Nordea Bank’s Second Quarter Review

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Nordea Bank reported net income of EUR 800 million for second quarter 2013 or EUR 0.19 per diluted share, representing a decline of 6.1% from the EUR 821 million or EUR 0.21 per diluted share earned a year ago. Net interest income declined to EUR 1.39 billion for second quarter 2013 from EUR 1.46 billion a year ago and EUR 1.40 billion last quarter. Overall, return on equity was 11.5% for the quarter as a result of weaker net interest income while fee and commission income improved and operating expenses declined.

Focus continues to be on Nordea’s credit quality, which has ceased its slow deterioration and has improved slightly for two consecutive quarters. Impaired loans decreased to EUR 6.7 billion or 1.90% of total loans in second quarter 2013 compared with EUR 6.8 billion in first quarter 2013 and EUR 6.4 billion in second quarter 2012. Impaired loans are divided into performing and non-performing impaired loans.

Total loan loss allowance of EUR 2.9 billion covers only 43% of total impaired loans but covers nearly 100% of the nonperforming impaired loans. While many would like to see larger loan loss allowances, Nordea’s credit problems still appear to be manageable at this time. Loan losses declined in the quarter by 6% to EUR 186 million or 0.22% of total loans compared with EUR 198 million last quarter. Loan losses are still largely concentrated in Denmark and shipping. Overall, Nordea expects continued improvement in the level of credit losses. Nordea’s 10-year historical average has been 0.16%, which they expect to eventually reach in coming years. While credit improvement has been slow, many are encouraged by the improving trend with impaired loans.

Analysts will continue to monitor any deterioration with their loan portfolios, specifically those credits in Denmark. Expense control continues to be an advantage for Nordea in maintaining double-digit ROEs. This is largely done through personnel reductions as the bank’s customers continue to embrace technological distribution channels to conduct their banking business. So far in 2013, costs have remained relatively flat compared with the same time last year.

For 2013-15, Nordea plans to reduce costs by EUR 450 million. This allows Nordea to reduce the number of full-time equivalent employees by about 150 from first quarter 2013. This has also resulted in the efficiency ratio equaling a very respectable 50.4%. Nordea remained well capitalized with a pro forma fully loaded Basel III core Tier 1 capital ratio of 14.0% at second quarter 2013. In June, Nordea agreed to sell its banking, financing, and life insurance segment in Poland to PKO Bank Polski for EUR 694, which contributed 50 basis points to the core Tier 1 ratio.

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