Nordea takes €600M hit from Russia exit, expects no further direct impact

One-off losses related to Russia drove Nordea Bank Abp's first-quarter net profit down by 66% year over year, but the bank has now taken all charges related to its exit from the country and does not expect any further direct impact on earnings, according to its CFO.

"We've done our best to clear the decks on Russia in Q1," Ian Smith said on an earnings call April 28. "I think we've done a pretty good job of identifying where we might need provisions. We're not expecting to see impact going forward."

Speaking on the same call, CEO Frank Vang-Jensen confirmed Nordea's 2022 financial targets of a return on equity above 11% and a cost-to-income ratio of between 49% and 50%, which it set in February.

Vang-Jensen said Nordea's direct exposure to Russia is "very, very low" after it made the decision in 2019 to exit its Russian operations and has been winding down business there since. Other foreign banks are also cutting Russian business in light of the Ukraine conflict and sanctions.

Finland-headquartered Nordea recorded a net profit of €269 million for the first quarter, down from €788 million in the same period last year, which was driven by "extraordinary items" related to the bank's decision to finalize the liquidation of its subsidiaries in Russia, Vang-Jensen said. It has therefore treated them as items affecting comparability.

That includes loan loss provisions of €76 million for its direct financial exposure to remaining Russian counterparties, as well as €8 million in losses in its asset management business following a March decision to exit all fund investments connected to Russia. The bank also took a €529 million charge from accumulated foreign exchange losses related to Russia operations, which Vang-Jensen said was a technical accounting item that would not impact its common equity Tier 1 ratio capital, equity, dividend or buyback capacity.

Excluding these items from its income statement, net profit would have been nearly €600 million higher, totaling €868 million for the first quarter, a 10% rise year over year, according to the bank's earnings report.

The war in Ukraine has also affected Nordea's income, Vang-Jensen said, as market turbulence and seasonal outflows caused AUM to drop while many corporate finance transactions were postponed amid increased economic uncertainty.

Beyond Russia-related loan losses, Nordea recorded net reversals of €12 million but kept its COVID-19 management judgment allowance at €610 million.

"We find this approach prudent, as it means we are well protected against potential future credit losses," said Vang-Jensen.

The pan-Nordic lender expects to get a clearer picture of the potential effects of the broader macroeconomic impacts of the war, including higher energy, food and commodity prices, on its customers during the second quarter, the CEO said.