income in particular falling slightly faster than expected. We still consider Aktia’s valuation attractive and see the dividend yield combined with the upside in valuation multiples providing investors with a good expected return. Despite our lowered earnings estimates, we reiterate our target price of EUR 10.5 and our Accumulate recommendation, as the payout outlook is better than before.

Profitability hit harder than expected by lower income

Aktia's operating income in Q1 was slightly lower than expected, as net interest income declined significantly from the previous quarter. However, there is no big drama associated with this, as the direction is known to be downward. Asset management sales, on the other hand, were a clear disappointment, with net subscriptions remaining well in the red. Overall, however, expenses developed broadly in line with expectations, although credit losses continued to be higher than anticipated. The quality of the loan book deteriorated again, with the number of loans overdue by more than one month increasing markedly since the turn of the year. This may point to rising credit losses in the coming quarters. Adjusted earnings per share were EUR 0.32 and the comparable return on equity was 13.5%. As expected, the company did not adjust its guidance and still expects comparable EBIT to be lower than last year.

Weakened outlook for net interest income burdened earnings forecasts

Our estimates for comparable EBIT in the coming years declined by 3-6%. The main reason behind this is net interest income, for which we have lowered our forecasts. We also increased our estimate for credit losses in the coming years. In turn, our dividend forecasts were raised to better reflect Aktia's updated profit distribution target. In addition to the basic dividend, we now expect additional dividends for 2026–2027. Our forecast for total profit distribution is therefore 75-90% of reported earnings in the
coming years.

In our forecasts, Aktia's interest income will be on a downward trajectory in the coming years, although the recovery in credit demand and the growth of the loan portfolio should mitigate the decline. Still, the outlook for the coming years is more subdued than before, as increased uncertainty is expected to cool the nascent economic recovery. However, we do not expect a dramatic drop in interest income, as the bank's hedging measures are stabilizing developments. We expect commission income to grow steadily, driven by moderate growth in asset management and a gradual normalization of credit demand. However, moderately rising cost levels and a gradually declining interest income will lead to a downward trend in the coming years. Nevertheless, we expect Aktia's return on equity to remain at a historically good level of around 11-12% (target +15 %). As the decline in interest rates comes to an end, earnings should begin to improve as loan volumes pick up and client AUM grow moderately.

The stock's expected return is attractive

We have examined Aktia's valuation through balance sheet multiples, Nordic bank peers and the dividend model. The methods indicate that the value of the share is EUR 10.2-11.3, with a midpoint of EUR 10.7. Overall, we continue to believe that Aktia's valuation is still low and that the upside potential of the multiples and the strong dividend yield (~9% basic dividend + additional dividends) offer a good expected return. Earnings growth in turn will be slightly negative in the coming years due to the declining interest income. However, a much higher price level than today would require a significant step-up in asset management sales, as performance has been sluggish in recent years and client assets under management have declined. In addition, the bank's profitability trend has historically been volatile. Thus, we feel these factors take away the best edge from the stock's upside.