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 IA.

The confirmation of the rating reflects the Group’s diversified Nordic banking franchise which reflects strong positions across the four large Nordic countries, as well as the Group’s strong earnings generation capacity and track record of solid profitability. The confirmation also incorporates Nordea’s conservative risk profile, and the solid capital and liquidity position. The trend is Stable and reflects DBRS’s expectation that the Group will continue to generate solid profitability while maintaining its solid capital position and sound risk management culture.

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 590,000 corporate customers across the Nordics, the three Baltic countries, and Russia.

Nordea’s ability to generate strong and resilient earnings is a key rating consideration. Nordea’s business and geographic mix enables it to produce good quality, highly resilient, earnings with income before provisions and taxes (IBPT) substantially exceeding loan losses. In particular the diversification of the Group’s income streams and risk profile has allowed it to generate strong profitability despite pressure in recent years in some of the Group’s key business areas such as Shipping, the Baltic region and Denmark. 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. In DBRS’s view this resilient earnings history supports the overall high ratings. In addition the Group’s ongoing cost reduction programme is expected to lead to the 2015 cost base (in local currencies) being 5 percentage points lower than in 2013. DBRS views the ongoing focus on cost efficiency positively.

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-2014 covered bonds accounted for 22% of the Group’s total funding base of EUR 456 billion. The Group’s covered bond usage is, however, relatively diversified with issuance through programmes in the four Nordic countries. At end-2014 deposits from the public accounted for 43% 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-2014 Nordea’s Liquidity Coverage Ratio (LCR), according to the Swedish FSA’s definition, was 149%, up from 117% at end-2013; the Group has stated that under the Basel definition the total LCR would be even higher.

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 issues in the Shipping sector, the Baltic region and Denmark. Given lending exposure to Russia of EUR 6.2 billion, and oil and gas related exposure of approximately 2% of the total Group exposure, at end-2014, DBRS will continue to monitor closely Nordea’s exposure to these areas.

DBRS considers Nordea’s capitalisation as solid and views positively the improvement in both the level of capital and the regulatory ratios in recent years. At end-2014 the Group’s Basel III Common Equity Tier (CET1) ratio was 15.7%, up from 13.9% at end-2013 and the Group’s reported leverage ratio, under the transitional definition, was 4.3% at end-2014. Nordea plans to manage the bank with a CET1 ratio of approximately 15%, including a management buffer, and DBRS continues to views the Group as being well placed from a capital perspective due to its strong earnings generation capacity and its robust capital base.

Given the already very high rating level any further upward pressure is unlikely. However any further upward pressure would require a substantial reduction in the level of wholesale funding, while maintaining (i) low levels of credit losses, (ii) solid and predictable underlying profitability, and (iii) continued sound capital management. Negative pressure on the ratings would likely be driven by a deterioration in asset quality measures, a weakening of underlying profitability, reduction in liquidity or capital measures, or further encumbering of the balance sheet.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015).These can be found can be found at: http://www.dbrs.com/about/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: February 20, 2014

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