Rebounding from disappointing results just two years ago, Nordea Bank Abp is now on course to hit its profitability and cost-efficiency targets for 2022 and is ready to compete with large Nordic peers on those measures, according to analysts.

Finland-headquartered Nordea, the Nordic region's largest lender by assets, is reviewing its post-2022 strategy and working to publish new targets in the spring of next year, a company spokesperson said in an email to S&P Global Market Intelligence.

Amid poor results in 2019, newly appointed CEO Frank Vang-Jensen launched Nordea's "New Phase" strategy, vowing to bring return on equity above 10% and to reduce its cost-to-income ratio to 50% by 2022. Return on equity measures a corporation's profitability in relation to shareholders' equity, while cost-to-income is used to evaluate efficiency.

The targets were deemed reasonable at the time but were still far off best-in-class Nordic peers, such as Sweden's Skandinaviska Enskilda Banken AB (publ), Swedbank ASand Svenska Handelsbanken AB (publ), and Norway's DNB Bank ASA, which at the time reported return on equity levels ranging from around 12% to more than 15%.

'In good shape'

Fast forward two years and Nordea is "in a good shape, expenses are under control, and the bank is now basically winning market share on every front," said Antti Saari, head of research at OP Financial Group, in an interview. With its current performance, Nordea's 2022 targets now "seem quite easy to reach," Saari added.

In the second quarter of 2021, return on equity increased year over year to 11.9% from 3.1%, Nordea said in its half-year filing. Return on average equity landed at 11.71% and cost-to-income at 45.84% in the quarter, according to Market Intelligence data. Return on average equity is an adjusted metric that smooths out changes in the value of shareholders' equity over a given year and can therefore give a more accurate view of profitability.

"One must careful about using a single quarter as a guideline for what levels should be. But it's still impressive that Nordea is delivering this," Mikkel Emil Jensen, equity analyst at Sydbank, told Market Intelligence.

Nordea has in particular proved more resilient to the coronavirus crisis than expected, according to Salla von Steinaecker, director and lead analyst for Nordic banks at S&P Global Ratings. The credit rating agency downgraded Nordea's outlook to negative in April 2020, expecting the bank's strategy execution to face pandemic-driven headwinds, but revised it back to stable in March 2021 after seeing sound business volume growth and progress on cost reductions, bringing the bank back "on track to regain the competitive edge," von Steinaecker said in an interview.

Nordea has, among other things, been successful in bringing down employee-related expenses. Meanwhile, efforts by the bank's previous management to invest in IT and derisk its credit book have started to bear fruit, said Jensen.

New targets

As Nordea prepares to release new strategic targets, which banks typically set for a three-year period, analysts consider the Nordic lender well-placed to raise its ambitions closer to levels of best-in-class regional peers.

A return on equity target of 12% would be ambitious but realistic, according to Saari, although he noted that this figure will also depend on factors that are outside the bank's control, such as its ability to lower its capital level through share buybacks.

Nordea has been accumulating material capital amid regulatory restrictions on dividend payments during the pandemic. The lender currently has more than €4 billion in excess capital above its own management target, and while it is planning share buybacks, it is ultimately up to its regulator, the European Central Bank, how much capital it will be allowed to return to shareholders, said Saari. Nordea may, as a result, not want to give a clear figure for its next return on equity target, he added.

Nordea may also decide to pick a more dynamic return on equity goal, for example by targeting a top 3 ranking among Nordic peers, said Sydbank's Jensen. This alternative to a "hard goal" will leave Nordea better placed to meet its target in case any extraordinary circumstances, such as a "COVID-19 hangover," were to hit banks, he said.

Such a target would not disappoint shareholders, Jensen said, with some Nordic peers currently performing "well above" what Nordea is aiming for. Skandinaviska Enskilda Banken AB (publ), for one, recorded a return on average equity of 14.28% in the first half of 2021, while for Swedbank AS this figure was 13.55%, according to Market Intelligence data.

On cost-to-income, Saari said a goal of around 45% "would be decent" and "should be achievable" for Nordea. Any ratio greater than that "would be considered as too easy to reach and not ambitious enough," he said.

Such a level is also more in line with that of Nordic peers, Saari added. In the first half of 2021, Norway's DNB Bank ASA recorded a cost-to-income of 45.15%, while for Swedish peers Swedbank and SEB these figures were 42.81% and 42.46%, respectively, according to Market Intelligence data.

Country barriers

S&P Global Rating's von Steinaecker also sees room for improvement on Nordea's profitability and cost efficiency, with the agency forecasting Nordea's return on equity to reach between 11.0% and 12.2% in 2023 and cost to income between 46.9% and 47.9%.

But competing with Nordic peers on those measures will not be without challenges, given that Nordea is a pan-Nordic bank.

"One thing important to keep in mind is that Nordea is operating as a full-service bank in all the four Nordic countries, while, for example, the Swedish banks that have quite high profitability and cost efficiency in normal times are more focused on Sweden, and their operations in the other Nordic countries are more specialized," von Steinaecker said.

Nordea moved its headquarter to Finland from Sweden in 2018 for regulatory reasons, but its operations span the Nordic region.

Structural differences between Sweden, Denmark, Norway and Finland mean profitability and cost-to-income levels for their banking sectors vary. In Denmark, for example, where Nordea has a large exposure, banks face tighter mortgage margins and operate in a more competitive environment than countries such as Sweden, said Sydbank's Jensen.

Return on equity among Danish banks was 8.76% in 2019, dropping to 4.77% in 2020, according to Market Intelligence data. In comparison, the Swedish banking sector recorded return on equity of 12.9% in 2019 and 9.19% in 2020.

Banks in Sweden and Norway are among those with the lowest cost-to-income ratios in Europe.

Yet Nordea in the long run may have one particular advantage over Nordic peers: scale. Presenting the bank's second-quarter earnings, CEO Vang-Jensen said customers' move away from branches toward digital banking platforms is enabling Nordea to utilize the same digital capabilities across markets, providing a "huge scale benefit." More such efficiencies are yet to come, he said.

"It is somewhat striking that, despite its size and scale, Nordea has not been able to deliver better results," said Sydbank's Jensen. "There are indications now that Nordea would be able to capitalize on this to a greater extent."