Large Nordic banks to reach net interest income peak in 2024

Most large Nordic banks are set to reach peak net interest income in 2024, S&P Global Market Intelligence data suggests.

Although interest rates remain elevated, they are expected to gradually fall throughout the year and eventually bring net interest income (NII) — the difference between interest revenues and interest expenses — down with them.

DNB Bank ASA is set to see a rise of 4.6% in NII in 2024 from 2023, with Danske Bank A/S just behind at 4.5%, before both banks see a dropoff in 2025, analyst consensus estimates show. Nordea Bank Abp and Svenska Handelsbanken AB (publ) are also expected to see NII grow this year, while that at Skandinaviska Enskilda Banken AB (publ) (SEB) and Swedbank AB (publ) will contract. At all banks, there is an expected decline in 2025.

Rate movements and funding outlook

Sweden's policy rate remains unchanged since September 2023, meaning the tailwind to NII is gradually decreasing, with the central bank suggesting its first rate cut could come in the first half of 2024. Similarly, Denmark's central bank last raised its key interest rate 0.25 percentage point to 3.60% in September.

Conversely, Norway's central bank surprised analysts by raising its benchmark interest rate by 25 basis points to 4.50% in December 2023, which given the lag effect on loan repricing is expected to have a positive impact on lending margins in the first quarter, according to Salla von Steinaecker, director and lead analyst for the Nordic and Baltic regions at S&P Global Ratings.

"At the same time we expect repricing of deposits to continue and some shifts in deposit mix toward savings deposits which will reduce deposit margins," she told Market Intelligence.

This year Nordic banks are also expected to encounter challenges with deposit funding, which usually take the form of traditional deposits and interbank lending. Banks are preparing, however, and as revenue growth flattens, there is an increased focus on cost discipline by the top banks, von Steinaecker said.

"Even with market-leading cost efficiency the top Nordic banks are emphasizing the cost containment in order to maintain strong earnings generation," she said. "Secondly, although not visible for the time being, a shift of customer deposits to mutual funds and asset management offering would support the net fee and commission income and revenue generation."

Nordic banks' net interest margin (NIM) was slightly below the top 25 European bank median in 2023 except for SEB, whose NIM was 2.31% compared with the 2.07% median. DNB and Swedbank are projected to outperform the NIM median in 2024, with 2.43% and 2.67%, respectively.

Mixed fourth quarters

Danske's NII was negatively affected by deposit migration to savings products after significant interest rate pass-through on deposits in light of Denmark's previous interest rate hikes.

"This is still within our expectations and NII sensitivity projections," CEO Carsten Egeriis said on the bank's fourth-quarter 2023 earnings call. The bank is still expecting NII growth in 2024, expecting its peak to come around the middle of the year.

Finland-based Nordea, the region's largest lender, said it expects NII to be "fairly resilient" in 2024 despite anticipated rate cuts, according to CFO Ian Smith. This is largely due to the pass-through on rate hikes late last year being higher than earlier rises.

"While we will see some reduction in net interest margin, we should retain the improvement we saw in the early stages of the rate cycle," said Smith on the bank's earnings call. "In addition, we will see some benefit from our deposit hedge."

Longer-term NII growth will come from Nordea's acquisition of Danske's personal customer and private banking business in Norway, which is expected to complete in December 2024. The bank said the NII level also depends on how many customers come across in that portfolio, it said.

Norway's DNB reported a dip in lending volumes and deposits among personal customers compared with the third quarter, owing to customers using savings to pay for everyday items, accelerated mortgage repayments and a general reduction in credit demand. The effect of rate cuts will likely be relatively obvious, according to CFO Ida Lerner.

"We have seen 14 rate hikes, so I think you have a meaningful reference base to think about what kind of effects we could be seeing also on the way down," Lerner said on the bank's earnings call.

Swedish lending growth and deposit stickiness

Swedish mortgages and corporate lending were two weaker-performing areas in 2023, with the mortgage market in particular growing by 0.6% in 2023, less than a tenth of the growth the previous year.

Swedbank reported decreased lending in the fourth quarter but remained hopeful that its newly automated customer service would pull in a greater number of customers seeking loans, CEO Jens Henriksson said on its earnings call. "We have shorter waiting times now, and are there for our customers," he said.

SEB expects the NII drop to be slightly slower than expected after it experienced better mortgage margins and a deceleration of long-term deposits in the same time period. "These [loans] almost stopped in November and December. We don't know whether that's a new trend or not, but that's what happened in the latter parts of the fourth quarter," the bank's CFO, Masih Yazdi, said on an earnings call.

Meanwhile, Handelsbanken saw NII increase in the fourth quarter and expressed optimism for its prospects in 2024, despite a decline both in private and corporate lending. While the demand for new loans was lower, the bank saw inflows of corporate deposits that were up by 3% over the year, CEO Michael Green said on an earnings call.