DBRS Takes Actions on Nordea. Senior Ratings Confirmed at AA (low), Some Sub Debt Under Rev Neg.

DBRS Ratings Limited (DBRS) has today taken various rating actions on Nordea Bank AB (Nordea or the Bank), including confirming the Bank’s Senior Unsecured Debt & Deposits rating at AA (low). Earlier today, in line with rating actions taken on other European banks, DBRS has also placed the subordinated debt rated one notch below the Bank’s Intrinsic Assessment (IA), Under Review with Negative Implications (see “DBRS Places Certain Subordinated Debt of 27 European Banking Groups Under Review With Negative Implications” for further details and related disclosures).

The confirmation of the Senior ratings follows Nordea’s announcement on January 2, 2017 that the mergers of Nordea Danmark A/S, Nordea Bank Finland Plc and Nordea Bank Norge ASA (respectively, the Danish, Finnish and Norwegian subsidiaries) into the Swedish parent entity (Nordea Bank AB) has been executed and reflects DBRS’s view that the executed mergers will not have a significant impact on the Bank’s creditworthiness. Nordea’s intention to simplify its legal structure by transforming the subsidiaries into branches was originally announced in July 2015, with the Bank stating that it had engaged into a dialogue with the relevant regulatory authorities in the Nordic countries with regards to this transformation. Finansinspektionen (the Swedish FSA) granted authorisation to execute the merger plan in May 2016 while the remaining authorisations by the Danish, Finnish and Norwegian authorities were received by December 21, 2016. As a result of the mergers, all assets and liabilities of the Danish, Finnish and Norwegian subsidiaries have been transferred to the parent Swedish entity while these companies have now been dissolved and the banking business operations in Denmark, Finland and Norway are now being performed by branches of the Swedish parent entity. DBRS understands that the terms and conditions of the outstanding instruments, which have now been assumed by the Swedish entity, remain unchanged. Therefore, DBRS has confirmed the current ratings of the Danish, Finish and Norwegian entities and concurrently amended the names of the issuers to Nordea Bank AB (Denmark Branch), Nordea Bank AB (Finland Branch) and Nordea Bank AB (Norway Branch) to reflect the change in the legal status of those entities. In addition certain securities have been transferred from the Norwegian entity to Nordea Bank AB in Sweden. As a result DBRS has Discontinued the ‘A’ Undated Subordinated Debt rating of Nordea Bank AB (Norway Branch) and assigned an ‘A’ Undated Subordinated Debt (Originally Issued in Norway) rating to Nordea Bank AB. The rating, which is two notches below the IA of Nordea Bank AB reflects the terms and conditions of the security which includes an irreversible write-down feature under certain circumstances.

DBRS expects that the cross-border mergers, which are part of Nordea’s Simplification Programme, will lead to a reduction in administrative costs, helping to improve the Bank’s already solid efficiency. Following the execution of the mergers, a major part of the regulatory supervision has been transferred from the local regulatory authorities to Finansinspektionen, which is now the ultimate regulator and is therefore responsible to coordinate the monitoring activities that remain with the local authorities. Given the established collaboration across the regulatory authorities in the Nordic countries DBRS would not expect any significant issues to arise as a result of this. DBRS also views that the reorganisation is likely to make recovery and resolution planning simpler, given the reduction in cross-border legal entities which should reduce the complexity inherent in any cross-border resolution.

Earlier today DBRS placed Under Review with Negative Implications the Dated and Undated Subordinated Debt currently rated one notch below Nordea’s IA. This affects only the higher rated subordinated debt in the banks’ capital structure, and reflects the increasing likelihood that holders of this debt are now likely to bear losses at the same time as lower rated subordinated debt of banks that come under financial stress. Any rating downgrade is expected to be limited to one notch and the review period is likely to take no longer than 90 days.

DBRS currently rates existing dated subordinated debt and cumulative junior subordinated debt of European banks one notch below the Intrinsic Assessment (IA), while non-cumulative junior subordinated debt is rated two notches below the IA. However, given the increasing likelihood that all subordinated debt will be used to absorb losses alongside equity under the European Union’s Bank Recovery and Resolution Directive (BRRD), DBRS has placed Under Review with Negative Implications the subordinated debt that is currently rated only 1 notch below the IA. One potential outcome of the review is that these instruments would be downgraded to the same level as existing non-cumulative junior debt (i.e. 2 notches below the IA).

The rating action is in line with the existing DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016).

RATING DRIVERS
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.

The Dated and Undated Subordinated Debt currently rated one notch below the IA are Under Review with Negative Implications as discussed above.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2016). 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), DBRS Criteria: Guarantees and Other Forms of Support (February 2016), and DBRS 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, Finansinspektionen and company reports. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

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

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

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 historical default rates published by the European Securities and Markets Authority (“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, Senior Vice President - Global FIG
Rating Committee Chair: Elisabeth Rudman - Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: November 28, 2006
Most Recent Rating Update: March 22, 2016

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