DBRS Confirms Nordea Bank AB at AA; Trend Stable

DBRS has today confirmed the ratings for the main entities forming the Nordea Group (together, Nordea or the Group), including the AA Senior Unsecured Debt & Deposits rating and the R-1 (high) Short-Term Debt & Deposits rating. The trend on all ratings remains Stable. The confirmation is based on the Group’s diversified Nordic banking franchise which reflects strong positions in Denmark, Finland, Norway and Sweden. The ratings also consider Nordea’s strong earnings generation ability and the Group’s track record of solid profitability throughout the most recent difficult period. DBRS also considers Nordea’s conservative nature, the strengthened capital position and the sound liquidity as noteworthy factors in the rating.

Nordea’s strong, diversified Nordic banking franchise is a key rating strength. The Group maintains top tier market shares in each of the four large Nordic countries. Moreover, the Nordic franchise is well diversified, comprising traditional retail and corporate banking, as well as life insurance, capital markets products and asset management. Further, DBRS sees Nordea’s specialised international business segments Shipping, Oil Services & International and Financial Institutions, and the limited presence in Eastern Europe as adding to the diversity of the franchise, however diversity is gained with the addition of risk owed to the more unstable nature of these asset classes or geographies.

The ratings consider Nordea’s resilient earnings generation. Indeed, the solid earnings generation ability is clearly illustrated by the Group’s ability to record positive results throughout the most recent difficult economic cycle. Nonetheless, interest income has been negatively affected in recent quarters by declining deposit margins; as such, minimising the impact of this pressure on earnings will be a near-term challenge. DBRS expects a level of pressure on interest margins to persist in the near-term, as interest rates will likely remain low, while continued heightened competition for deposits will further weigh on deposit margins. Nonetheless, although earnings may experience a level of pressure, given recent history, DBRS expects Nordea to continue generating solid net earnings. To this end, Nordea recorded 1Q10 net profit of EUR 643 million, increasing 44% quarter-on-quarter, as the Group benefited from solid revenue generation and declining net loan losses. For the year 2009, despite the difficult operating environment, the Group generated net income of a solid EUR 2.3 billion.

DBRS views Nordea’s ability to maintain sound overall asset quality, which is the result of an overall conservative approach to risk, as a factor which supports the current ratings. Accordingly to date, credit quality metrics have held up quite well, as impaired loans remained low at 1.40% of lending at 31 March 2010. Credit quality has been supported by resilient performance across most of the core Nordic region, particularly Sweden and Norway. However, DBRS views Nordea’s Baltic loan portfolio, which comprised 2.7% of lending at 31 March 2010, and the shipping and offshore book, which is 3.7% of lending, as posing a level of risk to the Group’s overall risk profile. Additionally, DBRS views components of the real estate management lending book, which amounted to 13% of lending, as adding a level of additional credit risk, given the ‘lumpiness’ of exposures and cyclicality of this sector.

The ratings also reflect the Group’s solid and strengthened capital position. Prudently, during 2009, the Group executed on a EUR 2.5 billion rights issue, which, together with the high level of earnings retention, resulted in a Tier 1 capital ratio of a solid 11.2% (Basel II, excluding transition rules) at 31 March 2010. Furthermore, DBRS views the funding and liquidity profile as sound and well-managed. Nordea’s strong and diversified deposit franchise adds a level of stability to the funding profile. The funding profile is rounded out by wholesale sourced funding, which remains slightly elevated at 54% of total funding, at 31 March 2010. Short-term funding remains somewhat elevated as well, with certificates of deposit and commercial paper amounting to a combined 14% of funding at year-end 2009.

The ratings are based on the Group’s consolidated credit profile, reflecting DBRS’ view that the various legal entities would likely benefit from intra-Group support in a stress scenario. This view is based on Nordea’s integrated management, centralised risk, liquidity and capital management and on the multiple operational links between the Group’s legal entities.

The Stable rating trend reflects DBRS’ view that Nordea is well positioned to further expand and strengthen the franchise, while navigating the still uncertain environment. However, DBRS remains cautious given the tenuous state of the global economic recovery and still fragile financial markets. DBRS sees elevated concerns about sovereign risks and uncertainties about the ultimate form and subsequent impact of new regulations as key risks. DBRS views Nordea as well placed to further strengthen its franchise, given its ability to successfully navigate through the difficult operating environment. Taking advantage of this window of opportunity, whilst managing the associated risks, poses a near-term challenge.

Note:
All figures are in euros (EUR) unless otherwise noted.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations 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.