DBRS Morningstar Confirms Nordea Bank Abp’s Long-Term Issuer Rating at AA (low), Trend 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 all ratings remains stable. The support assessment remains SA3 and the Intrinsic Assessment (IA) was maintained at AA (low). Concurrently, DBRS has discontinued the rating on Nordea’s Undated Subordinated Debt to reflect that these instruments have been repaid. See the full list of ratings at the end of this press release.

KEY RATING CONSIDERATIONS

Nordea’s ratings reflect its strong and well diversified pan-Nordic franchise. The Bank has substantial market positions across different segments in Finland, Sweden, Norway and Denmark, sound and improving earnings generation, while management has been able to maintain strict cost discipline. The ratings also incorporates Nordea’s robust capital position with its solid capital cushion against minimum requirements, as well as sound asset quality metrics supported by strategic de-risking in vulnerable sectors. DBRS Morningstar also notes that uncertainty remains, mostly driven by the deterioration of the macroeconomic outlook after Russia’s invasion of Ukraine as well as the Bank’s sizeable exposure towards the commercial real estate sector. Nordea continues to have a high reliance on wholesale funding, however, this is partially mitigated by the stable access to covered bond markets (55% of total wholesale funding) and the ample liquidity position.

RATING DRIVERS
An upgrade of the Long-Term Issuer Rating would require a significant reduction of the reliance on wholesale funding, improved profitability and maintenance of the current risk profile.

A downgrade of the Long-Term Issuer Rating would be driven by lower profitability and efficiency, and a material deterioration in asset quality.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Very Strong/Strong

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. As per its strategy, Nordea is now fully focused on its home markets in the Nordic area (Finland, Sweden, Norway and Denmark) and has gradually divested its operations in Poland, Luxembourg, the Baltics and Russia (with the Russian subsidiary being completely liquidated as of Q1 2022). In 2022, Nordea announced its new 2022-2025 strategy and set new financial targets which encompass a return-on-equity (ROE) above 13% by 2025 supported by a cost-income ratio of 45-47%, a normalised cost of risk of around 10 basis points (bps), a dividend payout ratio of 60-70% and a management buffer of 150-200 basis points (bps) above the CET1 regulatory requirement. DBRS Morningstar notes that the macroeconomic outlook has deteriorated with Russia’s invasion of Ukraine adding significant uncertainty and pressure in the operating environment. DBRS Morningstar notes that Nordea showed good execution capacity after reaching its 2022 financial targets one year in advance with a cost-income ratio of 48% in 2021 (vs. 50% target by 2022) and an ROE of 11.2% in 2021 (vs. >10% by 2022).

Earnings Combined Building Block (BB) Assessment: Strong / Good

Nordea has been able to maintain sound earnings generation due to effective cost discipline and improving revenues supported by the Bank’s strong franchise and relatively high business diversification. However, uncertainty remains on the evolution of the operating environment with the negative implications of the exit from Russian impacting Q1 2022 results. In FY 2021, Nordea reported a net profit of EUR 3,831 million, significantly higher than EUR 2,265 million in 2020. As a consequence, the Bank’s ROE improved to 11.2%, up from 7.1% in 2020. The result was mainly driven by the lower cost of risk in 2021 after the higher provisioning in 2020 due to the COVID-19 pandemic.

In Q1 2022, Nordea reported net income of EUR 269 million, much lower than EUR 788 million in Q1 2021. This reflected the significant impact of the losses related to the completion of the process of liquidation of the Bank’s Russian subsidiary. Those included a non-deductible loss from the recycling of EUR 529 million in accumulated foreign exchange losses and EUR 76 million LLPs on remaining Russian exposures. Excluding one-offs, Nordea’s net profit would be EUR 868 million, 10% higher than Q1 2021.

