Key Takeaways
- The largest Nordic banks reported record earnings during the first three quarters of 2023.
- Net interest income (NII) has increased substantially as deposit margins widened following numerous policy rate hikes by regional central banks and the European Central Bank (ECB).
- While costs have increased in line with inflation and continually high investment spending, cost-to-income ratios have improved across the board thanks to record income levels.
- We believe the top-tier Nordic banks will continue to outperform European peers in profitability and efficiency metrics in 2024.
For more information on our view of the overall banking markets in Denmark, Finland, Iceland, Norway, and Sweden, see "Nordic Banks: Resilient to Economic Weakening," published Oct. 18, 2023, on RatingsDirect.
Widening Net Interest Margins Boost Nordic Banks' Earnings
Numerous policy hikes by central banks in the region and the European Central Bank (ECB) saw Nordic banks' earnings improve significantly during the first three quarters of 2023. The operating profits of the top-tier banks surpassed most analysts' expectations and increased by 58% on average, underpinned by a roughly 51% average increase in NII due to higher deposit margins than a year ago. Nordic banks largely outperformed their European peers because their loan portfolios are mainly tied to floating rates, which allows for pricing flexibility. However, most central banks' tightening cycles have likely reached their peak, therefore increases in NII growth rates have largely abated in the third quarter of 2023 (see chart). Overall, largest Nordic banks' average return on equity increased to 15.9%, which further supports our strong capital and earnings assessment.
Chart 1
Over the past year, the trend of banks generating increasing revenues from net fee and commission income in the low interest rate environment has clearly reversed. Apart from Swedbank and DNB, which both registered strong growth across most business segments, net fee and commission income has declined by an average of 1% year-on-year. This was driven mainly by reduced lending and investment banking advisory fees and has further cemented the status of NII as the primary source of revenue (65.5% on average) among top-tier Nordic banks.
Rising interest rates and the global macroeconomic slowdown have dampened credit growth. Apart from Handelsbanken and Swedbank, banks' overall loan portfolios remained stable or registered a year-on-year decrease, with an average fall of 1.7% across the sample. However, central banks' tightening cycles have likely reached their peak, leading to more stable interest rate expectations. We therefore anticipate loan growth to slowly recover over the next two years. In terms of depositor behavior, we observe an increased tendency to either shift toward fixed-term deposit accounts or draw down from savings buffers to cover living costs and to repay debt. More generally, overall deposit levels are receding.
Banks' Cost-to-Income Ratios Have Improved Despite Soaring Inflation
With inflation still way above target in all Nordic countries, banks have not escaped cost pressures. Across the board, rising wage pressures have, alongside continually high investment levels, led to year-on-year operating expenses growth. However, thanks to record income levels, all top-tier Nordic banks have improved their cost-to-income ratios considerably over the past year (see chart 2). Nordic banks are already at the forefront of digitization; their strong earnings will therefore enable them to further enhance their cost efficiency through further investments.
Chart 2
Asset Quality Has Remained Solid Despite Intensifying Macroeconomic Challenges And Concerns Over Vulnerable Sectors
Nordic banks' asset quality has remained strong despite elevated inflation and the general macroeconomic slowdown. Banks' cost-of-risk has increased marginally to a non-weighted average of 6.4 basis points over the past quarter due to higher loan loss provisions, as certain corporate sectors (e.g. construction, property management) face ongoing challenges. Nevertheless, non-performing loans have only slightly risen across the sample. Even though Nordic banks are generally more exposed than peers to the commercial real estate (CRE) sector, credit quality remains mostly solid, and we do not expect major valuation losses and related impacts on banks.
Following this successful third quarter, none of the top tier banks has announced a major revision of financial targets or a change in overall strategy. Among the seven banks, Nordea, DNB, and SEB have implemented share buyback programs this year to optimize their capital base. Furthermore, in addition to existing programs, SEB announced a new Swedish krone (SEK) 1.25 billion program for Q4 2023 and DNB said it intends to buy back up to 1% of the company's own shares by the end of January 2024. Absent further macroeconomic uncertainty and an escalation of geopolitical conflicts, we expect the top Nordic banks to distribute profits in line with their dividend policies in 2023.
Table 1
Nordic Banks--Selected Indicators | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
As of Sept. 30, 2023 | ||||||||||||||
CET1 ratio (%) | C/I ratio (year-to-date, %) | ROE (year-to-date, %) | Cost-of-risk (bps) | NII growth (%, yoy) | Net profit growth (%, yoy) | |||||||||
Danske | 18.8 | 48.7 | 12.5 | 2 | 46 | N/A* | ||||||||
DNB | 18.3 | 33.9 | 16.4 | 12 | 33 | 29 | ||||||||
Nordea | 16.3 | 43.3 | 17.6 | 4 | 37 | 31 | ||||||||
OP Financial | 19.1 | 44.8 | 11.1 | 23 | 85 | 116 | ||||||||
SEB | 18.9 | 34.0 | 18.9 | 2 | 49 | 53 | ||||||||
SHB | 19.4 | 36.8 | 16.2 | 1 | 36 | 39 | ||||||||
Swedbank | 18.7 | 33.0 | 18.9 | 1 | 69 | 77 | ||||||||
*Not applicable, because Danske registered a negative net profit in 2022. CET1--Comment Equity Tier 1. C/I--Cost income. ROE--Return on equity. bp--basis points. NII--Net interest income. yoy--year on year. Source: Banks' interim reports and S&P Global Ratings. |
This report does not constitute a rating action.
Primary Credit Analysts: | Alexander Maichel, Frankfurt +491724529304; alexander.maichel@spglobal.com |
Salla von Steinaecker, Frankfurt + 49 693 399 9164; salla.vonsteinaecker@spglobal.com | |
Olivia K Grant, Dubai +971 56 680 1008; olivia.grant@spglobal.com | |
Secondary Contacts: | Niklas Dahlstrom, Stockholm +46 84405358; niklas.dahlstrom@spglobal.com |
Harm Semder, Frankfurt + 49 693 399 9158; harm.semder@spglobal.com | |
Kristian Pal, Stockholm +46 84405352; kristian.pal@spglobal.com | |
Panagiotis Mavrogiannis, Frankfurt; panagiotis.m@spglobal.com | |
Markus W Schmaus, Frankfurt + 49 693 399 9155; markus.schmaus@spglobal.com |
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