DBRS: Nordea Reports Solid Q4 Results; Further Cost Efficiencies Announced

Summary:
• Low growth environment leads to announcement of further acceleration of the ongoing cost efficiency programme.
• Q4 results were solid with income up QoQ and stable asset quality.
• DBRS rates Nordea Bank AB at AA, with a Stable trend, for Senior Unsecured Debt & Deposits.

DBRS Ratings Limited (DBRS) considers Nordea AB’s (Nordea or the Group) Q413 results as solid. However as a result of the Group’s forecast that loan demand is likely to be lower in the future, and that interest rates are likely to stay lower, for longer, the Group has announced a further acceleration of its cost efficiency programme. The Group’s target is now to increase its cost efficiency initiatives in the 2013 to 2015 period to EUR 900 million, from an original EUR 450 million (of which EUR 210 million has been met to end-2013). As a result, taking into account some planned reinvestments, the Group now expects that its 2015 cost base will be 5% lower than in 2013. DBRS views the ongoing focus on cost efficiency positively, and notes that further details on the Group’s plans will be presented later in 2014.

For the 4th quarter, income before provisions and taxes (IBPT) was relatively flat. Total income rose by 2%, driven primarily by an 8% rise in fee and commission income that reflects the improving trend in savings and investments where assets under management (AuM) are now at an all-time high. Total expenses were up more than expected quarter-over-quarter (QoQ) although this was partly driven by seasonal increases. Asset quality was stable and the Group’s capital position continues to improve.

The Group’s credit quality remained stable in Q4 with the impaired loan ratio improving slightly to 1.78%, from 1.82% at Q3. DBRS views the reduction in shipping loan losses positively but notes that loan losses in Denmark remain elevated, albeit stabilising, and that the performance in Finland has deteriorated a little, in line with the difficult macroeconomic environment.

At end-Q413 the Bank reported a fully loaded Basel 3 pro-forma Core Tier 1 ratio of 14.6%, and a Basel 2.5 Core Tier 1 ratio of 14.9%. Nordea estimates that the increase in the risk weight floor for residential mortgages to 15%, that is included within the Pillar 2 calculation, would lead to a reduction in the Basel 2.5 Core Tier 1 ratio of approximately 0.32%. Given the Group’s strong capital position and internal capital generation DBRS views the Bank as well placed to manage the impact of the evolving regulatory environment, including the intention of the Swedish authorities to further increase the risk weight floor for residential mortgages, within the Pillar 2 calculation to 25%.

DBRS rates Nordea Bank AB at AA, with a Stable trend, for Senior Unsecured Debt & Deposits.

Notes:
All figures are in euro (EUR) unless otherwise noted.

[Amended on December 23th, 2014 to remove unnecessary disclosures.]