DBRS Comments on Nordea’s Q3 2009 Results, Ratings Unchanged – Senior at AA

DBRS has today commented on the Q3 2009 results of the Nordea Group (Nordea or the Group). DBRS’s ratings for Nordea Bank AB and its main operating banks (together, Nordea or the Group) remain at AA for Senior Unsecured Debt & Deposits and R-1 (high) for Short-Term Debt & Deposits, both with a Stable trend.

Nordea recorded robust net profits of EUR 626 million for Q3 2009, up 1% from the prior quarter, and only slightly lower than the year-ago quarter. Strong revenues and well-controlled expenses led to very solid income before provisions for loan losses and taxes of EUR 1.190 billion, which was down a modest 4% from the record level of the prior quarter. In this quarter, the impact of one-off items was limited, as extraordinary charges for the Danish and Swedish guarantee scheme of EUR 52 million largely offset extraordinary fees from the Danish insurance business of EUR 46 million. In Danish life insurance, the temporary restriction of fee recognition was lifted in Q3 2009, after improved investment income strengthened the financial buffer (reserves) for policyholders. This led to the recognition of fees that had been deferred since the start of 2009. DBRS views Nordea’s robust overall result as a demonstration of the strength of Nordea’s franchise and its sound earnings generation, which underpin the ratings.

Stability in net interest income was an important component of the results. Net interest income of EUR 1.321 billion was up 1% in Q3 2009 from the prior quarter and remains Nordea’s largest revenue driver. Net interest income was helped by higher lending volumes and higher corporate lending margins, which more than offset lower deposit margins and reduced household mortgage lending margins. With credit spreads tightening, net gains on items at fair value of EUR 486 million remained elevated, supporting income in the quarter. DBRS does not expect the high level of net gains in recent quarters to prove sustainable, given increased stability in the markets.

Nordea’s provisions for loan losses at EUR 358 million declined by EUR 67 million or 16% quarter-over-quarter. Nordea’s overall provisions for loan losses at 0.54% of lending (annualized) in Q3 2009 compare favourably among its Nordic peers. In DBRS’s view, this reflects Nordea’s sound and relatively stable asset quality which underpins the ratings and Stable trend. The decrease was largely driven by the EUR 64 million reduction in loan losses in Denmark, helped by lower provisions related to the Danish guarantee scheme (-EUR 21 million). DBRS views the declining provisions for loan losses as indicating a level of stabilisation of credit quality in Denmark, which had shown elevated provisioning levels in prior quarters. The annualized pace of provisions for loan losses in Denmark declined from 1.22% of lending in Q2 2009 to 0.83% in Q3 2009.

Nordea’s impaired loans continued to grow, although the pace of the increase slowed. Overall impaired loans increased 9% quarter-over-quarter, to EUR 3.9 billion, after 19% quarter-over-quarter growth in Q2 2009. Importantly, 57% of all impaired loans were still performing at 30 September 2009, as Nordea strives to identify problem loans at an early stage. Impaired loans in Denmark, Norway and Sweden grew also 9% in Q3 2009, after increasing 25% in the prior quarter, with a decelerating trend in each country. In Finland, impaired loan growth also slowed, but figures remain elevated by Baltic impaired loans which are allocated to the Finnish operations.

Rising impaired loans in the Baltic region continued to drive overall impairments, although the rate of impaired loan growth in the Baltics slowed, from 63% in Q2 2009 to 25% in Q3 2009. While this may signal a slowdown in credit quality deterioration across Nordea’s footprint, DBRS remains extremely cautious, given the risk of currency devaluation and changes in the legal structure in the Baltics, which could drive loan losses higher. While outsized losses from the Baltics could cause negative rating pressure, DBRS recognises that Nordea’s Baltic exposure is limited at 2.8% of total lending at 30 September 2009.

DBRS views Nordea’s shipping portfolio (3.7% of total lending at 30 September 2009) as another source of credit risk, given the overcapacity and slow demand that continue to pressure freight rates for shipping companies. Impaired shipping loans declined slightly (-1%) in Q3 2009 and stood at 1.91% of sector lending. Despite this slight improvement, DBRS sees a risk that impairments could rise in coming quarters, if the shipping industry remains stressed.

Nordea’s capital position remains solid, with a Tier 1 ratio (excluding transition rules) of 12.0% and a Tier 1 ratio excluding hybrids of 10.7%. Liquidity remains prudently managed. The Bank’s deposit base provides the foundation of its funding profile, which DBRS views as sound and well managed, although Nordea’s noteworthy reliance on wholesale funding remains a challenge. Deposits from the public of EUR 149 billion at 30 September 2009 covered 53% of loans to the public. Deposits were largely unchanged from year-end 2008, as growth in Nordic Banking was offset by lower deposits in Institutional & International Banking. Demonstrating its solid access to market funding, Nordea raised EUR 12 billion in long-term debt in Q3 2009 across a range of instruments and currencies. This included EUR 5 billion in covered bonds, which DBRS views as a relatively stable market funding source. DBRS positively views that Nordea’s large liquidity buffer of EUR 44 billion at quarter-end enabled it to secure its funding requirements for two years without accessing the market.

Notes:
All figures are in EUR unless otherwise indicated.

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.