DBRS Confirms Nordea Bank AB at AA (low), Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed the ratings of the main entities forming the Nordea Group (together, Nordea or the Group), including the AA (low) Senior Unsecured Debt & Deposits rating and the R-1 (middle) Short-Term Debt & Deposit rating for Nordea Bank AB. The trend on all ratings is Stable. The support assessment remains SA3, reflecting DBRS’s view that developments in European regulation and legislation mean that there is less certainty about the likelihood of timely systemic support. As a result, the final senior debt rating is positioned in line with the AA (low) Intrinsic Assessment (IA).

The ratings reflect the Group’s diversified Nordic banking franchise, with strong positions across Sweden, Finland, Norway and Denmark, as well as the strong and resilient earnings generation ability and the established track-record of profitability. The ratings also incorporate Nordea’s low level risk profile, sound capitalisation, along with its well-managed funding profile, despite the reliance on wholesale funding.

Nordea’s pan-Nordic franchise is a key factor underpinning the rating. The Group has a strong banking platform with market leading positions in retail banking, wholesale banking and wealth management across the four large Nordic countries, as well as a strong retail presence in the Baltic region. The Group serves approximately 10.2 million private customers and 590,000 corporate and institutional customers across the Nordic region. Going forward, the Bank continues to plan for the simplification of its legal structure into a single pan-Nordic banking entity based in Sweden.

Nordea’s ability to generate strong and resilient earnings is a key rating consideration. Despite the variable economic conditions in the Nordic region, Nordea continues to generate substantial and stable earnings thanks to its diverse franchise, both in terms of business and geographic mix. The Group’s income before provisions and taxes (IBPT) is well spread across its three operating divisions. DBRS views the resilient earnings history as supportive of the high ratings. Furthermore, operating expenses for 2015 were in line with the EUR 4.7 billion target (excluding non-recurring restructuring charge of EUR 263 million). Nordea is further progressing with its Simplification Programme and is enhancing its digital capabilities. This is evidenced via the current replacement of its Core Banking Platform, as well as other IT investments. Including investment in compliance as well, the Group expects that these will increase its cost base by 3% in local currencies during 2016. DBRS notes, however, spending on these enhancements should contribute to improved cost efficiency in the medium term.

Nordea’s overall credit performance is viewed as solid, given the stable performance through the financial crisis, and the diversification of the loan portfolio by industry. The Group has an exposure at default of EUR 6.3 billion across the broader Oil & Offshore section, as well as EUR 5.5 billion in risk to Russia. DBRS notes that these combined exposures account for less than 3% of the total exposure at default. However, given the uncertain status for both the oil price and Russian geo-political risk, DBRS will continue to monitor these risks.

Nordea has a sound and well-managed funding profile. However, similar to its main Nordic peers, Nordea has a relatively high reliance on capital market funding due to the prevalence of mortgage covered bonds for mortgage funding. At end-2015 covered bonds accounted for 24% of the total funding base of EUR 449 billion. Nonetheless, the covered bond funding is well-diversified through programmes in the four Nordic countries. Customer deposits, which totalled EUR 193.3 billion at end-2015, have been relatively stable over the last 5 years and DBRS views the deposit base as providing a solid foundation to the funding profile. At end-2015 the Liquidity Coverage Ratio (LCR) was reported at 201%, according to Swedish rules, and 161%, according to the EBA Delegated Act.

DBRS views Nordea’s capitalisation as solid and notes positively that both the capitalisation levels and the regulatory ratios have increased in recent years. At end-2015 the Group’s fully loaded Basel III Common Equity Tier (CET1) ratio was 16.5%, up from 15.7% at end-2014 and the Group’s reported leverage ratio was 4.6% at end-2015, up from 4.3% at end-2014. DBRS notes that Nordea is classified as a global systemically important bank (G-SIB) by the Financial Stability Board and the Basel Committee on Banking Supervision. DBRS continues to view the Group as well-placed from a capital perspective given its strong earnings generation capacity and the robust capital base.

Given the already very high rating level, any further upward rating pressure is unlikely. However any upside 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 encumbrance of the balance sheet.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (December 2015). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2016), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016) and Critical Obligations Rating Criteria (February 2016).These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial and company reports. 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: Peter Burbank
Rating Committee Chair: Elisabeth Rudman
Initial Rating Date: November 28, 2006
Most Recent Rating Update: September 29, 2015

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