Nordic Bank1 1Q15

No surprises in 1Q but lower WACC could lift shares further

Margin pressure to continue

… but other income will compensate. Nordea remains our Swedish favorite

Negative interest rates in Sweden We expect Swedish banks to report solid net interest income despite negative interest rates in Sweden as buoyant real estate markets and vibrant Swedish corporates more than compensate lower interest rates and margin pressure. Despite a 60% drop in the oil price, adverse macro in Finland and Russian sanctions the Nordics show continued stable development and hence our top pick are also unchanged – NDA (BUY, SEK 120)

•Mild NII headwind to continue
The Swedish Riksbank lowered policy rates to -0.25% in 1Q which is unchartered territory for Sweden. NII margins will suffer again but the subdued credit growth banks have experiences in 2014 will get relief from the buoyant real estate markets and vibrant Swedish corporates. We estimate 4.5% lending growth in 2015. Earnings estimates for the Swedish banks left mainly unchanged although we have lowered NII and increased other income somewhat. We expect the Swedish banks to post an average 13.1% ROE in 1Q.

• Low interest rates imply multiple expansion
In 2015 three month rates have fallen avg. 26bp. More importantly the 10Y rates are also very lower and investors are asking questioning whether the required rate of return should be lowered even further. We currently use a cost of equity in our valuation models 9.4% for the Swedish banks. If we were to apply the current 10Y rate (at ~1.5% in Norway) as proxy for risk free interest rate our scenario analysis indicate further upside potential for the Nordic Banks.

•Valuation fair - NDA is our top-pick among Swedish banks backed by valuation
We conduct only minor changes to our estimates, and reiterate our Neutral recommendations on SEB, Swedbank and Handelsbanken. Nordea has been gaining momentum in the corporate segment and we believe consensus underestimate the earnings potential. Nordea is trading at 15e P/TB 1.71x, and P/E 11.9x – 10% P/B discount vs. Swedish peer average.


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