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

DBRS Ratings Limited (DBRS Morningstar) confirmed the ratings of Nordea Bank Abp (Nordea or the Bank), including the Long-Term Issuer Rating of AA (low) and the Short-Term Issuer Rating of R-1 (middle). The trend on all ratings is Stable and the Intrinsic Assessment (IA) is AA (low). See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS
The confirmation of the Long-term Issuer rating reflects Nordea’s strong and diversified banking franchise in Denmark, Finland, Norway and Sweden as well as the Bank’s conservative risk profile and strong capital position. The ratings also reflect the Bank’s resilient profitability despite increased pressure on revenues and costs, as well as the uncertainty caused by the coronavirus (COVID-19) outbreak and the significant relief measures being taken by governments and regulators. Conversely, the ratings also incorporate the Bank’s relatively high reliance on wholesale funding, when compared to European peers, but this is partially mitigated by a good liquidity position and access to very stable Nordic covered bond markets.

RATING DRIVERS
Given the already very high rating level, any further upward rating pressure is unlikely. However, positive pressure to the Long-term Issuer rating would require a reduction in its wholesale funding reliance, particularly of unsecured funding, together with a material improvement in profitability and efficiency.

Negative pressure to the Long-Term Issuer rating would likely be driven by (i) a severe deterioration in profitability and asset quality, or (ii) if the Bank were to face any major challenges accessing wholesale funding markets.

RATING RATIONALE
Nordea has a strong pan-Nordic franchise with market leading positions in retail banking, wholesale banking and wealth management across the four large Nordic countries. Over recent years, Nordea has refocused its strategy towards its core Nordic markets and has taken various steps to better manage risk and simplify its business. Furthermore, the Bank is domiciled in Finland since October 1, 2018 and, as such, regulatory supervision now lies with FIN-FSA (Finnish FSA) and the European Central Bank (ECB).

Nordea’s broad geographic diversification and business mix have historically generated strong and largely resilient earnings. However, Nordea’s operating revenues have been under pressure partly due to the low interest rate environment and the deconsolidation of certain operations. In 2019, Nordea reported a net profit of EUR 1,542 million, halved compared to 2018 largely as a result of some extraordinary costs. Excluding one-off, net profit declined by 7% year-on-year (yoy) to EUR 2,502 million. Net interest income (NII) was down 4% year-on-year (yoy), primarily due to lending margin compression in household lending in Sweden and Norway in spite of increasing lending volumes in all core countries. Overall, statutory total operating expenses were up 19% yoy in 2019 largely attributable to one-off restructuring costs. Excluding these, operating costs were relatively stable at EUR 4.9 billion. The cost-to-income ratio weakened to 69.3% in 2019 from 55% in 2018, which is well above large Nordic banking peers. Nonetheless, the underlying cost-to-income ratio (excluding one offs) was relatively stable yoy at 57% in 2019.

DBRS Morningstar views that Nordea has a conservative risk profile and good loan diversification by industry/country. Nordea’s credit quality is sound with a low level of impaired loans partly supported by generally good and stable macroeconomic conditions in its core markets. At end-2019, Nordea´s gross impaired loans (Stage 3 under IFRS 9) were up 1% yoy to EUR 4.6 billion and gross impaired loan ratio was 1.78% compared to 1.82% a year earlier. Furthermore, we note that the combined exposures to shipping, oil, gas and offshore, which were much higher in the past, have been significantly reduced to 3% of the total gross loans. However, we will closely monitor the impact of the Covid-19 outbreak on the Bank’s asset quality.

DBRS Morningstar views Nordea as having a sound and well-managed funding profile and strong liquidity position. Customer deposits represented the largest source of funding, accounting for around 42% of total funding at end-2019. Similar to its main Nordic peers, Nordea has a relatively high reliance on capital market funding, primarily covered bonds and short-term funding. Covered bonds represented a fairly substantial 29% of the total funding at end-2019, although we see this as being well-diversified through programmes in the four Nordic countries. In addition, Nordea’s use of short-term funding (including deposits by credit institutions and certificates of deposits/commercial paper) remains high, accounting for nearly 19% of total funding at end-2019. Liquidity remains strong as reflected in a reported Liquidity Coverage Ratio (LCR) of 166% at end-2019.

DBRS Morningstar considers Nordea as having a strong capital position, supported by its strong earnings generation capacity and good access to capital markets. At end-2019, the Bank’s Common Equity Tier 1 ratio was 16.3%, up from 15.5% at end-2018 as a result of lower risk weighted assets. This compares to a minimum requirements of 13.1% implying a capital buffer of around 320 bps or approximately EUR 4.7 billion at end-2019. We also note that countercyclical buffer requirements were recently reduced to 0% in Sweden (from 2.5%) and Denmark (from 1%), while the recommendation in Norway is to take it down to 1% from 2.5%, while the specific systemic risk buffer of 3% in Finland will be reduced and replaced by the general (O-SII buffer) buffer of 2% for Nordea, which will provide the Bank with additional room to manoeuvre the challenging environment in 2020.

The Grid Summary Grades for Nordea are as follows: Franchise Strength – Very Strong/ Strong; Earnings Power – Strong; Risk Profile – Strong; Funding & Liquidity – Strong/Good; Capitalisation – Strong.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 11, 2019). This can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial, Finansinspektionen (Swedish FSA), Finanssivalvonta (Finnish FSA), company documents and S&P Global Market Intelligence. DBRS Morningstar 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 Morningstar had no access to relevant internal documents for the rated entity or a related third party.

DBRS Morningstar 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 Morningstar's outlooks and ratings are under regular surveillance

For further information on DBRS Morningstar 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 and US regulations only.

Lead Analyst: Vitaline Yeterian, Senior Vice President, Credit Ratings
Rating Committee Chair: Elisabeth Rudman, Managing Director, Credit Ratings
Initial Rating Date: October 10, 2018
Last Rating Date: March 22, 2019

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