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) Issuer Rating, 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).

Nordea’s 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. The Group serves approximately 10 million private customers and 540,000 corporate and institutional customers across the Nordic region. Recently, the Bank simplified 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 four operating divisions. DBRS views the resilient earnings history as supportive of the high ratings. 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. 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 4.0 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-2016, covered bonds accounted for 26% of the total funding base of EUR 420 billion. Nonetheless, the covered bond funding is well-diversified through programmes in the four Nordic countries. DBRS views the deposit base as providing a solid foundation to the funding profile. Customer deposits totalled EUR 178.8 billion at end-2016, representing 42% of total funding according to DBRS estimates. At end-2016, the Liquidity Coverage Ratio (LCR) was reported at 159%, according to Swedish rules, and 165%, 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-2016, the Group’s fully loaded Basel III Common Equity Tier (CET1) ratio reached 18.4%, up from 16.5% at end-2015 and the Group’s reported leverage ratio was 5.0% at end-2016, up from 4.6% at end-2015. 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.

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 remain Under Review with Negative Implications as per DBRS’ review of European subordinated debt. See “DBRS assigns Issuer Ratings to 43 European Banking Group” for more details.

Notes:

All figures are in EUR (euros) 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 2017), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2017), and DBRS Critical Obligations Rating Criteria (February 2017). 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.

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

Certain ratings are under review. Generally, the conditions that lead to the assignment of reviews are resolved within a 90 day period. DBRS reviews 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: Vitaline Yeterian, 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 7, 2017

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