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An advantage of following the investment decisions of the best-performing fund managers from across the world is that it can lead this column to areas of the stock market we might otherwise not have considered.
To recap, Questor’s new Monday columns do just that. We’re tracking the shares owned by the very best professional investors – the top 3pc from the more than 10,000 equity fund managers the financial publisher Citywire monitors.
This week we’ve been led to Sweden’s stock market and a bank that can possibly lay claim to being one of Europe’s most boring – for all the right reasons.
Nordea is headquartered in Finland and operates across the Nordic region; it makes nearly 95pc of its money in Sweden, Denmark, Norway and Finland.
The bank is rated AA – just below a top AAA rating – by Citywire Elite Companies, which ranks companies on the basis of their backing by the best-performing fund managers (the full rationale is explained here).
Look more closely at the bank and it’s not hard to see why. Nordea is not only one of Europe’s safest banks, thanks to the quality of its loan portfolio and a substantial buffer against financial distress, but one of its most profitable.
First, let’s examine its conservative credentials. The bank’s loans are spread relatively evenly across the Nordic region and the different sectors of its economies.
The current fortunes of these economies are mixed: the OECD forecasts that the Norwegian and Danish economies will grow faster than Britain and the eurozone this year, but Sweden’s economy is predicted to contract in 2023 and Finland’s growth to stall.
However, relatively low levels of unemployment and substantial social safety nets make for an environment conducive to bank lending.
Ultimate proof of Nordea’s loan quality is in the numbers: in the three months to the end of June, net loan losses represented just 0.03pc of the bank’s entire portfolio.
More evidence of the bank’s attractive dullness comes from Nordea’s “common equity tier 1” ratio, a key regulatory measure of financial strength. Standing at 16pc at the end of June, Nordea has one of the highest scores of any European bank.
Crucial to its investment appeal, however, is that it couples this conservatism with consistently strong profitability. While Nordea’s “net interest margin” – the difference between the interest rates a bank earns on the loans it makes and the rates it pays to depositors – is no more than average, it stands out from other banks in its ability to keep a lid on costs.
It is helped by lacking a sizeable operation in investment banking, an area of the industry that is suffering falling revenues while costs, especially staff costs, remain stubbornly high.
That results in a return on equity – a yardstick for measuring bank profitability – that hit 18.4pc at the end of June, and is the envy of most other European banks.
Much of that profit is finding its way back to shareholders in the shape of sizeable dividend payments. Nordea aims to distribute between 60pc and 70pc of profits in dividends, and this year paid out 8.97 Swedish kronor, giving the shares a 7.5pc yield. Analysts forecast its next annual dividend to jump to Skr 11.10.
All of this comes at a price. Nordea is one of the few European banks to trade at a premium to its book value, and while a share price at 7.2 times its expected profits over the next 12 months may not seem high, it is for the lowly valued banking sector. That has not put off some of the world’s top-performing fund managers, however.
In a sector that has delivered more than its fair share of disappointments and pain to investors, Nordea stands out as a reassuringly boring bank with a track record of profitability that justifies its premium price.
Questor says: buy
Ticker: NDA-SE
Share price at close: 120.12 Swedish kronor
Phil Oakley is a contributing journalist for Citywire Elite Companies
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