Risk Combined Building Block (BB) Assessment: Strong

DBRS Morningstar views Nordea's risk profile as strong, supported by a high level of diversification of the lending portfolio by industry and country. While the Bank has been able to improve its asset quality metrics, DBRS Morningstar will continue to monitor any sign of credit deterioration taking into account the current uncertainty in the operating environment and deteriorating macroeconomic outlook. Nordea’s lending portfolio has been significantly de-risked over the last 10 years. From the geographic perspective, loans to public were 99% concentrated in the Nordic countries at end-2021 (vs. 92% at end-2011). Households represented 57% of total loans at end-2021 vs. 48% at end-2011. Nordea has significantly reduced its exposure towards risky sectors such as shipping, oil and offshore lending, with exposures to these sectors reducing by 79% compared to 2011. Restructuring within the oil, gas and offshore segment was the main driver of the 10% reduction of the Bank’s gross stage 3 loans at end-Q1 2022 vs. FY2021. Stage 3 loans were 1.12% of total gross loans to customers at amortised cost at end-Q1 2022 vs. 1.3% at end-2021 and 1.53% at end-2020. Nordea’s corporate exposure is well diversified across sectors with the largest concentration being real estate which accounted for 13.6% of total lending (of which 6.1% residential and 7.5% commercial). The Bank's exposure towards sectors which are deemed particularly vulnerable to COVID-19 amounted to 1% of total loans at end-2021.

Funding and Liquidity Combined Building Block (BB) Assessment: Good / Moderate

Nordea’s funding and liquidity profile is well-managed, supported by increasing customer deposits and ample liquidity available. Nevertheless, similar to other Nordic peers, reliance on wholesale funding remains high, mostly accessed through covered bonds, a common and stable source of funding in the Nordic area. Total customer deposits (excluding Repos) increased to EUR 212 billion at end-Q1 2022 from EUR 203.2 billion at end-2021 and EUR 182.1 billion at end-2020. As a result, the loan-to-deposit (LTD) ratio improved to 157% at end-Q1 2022 from 162% at end-2021 and 174% at end-2020. Covered bonds represented 27% of the total funding at end-2021 (vs. 29% at end-2020), or 55% of total wholesale funding. DBRS Morningstar considers them as being well-diversified through programmes in the typically stable four Nordic countries. The Liquidity Coverage Ratio (LCR) was strong at 160% at end-2021 (vs. 158% at end-2020). The Net Stable Funding Ratio (NSFR) was 111.1% at end-2021 (vs. 110.3% at end-2020).

Capitalisation Combined Building Block (BB) Assessment: Strong / Good

Nordea's capital position remains robust supported by resilient internal capital generation. Lower capital requirements as well as limitations on capital distribution led to a very high capital cushion which is expected to normalise towards the management target in the medium term. At end-Q1 2022, Nordea’s common-equity Tier 1 (CET1) ratio was 16.3%, down from 17% at end-2021 and 17.1% at end-2020. The reduction is almost fully attributable to the EUR 2 billion share buyback programme the Bank launched in October 2021 and ended in March 2022. At end-Q1 2022, Nordea's minimum CET1 ratio requirement was 10.2% leading to a capital cushion of 610 bps vs. minimum capital requirement, down from 680 bps at end-2021. Nevertheless, the minimum capital requirement is expected to increase in the following years and to settle around 13%. This is mostly because of the reinstatement of the countercyclical buffer which will be gradually increased across several jurisdictions. As a consequence, the capital cushion is expected to converge towards the management target of 150-200 bps above the minimum requirement with the capital excess to be either subject to additional share buybacks or used for inorganic growth.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/397239

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (19 July 2021) - https://www.dbrsmorningstar.com/research/381742/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 (17 May 2022) https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

The sources of information used for this rating include Morningstar Inc. and Company Documents, Nordea 2021 Annual Report, Nordea Debt Investor Presentation 2021 and Q1 2022, Nordea FY21 and Q1 2022 Presentation, Nordea Q4 2021 and Q1 2022 Factbook, Nordea Q4 2021 and Q1 2022 Interim Report. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://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/397238

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 FIG
Initial Rating Date: 10/10/2018
Last Rating Date: 06/16/2021

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