growth, high non-performing assets, and reserve building. Pressure is also expected on the net interest margin, varied fee income performance and more controlled operating expenses.
We found the largest short-term threat for Nordea to be the current situation in Latvia. The political, economical and social instability in Latvia could get out of hand and send shockwaves throughout the Baltic countries thereby affecting Scandinavia through the high exposure Swedish banks have in the Baltic region. Even though Latvia contributes with a relatively small amount on Nordea‟s income statement, loan losses for the country have significantly increased and the instability in Latvia could strongly influence Nordea.
Through the analysis of Latvia we found that the current financial climate in Latvia mainly arose due to two reasons. Firstly, the government did not intervene into the real-estate market and rules and regulations were close to nonexistent. Secondly, banks were easing access to credit in Latvia to an extent that got out of control. The combination of this government mismanagement of policies along with a very liberal credit market, primarily enabled by foreign banks, eventually made the Latvian bubble burst. Latvia was therefore bailed out by the international community.
However, the financial aid packages given to Latvia came at a cost of a tightened fiscal policy, which has had an adverse effect on the political stability of Latvia.
Through the Latvian analysis we have developed three scenarios for Latvia: a most likely scenario, a worst case scenario, and a best case scenario. Overall we look with critical eyes on Latvia‟s opportunities for growth, without an improved economic situation all over Europe and Latvia‟s main trading partners.
In the most likely scenario we do not expect the previous rapid growth seen in Latvia in the mid 2000‟s to return until global growth returns.
In the worst case scenario we do not expect the Latvian government to be able to impose the tightened 2010 budget, as the current pre-election political climate in Latvia poses a significant threat to this, due to short-term populism. We therefore have to consider a scenario where a devaluation occurs. We believe that a devaluation of the Latvian currency would worsen the
situation in the short-term, due to the high percentage of loans denominated in Euros, but turn Latvia back on track in the long-term.
In the best case scenario a high increase in GDP growth for Latvia is expected. This is forecasted on the basis of the Latvian government being able to implement the budget for 2010 and 2011 better than expected. Furthermore, the fast implementation combined with a global financial situation that picks up faster than expected would have a positive effect on Latvia leading to faster growth rates than expected.
We found Latvia‟s impact on Nordea‟s asset quality and profitability to be channelized through changes in real GDP, long-term interest rates, inflation, and unemployment. This impact will be amplified as Nordea increases exposure to Eastern Europe and especially Latvia.
From the financial analysis of Nordea we found that the overall development of the last 9 years has been positive and even though the result and key figures has dropped in 2009, Nordea performs acceptably. ROE and ROA show that Nordea‟s management has been good at utilizing financial resources to generate returns in environments where global financial markets are booming. While returns have been falling during the financial crisis Nordea has still performed better than peers and thus, in our opinion has better potential at being successful. However, large loan losses, due to the financial crisis, especially in the Baltic region, are threatening Nordea. The financial analysis showed that Tier 1 capital and total equity have increased over the last 5 years and that Nordea meets the current regulatory requirements with a clear buffer margin and is thus expected to meet Basel III requirements. Compared to its peers, Nordea ranks in the middle when measured by Tier 1 capital and equity ratio, but as previously mentioned, Nordea‟s NSFR indicates that the bank will be less affected by Basel III.
In the 10 years budgeted/forecasted for Nordea the main focus is global economic recovery in 2010, the effect of the fiscal stimuli packages and the reversal of these as well as the implementation of Basel III.
By using the RI model to estimate Nordea‟s value, we found that the theoretical stock price is EUR 8.22. This result is most sensitive to changes in CAPM. Furthermore, we have estimated Nordea‟s P/E and P/B in order to compare Nordea to its competitors. We found Nordea‟s P/E to be 13.01, which is low compared to its competitors. This indicates that the market sees Nordea as lees volatile and expects stable earnings. Furthermore, we found Nordea‟s P/B to be 1.50, which is high compared to its competitors. This substantiates that the market sees Nordea as an attractive investment. The P/B ratio also indicates that Nordea is found, by the market, to be a relatively safe investment and ready for regulatory requirements.
From the undertaken sensitivity analysis, with regards to the worst case and best scenario for Latvia, we found Nordea‟s stock price to be EUR 7.74 in the worst case scenario and EUR 9.54 in the best case scenario. This underlines the impact Latvia has on Nordea in the worst case scenario, while the best case scenario illustrates the upside of a potential economic upswing in Latvia as well as globally.
The most likely and what the stock price should be is EUR 8.22, according to our estimations and calculations. The actual stock price was EUR 7.55 on 14 April 2010, we therefore recommend potential investors to buy the Nordea stock, as we see the stock price on the stock exchange as being traded at a too low price. However, as the scenario analysis showed, potential investors should be aware of the situation in Latvia and globally, as this could impact the stock price within a range of EUR 7.74 to EUR 9.54.