Nordea: Danske deal completed

Translation: Original published in Finnish on 11/20/2024 at 8:30 am EET.

Nordea announced that it has completed the acquisition of Danske Bank's Norwegian retail and private banking businesses. As a result of the transaction, Nordea expects to increase its market share in the Norwegian mortgage market from the current 11% to approximately 15%. We have included trade in our forecasts and have increased our EBIT forecasts for the next few years by about 2%. The stock is still cheaply priced, so the expected return looks attractive. We reiterate our EUR 12.5 target price and Buy recommendation.

Deal has a positive impact on volumes and profit

The transaction transferred to Nordea around 235,000 customers, 9 BNEUR in credit volumes, 3 BNEUR in deposits and 1.2 BNEUR in AUM. As a result, the acquisition target's volumes have declined somewhat from 2022, when the corresponding figures were 18 BNEUR in credit volumes, 4 BNEUR in deposits, and 2 BNEUR in client AUM. However, Nordea will only pay for the assets and liabilities transferred at the time of the transaction, so we do not see a material negative impact. The transaction will have a negative impact on Nordea's CET1 ratio of approximately 0.4%, which is in line with the bank's previous estimates.

Nordea expects the transaction to improve the cost/income ratio of its Norwegian retail banking operations and increase annual revenue by slightly more than 100 MEUR. In addition, the transaction is expected to have a positive impact on Nordea's EPS and return on equity in line with the size of the acquired business.

We have included the deal in our forecasts

We have included the acquired businesses in our forecasts. These will increase the bank's loan portfolio by around 2.6% and the amount of client AUM by around 0.3% compared with the end of the previous quarter. As a result, our income forecasts for the coming years increased by around 1%. Based on the release, the impact on operating costs remains low, so the impact on our EBIT forecasts was slightly higher than on the top line. The transaction will not have a material impact on the current year's income as the acquired businesses will only generate revenue for around one and a half months.

Overall, we expect Nordea's EBIT to decline in line with interest rates in the coming years, but ROE to remain at the company's target level of 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. In addition, the decline in interest rates should gradually support credit demand and return the bank to organic growth.

Substantial profit distribution ahead

Although we expect Nordea's absolute earnings to decline in 2025-2026, Nordea's EPS will be more stable as a result of share buybacks. In the third quarter, Nordea launched a new 25 MEUR share buyback program, and we expect the company to launch another program of approximately 500 MEUR next year and two programs totaling 1.0 BNEUR for 2026-2027. In addition, we expect Nordea to pay a dividend of EUR 0.96-0.91 per share in 2024-2027, representing a payout ratio of around 65% (official payout policy 60-70%). Thus, 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.

Expected return is attractive

Looking at the balance sheet, Nordea is valued at a P/B ratio of 1.2x. As with the rest of the banking sector, the valuation is moderate and, in our view, paints an overly pessimistic picture of the company's prospects. 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.