Nordea Bank Abp (NDAFI) Earnings Call Transcript & Summary

Good morning, and welcome to Nordea's Third Quarter 2026 Results. I'm Ilkka Ottoila, Head of Investor Relations. As usual, we'll start with the presentation by Group CEO, Frank Vang-Jensen, followed by a Q&A session with Frank and Group CFO, Ian Smith. Please remember to dial in to the teleconference to ask questions. With that, Frank, please go ahead.

Good morning. Today, we have published our results for the third quarter of 2026. Nordea performed well again this quarter. We grew total income year-on-year. We further expanded our customer base and delivered strong growth in savings and investments. Fee and other ancillary income were strong, net interest income rose both year-on-year and quarter-on-quarter despite lower mortgage margins and foreign exchange effects. This was a solid performance in a seasonally slower quarter. The result underlines the strength of our business and the good progress we are making with our strategy execution across all key initiatives. Geopolitical uncertainty and volatility remain high. However, European countries in general and the Nordics, in particular, are navigating higher energy costs and other challenges well. Growth expectations for our 4 home markets have improved. Structural changes underway in Europe's economy are creating significant opportunities. And Nordic corporates are well positioned to capture them. Growth is being driven by substantial investment in areas, including artificial intelligence, defense, infrastructure and energy transition. We expect continued economic growth by corporates and gradually improving household consumption across the Nordics. It is encouraging to see growth now also picking up in Finland. At the same time, we are mindful of the recent sharp increase in forward rates and the potential for higher rates to affect consumer confidence in the months to come. In this environment, Nordea is uniquely placed to serve our customers with our sector expertise, enhanced customer offering, including digital services and our strong balance sheet. In short, by leveraging our Nordic scale, we continued to do just that in the third quarter, supporting our customers and driving business growth. Let's take a look at the highlights. Beginning with our return on equity, which was solid at 15.1%, amid seasonally more subdued activity levels. Earnings per share were EUR 0.35, broadly stable year-on-year. Total income was up 2%, driven by a 9% increase in net fee and commission income. We continued to see high demand for our savings and investment products together with strong investment performance, increased our assets under management by 13% to a record high of EUR 509 billion. Net interest income continued to steadily improve in line with our expectations and was up 1%, both quarter-on-quarter and year-on-year. Strong volume development was the main driver with corporate lending up by 8% and deposits by 7%. In households, mortgage volumes increased by 2% year-on-year and deposits were up 4%. Net fair value was down 19% due to the extraordinary interest rate volatility late in the quarter, while customer activity was solid during the seasonally slower period. Our cost performance is strong with costs flat year-on-year, excluding FX effects. Our credit quality is also strong, net loan losses and similar net result corresponded to 7 basis points, well within our long-term expectation of around 10 basis points. The losses were driven mainly by a limited number of individual provisions on corporate customers. Our CET1 ratio was 15.8% at the end of the quarter, 1.9 percentage points above the current regulatory requirements. This reflects Nordea's strong capital position and capital generation and supports our strategic priority to deploy capital for profitable growth. Nordea's strong balance sheet and Nordic scale play an important role in the growth of its customers and Nordic societies. Our performance is reflected in the full year 2026 guidance, which is unchanged. We continue to expect a return on equity of greater than 15% and a cost-to-income ratio of 44% to 45%. Let's now look at the results in more detail, starting with the income lines. As mentioned, net interest income increased in Q3 despite lower lending margins. During Q3, lending and deposit growth continued to be strong among our corporate customers, up 8% and 7%, respectively. This demonstrates the close relationship we have with our customers and means that we are at the table when opportunities arise. The development also reflects higher activity and confidence among Nordic businesses and the progress we are making in implementing our strategy. Household customers are also increasing their activity as they have experienced real wage increases and a more moderate inflation rate. This combination has increased their willingness to consume and invest. The impact of the conflict in the Middle East and the resulting higher energy prices has so far been rather mild on Nordic consumer confidence. Across the region, households strengthened our savings and investments and that contributed to higher retail deposits, which were up 4%. Mortgage volumes in Q3 were up 2%. This was driven especially by Sweden and Norway. Finland is performing well in a slower market, and we are seeing early signs of improvement in Denmark. Our net interest margin for the quarter was 1.53% compared to 