Nordea, the one of the biggest banks in Northern Europe, is widely believed to be one of the best banks in the region.
One of the reason is that its main owner is Sampo, an insurance company which has one of the best track records of all big financial institutions in Europe if not in the world under legendary leaders Björn “Nalle” Wahlroos and Kari Stadigh (say 20 % p.a. for last 10-20 years).
Their famous saying is that “boring is good” and it’s believed they have brought credit underwriting and cost discipline to Nordea under their ownership since somewhere around the financial crisis lows, same that has been seen in Sampo’s main insurance businesses.
It’s true, they have been exiting and reducing exposures in some riskier business areas like oil, offshore, Russia and Baltics.
But if we look at the credit portfolio, it looks like to be the worst of big banks in the Nordic region if measured by gross impaired loans as percentage of gross loans:
(Quite interestingly, Wells Fargo, the Buffet favorite, has even worse credit quality. To Wells Fargo’s credit, they have gone through one of the worst real estate markets in history unlike Nordea, which have gone one of the best real estate markets in history.)
More over, Nordea has the least conservative provision ratios for the impaired loans of all big Nordic banks:
Nordea has provisioned only 26 % of the private individual impaired loans and 43 % of the other loans, while for example Handelsbanken has provisioned 50 % of the private individual impaired loans and 69 % of the other loans, much more conservative.
I’m not sure how to interpret this, is Handelsbanken over provisioning, Nordea under provisioning, or has Nordea better models or more trust to their models so that they can predict the expected losses more accurately, and thus use lower provisioning ratios.
How ever the case, the Handelsbanken’s better credit quality and more conservative provisioning numbers build more emotional trust than Nordea’s credit quality and provisioning numbers.
The widely cited bull case for Nordea is that they will improve earnings significantly in next three years or so as the currently ongoing big IT-infrastructure project is finalized. In 2017 Nordea earned about 3 000 MEUR and the cost savings could bring 300-400 MEUR cost savings.
With about 10x forward earnings ratio that alone would be significant upside for mega cap. More over, each one percentage point change in interest rates would bring about 1000 MEUR more earnings, making it big beneficiary, if it “ever” happens.
The Q2 trends showed that yes, costs are decreasing pretty much as planed, but income is decreasing (low interest rates etc.) so that core earnings are not much growing (or even going down, I didn’t make accurate calculations)
The longer term bear case is that world is changing threatening the traditional bank business model in all fronts (payments, asset management, deposit instability through open banking, new industry players etc.) and the asset management, investment banking and credit quality are now cycle high levels, with potential lot of downside if the cycle turns.
I sold my shares (about break even result) as I really don’t feel I have any edge on this. You might ask why I had the position in the first place and I’m asking the same thing. Best explanation is that I saw the low P/E and got mesmerized by the charismatic Sampo managers who talked lot of good about Nordea, and I had lot of cash burning in my pocket.
The numbers how ever indicate that Nordea is not the most conservative bank in the Nordics and when you are leveraged 20 to 1, it’s not a comfortable position for me to be in as I’m clearly not on top of the situation.
If I would have to blindly to pick a Nordic bank for long term holding, it would clearly be Handelsbanken which seems to be more conservative in its credit underwriting and recognizing losses, more open in their explanations and reporting of risk management, and has much less top management turnover.
Boring is good but most boring seems to be Handelsbanken, not Nordea.
Disclosure: Sold 100% of Nordea as of today, no positions in the other stocks mentioned