DBRS: Nordea Reports Further Growth in Customer Base; Solid 2Q Results

Summary:
• Expansion of customer base evidences strength of franchise.
• Solid 2Q14 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) views Nordea AB’s (Nordea or the Group) 2Q14 results as evidencing both franchise strength and solid fundamentals. In 1H14 the Group gained a further 45,600 new retail relationship customers, as well as 700 new relationship customers in the Wealth Management division. This takes the Group’s total relationship customer base to approximately 3.2 million, up from 2.4 million at end-June 2007. DBRS views this trend as reflecting the strength and diversification of the franchise, as well as the advantage of its pan-Nordic operations. In 2Q14 the group also recorded a quarterly net inflow of assets under management (AUM) of EUR 4.8 billion, taking total AUM to EUR 248.3 billion, an all-time high for the Group.

Excluding a EUR 190 million restructuring charge related to the Group’s cost efficiency programme, income before provisions and taxes (IBPT) in 2Q14 increased 2% compared to 1Q14, mainly driven by a 12% reduction in costs. For 1H14 IBPT was up 7% on 1H13, again helped by the lower cost base. Total income was down slightly on 1Q14, and up slightly on 1H13. DBRS expects income growth may be relatively muted in the near future given the low interest rate environment and limited increases in lending volumes. The Group continues to make progress on its 2013 commitment to reduce its cost base by 5% by 2015. In 2Q14 the Group reported annualised expense reductions of EUR 45 million, taking total cost savings since 2013 to EUR 300 million.

Credit quality across the Group remains robust. At end-2Q14 the impaired loans ratio was 1.7%, down from 1.78% at end-2013 and from 1.85% at end-2Q13. DBRS notes that the improvement includes reversals in the Shipping, Offshore & Oil Services sector as asset values have improved. In regards to Russian and Ukrainian exposure, DBRS will continue monitoring the developing situation. The Group’s current lending exposure in Russia is EUR 6.1 billion, mainly focused on the largest Russian corporates and the Group’s Nordic customers. This compares with common equity tier 1 capital of EUR 23.2 billion.

At end-2Q14 the Group reported a fully loaded Basel 3 Common Equity Tier 1 (CET1) ratio of 15.2%, up from 14.6% at end-2013. This incorporates a ratio improvement of 0.25% from the divestment of the Polish operations during the quarter. In May 2014 the Swedish Financial Supervisory Authority (FSA) announced details on the proposed structure of how capital requirements for Swedish banks will be devised in the future. These include an increase in the risk weight floor for residential mortgages to 25%, a systemic risk buffer of 3% of risk weighted assets (RWAs) and a 2% buffer requirement within the Pillar 2 framework, both are to be met with common equity tier 1 capital. In addition, a decision on the likely activation and final level of the counter-cyclical capital buffer is expected in the autumn of 2014. Given the Group’s strong internal capital generation and its current capital base DBRS views Nordea as well placed to manage the impact of the evolving regulatory environment.

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

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