DBRS Ratings GmbH (DBRS Morningstar) confirmed the 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 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 RATING CONSIDERATIONS
The confirmation of the ratings takes into account Nordea’s leading franchise in the Nordic countries as well as its robust and well-diversified business portfolio. The ratings also reflect its sound profitability and operating efficiency as well as its strong capital position. Nordea’s asset quality remains sound and resilient despite the current challenging global and domestic economic environment.
The ratings also incorporate Nordea’s elevated reliance on wholesale funding compared to international and most Nordic peers, which is reflected in its very high net loan to deposit ratio (LTD). Nonetheless, wholesale funding reliance is mainly long-term funding through covered bonds issued in the Nordic covered bond markets, which DBRS Morningstar considers to be a resilient and stable source of funding.
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/or profitability materially weakening its capital position.
Franchise Combined Building Block (BB) Assessment: Very Strong/Strong
Nordea is the largest Nordic bank by assets with a balance sheet of EUR 604 billion at end-Q1 2023. The Bank has a diverse and well-balanced pan-Nordic franchise which resulted from the merger of four major Nordic banks in 2001. Nordea’s main markets are Finland, Sweden, Norway and Denmark, where it benefits from leading market shares in the household, small and medium-sized corporate customers (SMEs), large corporates and asset and wealth management segments. The Bank’s Strategic Plan for 2022-2025 aims to achieve 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 pay-out ratio of 60-70% and a management buffer of 150-200 basis points (bps) above their CET1 regulatory requirements.
Earnings Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar views Nordea’s profitability as good and resilient supported by its diversified business portfolio, good cost control and low cost of risk. In 2022, the Bank reported net profit of EUR 3,587 million in 2022, down from EUR 3,831 million in 2021, negatively impacted by the exit from its Russian operations. Excluding this one-off, Nordea’s profitability was up 9.3% year-on-year (YoY). As a result, Nordea’s return-on-equity (ROE) ratio (as calculated by DBRS Morningstar) stood at 13% in 2022, excluding one-offs, significantly higher than the average of the last 10 years of 10.3%. 2022 results were mainly driven by higher Net Interest Income (NII), up 15% YoY benefitting from several interest rate hikes since May 2022; controlled operating costs despite high inflation, the acceleration on technology investments and the acquisition of Topdanmark Life in December 2022; and a very low cost of risk (4 bps at end-2022). In Q1 2023, Nordea reported net profit of EUR 1,148 million, down 9.8% Quarter on Quarter (QoQ), driven by higher regulatory fees in Q1 vs Q4 (seasonal impact).
Risk Combined Building Block (BB) Assessment: Strong
DBRS Morningstar considers Nordea's credit profile as strong, underpinned by a high degree of diversification of the lending portfolio both by industry and geography. Asset quality metrics are strong and resilient with low levels of NPLs/Stage 3 loans and Stage 2 loans despite the current challenging macroeconomic environment. Stage 3 loans remained at historically low levels of 0.80% of total gross loan book (excluding repos) at end-Q1 2023. Stage 2 loans at amortized cost, which increased by 2.5% QoQ, still represent a low 3.9% of the total gross loan book (excluding repos). Nordea’s credit exposure towards real-estate companies, which includes commercial real estate, residential real estate and tenant owned association, represented a relatively high 13.3% of total gross loans (excluding repos) at end-Q1 2023. However, the credit quality for the real estate portfolio appears strong with a Stage 3 loan ratio of only 0.38% of total real estate gross lending.
Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate
DBRS Morningstar views Nordea’s funding and liquidity profile as good and underpinned by increasing customer deposits, ample liquidity buffers and a well-diversified funding mix. Customer deposits grew by 3.9% YoY in 2022 to EUR 212.5 billion (excluding repos), leading to a net loan to deposit ratio of 159%. In Q1 2023, Nordea’s customer deposits (excluding repos) decreased 0.8% QoQ due to foreign exchange effects. In local currencies, they increased by 2% QoQ driven by strong growth in large corporates & institutions and the net LTD ratio kept improving to 156%. Similar to domestic peers, Nordea’s reliance on wholesale funding is higher than most European peers and is mostly accessed through covered mortgage bonds. DBRS Morningstar considers the Nordic covered bond markets to be stable. Yet, current quantitative tightening (QT) driven by central banks to fight sticky inflation might saturate the debt market with high quality securities and potentially pose a challenge to Nordea to issue new debt at advantageous rates. Nordea's liquidity position at end-Q1 2023 was solid with a reported high-quality liquidity reserve of EUR 122 billion, a Liquidity Coverage Ratio of 161% and a Net Stable Funding Ratio (NSFR) of 116.3%.
Capitalisation Combined Building Block (BB) Assessment: Strong
DBRS Morningstar considers Nordea’s capital position as strong supported by its resilient internal capital generation. At end-March 2023, Nordea had a generous capital cushion of 400 bps above its minimum capital requirement, although we expect this to decrease over time and converge towards the Bank’s management target of around 150-200 bps above the minimum target. Nordea reported a Common Equity Tier 1 (CET1) ratio of 15.7% at end-Q1 2023, down from 16.4% at end-2022 as a result of the share buyback programme announced in March 2023, the implementation of IFRS17 and foreign exchange effects, which were partly offset by strong earnings generation.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/414318
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors 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 (17 May 2022) https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings
All figures are in EUR unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations (23 June 2022). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-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://www.dbrsmorningstar.com/about/methodologies
The sources of information used for this rating include Morningstar Inc. and Company Documents, Nordea Annual and Sustainability Report 2022, Nordea Investor Presentation Q4 2022 and Q1 2023, Nordea Facts Q4 2022 and Q1 2023, Nordea Year-End-Report 2022, Nordea Pillar 3 Annual Report 2022. 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. For further information on DBRS Morningstar 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 rating assumptions can be found at: https://www.dbrsmorningstar.com/research/414317
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Maria Jesus Parra, Vice President, European FIG
Rating Committee Chair: William Schwartz, Senior Vice President, Credit Practices Group
Initial Rating Date: 10 October 2018
Last Rating Date: 25 May 2022
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