1.59% in Q3 last year and 1.54% in Q2. Net fee and commission income was up 9% year-on-year, driven by 14% growth in savings income. This is encouraging as higher cross sales and savings in particular, are key priority areas of our 2030 strategy. Demand for our savings and investment products remain strong, and our expanded advisory coverage is delivering good results. We welcome the significant number of new Private Banking customers across all 4 markets, driving strong net flows. Asset under management were up 13% to a record EUR 509 billion, which was driven by the strong net flows as well as good market performance. Activity remained high during the quarter in debt capital markets, and we helped customers raise capital and execute strategic transactions amid signs of improving sentiment in equity capital markets and M&A. Turning to net fair value. Our result was down 19% year-on-year in Q3. Customer hedging activity was solid during the seasonally slower period in FX and rate products. The lower market-making result was due to the extraordinary interest rate volatility late in the quarter, which negatively impacted asset values in our market making. Cost management was strong with costs flat year-on-year, excluding FX effects, despite heavy strategic investments in growth, resilience, technology and AI. This would not have been possible without our structural improvements to support productivity and efficiency across the group. Under our 2030 strategy, we are continuing to simplify processes, improve productivity and drive our Nordic scale agenda. Our particular focus is expanding the use of AI to redesign our core processes and improve the customer experience. The realized savings give us the capacity to absorb inflation and continue making focused investments towards our strategic growth priorities while keeping overall cost growth under control. We are in a strong position to continue delivering positive jaws. The Q3 cost-to-income ratio was 45%, and we are on track to meet our full year guidance of 44% to 45%. Our credit quality continues to be strong. The resilience of the Nordic economies is clearly reflected in our customer base and our underwriting and credit management approach has remained consistent and prudent. Household finances remained strong, while corporates are generally well positioned, funded and capitalized. Net loan losses and similar net result corresponded to 7 basis points for the quarter. This was driven by a handful of provisions for individual corporate customers and a small increase in collective provisions. The quality of our credit portfolio remains strong, and loan losses are well within the group's long-term guidance of 10 basis points. Our capital position and capital generation is strong and supports our strategic priority to deploy capital for profitable growth. Given we are the largest financial services group in the Nordic region, we play an important role in supporting the growth of the Nordic economies. At the end of the quarter, our CET1 ratio was 15.8%, 1.9 percentage points above the current regulatory requirement. As we have communicated previously, in 2025, Nordea submitted an application to the European Central Bank for approval of new IRB capital models for corporate lending portfolios. Nordea has been in active dialogue with the ECB on the application and the most recent discussions have indicated that additional conservatism in our model outputs will be required. This would increase Nordea's REA and is an update to our earlier expectation of a neutral outcome. The timing and impact of any supervisory decisions related to this matter remains subject to our ongoing discussions, and we understand that no decisions will be taken before 2027. In the meantime, we think it is sensible to pause share buybacks pending clarification of the REA impact. Importantly, there is no change in the risk or credit quality of the loan portfolios concerned. Nordea's business model and performance is robust and resilient, and our portfolio is very well diversified across the strong and growing Nordic economies. Our credit quality is strong as evidenced by the very low loan losses over Nordea's 25-year history. And now let's turn to our business areas. In Personal Banking, we delivered solid lending growth and generated strong fee income. Customer savings and investment activity remained at high levels across the Nordics. Mortgage volumes were up 2% year-on-year. This was driven by Sweden and Norway. In Sweden, we took 21% of the market growth year-to-date in August, and we continued to grow our market share. Finland is performing well in a slower market, and Denmark is showing early signs of improvement. We continue to manage the competition for mortgages carefully while capturing opportunities to grow. Deposits were up 4%, driven by growth in Norway, Denmark and Finland. Investment product AUM increased by 15%, reflecting the high levels of customer savings and investment activity. The share of customers with recurring savings have been increasing over the past 3 years. And during the quarter, recurring savings inflow were up 14% year-on-year. In Norway, we delivered a 20% year-on-year increase in savings fee income. This was supported by a stronger integration of savings and daily banking into the onboarding journey for new mortgage customers. This is a good example of Nordea's strength. As customers choose us for a