DBRS Morningstar Revises Trend on Nordea to Negative, Confirms AA (low) LT Issuer Rating

DBRS Ratings GmbH (DBRS Morningstar) confirmed the Long-Term Issuer Rating of Nordea Bank Abp (Nordea or the Bank) at AA (low) and the Short-Term Issuer Rating at R-1 (middle). The trend on the Long-Term ratings has been changed to Negative from Stable. The support assessment remains SA3 and the Intrinsic Assessment (IA) was maintained at AA (low). See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS

The change of the trend to Negative on the long-term ratings reflects our view that the wide and growing scale of economic disruption caused by the coronavirus (COVID-19) pandemic is negatively affecting the Bank’s operating environment. The impact of economic slowdown is likely to emerge in the coming quarters. In particular, this will translate into lower revenues and higher loan loss provisions, on the back of profitability levels that are already at the lower-end relative to similarly rated peers.

The confirmation of the Long-Term Issuer Rating reflects Nordea’s strong and diversified banking franchise in Denmark, Finland, Norway and Sweden; the Bank’s conservative risk profile; as well as its strong regulatory capital position with large cushions over minimum regulatory requirements. The ratings also incorporate the Bank’s relatively high reliance on wholesale funding, when compared to European peers. Nonetheless, this is partially mitigated by a good liquidity position and access to very stable Nordic covered bond markets as demonstrated in recent months.

The implications for the medium to long-term will depend on the Bank’s resilience in the face of this economic crisis, and we will continue to monitor the developing situation and its impact on Nordea’s overall credit profile. Downward rating pressure would increase should the crisis be prolonged.

RATING DRIVERS

An upgrade of the Long-Term Issuer Rating is unlikely given the change in trend. The Trend could return to Stable through a material improvement in profitability metrics, whilst maintaining robust capital levels.

A downgrade of the Long-Term Issuer Rating could arise if profitability, asset quality metrics, or capital cushions deteriorate significantly, potentially as a result of the COVID-19 pandemic, or if the Bank were to face any major challenges accessing wholesale funding markets.

RATING RATIONALE

We expect Nordea to maintain its 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. Nordea’s broad geographic diversification and business mix have historically generated strong and largely resilient underlying earnings. However, Nordea’s operating revenues have been under pressure partly due to the low interest rate environment and the deconsolidation of certain operations. This weaker level of profitability constrains the Bank’s ability to manage the current economic crisis, in DBRS Morningstar’s opinion.

In Q1 2020, Nordea reported a net profit of EUR 460 million, up 4% from EUR 443 million in Q1 2019. However, excluding items affecting comparability, mainly EUR 95 million non-deductible expense related to provision for ongoing AML-related matters in Q1 2019, net profit was down 14% year-on-year (YoY). Nordea reported a relatively good performance in net interest income (NII) (up 5% (YoY), and net fee and commission income (up 4% YoY), but the Bank's operating profit was down 16%, negatively affected by lower net fair values, and higher net loan losses mainly driven by COVID-19.

In 2020, we expect to see pressure on revenues based on our macroeconomic scenario for Sweden, Norway and Denmark, while it is unclear to what extent the Bank can further manage down the cost base. 2019 was marked by restructuring one-offs charges, while costs went down by 8% YoY in Q1 2020 according to plan leading to an underlying cost-to-income ratio of 57% (with amortised resolution fees, or 62% as reported down from 69% in Q1 2019).

Nordea’s credit quality remains sound to date with a low level of impaired loans partly supported by the good and stable macroeconomic conditions in its core markets prior to the pandemic. At end-Q1 2020, Nordea´s gross impaired loans (Stage 3 under IFRS 9) ratio was down to 1.7% (2019: 1.78%; 2018: 1.82%). However, with COVID-19, sector specific provisioning adjustments have increased generally in sectors most likely to be negatively affected (transportation, hospitality, etc.). Overall, Nordea reported that immediately affected segments represented about 9.6% of its total portfolio. The decline in oil price was also an important component of loan loss provisions in Q1 2020. In spite of the Bank's low exposure to oil-related sectors (0.7% of total portfolio) reflecting the de-risking carried out in the past years, 39% of the provisions reported by Nordea in Q1 2020 was driven by credit weakness in the oil and gas sector, shipping and off-shore portfolios, reflected in both specific and model-driven provisions. In terms of relief to customers, Nordea reported it had accepted 60,000 instalment free applications for households, and 8,000 for corporates as of end-Q1 2020, This compares to a client base of 9.3 million households, 530,000 SMEs, and about 2,650 large corporates. However, the cumulative impact of COVID-19 and payment deferral programmes on Nordea’s balance sheet depends on many factors and will only become apparent over time.

Nordea maintained good access to funding markets in Q1 2020, with new issuances totaling EUR 5.7 billion and domestic covered bond markets functioning well. In our view, the Bank’s liquidity position was strong as of end-Q1 2020, underpinned by a LCR of 182% and a NSFR of 109%.

Nordea's capital position remains strong with a CET1 ratio of 16.0% at end-Q1 2020, albeit slightly down from 16.3% at end-2019, representing a CET1 capital cushion of 580 bps, which strengthened mainly on the back of the reduction or cancellation of countercyclical capital buffers. The Board proposed to postpone the decision on dividend payment for the 2019 financial year.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

The Grid Summary Grades for CL 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 (8 June 2020) https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

The sources of information used for this rating include Nordea Bank Abp Q1 2020 Presentation and Factbook, Nordea Bank Abp 2019 Annual Report 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.

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 12-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

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/362793.

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Arnaud Journois, Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG - Global FIG
Initial Rating Date: October 10, 2018
Last Rating Date: March 23, 2020

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Tel. +49 (69) 8088 3500
60311 Frankfurt am Main Deutschland
Geschäftsführer: Detlef Scholz
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For more information on this credit or on this industry, visit www.dbrsmorningstar.com.