DBRS: Nordea Reports Solid Q1 Results; Progress on Cost Reductions

Summary:
• Progress on cost reductions with the cost income ratio at 49% in Q1 2014
• Solid Q1 2014 results and stable fundamentals with sound asset quality and improving capital ratios
• 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) Q1 2014 results as solid, boosted by a reduction in costs. The Group reported that its cost efficiency programme has delivered efficiencies of EUR 45 million in Q1 2014, and since the beginning of 2013 a total of EUR 255 million. The Group’s additional efficiency initiatives, to enable the Group to reach its target of the 2015 cost base being 5% lower than in 2013, are being finalised and are expected to be presented later in 2014. The progress made to date resulted in the cost income ratio reducing to 49% in Q1 2014, from 52% in Q4 2013 and 51% in Q1 2013. DBRS views the ongoing focus on cost efficiency positively, especially given the relatively muted loan demand in the region.

Overall in Q1 2014 income before provisions and taxes (IBPT) increased by 7% on Q4 2013, driven primarily by the 4% reduction in operating expenses. Operating income rose 1%, although the 2% fall in net interest income was mainly due to the lower number of days during Q1 compared to Q4. The impairment charge for loan losses reduced, reflecting the solid asset quality of the Group, and the Group’s capital position continues to improve.

The Group’s credit quality remained solid in Q1 2014 with the impaired loan ratio improving to 1.71%, from 1.78% at end-2013. DBRS views the further reduction of impaired loans in the shipping, offshore and oil services sector positively but notes that loan losses in Denmark remain elevated, albeit stabilising. DBRS will continue to monitor whether the elevated risks stemming from the ongoing issues in Ukraine and Russia will impact upon the Group’s operations in the Baltic countries and in Russia. Nordea’s Russian operation is focused on the largest Russian corporates and the Group’s Nordic customers. Total lending exposure at end-Q1 2014 was EUR 6.2 billion, and this compares to common equity tier 1 capital of EUR 23.3 billion. Nordea does not have any exposure to Ukraine.

At end-Q1 2014 the Group reported a fully loaded Basel 3 Common Equity Tier 1 (CET1) ratio of 14.6%. This incorporates the 0.65% benefit from the regulatory approval to use the advanced internal ratings-based (IRB) approach for the Group’s corporate exposures in the Nordic region, as well as a 0.09% reduction as a result of the increase in the LGD (loss given default) floor to 20% from 10%, for residential mortgages in Norway. 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.