DBRS Morningstar Confirms Nordea’s Issuer Ratings at AA (low)/R-1 (middle), Trend Revised to Stable

DBRS Ratings GmbH (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 the Long-Term Issuer Rating has been revised to 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 Stable on Nordea's long-term ratings reflects DBRS Morningstar’s view that the economic disruptions related to the COVID-19 pandemic, are likely to only have a limited impact on the Bank's financial metrics. Despite the challenging operating environment and the low interest rate levels, Nordea's revenue generation remained resilient over the last year, supported by the Bank's strong and diversified Nordic franchise. DBRS Morningstar also notes that the Bank reported strong net profit in Q1 2021, up over 70% YoY, boosted by the resilient revenue generation and the lower impairment charges. The change in trend also reflects the good credit performance of the Bank with asset quality metrics improving since end-2019, a result of the resilient Nordic economies, compared to many other European countries, as well as certain corporate loans being written-off.

The confirmation of the Long-Term Issuer Rating reflects Nordea's well established Nordic franchise and its strong capital position. While profitability levels remain at the low-end compared to Nordic peers, the Bank's earning profile is supported by the high level of geographical and business diversification, disciplined cost management and good ability to absorb credit losses. Nordea's risk profile remains sound with overall manageable exposure towards COVID-19 vulnerable sectors albeit the sizeable real estate exposure remains a concern. The Bank's funding and liquidity profile is strong notwithstanding the high reliance on wholesale funding, in line with Nordic peers.

RATING DRIVERS
Considering the high level of the ratings and the still challenging operating environment, an upgrade of the Long-Term Issuer Rating is unlikely and would require a significant reduction of the reliance on wholesale funding and a material improvement in profitability.

A downgrade of the Long-Term Issuer Rating would be driven by a significant deterioration of profitability and efficiency, and/or a material deterioration of asset quality metrics.

RATING RATIONALE
Nordea is the largest bank in the Nordic region and has a diverse and well-balanced pan-Nordic franchise benefiting from leading market positions among households, SMEs and large corporate and institutions across Denmark, Finland, Sweden and Norway. In terms of strategy, Nordea remains fully committed to deliver on income growth initiatives and optimise its operational efficiency. The Bank has a cost-to-income ratio target of 50% by 2022 and a Return-on-Equity (ROE) target of above 10% by 2022. In terms of capital, Nordea's management target is to have a 150-200 basis points (bps) buffer above the minimum requirement while maintaining a 60-70% dividend payout ratio from January 1, 2021.

Nordea's strong franchise and relatively well diversified business profile has historically led to strong and stable earnings generation. In DBRS Morningstar view, Nordea has been able to maintain sound profitability supported by overall resilient revenue generation and cost discipline notwithstanding the low interest rate environment and the economic restrictions linked to the COVID-19 pandemic. In 2020, the Bank reported a ROE of 7.1%, down from 8.2% in 2019 on an underlying basis. The reduction was mostly related to higher loan loss provisions (LLPs) linked to the economic disruptions of the COVD-19 pandemic. The ROE in Q1 2021 was 9.4%, a significant rise on the 5.9% reported in Q1 2020 mainly driven by the significantly lower cost of risk. In line with its Nordic peers, Nordea's revenue generation proved to be resilient in 2020 and Q1 2021, benefiting from higher net interest income (NII). Nordea maintained good cost discipline in 2020 and Q1 2021 leading to a cost-to-income ratio of 55%, down from 57% in 2019 on an underlying basis. The Bank’s cost targets are considered achievable. Nordea reported loan loss provisions (LLPs) of EUR 908 million in 2020, up 69% compared to 2019 which corresponded to a cost of risk of 35 basis points (bps) in 2020 (2019: 22 bps). LLPs included EUR 443 million post-model management adjustment to cover the uncertainty related to the impact of the COVID-19 pandemic. In 2020, LLPs absorbed a relatively low 24% of total income before provisions and taxes (IBPT), compared to 20% in 2019. This remains manageable in our view. In Q1 2021, LLPs decreased significantly to EUR 63 million, compared to EUR 154 million in Q1 2020.

The Bank’s risk profile remains solid, supported by the diversification of the lending portfolio, both by industry and geography. The Bank's asset quality metrics have remained sound in recent years, with the NPL ratio improving to 1.53% at end-2020 from 1.78% at end-2019. The reduction was related to a 14% decrease in Stage 3 loans to EUR 3,979 million at end-2020 mainly a result of write-offs in the oil, gas and offshore, shipping and industrials sectors. Stage 3 loans increased by 1% at end-Q1 2021 due to FX movements and the NPL ratio increased marginally to 1.55%. Nordea's total exposure to the real estate segment, including loans at fair value, totaled EUR 46.6 billion of which 60% was commercial real estate and 40% residential real estate. Around 37% of the total real estate portfolio was related to Sweden, followed by Denmark (23%), Norway (22%), Finland (17%) and others (1%). DBRS Morningstar will continue to monitor the performance of this portfolio closely.

In DBRS Morningstar’s view, Nordea continues to have a sound and well-managed funding and liquidity profile further improved by the increase in customer deposits and the ample liquidity available. We also recognise that reliance on wholesale funding remains relatively higher than European peers but in line with Nordic peers. Customer deposits increased significantly at end-2020 and Q1 2021 leading to a loan-to-deposits (LTD) ratio (excluding repos) of 165% at end-Q1 2021, (FY2020: 174%, and FY2019: 183%). Wholesale funding is mainly accessed through covered bonds which represented 29% of total funding at end-2020, in line with end-2019, which DBRS Morningstar sees as being well-diversified through programmes in the typically stable four Nordic countries. The Liquidity Coverage Ratio (LCR) was strong at 158% at end-2020 (278% in EUR and 119% in USD) while the Net Stable Funding Ratio (NSFR) was 110.3% at end-2020.

Nordea's capital position remains extremely robust, supported by resilient internal capital generation notwithstanding the difficult operating environment. The Bank’s very high capital cushion against minimum requirements also reflects the capital relief measures adopted by the ECB during the COVD-19 pandemic. At end-Q1 2021, Nordea’s common-equity Tier 1 (CET1) ratio was 17.5%, up from 17.1% at end-2020 and 16.3% at end-2019 which compares to a regulatory requirement of 10.2% (down from 13.1%) translating into a capital cushion of 730 bps at end-Q1 2021, among the highest in its peer group.

ESG CONSIDERATION
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

The Grid Summary Grades for Nordea Bank Abp are as follows: Franchise Strength – Very Strong/Strong; Earnings Power –Strong; Risk Profile – Strong; Funding & Liquidity – Strong/Good; Capitalisation – Very Strong/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 . Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

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

The sources of information used for this rating include Nordea’s Annual and Sustainability Report 2020 and Q1 2021 Interim Report, Nordea’s Debt Investor Presentation 2020 and Debt Investors Presentation Q1 2021, Nordea’s Fact Book 2020 and Q1 2021, Nordea’s Pillar 3 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.

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

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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/380304

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Mario De Cicco, Vice President, Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director, Global Financial Institutions and Sovereign Ratings
Initial Rating Date: October 10, 2018
Last Rating Date: June 18, 2020

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