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), including the AA Senior Unsecured Debt & Deposits rating and the R-1 (high) Short-Term Debt & Deposits rating for Nordea Bank AB. DBRS also confirmed Nordea Bank AB’s AA (low) intrinsic assessment (IA). The trend on all ratings is Stable. DBRS maintains a Support Assessment of SA-2 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, and as a result the AA senior ratings are positioned one-notch above the intrinsic assessment.

The confirmation of the rating reflects the Group’s diversified Nordic banking franchise which reflects strong positions in Denmark, Finland, Norway and Sweden, as well as Nordea’s strong earnings generation capacity and the Group’s track record of solid profitability. The confirmation also incorporates Nordea’s conservative risk profile, and the solid capital and liquidity position. 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.

Nordea’s sizeable and well balanced franchise across the Nordic region is a key strength underpinning the ratings which are at the top-end of DBRS’s global rating universe. The core of the franchise is formed by the well-balanced Nordic banking platform, with the Group ranking among the top-tier banks in each of the four large Nordic countries. The Group serves about 11 million customers, including approximately 10 million personal customers and 500,000 corporate customers in its eight home markets, including the three Baltic countries and Russia.

Nordea’s ability to generate strong and resilient earnings is a key rating consideration. Although economic conditions in the Nordic region have weakened in 2013, Nordea continues to generate substantial and stable earnings from its diversified franchise. Nordea’s business and geographic mix has enabled it to produce good quality, highly resilient, earnings with income before provisions and taxes (IBPT) substantially exceeding loan losses. DBRS notes that some of the sectors in which the Group operates, including the Shipping sector, the Baltic region and the Danish operations, have all been adversely affected by market conditions in recent years. Nevertheless, through the strength of its other businesses, Nordea has continued to generate stable and recurring earnings. In DBRS’s view this resilient earnings history supports the overall high ratings. Nordea’s IBPT is well spread across its three operating divisions, and this is further supported by the geographic and product diversification of these divisions. DBRS also views positively the ongoing focus on cost efficiency positively with the Group now targeting EUR 900 million cost savings in the 2013 to 2015 period.

DBRS considers Nordea’s overall credit performance as solid, given the stable performance through the financial crisis, and the diversification of the loan portfolio by both country and industry which has meant that the Group has comfortably been able to cope with the issues in the Shipping sector, the Baltic region and Denmark. These areas now seem to be improving, although DBRS notes that loan losses in Denmark remain elevated, and that the performance in Finland has deteriorated a little, in line with the difficult macroeconomic environment. As one of the leading banks to the global shipping industry Nordea has been impacted by the difficulties that the industry has faced in recent years, however, the Shipping, Offshore and Oil business line has continued to report positive quarterly operating profit throughout the last five years. DBRS will continue to monitor Nordea’s exposure to this sector closely given the challenges that the industry continues to face.

Nordea’s funding and liquidity profile is viewed as sound and well-managed. The Group benefits from a diverse funding profile, however like its Nordic peers, Nordea has a relatively high usage of capital market funding, particularly as a result of covered bond issuance. At end-2013 covered bonds accounted for 20% of the Group’s total funding base of EUR 455 billion. The Group’s covered bond usage is, however, relatively diversified with issuance through programmes in the four Nordic countries. At end-2013 deposits from the public accounted for 45% of total funding and DBRS views the deposit base as providing a solid foundation to its funding profile given its stability and the solid market shares that the Group has across the Nordic countries. As of end-2013 Nordea’s Liquidity Coverage Ratio (LCR), according to the Swedish Financial Supervisory Authority’s definition, was 117%; the Group has stated that under the Basel definition the total LCR would be even higher.

DBRS considers capitalisation to be solid and views positively the improvement in both the level of capital and in the regulatory ratios in recent years. At end-2013 the Group’s Core Tier 1 ratio, under Basel II, was 14.9%, up from 13.1% at end-2012. Under Basel III the Group’s Common Equity Tier 1 ratio was 13.9% at end-2013. DBRS notes that, although the Group benefits from the low risk-weighting of mortgage assets, it is well placed to cope with a potential increase in the risk weighting of mortgages to 25%, under Pillar 2, as currently being discussed by the Swedish authorities. Mitigating this, the Group’s ratios will benefit from moving to the advanced internal ratings-based (IRB) approach for the Group’s corporate exposures in the Nordic region.

Separately, DBRS has also withdrawn the R-1 (high) Short-Term Debt rating of Nordea North America Inc, as the debt has been repaid and the company was closed at year-end 2013.

Notes:
All figures are in Euros (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: Support Assessment for Banks and Banking Organisations and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities. All can be found on the DBRS website under Methodologies.

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

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

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

Lead Analyst: Ross Abercromby
Rating Committee Chair: Alan G. Reid
Initial Rating Date: November 28, 2006
Most Recent Rating Update: August 2, 2012

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