Nordea Profit Misses Estimates as Bank’s Loan Losses Swell

Nordea Profit Misses Estimates as Bank’s Loan Losses Swell
Nordea, like most of its peers in Europe, is struggling to generate income growth as interest rates hover close to record lows amid central bank efforts to stimulate demand. Photographer: Ville Mannikko/Bloomberg

Nordea Bank AB posted third-quarter profit that missed analyst estimates after the Nordic region’s largest lender said impairments more than doubled from a year earlier on continued losses in shipping and Danish real estate.

Net income rose to 686 million euros ($891 million) from 404 million euros a year earlier, the Stockholm-based bank said in a statement today. That failed to reach the 751 million-euro average estimate of 19 analysts surveyed by Bloomberg. Net interest income rose 4.5 percent to 1.44 billion euros, while costs fell 8.5 percent to 1.29 billion euros. Net loan losses grew to 254 million euros from 112 million euros.

Nordea, like most of its peers in Europe, is struggling to generate income growth as interest rates hover close to record lows amid central bank efforts to stimulate demand. At the same time, Sweden’s four biggest lenders need to meet stricter capital requirements than those set elsewhere as the government pushes through a regulatory overhaul it says will protect taxpayers from losses.

“The third quarter was affected by declining growth and corresponding low interest rates in our home markets,” Nordea Chief Executive Officer Christian Clausen said in today’s statement. “The slowdown in economic activity continues to hamper consumption and investments thus reducing the demand for loans and other banking services in the Nordic market.”

Shares Fall

The central bank lowered its benchmark repo rate a quarter of a percentage point last month to 1.25 percent, citing the need to protect Sweden from the fallout from Europe’s debt crisis. Nordea’s third-quarter net interest income declined 1 percent from the second quarter and its net fee and commission income also dropped 1 percent. Net loan losses rose 17 percent to 254 million euros in the three months through September from the second quarter, driven by impairments in Denmark.

“The report is a little disappointing on almost all fronts,” Mads Thinggaard, an analyst at Nykredit Markets in Copenhagen, said in a note. “The bank’s return on equity,” which reached 10.1 percent, “may well prove to be the lowest level among Sweden’s banks in the third quarter,” he said.

Nordea shares lost 3 percent, or 1.85 kronor, to trade at 59.85 kronor as of 9:48 a.m. in Stockholm. The 38-member Bloomberg index of European financial stocks slipped 0.6 percent. Nordea shares have risen 12 percent this year, versus a 14 percent increase in the Bloomberg index of European banks.

Danish Losses

Loan losses in Denmark, which is teetering on the brink of its second recession in less than a year after house prices collapsed 25 percent since their 2007 peak, jumped 93 percent to 145 million euros last quarter from a year earlier. Impairments at Nordea’s shipping unit, which is trying to contain losses in a container industry battling overcapacity, more than doubled to 54 million euros.

Sweden, whose bank industry assets are four times the size of the economy, requires its lenders to target 10 percent core Tier 1 buffers of their risk-weighted assets from next year and 12 percent from 2015. That compares with the Basel Committee on Banking Supervision’s core capital target of at least 7 percent, while the European Banking Authority has set a temporary 9 percent target for some banks.

Sweden’s banks have largely steered clear of the European debt crisis and their balance sheets aren’t weighed down by assets linked to the region’s most indebted nations, giving them better access to funding than many European peers and allowing them to increase lending to their Nordic clients.

Capital Buffers

Nordea had a core Tier 1 capital ratio of 12.2 percent at the end of September, up from 11.8 percent at the end of June, excluding so-called transition rules to new regulation. Including the transition rules, the ratio was 9.8 percent at the end of the third quarter, the bank said.

The bank “can of course keep increasing” its capital ratio if needed, Clausen said in a Bloomberg Television interview today. While Nordea’s capital buffer is lower than reserves at its main rivals in its home market, Clausen said that is offset by the fact that the pan-Nordic bank only has 20 percent of its business in Sweden.

While Nordea had the sixth-highest core Tier 1 capital ratio among the largest banks in the European Union in the second quarter, it is lagging behind its Swedish rivals.

Svenska Handelsbanken AB and Swedbank AB had core Tier 1 ratios of 17.9 percent and 17.3 percent, respectively, at the end of September, making the two the best capitalized banks among 21 major EU lenders.

Swedbank and Handelsbanken also saw higher third-quarter profit, driven by lower costs and higher net interest income.

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