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

DBRS Ratings Limited (DBRS) has today confirmed the ratings of Nordea Bank AB (the Bank), including the AA (low) Issuer Rating, AA (low) Senior Unsecured Debt & Deposits rating and the R-1 (middle) Short-Term Debt & Deposit rating for Nordea Bank AB. The trend on all ratings is Stable. The support assessment remains SA3, reflecting DBRS’s view that developments in European regulation and legislation mean that there is less certainty about the likelihood of timely systemic support. As a result, the Bank’s final senior debt rating is positioned in line with the AA (low) Intrinsic Assessment (IA).

Nordea’s ratings reflect the Bank’s diversified Nordic banking franchise, with strong positions across Sweden, Finland, Norway and Denmark, as well as the strong and resilient earnings generation ability. The ratings also incorporate Nordea’s low risk profile and sound capitalisation, along with its well-managed funding profile, despite the reliance on wholesale funding.

Nordea’s pan-Nordic franchise is a key factor underpinning the rating. The Bank has a strong banking platform with market leading positions in retail banking, wholesale banking and wealth management across the four large Nordic countries. DBRS views positively Nordea’s various initiatives to better manage risk and reduce complexity, the major one being the simplification of its legal structure into a single pan-Nordic banking entity based in Sweden. DBRS views the reduction in cross‐border legal entities as reducing the complexity inherent in a cross‐border resolution. Separately, Nordea is currently in the process of redomiciling its headquarters to Finland, following the approval of the merger plan between Nordea Bank AB and Nordea Holding Abp (the newly set up Finnish entity) during the AGM on March 15, 2018. The decision to domicile in a country participating in the banking union will result in Nordea being subject to the same regulatory framework as its European peers, with a level playing field.

Nordea’s ability to generate strong and resilient earnings is a key rating consideration. Thanks to its diverse franchise, both in terms of business and geographic mix, Nordea has managed to partially mitigate the continuous pressure from the negative interest rate environment in Sweden with increased net fee and commission income and as a result Nordea continues to generate substantial and stable earnings. Furthermore, the Bank’s income before provisions and taxes (IBPT) is well spread across its four operating divisions. DBRS views the resilient earnings history as supportive of the high ratings and notes that the Bank’s decision to deconsolidate the Baltic operations as well as to reduce exposure to riskier segments and regions, such as Shipping, Offshore & Oil Services and Russia will most likely have a negative impact on revenues, but should lead to a better-balanced and more efficient bank. Nordea is further progressing with its Simplification Programme and is enhancing its digital capabilities. This is evidenced by the current replacement of its Core Banking Platform, as well as other IT investments. DBRS notes that spending on these enhancements is putting pressure on the Bank’s cost efficiency compared to its Nordic peers, however, the technological enhancements are supportive of longer-term efficiency and should further increase Nordea’s competitive position.

Nordea’s overall credit performance is viewed as solid, given its stable performance through the financial crisis, and the diversification of the loan portfolio by industry and by country. Nordea’s exposure to shipping and offshore has been reduced to EUR 8.4 billion at end-2017, or 2.7% of the total loan portfolio down from 3.3% at end-2016, and as per the Bank’s re-focused strategy towards less risky segments, the corporate lending portfolio in Russia has also been reduced, by approximately 30% during 2017.DBRS notes that these combined exposures account for about 3% of the total exposure at default. However, given the uncertain status for the oil price, shipping industry, and Russian geo-political risk, DBRS will continue to monitor these risks.

Whilst wholesale funding accounts for a higher proportion of total funding than most EU peers, DBRS views Nordea to have a sound and well managed funding profile. Similar to its main Nordic peers, Nordea has a relatively high reliance on capital market funding due to the prevalence of mortgage covered bonds for mortgage funding and the preference for shares, funds and pension solutions by Swedish households over saving in bank accounts. At end-2017, covered bonds accounted for 28% of the total funding base of EUR 400.5 billion. Nonetheless, the covered bond funding is well-diversified through programmes in the four Nordic countries. DBRS views the deposit base as providing a solid foundation to the funding profile. Customer deposits totalled EUR 172.4 billion at end-2017, representing 43% of total funding according to DBRS estimates. Reflecting good liquidity buffer, Nordea’s Liquidity Coverage Ratio (LCR) was reported at 152% at end-2017 according to the EBA Delegated Act. DBRS also notes that Nordea’s use of short-term funding is still relatively high but is coming down, accounting for 19% of total funding at end-2017 vs. 26% at end-2014.

DBRS continues to view the Bank as well-placed from a capital perspective given its robust capital base, strong earnings generation capacity, and flexibility to access capital markets. At end-2017, Nordea’s fully loaded Basel III Common Equity Tier (CET1) ratio reached 19.5%, up from 18.4% at end-2016 and the Bank’s reported leverage ratio was 5.2% at end-2017, up from 5.0% at end-2016. DBRS notes that Nordea is classified as a global systemically important bank (G-SIB) by the Financial Stability Board and the Basel Committee on Banking Supervision, and understands that with a total capital ratio of 25.2% at end-2017 is close to fulfilling the TLAC 2019 requirements. DBRS does not anticipate any major capital impact from the Bank’s planned re-domiciliation to Finland in October 2018. Nordea is to be subject to Finnish legislation and ECB supervision by the end of 2018, but DBRS expects a convergence over time between the Swedish FSA and SSM requirements.

RATING DRIVERS
Given the already very high rating level, any further upward rating pressure is unlikely. However, there could be positive pressure on the IA (i) if the Bank is able to reduce its reliance on unsecured wholesale funding, and (ii) if the Bank continues to make progress with its refocused strategy towards less risky segments while maintaining strong earnings.

Negative pressure on the ratings would likely be driven by (i) a severe deterioration in asset quality potentially prompted by a drop in price in the Swedish residential and commercial property markets, or (ii) a reduction in investors’ confidence triggering liquidity concerns.

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 (May 2017). 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, company reports, Finansinspektionen, Financial Stability Board and the Basel Committee on Banking Supervision. 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: Vitaline Yeterian, Vice President, Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of EU FIG, Global FIG
Initial Rating Date: November 28, 2006
Last Rating Date: July 14, 2017

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