Next week, Nordea’s first-quarter earnings release is due. Profitability should remain at a good level, even though the decrease in net interest income is weighing on earnings development.
Regarding the recent sharp movements, an escalation of a potential trade war would, in principle, weaken Nordea’s growth and earnings outlook.
The impact would be indirect and would come through 1) lower interest rates, 2) weakening loan demand, and 3) increasing credit losses. Nordea has a substantial buffer in place for increasing credit losses, so the impact of point 3 would remain moderate. Furthermore, the bank’s lending criteria are, in our assessment, quite conservative regarding creditworthiness and collateral, so it is unlikely that an economic downturn would dramatically affect the bank’s profitability even without buffers (although there would certainly be some short-term effects). However, lower interest rates would, in principle, weaken the net interest income of all Nordic banks. The outlook for loan demand also affects all banks, as declining consumer confidence erodes mortgage demand, and an unpredictable macro environment curbs companies’ investment enthusiasm and, through this, loan demand.
For now, I do not consider the impact of the factors listed above to be dramatic, as no boom-time celebrations have been baked into bank forecasts even before this. In addition, market interest rate forecasts have, at least for now, fallen relatively moderately – by 15–20 bps in Europe after the tariffs were announced. The situation may, of course, have already changed today, given how rapid the news cycle currently is. The euro area interest rate level (e.g., 12-month Euribor) is still, in forecasts, around the 2% level that Nordea applies in its calculations and targets. At its lowest, the interest rate level in forecasts falls to exactly around 2% in 2027. Of course, when reading these, it is good to remember that it is rare for markets to successfully predict the overall development correctly. The current year serves as a good example: at the beginning of the year, interest rates rose amid hopes of European stimulus, until the rug was pulled out from under due to fears of a tariff war.
In addition, a decline in capital markets would affect commission income through assets under management. A cooling market sentiment could also weaken the investment enthusiasm of wealth management clients and reduce new subscriptions (or even lead to significant redemptions, as at the beginning of the corona crisis).
In summary, the threat of tariffs and a trade war is also negative for banks, as they are very closely tied to the macroeconomy in their business, but the ultimate impact is impossible to reasonably assess at this point. So, there is nothing to do but monitor the situation’s development. In my opinion, the market reaction has, however, been quite sharp, and Nordea, for example, was momentarily priced at its book value. This is difficult to justify, even if the visibility into the ultimate effects is hazy. Of course, today there was a strong upward correction again, so at the time of publication of this article, it has already returned slightly above book value.
