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

DBRS Ratings Limited (DBRS) 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 the recent pressure on revenues, and the Bank’s progress in reducing its operating costs. The ratings, however, also take into account the Bank’s relatively high reliance on wholesale funding, when compared to European peers.

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 of the Bank’s 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 asset quality, that could potentially be prompted by a severe price decline in the residential and commercial property markets in the Bank’s core markets, or (ii) if the Bank were to face any major challenges accessing wholesale funding markets due to a reduction in investor confidence.

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 ultimately 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 due to the low interest rate environment and the deconsolidation of certain operations in the last two years. In 2018, net interest income (NII) was down 7% year-on-year (yoy), mainly as a result of margin pressure, particularly in household lending in Sweden and Norway. Furthermore, net fee and commission income was 11% lower than in 2017, due a combination of challenging market conditions and the divestments of Nordea Life & Pension in Denmark and Private Banking International in Luxembourg. Statutory total operating expenses were down 4% yoy in 2018, reflecting both the divestment of assets and the Bank’s progress in reducing its cost base, following a spike in expenses as a result of its Simplification Programme in 2017. Nonetheless, the cost/income ratio weakened to 54%, which is at the upper end of its Nordic peer group, reflecting the ongoing revenue pressure.

DBRS views that Nordea has a conservative risk profile and good loan diversification by industry/country. Nordea’s credit quality has remained sound in recent years, with a low level of impaired loans, and has also been helped by generally good and stable macroeconomic conditions in its core markets. At end-2018, the gross impaired (Stage 3) loans ratio was 1.82%. Nordea’s loan book is largely concentrated in housing loans, accounting for 43% of the total loan portfolio. This, together with real estate management (14% of the total loan portfolio at end-2018) makes, in DBRS’s view, the Bank vulnerable if there is a sudden deterioration in the residential and commercial property markets in its core markets, particularly Sweden. Furthermore, DBRS notes that the combined exposures to shipping, offshore, and Russia, which were much higher in the past, have been significantly reduced to 3% of the total gross loans.

DBRS 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 41% of total funding at end-2018. 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 27% of the total funding at end-2018, although DBRS sees 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 22% of total funding at end-2018. Liquidity is strong as reflected in a reported Liquidity Coverage Ratio (LCR) of 185% at end-2018.

DBRS considers Nordea as having a strong capital position, supported by its strong earnings generation capacity and good access to capital markets. At end-2018, the Bank’s Common Equity Tier 1 ratio was 15.5%, compared to 19.5% at end-2017, as a result of a 29% increase in risk weighted assets (RWAs) in 4Q18. The latter was related to Nordea’s change of domicile to Finland from Sweden and the subsequent change of regulator to the European Central Bank. As a result, the ECB requested Nordea to migrate certain Pillar 2 capital add-ons into Pillar 1 risk-exposure amounts for the continued use of internal models for the calculation of RWAs. The leverage ratio was 5.1% at end-2018.

Concurrently, DBRS has discontinued the rating on Nordea’s Capital Contribution Securities to reflect that these instruments have been repaid.

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

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (Month July 2018). This can be found 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) and company documents. DBRS 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 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

For further information on DBRS 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: Maria Rivas, Senior Vice President – Global FIG
Rating Committee Chair: William Schwartz Senior Vice President – Credit Practices Group
Initial Rating Date: October 10, 2018
Last Rating Date: October 10, 2018

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