Nordea cuts loan loss reserves despite difficult macroeconomic outlook

Nordea Bank Abp made net loan loss reversals in the second quarter despite a worsened macroeconomic outlook, as the pan-Nordic lender released parts of its coronavirus-related management buffer for the first time.

Adverse developments following Russia's invasion of Ukraine, including higher energy, food and commodity prices, had an impact on loan loss provisions, but these were offset by the continued improvements in overall credit portfolio quality, CEO Frank Vang-Jensen told analysts during a July 18 earnings conference call.

The Finland-headquartered bank also released €45 million from its COVID-19 management judgement buffer in response to lower credit risk in sectors affected by the pandemic, bringing the reserve down to €565 million. A management judgement buffer, also known as a management overlay, is made based on assumptions of expected credit losses not sufficiently covered by a bank's modeling.

"We've taken a very first small step to recognize that COVID losses are not coming through in the manner that may have been predicted a while ago," said CFO Ian Smith. The situation related to the pandemic is more stable and predictable than previously, he said.

The bank's share price was up more than 6% by 4 p.m. Helsinki time.

Nordea, which operates across Finland, Sweden, Denmark and Norway, did not think it necessary to reclassify its COVID-related management buffer to cover for new geopolitical risks in the way that some Nordic peers have done, said Smith.

Denmark's Danske Bank A/S said in its first-quarter report that it had "repurposed" parts of its pandemic-related post-model adjustments to cover global uncertainty, renaming it a "global tensions buffer." Sweden's Skandinaviska Enskilda Banken AB (publ) redistributed COVID-related overlays in the second quarter to cover risks related to higher energy prices, supply chain issues and inflation.

"We will watch very closely in terms of other developments," Smith said. "But we have a strong portfolio and we have good levels of provisioning in place already. So we go into whatever the world may throw at us from a very resilient position."

Macroeconomic headwinds

Nordea expects to continue to further reduce its pandemic-related management buffer in the coming quarters and next year, said Vang-Jensen.

The bank recorded net profit of €1.05 billion in the second quarter, above the S&P Capital IQ consensus estimate of €931.6 million, and compared to €1.03 billion in the same period last year.

Net loan loss reversals amounted to €56 million in the quarter. While this supported the results, Nordea did face some headwinds related to the macroeconomic environment. Net fee and commission income was down 5% compared to last year due to declining assets under management amid the financial market downturn, said Vang-Jensen.

Return on equity with amortized resolution fees came in at 13.3% for the quarter, and 9.1% for the first half of the year, after Nordea took a €600 million hit in the first quarter from one-off charges related to its exit from Russia.

Vang-Jensen confirmed the bank's target to reach above 11% in return on equity for 2022, and said he is confident the bank could bring this figure above 13% by 2025.