DBRS Comments on Nordea’s 2008 Results and Rights Issue – Senior at AA

DBRS has commented today that its ratings for the operating banks of the Nordea Group (Nordea or the Group) are unchanged following the Group’s announcement of full-year 2008 results and of a EUR 2.5 billion rights issue. DBRS maintains ratings of AA for Senior Unsecured Debt & Deposits and of R-1 (high) for Short-Term Debt & Deposits of Nordea Bank AB and its main operating banks. The AAA rating for Senior Unsecured Long-Term Debt Guaranteed under the Danish Guarantee Scheme for Nordea Bank Danmark A/S also remains unaffected. The trend on all ratings is Stable.

Nordea reported record profit before loan losses and taxes of EUR 1.1 billion in Q4 2008, demonstrating resilient underlying earnings. Quarterly net profit was EUR 637 million, down 3% from Q3 2008 and down 25% from Q4 2007. The profit decline was driven by sharply higher loan losses of EUR 320 million in Q4 2008, which were up 3.6 times from the prior quarter and a reversal from net recoveries of EUR 6 million in the year-ago quarter. The increased loan loss provisions primarily reflected reserve-building to cover future losses.

DBRS views Nordea’s performance as strong, given difficult operating conditions. Return on equity was solid at 14% for the quarter and 15% for the full year. Full-year 2008 net profit was EUR 2.7 billion, down 15% from 2007 due to rising credit costs, which are likely to remain a challenge in DBRS’s view.

DBRS views positively Nordea’s announcement of an underwritten discounted rights issue of new ordinary shares. The rights issue is expected to add approximately EUR 2.5 billion in core capital. Nordea’s three largest shareholders, including the Swedish government, will subscribe for their pro-rata 36% share of the rights issue. The remainder is underwritten by Sampo Group, one of the three largest shareholders, and two investment banks. In addition, Nordea plans to cut its 2008 dividend, which would preserve about EUR 500 million in retained earnings. The Group also increased its total allowances and provisions by EUR 220 million in Q4 2008, further boosting its loss-absorption capacity. DBRS sees these actions as a prudent response to the deteriorating economic environment.

Nordea’s operating results benefited from a 21% rise in net interest income to EUR 1,386 million in Q4 2008 relative to the year-ago period. This strong increase was driven by higher loan volumes, up 8% year-over-year and up 17% in local currency terms. Corporate lending margins improved, reflecting reduced competitive pressure, as some banks constrain business lending and capital markets remain disrupted. Nordea passed on higher liquidity premiums through rising lending spreads. Net fees and commissions declined 26% from Q4 2007 to EUR 390 million. This was mostly driven by lower asset management fees due to falling asset values and net outflows. Moreover, fee expenses rose in Q4 2008 with the EUR 50 million guarantee fee paid in connection with the Danish Guarantee Scheme. Net gains/losses on items at fair value of EUR 325 million in the quarter benefited from strong capital markets-related revenue. This was partly offset by lower insurance fees.

Nordea’s gross impaired loans rose sharply, by 32%, from September to December 2008, ending the year at EUR 2.224 billion. Gross impaired loans accounted for 0.77% of gross lending at year-end, which was up from 0.53% at year-end 2007. DBRS expects Nordea to sustain further increases in loan losses in 2009, as the economic downturn across its footprint continues. While the outlook is uncertain, solid underlying earnings, increased reserves and solid capital should enable Nordea to cope with the challenging environment. Nordea’s loan portfolio remains concentrated in the Nordic region, which accounted for 87% of total net lending of EUR 265 billion as of December 2008. Lending in the Baltics, Poland and Russia amounted to a modest 5.8% of the Group’s net lending.

DBRS continues to monitor the financial profile of Nordea’s Life & Pensions business, where investment results have suffered from falling stock markets. Financial buffers in the insurance business declined sharply over the past year to only 3% of total technical provisions, or EUR 673 million, at year-end 2008. The Group strengthened the solvency of its subsidiary Nordea Life Holding by injecting EUR 200 million of capital in Q4 2008, adding to double leverage at the Group level. The insurance business could become a drag on the Group if investment results continue to disappoint. However, any further losses should remain manageable relative to the Group’s solid capitalisation. DBRS recognises that Nordea has sharply reduced the equity exposure in its Life & Pensions business to only 6% of invested assets as of December 2008.

DBRS views Nordea’s capitalisation as sound, helped by the rights issue. The Group’s Tier 1 capital ratio stood at 7.4% as of December 2008 under Basel II including transition rules. Excluding transition rules, the Tier 1 ratio was 9.3%. The announced capital measures are projected to boost the Tier 1 capital ratio before transition rules to 10.8% on a pro-forma basis. Shareholders’ equity was EUR 17.8 billion at year-end 2008 and is expected to rise by approximately EUR 3 billion.

Nordea’s liquidity profile remains sound. The Group reports continued market share gains in Nordic household savings and corporate deposits. Deposits rose 4% in 2008 to EUR 149 billion at year-end. Excluding the negative effect from weakening Nordic currencies, customer deposits even grew by 12%. Nordea also reported that all short-term funding programmes remained active in Q4 2008, and the Group continued to place long-term covered bonds in Denmark and Sweden.

DBRS will closely monitor how Nordea copes with the challenging environment and expected further credit deterioration. An unexpected acceleration of loan losses and impairments beyond DBRS’s tolerance levels could become a ratings concern. Reduced underlying earnings or a weakening of the Group’s capital and liquidity profile could also have negative implications.

Notes:
All figures are in Swedish Krona unless otherwise indicated.

The applicable methodology is Analytical Background and Methodology for European Bank Ratings, Second Edition, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.