broader range of financial needs, it creates opportunities to offer them a deeper range of products from across the group. Net fee and commission income increased by 4% year-on-year, mainly driven by a 12% increase in savings income. Total income in the third quarter was broadly stable year-on-year as growth in the fee and commission income offset lower net interest income. Return on allocated equity was 15% and the cost-to-income ratio was 51%. In Assets and Wealth Management, we continued to drive robust growth in income and assets under management. In Private Banking, a strategic growth area, we made strong progress across the region in the quarter with net flows amounting to EUR 0.9 billion. We delivered a 14% year-on-year increase in net fee and commission income with clear growth in all 4 countries. This was driven by strong assets under management growth supported by continued high customer inflow and positive net flows. We continue to progress with our strategic ambition to deliver leading digital savings and investment experiences, further strengthening our digital offering to make investing more straightforward for customers. In Life and Pension, another strategic growth area for us, we made further strong progress in the quarter across our home markets. We are supporting customers with the long-term savings, pension and protection needs while making these solutions a natural part of the broader Nordea relationship. Life and Pension assets under management increased 20% year-on-year, while gross written premiums in the quarter amounted to EUR 3.3 billion, up from EUR 2.9 billion a year ago. Wholesale distribution net flows returned to positive at EUR 0.5 billion, supported by inflows each month of the quarter. In Business Banking, we continued our strong momentum and delivered solid business volume growth across our home markets. Customer growth accelerated in the quarter, and we further invested in our digital capabilities to make Nordea the leading digital bank for small and midsized businesses in the Nordics. Lending volumes increased by 6% in local currencies year-on-year, led by Denmark, Norway and Sweden, while growth also picked up in Finland. Deposit volumes grew by 2% and were also up in all markets. We made good progress in our focus on entrepreneurs and small businesses with the number of new customers joining Nordea increasing by 58% year-on-year. Our focus is on making the onboarding process more user-friendly, leaner and more automated, harmonizing our offering across the region, so entrepreneurs and small businesses get up and running more quickly. During the quarter, Nordea Business and the mobile app won Global Finance's Award for Best Corporate Digital Bank and Best Mobile Banking app in each of our 4 home markets. This is the fourth consecutive year that we have gained this recognition. Total income in the third quarter increased by 5% year-on-year, driven by volume growth and higher ancillary income, while assets under management were up 18%. Return on allocated equity was 15%. The cost-to-income ratio improved to 44% from 46% a year ago. In Large Corporates and Institutions, customer engagement remained high, and we drove further progress in our strategic growth areas. We strengthened our customer offering in investment banking and payments, streamlined processes and scaled AI adoption across the businesses. Lending growth remained strong across all 4 countries, increasing by 13% year-on-year and reflecting higher investment activity among large corporates in the Nordics. Deposits were also up 13%. Net interest income increased 7%, driven by higher lending and deposit volumes. Net fee and commission income increased by 6% with particularly strong performance in lending and asset management fees. In debt capital markets, we arranged more than 150 market transactions in the quarter, significantly higher versus a year ago. Activity also showed signs of picking up in equity capital markets and M&A, where we continue to help customers raise capital and execute strategic transactions. Secondary equities continue to deliver year-on-year growth. Total income was down 6% year-on-year despite solid customer activity as the extraordinary interest rate volatility late in the quarter adversely affected our Market Making business. These type of large moves have a negative effect on the inventory of the bonds we hold to facilitate our customers' businesses. Return on allocated equity with amortized resolution fees was 11%. The cost-to-income ratio was 43%. To sum up, Nordea performed well in the quarter. We grew total income year-on-year with high lending and deposit activity in both corporate and household segments and delivered strong growth in new customers and across our products and services. The results underline the strength of our business, and we are progressing well in our strategy execution across all key initiatives. We go into the fourth quarter with good business momentum. We continue to expect a return on equity of greater than 15% and a cost-to-income ratio of 44% to 45%. The Nordic economies are showing their strength and resilience and Nordea with its unique presence across the region is well equipped to support our customers and the societies in which we operate. Our 2030 ambition is to become the undisputed best-performing financial services group in the Nordics. We are moving in the right direction. Thank you.

