DBRS Confirms Nordea Bank AB at AA; Trend Stable

DBRS Ratings Limited (DBRS) has today confirmed the ratings for the main entities forming the Nordea Group (together, Nordea or the Group). The confirmation considers the Group’s diversified Nordic banking franchise that reflects strong positions in Denmark, Finland, Norway and Sweden. The ratings also reflect Nordea’s strong earnings generation capacity and the Group’s track record of solid profitability throughout various economic cycles. Further, DBRS views Nordea’s conservative risk profile, the solid capital and liquidity position as noteworthy factors in the ratings. The trend on all ratings is Stable.

The Stable trend reflects DBRS’s expectations that the Group will continue to enjoy the benefits of its sound risk management culture, its ample earnings generation ability, and its solid capitalisation. The Stable trend also considers DBRS’s view that Nordea is well-positioned to further expand and strengthen the franchise. That said, DBRS sees elevated concerns about sovereign risks and uncertainties about the ultimate form and subsequent impact of new regulations as key risks; however, DBRS views these concerns and risks as present for many European banks and not specific to Nordea.

DBRS has also today confirmed Nordea’s intrinsic assessment of AA (low). DBRS continues to ascribe implicit systemic support to systematically important banks in the Nordic region, as reflected in the SA-2 Support Assessment for the main operating banks of the Nordea Group. The SA-2 reflects DBRS’s expectation that some form of timely systemic support would be provided to the Group, if needed. The SA-2 assessment results in a one-notch uplift from the intrinsic assessment for Nordea’s final rating.

Nordea’s strong and well diversified Nordic banking franchise is a key rating strength. The Group maintains top tier market shares in each of the four large Nordic countries. Further, the franchise has a high level of product/business diversification, comprising traditional retail and corporate banking, as well as life insurance, private banking, and asset management. While DBRS views Nordea’s specialised businesses, including its Shipping, Offshore, and Oil Services, its International and Financial Institutions businesses, and its limited presence in Eastern Europe as adding to the diversity, this diversity is gained with the addition of risk owed to the potential instability of these asset classes or geographies. Importantly, however, in DBRS’s opinion, this risk is well-contained and well-managed.

The overall high ratings consider Nordea’s resilient earnings generation. Indeed, the solid earnings generation ability, which is clearly illustrated by the Group’s ability to record positive results throughout the most recent difficult economic cycle, sets the Bank apart from many of its European peers. Moreover, since the end of the 2008/2009 financial crisis, Nordea’s earnings continue to display a positive trajectory. With a net profit of EUR 1.6 billion, 1H12 was up 11% year-on-year and a record for the Group. Total operating income, at EUR 5.1 billion was an all-time high, as well. The results were driven by solid net interest income and steady net fee and commission income. In sum, DBRS sees the consistently strong results as illustrating the Group’s sizeable earnings generation capability, while the geographic and product diversity and high level of recurring income add a high level of predictability and resiliency to the earnings profile. However, given the uncertainty in the Euro zone and potential contagion effect which may impact the economic environment in Nordea’s operating footprint, DBRS sees maintaining solid earnings growth as more difficult going forward.

The ratings consider the solid and growing franchise and overall sizeable market shares. The Group continues to increase business volumes, illustrating the positive momentum of the franchise and the depth of the customer loyalty to the Nordea brand. This is further demonstrated by the increase in new household relationship customers, which has increased approximately 30% since 2007. The Group is also experiencing positive momentum in lending volumes whilst deposits from the public, which totaled EUR 193 billion, at 30 June 2012, continue to evidence respectable growth. Indeed, since year-end 2011 household deposits increased by EUR 5.2 billion to EUR 87.2 billion despite fierce competition. Corporate deposits, at EUR 106 billion, are up 14% year-on-year as Nordea benefited from a flight to quality as the Euro zone crisis intensified. Corporate lending and household mortgage activity continue to benefit from the recovery in loan demand reflecting the somewhat improved economic environment in the Nordic region, with a significant increase in housing loans during 2011.

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 ratings. However, in 1H12, the impaired loan ratio increased to 164 basis points (bps) of total loans, due to higher impaired loans mainly in Denmark, as a result of new more stringent rules from the Danish regulator, and in Shipping. The net loan losses, at 26 bps, excluding the Danish deposit guarantee fee, increased from 23 bps in the comparable period a year ago, but continue to be close to the Group’s through-the-cycle credit risk appetite (or expectation) of 26 bps. From a sector standpoint, performance in the Group’s well-diversified EUR 12.9 billion Shipping, Offshore & Oil Services portfolio continues to be impacted by persistent overcapacity and weak demand in shipping, predominantly in the oil tanker segment, with net loan losses remaining elevated at EUR 126 million for the six months to 30 June 2012. Impaired loans in the shipping book increased by 92% from the end of 2011 to EUR 850 million. DBRS notes that overcapacity, soft market conditions, and macroeconomic risks are likely to continue pressuring industry fundamentals through the remainder of 2012. While DBRS sees elevated risk in this business segment, DBRS recognises Nordea’s considerable experience in managing shipping fleet financing. Furthermore, given Nordea’s strong earnings generation profile, DBRS sees Nordea as having significant ability to absorb increased credit costs.

The Group’s funding and liquidity profile remains sound and well managed benefitting from the diversity of funding instruments, access across multiple geographic markets, and a growing deposit base. Demonstrating market confidence in the Group, during 1H12, Nordea issued EUR 17 billion of long-term funding, exceeding the full-year redemptions for 2012. Included in the issuance was EUR 7.4 billion of Swedish, Norwegian and Finnish covered bonds as well as the Group’s first ever issuance of Samurai bonds. DBRS notes that the Group did not participate in any of the ECB’s LTRO programmes. Further, the Group extended the duration of its funding profile with long-term funding comprising 69% of total wholesale funding. To further bolster its liquidity profile, Nordea maintains a liquidity buffer composed of highly liquid central bank eligible securities with characteristics akin to Basel III liquidity assets, which amounted to EUR 67.8 billion at 30 June 2012.

In terms of capitalisation, the Group reported a core Tier 1 ratio of 11.8% (Basel II, excluding transition rules) and a Tier 1 ratio of 12.8% at the half-year end. Capital ratios benefited from earnings retention and a 2% reduction in risk weighted assets since year-end 2011 to EUR 181.3 billion. Although the ratios are strong relative to many European banking peers, Nordea intends to continue to build capital in order to meet the new guidance by the Swedish authorities, which require a minimum Core tier 1 capital ratio of 12% from 2015, plus a potential countercyclical buffer requirement. Considering the Group’s good internal capital generation ability and the current level of capital, Nordea is well-positioned to handle the additional capital requirements in DBRS’s opinion.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Peter Burbank
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 28 November 2006
Most Recent Rating Update: 30 June 2011

For additional information on this rating, please refer to the linking document under Related Research.