Key Takeaways
- Top-tier Nordic banks demonstrated continued solid financial performance in the first nine months of 2024, with resilient net interest income and a renewed cost focus.
- We forecast banks' profitability will remain robust but start declining in tandem with policy rates over 2025-2026.
- Solid cost efficiency and robust credit quality will, alongside gradually recovering loan growth, continue to support earnings generation.
- Ample capital remains a strong buffer against downside risk.
Despite the challenging economic environment, with muted credit growth and declining net interest margins, the top-tier Nordic banks reported robust earnings in third-quarter 2024. Operating profits grew by 7.9% quarter-on-quarter supported by resilient revenue generation and contained operating expenses, including cost of risk (chart 1).
So far, net interest income (NII) has proven resilient for most banks, and average NII has been flat quarter-on-quarter for the seven largest lenders. OP Financial Group was the top performer and grew NII by 2% supported by positive market rates. For the seven banks, increased assets under management underpinned by strong equity markets, higher brokerage commissions, and positive net inflows continued to support fee and commission income, which declined slightly in the third quarter but is up 6.8% year-on-year.
A renewed cost focus contributed to an aggregated average decline in operating expenses of 2.7%. Some banks--notably Handelsbanken, DNB, and Swedbank--reduced consultants and full-time-equivalent (FTE) staff over the period. If we exclude one-off costs related to the AirPlus acquisition, SEB's costs have been declining, mainly driven by organizational consolidation and cutting FTEs.
Chart 1
Chart 2
Robust revenue generation and solid cost efficiency should underpin profitability over the next two years, despite waning NII
Operating profits for the top-tier banks increased by 8% in the first nine months of 2024, compared to the same period in 2023, and we expect profitability will remain historically high in 2024. Although we forecast profitability to gradually decline, it will remain robust with the banks upholding a weighted return on average equity (ROAE) of 12%-13% over 2025-2026, compared with 15.2% in 2023, and our estimate of 14.8% in 2024. This aligns with the banks' targeted ROAE range of 9%-15%.
Following a period of tepid credit demand, we anticipate a rebound in loan growth. This reflects the improving economic environment, recovering consumer and business confidence, and easing financing conditions as interest rates continue to decline over time. Stronger loan growth should mitigate some of the downside pressure on banks' earnings from lower net interest margins. Similarly, while lower market interest rates will weigh on deposit margins, we expect competition for volumes and very tight lending margins could ease in such an environment. We also project growing fee and commission income of 2%-4% on average over the next two years. In our view, Nordic banks' solid operating efficiencies, underpinned by digital advancements, will continue to aid their profitability. As of the first nine months of 2024, the top-tier banks' cost-to-income ratios averaged 42%, well below the 50% median for European banks.
Chart 3
Despite a challenging macroeconomic backdrop, with moderately rising unemployment and corporate bankruptcies in many Nordic countries, credit quality has remained resilient. The average nonperforming assets ratio for the top lenders has increased marginally (4 bps) for the three first quarters of 2024. Driven by somewhat brighter macroeconomic projections and reversals of expert-based management overlays (beyond model-based credit losses), the banks' loan-loss provisioning decreased over 2024. It averaged 3 basis points (bps) as of the first nine months of 2024, compared with 9 bps for full-year 2023. Loan-loss coverage for the lenders averaged 49% of nonperforming assets for the same period, from 58% as of Dec. 31, 2023.
Chart 4
Nordic banks' robust capitalization provides a strong buffer to downside risk beyond our base case
While we expect Nordic banks will remain broadly resilient, we continue to see downside risk from the still-muted economic activity in most Nordic and European countries as well as potential asset quality pressures from the lagged effects of previous years' high inflation and interest rates.
Mitigating these downside risks is the banks' robust capital positions, notwithstanding their distribution of excess capital. We project the weighted-average risk-adjusted capital (RAC) ratio of our rated Nordic banks will be 17.0% at year-end 2024, from 17.1% at year-end 2023. Moreover, we forecast all rated Nordic banks will have RAC ratios above our 10% threshold for a strong capital assessment, with 18 banks having RAC ratios above our 15% threshold for a very strong assessment under our bank capital methodology.
Chart 5
However, for the region's top-tier banks, we expect capitalization will decline gradually toward their long-term targets. This follows a period of uncertainty during which they retained management buffers on top of their long-term capital targets. As of Sept. 30, 2024, the common equity tier (CET) 1 ratios for the largest seven banks were about 400 bps above their regulatory threshold whereas most of the top-tier banks guide toward a target of 100-300 bps.
As a result, several banks have announced plans to continue share buy-back programs in 2024 and into 2025. Both Nordea and SEB are continuing with additional share buy-back programs of €250 million and SEK2.5 billion, respectively (Nordea and SEB already concluded several buy-back plans totaling €4.0 billion and SEK3.7 million, respectively, in 2022-2023). DNB announced its board approval to repurchase 3.5% of the bank's share capital. Similarly, Danske Bank has bought back around 18.7 million shares for DKK3.8 billion of the planned DKK5.5 billion in its ongoing share buy-back program.
Related Criteria
- Risk-Adjusted Capital Framework Methodology, April 30, 2024
- Banking Industry Country Risk Assessment Methodology And Assumptions, Dec. 9, 2021
- Financial Institutions Rating Methodology, Dec. 9, 2021
Related Research
- European Banks Will Pull Multiple Levers To Protect Operating Performance In 2025-2026, Sept. 25, 2024
- Economic Research: Economic Outlook Eurozone Q4 2024: Consumer Spending To The Rescue, Sept. 24, 2024
- Fee Income Increase Largely Buffers Top-Tier Nordic Banks' Q2 Earnings Against Waning Interest Income, Aug. 5, 2024
- Top Nordic Banks Continued Strong Performance in Q1, May 28, 2024
This report does not constitute a rating action.
| Primary Credit Analyst: | Fredrik Fors, Stockholm +46 84405930; fredrik.fors@spglobal.com |
| Secondary Contacts: | Niklas Dahlstrom, Stockholm +46 84405358; niklas.dahlstrom@spglobal.com |
| Salla von Steinaecker, Frankfurt +49 69 33999 164; salla.vonsteinaecker@spglobal.com | |
| Olivia K Grant, Dubai +971 56 680 1008; olivia.grant@spglobal.com | |
| Harm Semder, Frankfurt +49 69 33999 158; harm.semder@spglobal.com | |
| Romain Naegelen, Frankfurt 1737021006; romain.naegelen@spglobal.com |
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