The large Nordic banks1 delivered strong results in Q1/2024 with an average return-on-equity (ROE) of 15.1% and a cost-to-income ratio (C/I) of 38%. These numbers are below the peak witnessed in Q3/2023 but much better than in the previous quarter.
In our earlier reports2 we have predicted that 2024 will be a challenging year for the Nordic bank earnings. We expect the banks to face three main headwinds this year i.e. squeezed net interest margins, higher expenses, and growing loan losses. So far, we have only seen one of these factors materialise i.e. higher expenses as evidenced by the fact that staff cost was up for all banks year on year (YoY). However, net interest margins are still holding up well and loan losses remained at low level, thus contributing to a clear improvement in overall performance of the banks quarter on quarter (QoQ).
We expect margin pressure to begin to emerge during the latter part of the year.
Chart 1: Key financial figures for Q1/2024. Source: The sample banks’ Q1/2024 interim reports.
FX rates as of 31 March 2024. Source: https://www.ecb.europa.eu/stats/policy_and_exchange_rates/html/index.en.html.
The banks’ strong profitability in Q1/2024 was driven by higher net interest income (NII) YoY that was predominantly contributed to higher deposit margins as well as low loan losses. Compared to Q4/2023 NII was flat indicating the stabilisation of interest rates across the Nordic region. We expect this trend to continue and hence, margin pressure to begin to emerge during the latter part of the year. In fact, the central bank policy rates have recently been cut in Sweden4 and Finland5 which over time will be reflected in the banks’ NII.
The challenging macro conditions will continue to pressure the Nordic economies and consequently the Nordic banking customers creating uncertainty around the banks’ loan loss levels later in the year. Under these conditions we feel confident to maintain our sector outlook of a challenging year.
Challenging quarter for Handelsbanken
The biggest surprise of the quarter was SHB’s financial result. Their income declined and expenses increased compared with Q4/2023 resulting in significantly lower profitability with a ROE of 13.7%. This signifies a decline of 10% and was met by a similar drop in SHB’s share price on the date of the result’s release.
According to SHB margin pressure was one of the main reasons for the declining result. They are taking steps to react to the development with the introduction of a new organisation model that moves more business support operations and expenses to its decentralised business units. SHB’s philosophy is to keep expenses close to the revenues and the change will reinforce that.
After only one relatively weak quarter it is far too early to draw any conclusions on SHB’s business model choices, but one thing is clear: the impact of those choices on its performance will be one of the most anticipated news items in the summer when SHB reports its Q2/2024 numbers.
Nordea goes strong
The best result in the quarter was delivered by Nordea with a ROE of 18.1%, an improvement of a full percentage point compared with the same period last year. This is all the more impressive given Nordea’s size. Nordea is more than 20% larger than its closest peer and 75% larger than the group average.
We’ll note that Nordea’s strong result was positively affected by its substantially lower regulatory fees compared to the previous year (close to EUR 200 m). Then again, the other banks benefitted from this effect as well. Finally, Nordea was the only large Nordic bank that hit a new high in their ROE in Q1/2024 while most other banks saw their profitability peak in the second or third quarter of last year.
To stay competitive the banks must demonstrate conviction towards their chosen business models but also operate with agility.
Conclusion
On aggregate the Nordic banking sector started 2024 strongly. Out of the three main earnings headwinds we predicted the sector to face this year only higher expenses are currently materialising. The other two, margin pressure and higher loan losses, are yet to surface in any meaningful manner. Still, we maintain our outlook for the year and thus, expect the last nine months of the year to be more challenging for the banks.
This will test the banks’ strategic choices and potentially separate the winners from the losers. To stay competitive the banks must demonstrate conviction towards their chosen business models but also operate with agility to be able to quickly respond to changes in their operating environment. One key force for such changes is increasingly geopolitical risk. In our recent paper on the topic, we lay out the playbook for Boards and C-suite executives on how to respond those6.
This all sets the stage for another extremely exciting year ahead for the Nordic banking sector. We certainly will be watching this closely and will keep you updated on the developments in the sector.
_________________________________________
1Nordea Bank, Danske Bank, Skandinaviska Enskilda Banken (SEB), Svenska Handelsbanken (SHB), Swedbank, DNB, Nykredit, OP Financial Group (OP)
2https://www2.deloitte.com/fi/fi/blog/finland-blog-homepage/2023/nordic-banking-insights-q3-2023.html
3Common Equity Tier 1
4https://www.riksbank.se/en-gb/statistics/interest-rates-and-exchange-rates/policy-rate-deposit-and-lending-rate/
5Effectively in the euro zone: https://www.ecb.europa.eu/stats/policy_and_exchange_rates/key_ecb_interest_rates/html/index.en.html
6https://www.deloitte.com/uk/en/services/risk-advisory/blogs/2024/geopolitical-risk-management-in-financial-services.html
Contacts
Mikko Leinonen
Mikko is a Partner and the leader of Deloitte’s financial services strategic advisory business in Finland. He has 20 years of experience in the Nordic financial services sector as an advisor and leader. Mikko has specialised in business transformations, including e.g. organisational and operating model changes and strategic planning. He has deep and holistic understanding of the Nordic financial services sector. Mikko toimii osakkaana johtaen Deloitten finanssialan strategianeuvonantopalveluita Suomessa. Hänellä on 20 vuoden kokemus pohjoismaisesta finanssisektorista neuvonantajana sekä johtajana. Mikko on erikoistunut liiketoiminnan muutoshankkeisiin, mukaan lukien mm. organisaatio- ja toimintatapojen muutokset sekä strategian suunnittelu. Hänellä on syvä ja kokonaisvaltainen ymmärrys pohjoismaisen finanssialan toiminnasta.
