Morningstar DBRS Confirms Nordea's LT Issuer Rating at AA (low), Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed the credit ratings of Nordea Bank Abp (Nordea or the Bank), including the Long-Term Issuer Rating at AA (low) and the Short-Term Issuer Rating at R-1 (middle). The trend on all credit ratings remains Stable. The Bank's Intrinsic Assessment was confirmed at AA (low) and the support assessment remains SA3. See the full list of ratings at the end of this press release.

KEY CREDIT RATING CONSIDERATIONS

The confirmation of Nordea's credit ratings reflects Nordea's well established franchise in the Nordic countries as well its sound profitability and operating efficiency. The credit ratings also take into account Nordea's strong asset quality metrics that have remained resilient remains despite the challenging global and domestic economic environment. The credit ratings also benefit from the Bank's strong capital position and capital generation capacity and good access to capital markets. This is somewhat offset by Nordea's elevated high reliance on wholesale funding compared to international and most Nordic peers, which is reflected in its very high net loan to deposit ratio (LTD). However, Morningstar DBRS notes that wholesale funding consists to a large extent of covered bonds issued in the Nordic covered bond markets, which, in our view, is a resilient and stable source of funding.

The Stable trend reflects our view that Nordea will be able to retain a significant part of the improved profitability even if interest rates decline due to hedges put in place and stronger underlying profitability. We also expect credit costs to increase, albeit at to moderate level.

CREDIT RATING DRIVERS

An upgrade of the Long-Term Issuer Rating would require lower reliance on wholesale funding and sustained improvement in profitability while maintaining robust asset quality and capitalisation.

A downgrade of the Long-Term Issuer Rating would be driven by a substantial deterioration in the Bank's asset quality and profitability materially weakening its capital position.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Very Strong/Strong
Nordea is the largest bank in the Nordic region with total assets of EUR 605 billion at end-Q1 2024. The Bank has a diverse franchise across Finland, Sweden, Norway and Denmark, where it holds leading market shares in a wide range of financial services for households, small and medium-sized corporate customers (SMEs), large corporates and in asset and wealth management. The Bank's strategy strives to further build out its presence in these markets as demonstrated by its acquisition of Danish life insurer Topdanmark in 2022 and Danske's Norwegian personal customer and private banking business, expected to close at end-2024. Nordea's most recent 2025 financial targets include a return on equity (ROE) above 15% and a cost-to-income ratio of 44-46%, a normalised cost of risk of 10 basis points (bps), a dividend pay-out ratio of 60-70%, and a management buffer of 150 bps above the regulatory CET1 requirement.

Earnings Combined Building Block (BB) Assessment: Strong/Good
Morningstar DBRS views Nordea's profitability as strong supported by good cost control and low cost of risk. Revenues are diversified, albeit not at the same level as more global peers. Nordea's 2023 net profit was EUR 4,934 million, up significantly from EUR 3,587 million in 2022, when results were negatively impacted by foreign exchange losses related to its Russian operations. Excluding this one-off, Nordea's profitability was up 18% Year on Year (YoY) on higher net interest income. The Bank's return-on-equity (ROE) ratio as calculated by Morningstar DBRS was 16.5% in 2023, the highest since 2008. In Q1 2024 Nordea reported a net profit of EUR 1,361 million, up 19% year-on-year (YoY), still driven by higher net interest income. Going forward we expect Nordea to retain a significant part of the increase in net interest income due to deposits hedged put in place with an average maturity of three years.

Risk Combined Building Block (BB) Assessment: Strong
Nordea's risk profile is strong, characterised by a low level of loan losses, supported by a highly diversified lending portfolio both by industry and geography in Europe's wealthy Northern regions. Asset quality metrics are still robust. Stage 3 loans and the probability of default for total loans have started to edge up, albeit still at a very low level. The Bank's gross Stage 3 loans ratio was 0.8% at end-Q1 2024, and the cost of risk was 4 basis points, comparing favourably to international peers. As the current challenging macroeconomic environment of weak economic growth and still high interest rates continues, we will monitor any sign of credit deterioration in the Bank's lending book. Most of the book is comprised of household lending (56%) with mortgages accounting for 48% of the Bank's total loan book at end-Q1 2023, while lending to corporates represented 42%.

Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate
Morningstar DBRS views Nordea's funding and liquidity profile as good, underpinned by diversified customer deposits, good access to capital markets, and ample liquidity available. However, the Bank's reliance on wholesale funding is very high compared to most European peers, and one of the highest among the Nordic peers. Nevertheless, the main source of long-term wholesale funding for Nordea is covered bonds, which has historically been a very stable funding source in the Nordic countries. Wholesale funding represented 44% of total non-equity funding at end-2023 and was well-diversified in various capital markets and currencies and adequately distributed in terms of maturity profile. Nordea's loan-to-deposit (LTD) ratio (excluding repos) edged up a bit for the first time in recent years to 160% at end-Q1 2024, up from 157% at end-2023 and 154% at end-2022, as deposits declined in the Large Corporates & Institutions segment. The Liquidity Coverage Ratio (LCR) was strong at 162% at end-2023 and the Net Stable Funding Ratio (NSFR) was 118.7%.

Capitalisation Combined Building Block (BB) Assessment: Strong
Nordea's capital position improved further with the common equity Tier 1 (CET1) ratio reaching 17.2% at end-Q1 2024, up from 17.0% at end-2023 and 16.4% and end-2022, supported by strong earnings and capital management initiatives, largely offset by dividends and higher operational risk. This is a cushion of 510 bps over Nordea's minimum CET1 ratio requirement of 12.1% at end-Q1 2024. The requirement is set to increase by a further 150 bps by Q3 2024 due to the upcoming increase of systematic risk buffers in Finland and Norway in Q2 and Q3 2024. In 2024 and 2025 capital will also be adversely affected by changes in retail models, the Basel IV impact and the acquisition in NorwayGiven the strong capital generation, the Bank has lowered its internal management buffer to 150 bps from 150-200 bps above the minimum requirement. Given the Bank's sound capital generation capacity we expect the CET1 ratio to be comfortably managed above the minimum requirements and the additional management buffer leaving room for shareholder returns and bolt-on M&A.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/432879.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings

Notes:
All figures are in Euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (15 April 2024) https://dbrs.morningstar.com/research/431155/global-methodology-for-rating-banks-and-banking-organisations In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for these credit ratings Morningstar Inc. and Company Documents, Nordea Annual and Sustainability Report 2023, Nordea Investor Presentation Q4 2023 and Q1 2024, Nordea Factbook Q4 2023 and Q1 2024, Nordea Year-End-Report 2023, Nordea Pillar 3 Annual Report 2023, Nordea Capital and Risk Management Report 2023. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, these are unsolicited credit ratings. These credit ratings were 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

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS's outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/432878

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Sonja Forster, Vice President - European Financial Institution Ratings
Rating Committee Chair: Vitaline Yeterian, Senior Vice President - European Financial Institution Ratings
Initial Rating Date: October 10, 2018
Last Rating Date: May 22, 2023

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

For more information on this credit or on this industry, visit dbrs.morningstar.com.