DBRS Comments on Nordea’s Q2 2009 Results, Ratings Unchanged – Senior at AA

DBRS has today commented on the Q2 2009 results of the Nordea Group (Nordea or the Group). DBRS’s ratings for the main entities forming the Group remain at AA for Senior Unsecured Debt & Deposits and R-1 (high) for Short-Term Debt & Deposits, both with a Stable trend. These ratings apply to Nordea Bank AB, the Group’s bank holding company, as well as to the operating banks Nordea Bank Danmark A/S, Nordea Bank Finland Plc, and Nordea Bank Norge ASA.

Nordea reported solid net profit of EUR 618 million for the quarter ended 30 June 2009, showing resilient profitability despite increased credit losses owed to the global economic downturn. Net profit was down 1% from the prior quarter, primarily due to the 19% linked-quarter increase in net loan losses, to EUR 425 million in Q2 2009. DBRS views Nordea’s solid earnings as a key factor underpinning the ratings, as they give Nordea a buffer to absorb further rising loan losses. Nordea posted the highest-ever income before loan loss provisions and taxes of EUR 1.2 billion in Q2 2009, surpassing the prior-quarter record by 5%.

Nordea recorded relatively stable net interest income of EUR 1.3 billion, down 4% quarter-over-quarter. During the quarter, Nordea’s deposit margins declined due to the low interest rate environment, but this was partly offset by higher loan spreads, particularly in corporate lending. Nordea’s capital markets operations continued to benefit from favourable market conditions and solid customer activity, driving record gains on items at fair value of EUR 594 million. DBRS expects the recent high level of fair-value gains to decline, as capital markets stabilise and bid-ask spreads return to narrower historical levels. However, earnings from capital markets are expected to remain solid even with lower fair-value gains. Fee and commission income rose 8% on a linked-quarter basis in Q2 2009, reversing a negative trend of several prior quarters. Fee income benefited from higher asset management fees resulting from net asset inflows of EUR 2.8 billion during the quarter.

Total loan impairments of EUR 3.5 billion represented 1.3% of the Group’s total lending to the public of EUR 278 billion at quarter-end. DBRS views this level of impairments as manageable, considering Nordea’s solid earnings buffer. More than half of impaired loans (55%) were still performing as of 30 June 2009. Loan impairments in the Baltics rose 63% during Q2 2009, to EUR 418 million as of 30 June 2009, or 5.5% of the Baltic loan book. Although this region presents a level of risk, given the economic pressures in the Baltics, Nordea’s exposure is limited, as Baltic lending and commitments totals EUR 8.0 billion, or just 2.9% of total lending and commitments. Shipping finance represents another area of elevated credit risk, in DBRS’s view. Nordea’s shipping portfolio of EUR 11.2 billion (4.0% of total lending) as of 30 June 2009 is exposed to the shipping industry’s challenges of overcapacity and slow demand, which has depressed freight rates. Impaired shipping loans more than doubled during Q2 2009, to EUR 249 million. The risk of outsized losses is reduced, however, by the well-diversified structure of the shipping portfolio, with only 16% of loans relating to the high-risk areas dry bulk and container.

DBRS continues to view Nordea’s capital position as sound. The Group’s tier 1 ratio improved slightly to 11.2% (excluding transition rules) as of 30 June 2009, up from 10.9% as of 31 March 2009. Nordea’s capitalisation benefited from the EUR 2.5 billion equity issuance in Q1 2009, and the Group continues to generate capital internally. Liquidity is viewed as solid; however, Nordea’s reliance on wholesale funding exposes it to the risk of renewed market disruption, as only 54% of loans to the public were covered by deposits from the public at quarter-end. Covered bonds funding accounted for 18% of loans to the public at quarter-end. The Group continues to enjoy access to the market liquidity. During the quarter, Nordea issued EUR 13 billion in long-term debt during Q2 2009, mostly through covered bonds, but also including a EUR 2 billion senior unsecured five-year bonds issuance without government guarantee.

The ratings and Stable trend are based on Nordea’s strong Nordic banking franchise, its resilient underlying earnings generation ability and its sound capitalisation and liquidity.

Notes:
All figures are in euros unless otherwise noted.

The applicable methodologies are Analytical Background and Methodology for European Bank Ratings, Second Edition and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.