DBRS Confirms Ratings for Nordea Following Q1 2009 Results – Senior at AA

DBRS has today confirmed all unguaranteed ratings for the operating banks of the Nordea Group (Nordea or the Group), following the announcement of the Group’s interim results through March 2009. This rating action includes the 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 trend on all ratings remains Stable.

The confirmation reflects Nordea’s resilient underlying earnings that have enabled the Group to absorb rising loan loss provisions and still remain solidly profitable in Q1 2009. The Group reported solid net income of EUR 627 million for Q1 2009, down 2% from the prior quarter and down 9% from Q1 2008. Solid net interest income generation, strong trading results and effective cost controls helped Nordea absorb rising loan loss provisions.

Net interest income of EUR 1.4 billion held almost stable (-2%) from the strong prior quarter. Excluding negative currency effects, net interest income was up 3% on a linked-quarter basis. The interest result benefited from higher loan volumes, particularly in household mortgages, and higher lending margins, which were countered by significant pressure on deposit margins. Nordea benefited from a sharp increase in net gains from items at fair value to EUR 515 million, reflecting strong customer activity in currency and interest rate trading and gains from interest-rate positioning. Net fees and commissions declined 2% from the prior quarter to EUR 381 million, driven by reduced fees from asset management. Expenses decreased 5% quarter-over-quarter, driven by reduced headcount and lower spending on growth initiatives.

However, loan loss provisions increased 11% from already-elevated Q4 2008 levels to EUR 356 million, weighing on net profit. Importantly, DBRS notes that Nordea’s solid income before provisions and taxes of EUR 1.2 billion in Q1 2009 gives the Group a sizable cushion to absorb further rising provisions and still remain solidly profitable.

DBRS expects the ongoing economic downturn across Nordea’s footprint to cause higher loan impairments and provisions in coming quarters, which could become a rating concern if accelerating losses undermined the Group’s earnings generation ability or raised questions about Nordea’s risk management. The Group’s ratio of impaired loans to total lending stood at 1.1% (DBRS-calculated) at 31 March 2009, compared to 0.8% at year-end 2008, which DBRS regards as manageable, given Nordea’s solid earnings generation. However, DBRS notes that further credit quality deterioration in the Group’s core banking franchise in Sweden, Denmark, Finland and Norway could have a noteworthy impact on earnings, as 87% of Nordea’s lending is concentrated in this area.

DBRS continues to monitor Nordea’s exposure to higher-risk asset classes, particularly lending in Eastern Europe and shipping finance. The Baltic countries that are experiencing a deepening economic crisis accounted for 2.7% of Nordea’s total lending at 31 March 2009. An additional 2.7% of lending was located in Poland and Russia that also pose elevated credit risk relative to the Group’s core Nordic franchise, in DBRS’s view. While DBRS expects Nordea to sustain further elevated provisions and rising loan impairments in Eastern Europe, DBRS recognises Nordea’s efforts to limit its risk exposure by focusing its Baltic operations on large corporates and Nordic customers which account for over half of lending in the region, and by maintaining only a limited presence in Eastern Europe. Another higher-risk area DBRS continues to monitor is shipping finance. Although impaired shipping loans stood at a below-average 1.0% of total lending at 31 March 2009, shipping customers are negatively affected by the sharp drop in demand and freight rates due to the weak economy.

DBRS positively views Nordea’s strengthened capital position following its recent capital raise. Factoring in the EUR 2.5 billion equity issuance, the Group’s tier 1 ratio stood at 10.9% on a pro-forma basis as of 31 March 2009 (excluding transition rules). Nordea’s liquidity position remains sufficient. Importantly, Nordea raised its buffer of liquid securities in Q1 2009, which enables the Group to remain funded for more than one year without accessing capital markets. This reduces DBRS’s concern about Nordea’s reliance on wholesale funding, reflected in a customer deposits to total funding ratio of 46% as of 31 March 2009, which is considered a weakness. Nordea’s liquidity profile is also enhanced by its membership in the Danish guarantee scheme, access to swap facilities from the Norwegian central bank and the option to participate in the Swedish guarantee scheme.

The Stable ratings trend is based on the Group’s resilient earnings generation, its strong franchise as a leading bank in Sweden, Denmark, Finland and Norway, as well as its solid capitalisation and sufficient liquidity. Negative ratings pressure could result from an acceleration of loan losses and impairments beyond DBRS’s tolerance levels or from indications that the economic downturn across the Group’s footprint is weakening its underlying earnings generation ability. DBRS continues to monitor how Nordea copes with the challenging environment.

Notes:
All figures are in euros unless otherwise noted.

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.