And operator, we are now ready to take questions. [Operator Instructions]

[Operator Instructions] The next question comes from Gulnara Saitkulova from Morgan Stanley.

Could you confirm the current average risk weight on the corporate portfolio, which is subject to the ECB review? And also, what proportion of the non-retail book is covered by the review and which specific segments or exposure classes are affected? Should we assume that the entire corporate portfolio is potentially impacted? Or is the review limited to certain portfolios? The reason for asking is that if we, for illustrative purposes, were to apply the average corporate risk weight of European peers to Nordea's entire corporate lending book, the resulting increase in REA and capital impact could be quite material. That's why understanding the precise scope of the ECB review, including the proportion of the portfolio affected and its current risk weight density could be very useful. And what are the mitigating actions you are considering to manage the potential capital impact? In particular, are you planning for the SRTs? And can you potentially change your risk appetite when it comes to lending?

Gulnara, thank you for the question. I think the first thing is we're not going to speculate on the outcome. We are reporting today 2 things. The first is that recent discussions with ECB indicate that they want to see more conservatism in the output from our risk models for corporate. And as a result, we think it's sensible and prudent to pause buybacks. That's the key information you should take from today. The scope of the ECB review is amongst -- it covers our most important portfolios, but we're not going to talk about details of the review or any other related matters today. In terms of the average corporate risk weights, I'll get IR to get back to you on that one because I want to ensure that you get it precisely. But the main message from today is we can't talk about outcomes. And the main thing to note is that we've paused buybacks pending clarity of the REA impact.

And what about the mitigating impacts potentially apart from the buybacks? Do you think you can potentially do further SRTs? And do you expect any potential impact on the risk appetite and the capital allocation towards lending growth in the near term, i.e., should we expect a more selective approach to new lending or potentially some moderation in loan growth until there is a greater visibility on the capital impact from model review?

So again, Gulnara, I'll take you back to what we said today. The action that we're taking is to pause buybacks. It's a prudent decision on discretionary capital distributions, and it's not a signal that we intend to constrain business growth. The business plan includes profitable growth and our capital planning always takes that into account. We're there for our customers, and we haven't changed our business plans.

The next question comes from Shrey Srivastava from Citi. The next question comes from Martin Ekstedt from Handelsbanken.

Can you hear me?

Yes, we can, Martin.

So you said in response to the previous question, and I'm sorry to come back to the IRB model, you said you will not speculate on the outcome, right? But we, as analysts, we kind of have to speculate on the outcome, as I think the previous question highlights quite well. I mean, is there any guidance you can give us to funnel this down a little bit for us? At this point, it's an open-ended unquantified regulatory risk. So any guidance you can provide us would be quite helpful. And just to double check, is it specifically probability of defaults or loss given default or model methodology that is driving this? Is it related to any particular sector? Anything you can give us to clarify would be super helpful.

Thank you, Martin. And I understand what's behind the question. But please then also understand we're in active discussions with ECB we've got different views on some key issues, and we accept their position on others, and that's why we're in active dialogue. But the timing and impact of any supervisory decisions is subject to those. And I don't think we should speculate any further at the moment. But I can understand your frustration. I bring you back to what we said today, which is to flag that where we had previously guided that the outcome would be capital neutral, that we now expect to increase, and as a result of that, we're pausing buybacks. And that's the critical message to take away from today.

Okay. Then if I may pivot to a business question then. So Finnish NII was up 6% in Business Banking and 7% in Personal Banking quarter-on-quarter, but with very little actual lending growth, which implies quite good net interest margin improvement. What drove this? And is it sustainable? And Finnish fee income was down 6% in Business Banking and 11% in large corp, may be partially down to seasonality, but it doesn't point to, for example, a surge in corporate activity. So could you just talk a bit about the Finnish markets and what you're seeing there currently and the trends?

