Biggest Nordic Banks Hit by Selloff After Bleak Results

(Bloomberg) -- The two biggest banks in the Nordic region saw their market values shrink on Tuesday after publishing first-quarter results that disappointed investors.

Danske Bank A/S said it now expects net interest income to be lower this year than in 2018 as the higher cost of funding brought on by its money-laundering scandal erodes its top line. Its shares plunged more than 7 percent after the market opened in Copenhagen. At Nordea Bank Abp, net interest income missed market expectations amid growing pressure from its biggest investors to boost revenue. Its shares fell as much as 4 percent.

Biggest Nordic Banks Hit by Selloff After Bleak Results

Not that long ago, Nordic banks were seen as the darlings of European finance, boasting some of the region’s highest capital buffers and business models that seemed impervious to years of negative interest rates. But those days are over. Tuesday’s development shows how banks in one of the world’s richest regions have lost their luster, after a series of money laundering scandals and the cost of restructurings dismayed investors.

At Danske, net interest income in the first quarter missed estimates and net income lagged behind even the lowest prediction in a survey of analysts. Acting Chief Executive Officer Jesper Nielsen said on Tuesday that the dirty-money scandal continues to weigh on the bank’s business.

Read More: Danske Bank First Quarter Net Income Misses Lowest Estimate

Danske is trying to regain the trust of customers and investors after last year revealing that a large part of $230 billion that flowed through an Estonian unit was suspicious. Authorities in several countries are investigating the bank, which is still looking for a permanent CEO to replace ousted Thomas Borgen.

What Bloomberg Intelligence Says

“A near double-digit downgrade to 2019 profit guidance, almost certainly driven by revenue and margin weakness, heap further uncertainty on Danske’s outlook and suggest to us that valuation will remain below peers. On top of fears about a money-laundering fine, some investors may consider the bank currently uninvestable.”
--Philip Richards and Georgi Gunchev, European bank analysts
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The bank has felt the fallout of the laundering case on its share price, which plunged almost 50 percent last year, and on funding costs, with debt issuance costing more since the Estonian affair erupted. Danske Chief Financial Officer Christian Baltzer said in an interview with Bloomberg TV that the bank is continuing to devote considerable resources to compliance.

Compliance Costs

“With the investments we are doing to make sure we are as strong as we can be to fight financial crime, that will increase costs significantly,” he said. Baltzer also pointed to the negative interest-rate environment in Denmark as a continued challenge. “When and if Danish rates increase, that will significantly lift our profits,” he said.

The bank revealed on Tuesday that it will effectively need to cut its 2019 outlook for profit as well as net interest income. It still sees net profit in a range of 14 billion kroner ($2.1 billion) to 16 billion kroner, but the forecast now includes an expected 1.3 billion-krone gain from the sale of its Swedish pension assets.

At Nordea, which moved its headquarters to Helsinki from Stockholm last year, investors have been putting pressure on management to deliver revenue growth after years of focusing on cost cuts. But on Tuesday, the bank’s miss on net interest income was met with concern.

“This was again a big disappointment. Net interest income was clearly weaker than expected and represented a drop from already low levels,” said Antti Saari, an analyst at OP Group in Helsinki. “Erosion of the top line remains an acute problem for Nordea.”

Chief Executive Officer Casper von Koskull has struggled to revive revenue growth after his strategy to focus on costs and automation drew mixed responses from some key shareholders. Both Sampo Oyj, Nordea’s biggest owner, and activist investor Cevian, have voiced concerns that revenue isn’t growing fast enough.

“Through the actions we have taken in recent quarters there are now some encouraging signs of improved business momentum, although lending margins are under continued pressure and market making activities remain challenging,” von Koskull said in Tuesday’s statement.

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