DBRS Comments on Nordea Group’s 3Q12 Results – Senior Unaffected at AA, Trend Stable

DBRS Ratings Limited (DBRS) has today commented on Nordea’s 3Q12 results. The ratings for Nordea Bank AB and its main operating banks (together, Nordea or the Group), including Nordea Bank AB’s Senior Unsecured Debt & Deposits rating of AA, remain unchanged. The trend on all ratings remains Stable. The quarter was highlighted by sustained positive franchise momentum, record third quarter income, prudent pre-funding of future debt maturities, and solid regulatory capital.

For the quarter, Nordea reported operating profit of EUR 922 million on total operating income of EUR 2.5 billion for 3Q12. This was the best third quarter result in the Bank’s history, but operating profit was still down 16% quarter-over-quarter (QoQ). Third quarter results were supported by resilient net interest income and net fee and commission income, while net results from fair market valuation adjustments declined significantly. Net interest income of EUR 1.4 billion for 3Q12 was the second highest ever recorded by Nordea, down marginally from 2Q12, with higher corporate lending margins helping to partially offset deposit margin pressure. This led to the net interest margin narrowing 4 bps QoQ to 1.05%. Net fee and commission income was also down marginally from 2Q12 at EUR 605 million. The result was negatively impacted by lower commissions in custody services. Within savings and investments, overall commission income was higher and benefited from higher lending-related commissions. Net results from items at fair value fell 24% QoQ to EUR 377 million for 3Q12, from what had been unusually high levels during 2Q12 and due to fair market valuation losses in the bond portfolio in Q3. Positively, the customer-driven capital markets business remains stable. Although pressured by market-related headwinds, DBRS considers the results as evidencing the strength of Nordea’s franchise and the ample earnings generation ability of the Bank’s diverse business model.

Nordea’s sustained momentum underscores the sound profitability across its core business segments. Nordea was able to increase business volumes in its Retail Banking segment and this contributed to marginally higher net interest income and net fee and commission income. Although income before provisions and taxes (IBPT) increased modestly during the quarter to EUR 613 million, operating profits for the period fell 16% QoQ due to higher net loan losses emanating mainly from Denmark. The Wholesale Banking segment is the largest contributor to Nordea’s operating profit at EUR 418 million and also benefited from higher business volumes during the quarter. The segment’s 14% QoQ increase in operating profit was supported by unusually high client activity, as well as strongly higher income in the Shipping, Offshore & Oil Services sub-segment. Complementing Nordea’s two primary business segments, the Wealth Management segment continued to generate stable operating profit of EUR 149 million for 3Q12. Reflecting Nordea’s positive franchise momentum, assets under management reached record levels at EUR 211 billion at quarter-end.

Although DBRS considers Nordea’s overall asset quality as solid, credit performance has weakened in specific parts of the loan book. Net loan losses, at 30 bps, excluding the Danish deposit guarantee provisions, rose from 26 bps last quarter and 16 bps in 3Q11. The impaired loan ratio increased to a still low 181 bps of total loans due to credit quality problems in Danish household and agriculture exposures. The weakened economic environment in Denmark has contributed to a 9.3% rise in impaired loans to Danish households QoQ to EUR 2.0 billion. However, the impaired loan ratio for Nordea’s overall household lending book, which represents 44.8% of total public lending, remains low at 1.24%.

From a sector perspective, performance in Nordea’s EUR 12.5 billion consumer staples portfolio, which includes Danish agriculture, has deteriorated with the weakening economic environment. As a result, impaired loans increased 26.7% QoQ to EUR 911 million at 30 September 2012. Similarly, pressured global trade flows continue to affect credit performance in the Group’s well-diversified EUR 13.4 billion Shipping, Offshore & Oil Services portfolio. Impaired loans in this book remain high at EUR 820 million due to persistent overcapacity and weak demand in shipping. Balancing concerns of marginal deterioration in credit performance of specific portfolios, DBRS recognises Nordea’s considerable experience in managing shipping fleet financing. The combined shipping and consumer staples portfolios accounted for a limited 7.0% of Nordea’s total public lending at 30 September 2012 and DBRS views Nordea as capable of absorbing increased credit costs from these segments.

DBRS views Nordea’s funding profile as sound and well-managed. The Group benefits from a diversity of funding instruments, access to multiple geographic markets, and a growing deposit base. During the quarter, Nordea issued EUR 7.6 billion of long-term funding, including EUR 2.6 billion of Swedish, Norwegian and Finnish covered bonds. Given the challenging wholesale markets, DBRS believes that this demonstrates market confidence in Nordea. Further, the Group extended the duration of its funding profile with long-term funding comprising 72% of total wholesale funding. To further bolster its liquidity profile, the Group maintains a liquidity buffer composed of highly liquid central bank eligible securities with characteristics akin to Basel III liquidity assets, which amounted to EUR 65 billion at quarter end. Nordea reported a liquidity coverage ratio of 129% at 30 September 2012.

In terms of capitalisation, the Group reported a Core Tier 1 ratio of 12.2% (Basel II) and a Tier 1 ratio of 13.3% at quarter end. Capital ratios benefited from earnings retention and a 1.2% reduction in risk weighted assets to EUR 179.0 billion. Considering the Group’s good internal capital generation ability and its focus on improving efficiency, DBRS views Nordea’s regulatory capital position as solid.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments, Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments, and Rating Bank Preferred Shares and Equivalent Hybrids. All can be found on the DBRS website under Methodologies.

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

This commentary was disclosed to the issuer and no amendments were made following that disclosure.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Peter Burbank
Approver: Alan G. Reid
Initial Rating Date: 28 November 2006
Most Recent Rating Update: 2 August 2012

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