On Tuesday, BofA Securities adjusted its stance on Nordea Bank Abp (NDA:SS) (OTC: OTC:NRDBY), downgrading the stock from Buy to Neutral and revising the price target to €12.40 from the previous €13.60. The move reflects the firm's assessment of the bank's prospects relative to other opportunities within its coverage area.
The decision to downgrade Nordea Bank is based on the belief that while the bank holds a quality franchise capable of capitalizing on the volume recovery in the Nordic region, there are currently better risk/reward options available.
Nordea's diversified pan-Nordic business model positions it to benefit from regional economic improvements, and its net interest income (NII) is expected to show resilience, with a compound annual growth rate (CAGR) of approximately 1% from 2023 to 2025, bolstered by its substantial swap hedge portfolio.
Additionally, Nordea's asset management capabilities are anticipated to support revenue, especially in scenarios where interest rates are cut. Despite these positive aspects, concerns are raised regarding the bank's increasing costs, which are expected to lead to a negative operating jaws effect of -5% in 2025. This refers to the gap between the growth rates of expenses and income, with expenses outpacing income.
Moreover, the bank's capital buffers are reportedly narrowing, which could impact its historically strong capital distribution narrative. The medium-term headwinds due to internal ratings-based (IRB) models, the upcoming Basel 4 regulations, and potential mergers and acquisitions are likely to strain the bank's capital. Future capital distributions are predicted to be funded from new profits, with the capital return aligning with the sector average at 10%, including share buybacks.
In terms of valuation, Nordea Bank is currently trading at approximately 1.25 times its price to tangible book value (P/TBV), which is about a 40% premium compared to the sector. For the expected return on tangible equity (ROTE) of 18% in 2025, the firm considers the bank's valuation to be fair.
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