Yes, of course, Martin. So as you point out, a good performance in both of those divisions in Finland. The key driver has been deposit margins, which have been positive, particularly on the retail side. So I think it's good to see that. So both volumes and margins contributing on the deposit side and steady margins, I guess, on the asset side of the balance sheet. And then in terms of fee income in our corporate businesses, it was a slightly slower quarter activity-wise, particularly in relation to corporate transactions and things like that. I think it was seasonal. Certainly, no indication of corporates taking a step back or something like that. So I would take it as seasonal. So good progress in Finland, deposit margins helping very much on PEB and Business Banking and then activity levels a little bit slower coming out of the summer.

Okay. And then quickly, if I may end with a quick confirmatory question. So on your Danish AML court case, the Danish court scheduled the verdict for 9th of November, but they just not named the defendant, just saying it's a bank. Could you confirm if this relates to your case, please?

Yes, it does, Martin. So that's the date that we expect to get an outcome of the initial court case. So you're correct.

The next question comes from Jacob Hesslevik from SEB.

Your CMD plan for more than EUR 20 billion of distributions in 2026 to 2030 assumed EUR 4 billion to EUR 6 billion of retail model REA relief and nothing from non-retail with only 40 basis points above your 150 bps buffer and now retail -- non-retail now a headwind, does that ambition still hold? And is the retail relief still on track for end of 2027?

Jacob, thank you for the question. So you'll see from today, there's no change to our guidance. Our short-term outlook for -- so for the rest of 2026, we continue to expect greater than 15% ROE and a cost-to-income 44% to 45%. We've also reiterated the 2030 targets, which I guess, is the key message at the moment. No change to our guidance or targets at this stage.

Got it. And looking at LC&I Denmark, it has taken EUR 99 million of loan losses year-to-date. Is the legacy customer case the same name each quarter? And if so, how much exposure is left?

So it's not the same story. So in each of our quarters where we've seen these instances, it's been different positions. So it's not, I guess, a cumulative position. And these things fall where they fall.

But it's well known -- it's Frank. It's well-known names, and they are Danish, but resides within one of our specialist areas, well-known names and increasing provisions according to the performance. And -- but there's no -- sorry, but just to be certain, we get it clear, there's no deterioration of the credit quality in the Danish business. It is super strong. But there are a couple of customers that struggle, and we have followed them closely for quite some time.

The next question comes from Shrey Srivastava from Citi.

I'm sorry about previously. I don't know my line just cut off. I have one question, which is that we saw a ruling yesterday on one of your peers saying that their REA add-on reduced the risk they gain an undue competitive advantage versus other market participants. Now with the knowledge that you can't comment on specific players, just in terms of general market dynamics, the players that have been winning market share in this market over the last year or two, what exactly have they been winning on? What have you been winning on? Is it quality of service? Or has there been certain sort of products that you've cut pricing on in order to gain the broader relationship and so on? So I'd be really interested in hearing that.

Thank you for the question, Frank speaking. I would say it's very dependent on which segment and which country and thereby due to the competition. Prices for a very large part of the broader market, i.e., household, SMEs, especially small segment, but -- and then to some extent, small corporates as well, the market is super transparent across the board in the Nordics. And that means that the prices are not what -- of course, you can win on price. But if you win on price, it's usually not sustainable. So it is about using your entire size, using your capabilities, expertise and then speed is important. So ensure that you are there when the customer needs you and want a response. That goes especially on mortgages. On smaller and midsized business, of course, it's more relationship based. What can you offer? How can you do it? How sharp are you? What is the accredited services and so. So that is the totality. Our view has always been that we are a relationship bank. And when we enter a deal, it is to be the main partner across all needs. Then the dynamic in each country is, of course, unique in each country, so depending on which competitor it is. There could be, in some countries, mutual ones that are super aggressive. There could be some in other countries, some that has a growth strategy and want to win and so and use price or whatever it might be. So I guess that's the overall answer. And if you want to hear more, then help me to be more precise in which segment and which country you want to discuss.

The next question comes from Magnus Andersson from ABGSC.